Foreign nationals employed by multinational companies and assigned in the Philippines are commonly referred to as ‘expatriates’. An expatriate’s compensation is typically paid under a split arrangement, i.e. a portion of the compensation is paid in the Philippines (Philippine portion) and the other portion is paid abroad (offshore portion). Expatriates and their employers are usually concerned about the Philippine tax reporting requirement for the offshore portion of the expatriates’ compensation under the split arrangement.
Expatriates, as alien individuals, are taxed on their compensation derived within the Philippines. As a rule, compensation or remuneration for services performed in the Philippines, regardless of the place or manner of payment, is considered income derived within the Philippines, Thus, the offshore portion of the expatriate’s compensation under the split arrangement would be taxable in the Philippines if paid in connection with the expatriate’s assignment or employment in the Philippines.
In most cases, the Philippine company where the expatriate is assigned, is billed by the foreign employer for the offshore portion of the expatriate’s compensation. When this happens, the Philippine company is deemed to have control over the payment of the offshore portion of the expatriate’s compensation. The Philippine company is thus constituted as a withholding agent with an obligation to withhold and remit to the Bureau of Internal Revenue, on a monthly basis, the taxes due on the Philippine and offshore portions of the expatriate’s compensation income. Expatriates can potentially benefit from this since Philippine taxes due on the Philippine and offshore portions of their compensation income should already be remitted to the tax authorities. They may also qualify for substituted filing where they are not required to file a tax return for income earned during the year.
However, there are times when the offshore portion of the compensation is not billed to the Philippine company. Under such circumstances, the Philippine company has no control over the payment of the offshore portion of the expatriate’s compensation, and has no obligation to withhold tax on the said portion. Consequently, the taxes pertaining to the offshore portion of the compensation income is not remitted to the BIR, and the total Philippine tax liability of the expatriate is not sufficiently covered by the amount of taxes withheld from the Philippine portion of the compensation income. In this case, the expatriate is required to file an income tax return to report compensation received in the Philippines and offshore during the year.
The deadline for filing and payment of income taxes in the Philippines is on April 15 of each year covering the income for the preceding taxable year.
(Sheryl Mae T. Amarille-Vegilla is an Assistant Manager for Tax & Corporate Services of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it 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. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email manila@kpmg.com.ph or svegilla@kpmg.com)