Taxation of expatriates

With the April 15 tax filing deadline in the horizon, every income earner in the Philippines, Filipino or otherwise, should start thinking taxes. Let me show the way to those who are non-Filipinos, otherwise known as expatriates, working in the Philippines.

The basics

For Philippine income tax purposes, an individual is classified as a resident citizen, a non-resident citizen, a resident alien, a non-resident alien engaged in trade or business, or a non-resident alien not engaged in trade or business. Of course, an expatriate working in the Philippines may fall under any of the last three categories of individual taxpayers.

In general, an expatriate who stays in the Philippines for more than 180 days is considered a non-resident alien engaged in trade or business. Should the duration of the work extend to more than two years, the expatriate may already be considered as a resident alien. The expatriate is considered a non-resident alien not engaged in trade or business if he stays in the Philippines for not more than 180 days.

Why the classification

Resident aliens and non-resident aliens engaged in trade or business are taxed similarly as citizens, at graduated rates ranging from five percent to 32 percent, depending on the taxable income bracket. The income tax brackets and the corresponding tax rates are as follows:

On the other hand, expatriates deemed as non-resident aliens not engaged in trade or business are taxed at a flat rate of 25 percent based on the gross income received in the Philippines.

Allowable deductions

An expatriate deemed as a resident alien is entitled to a basic personal exemption amounting to P 20,000 if single or legally separated with no dependents, P 25,000 if head of family, and P 32,000 if married. In addition, the expatriate is allowed additional exemption of P 8,000 for each dependent child not exceeding four.

The term “head of family” means an unmarried or legally separated man or woman with one or both parents, or with one or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted children living with and dependent upon him for chief support, where such brothers or sisters or children are not more than 21 years of age, unmarried and not gainfully employed or where such children, brothers or sisters, regardless of age are incapable of self support because of mental or physical defect. On the other hand, a “dependent” means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than 21 years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

A benefactor of a senior citizen may also be considered as “head of family”  and is allowed to avail himself or herself of that status for taxation purposes, subject however to certain conditions provided for by law.

For an expatriate deemed as a nonresident alien individual engaged in trade or business in the Philippines, entitlement to personal exemption is not automatic. He shall be entitled to personal tax exemption only if his country of residence allows exemption to similarly situated citizens of the Philippines. If any, the amount of personal exemption shall not exceed the amount of exemption granted to citizens and residents of the Philippines.

Expatriates deemed as non-resident aliens not engaged in trade or business are not entitled to any exemption or deduction, as they are taxed based on gross compensation income.

Exceptions

Certain expatriates are given preferential tax treatment in the Philippines, i.e., taxed at a lower rate. These are the expatriates employed by regional or area headquarters of multinational companies, by offshore banking units, petroleum service contractors and subcontractors, who are taxed at 15 percent, based on gross compensation income.

Also, expatriates deemed as non-resident aliens not engaged in trade or business in the Philippines may be exempted from the payment of income tax, if he is a resident of a country to which the Philippines has an existing tax treaty (e.g., USA, Australia, Singapore) and the conditions imposed under the relevant tax treaty are met. Basically, to be entitled to exemption, the remuneration received by the expatriate in the exercise of employment in the Philippines must not be charged to the Philippine entity, i.e., must be borne entirely by the foreign employer.

Under the law, any person who willfully attempts in any manner to evade or defeat any tax or the payment thereof can be held criminally liable. Thus, while the expatriates working in the Philippines do not owe patriotic duty to the country, they are still required to pay Philippine taxes, and failure to do so could lead to criminal prosecution.

(Herminigildo G. Murakami is a Principal for Tax and Corporate Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firm affiliates with KPMG International, a Swiss Cooperative. This article is for general information only and is not intended to be, nor it is a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. 

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