Income Taxation of Expatriates in the Philippines

By: Tax and Accounting Center Philippines

With the boom of the business process outsourcing industry in the Philippines, it is undeniable that foreign expatriates is accordingly increasing in number. Hereunder are the few reminder on how income taxation applies to compensation of expatriates in the Philippines. For better appreciation of this article, we suggest that you read first our article on Income Tax Classification of Expatriates in the Philippines.

Withholding tax on compensation of expatriates in Philippines

The taxable compensation of expatriate refers to the compensation received by the expatriate for its services performed in the Philippines. For resident expatriate and non-resident expatriate engaged in trade or business, withholding tax on compensation table is used for the purpose. The 2009 withholding tax table is patterned after the income tax rates of 5-32% where the applicable tax rate in any tax bracket corresponds to the level of compensation of expatriates. Yes, deductible personal exemptions had already been considered.

For non-resident expatriate not engaged in trade or business, the same is withheld at the straight rate of 25%, while the special alien employee is withheld at the straight rate of 15%. Notably, some tax treaties provides some  tax exempt compensation of expatriates in the Philippines (e.g. the 90-day rule under RP-U.S. Tax Treaty and you need to secure a Tax Treaty Relief Application with the International Tax Affairs Division with the Bureau of Internal Revenue.

Under BIR Ruling No. 192-2008, compensation paid abroad under an split-pay arrangement is likewise taxable in the Philippines. The reason is that such payment relates to services performed in the Philippines in line with the rule that services are taxable in the place where the same is rendered.

Withholding tax on compensation of expatriates in the Philippines is the obligation of the employer with respect to its compensation payments made in the Philippines – direct payments and indirect payments for offshore compensation charged back by the foreign counterpart. For compensation paid abroad and which is not charged back, the employer is no longer responsible same as it does not any control of payment. Instead, it will be the responsibility of the expatriate to report in its income tax return and pay the corresponding taxes.

For more readings, please read our article on Features of Withholding Tax on Compensation.

Fringe benefits tax of expatriates in Philippines

Fringe benefits  tax is imposed upon the employer for expatriates benefits on top of its taxable compensation such as housing privilege, motor vehicles, personal expenses shouldered by the employer. It is intended to recover the lost withholding tax on compensation so that the tax computation is premised on the fact that the expatriate gets an amount net of applicable tax.

Accordingly, computing for the fringe benefits tax requires grossing up the monetary value of the fringe benefit and the tax rates vary based on the income tax classification of the expatriate as follows:

1. Non-resident alien not engaged in trade or business – 25% of the grossed-up monetary value;
2. Resident alien – 32% of the grossed up monetary value
3. Special alien expatriates – 15% of grossed-up monetary value

Fringe benefits tax is filed and paid quarterly using BIR Form No. 1603. For more readings, please read our article on Fringe Benefits Tax in the Philippines.

De minimis benefits of expatriates in the Philippines

De minimis benefits are benefits of relatively small values provided by the employer for the general welfare of the employees. The regulations provide 10 de minimis benefits and this may extend to expatriate employees. These benefits are exempt from income taxation and accordingly, withholding tax on compensation to the extend limited by law. For more ot it, please refer to our article on Tax Exempt De Minimis Benefits. 

Filing of annual individual income tax return

Under Section 51 of the Philippines Tax Code, every alien residing in the Philippines and every non-resident alien engaged in trade or business are required to file an income tax return in the Philippines ( BIR Form No. 1701 for engaged in trade or business or practice of profession and BIR Form No. 1700 for pure compensation income earners).  Under the substituted filing of Revenue Regulations No. 2-98, as amended, an individual earning pure compensation income from a single employer on which withholding tax on compensation had been properly withheld, it shall no longer be required to file an income tax return.

Applying the above, resident expatriates and non-resident expatriates engaged in trade or business in the Philippines are required to file income tax return, except under substituted filing where the Certificate of Withholding Taxes on Compensation or BIR Form No. 2316 would suffice for the purpose. If they would claim tax credits in their home country, they may use such BIR Form No. 2316 or alternatively, they may file income tax return at their option.

We likewise submit that those under split pay arrangement where salaries are paid abroad but is not charged back are required to file their respective income tax return in the Philippines and paying the related income tax due thereon. The withholding tax of 25% for non-resident expatriate not engaged in trade or business, and the 15% tax on special alien employee are final taxes. As such, we submit that are no longer required to file an income tax return under Section 51(2)(c).

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at in**@************er.org.

By; Tax and Accounting Center Philippines

For foreign investors, one consideration on foreign investments in the Philippines is the payroll tax of its expatriates employees who will man the operations in the Philippines. For income tax purposes, an expatriate employee in the Philippines may be taxed as follows:

Non-resident alien/expatriate in the Philippines

An non-resident alien/expatriate in the Philippines is one who is not a citizen of the Philippines and who is not a resident of the Philippines but deriving income as employee in the Philippines. He is classified either as a non-resident alien:

1. Not engaged in trade or business, or,
2. Engaged in trade or business

The determining factor is the aggregate length of presence in the Philippines. Under Section 25(A)(1) of the Philippines Tax Code, a non-resident alien who stayed an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines. In BIR Ruling No. 056-05, the BIR ruled that “any calendar year” covers all the months in the calendar year covered by the period of assignment of the expatriate in the Philippines.

A non-resident expatriate in the Philippines not engaged in trade or business in the Philippines is subject to 25% withholding tax on gross compensation. On the other hand, as non-resident expatriate engaged in trade or business in the Philippines is taxed at 5-32% of compensation income after deductions for personal exemptions (P50,000.00 basic personal exemptions, and P25,000 additional personal exemptions for every qualified dependent child up to four or up to P100,000).

Resident alien/expatriate in the Philippines

A resident alien in the Philippines is a non-Filipino citizen whose residence is within the Philippines. This is a matter of intention to reside in the Philippines and length of stay in the Philippine such as when his employment contract in the Philippines would require his presence in the Philippines for the entire taxable year.

A resident expatriate in the Philippines is taxable at 5-32% income tax rates in like manner as a Filipino citizen using the withholding tax table on compensation.

Special alien employees/expatriate in the Philippines

To encourage relocation of multinational companies and establishing certain entities in the Philippines, managerial and technical employees of the following entities in the Philippines are taxed at a lower tax rate of 15% of gross compensation income:

1. Expatriates of Regional or Area Headquarters of Multinational Companies (RAHQ)
2. Expatriates of Regional Operating Headquarters of Multinational Companies (ROHQ)
3. Expatriates of Offshore Banking Units (OBU)
4. Expatriates of Petroleum Service Contractor and Subcontractor

The 15% is made as a final withholding tax because the rate constitutes final payment of income tax on such gross income that the expatriate receives such as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances from such employment.

Summary

Based on the above income tax classifications, the length of stay and intention of the expatriate in the Philippines dictates their tax classification. Due care should be exercised in their classification to avoid misapplications of tax rates and do away with penalties for misapplications.

For further reading on the income taxation of expatriates, please read further on our other article on Income Taxation of Expatriates in the Philippines.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.