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Beating the odds of filing expat tax return

Beating the odds of filing expat tax return by: Clarissa R. Hornilla

For foreign nationals assigned abroad – or the so called expats – the fear of culture shock, unfamiliar sights, sounds, new ways of thinking, and new rules of the foreign land can be very stressful.

In the Philippines, I believe expatriate tax return filing would rank as one of the most stressful for expatriates.

Adding to that, just recently, the Bureau of Internal Revenue (BIR) has issued Revenue Regulations No. (RR) 10-2010, which is the implementing rules and regulations of Republic Act No. (RA) 10021 (The Exchange of Information on Tax Matters Act of 2009). One of the provisions of this revenue regulation is to allow Foreign Tax Authority to examine income tax returns (ITR) of taxpayers in the Philippines. This would mean that the tax authority of the expatriate’s home country has the power to assess its citizens even if stationed abroad. 

Surely, no expatriate would want to be exposed to deficiency taxes. But how can an expat beat the odds of filing expat tax return?

Among others, I believe that knowing the basics in expat taxation, planning ahead, and seeking the help of expat tax experts are some of the factors that could help beat the odds of expat tax return filing.

To gain a better understanding of expat tax return filing, some basic principles of expatriate taxation in the Philippines will be discussed in the succeeding paragraphs.

Are expats taxable in the Philippines? It depends. The taxability of expats depends on their residency and source of income.  The manner of taxation of an expat depends on whether they are classified as resident aliens or as non-resident aliens.

Under Philippine tax laws, a resident alien refers to an individual who is not a citizen of the Philippines but whose permanent residence is within the Philippines. On the other hand, a non-resident alien is one who derives income from Philippine sources but who has not established his intention to make Philippines his permanent residence. Non-resident aliens are further classified into two categories:

·      Non-resident alien engaged in trade or business in the Philippines (NRAETB) – refers to one who stays in the Philippines for an aggregate period of  more than 180 days in any calendar year; and

·      Non-resident alien not engaged in trade or business in the Philippines (NRANETB) – refers to one who stays in the Philippines for 180 days or less.

No matter how they are classified, aliens are taxable only on income derived from sources within the Philippines.

The Philippine source incomes of both a resident alien and an NRAETB are taxed at the graduated rates from 5 percent to 32 percent.  However, unlike a resident alien, an NRAETB is not allowed for substituted filing, and is therefore required to file an ITR.  On the other hand, the Philippine source income of an NRANETB shall be subject to final tax of 25 percent of gross income. Note, however, that there are certain types of income that are subject to final tax.

Since there are different modes of compensation payments for different expatriate assignments, there is confusion on how they will treat their income.

What if an expat rendering service in the Philippines is being paid by the foreign head office through its foreign bank account? Should this compensation income still be considered taxable in the Philippines?

In general, the situs of income for sale of services is the place where the services are performed.  Thus, for income arising from employment, any compensation or remuneration derived from services rendered in the Philippines, regardless of the place of payment or manner thereof, is considered as income derived from sources within the Philippines.  Therefore, even if payment of the expatriate’s compensation income is made abroad, the expatriate is still liable to Philippine income tax if he performs his employment in the Philippines.

Withholding tax liability for expatriate compensation can also be very confusing for the Philippine employer, especially for companies adopting split-pay arrangements. Philippine employers are often faced with the question of whether they are liable to withhold and remit the tax on the portion of salaries paid outside the Philippines.

Under Section 79 of the Tax Code, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

The “employer” for withholding tax purposes may be a person different from the one for whom the services are performed. Section 2.78.4 of RR 02-1998, as amended, also provides that the term “employer” also means any person paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation, who is not engaged in trade or business within the Philippines.

The same regulations provide that the exercise of control over the payment of salaries is one of the criteria in determining liability as a withholding agent. The liability to withhold tax on compensation arises when the employer pays wages or other forms of compensation, either directly or indirectly through a person, natural or juridical, that had been authorized by it to make such payment.

In addition, the BIR ruled that expatriates should declare as part of their salaries all compensation paid outside the Philippines related to services rendered in the country, whoever is the payor and wherever it is paid (BIR Ruling No. DA-192-08).

Thus, in the case of salaries paid in the foreign country but later on charged back to the Philippine entity, these charges shall establish that the Philippine entity has control over the particular compensation of the expatriate.  Accordingly, the Philippine entity is liable to withholding tax on such compensation. On the other hand, if the salaries paid in the foreign country are not charged back to Philippine entity, the Philippine employer may not be liable as a withholding agent. It should be noted, however, that the expat employee will be liable to file an annual ITR and remit to the BIR the additional tax for the portion of the salaries paid outside which have not been subjected to withholding tax.

The liability to withhold tax on compensation arises when the employer pays wages or other forms of compensation, either directly or indirectly through a person, natural or juridical, that had been authorized by it to make such payment.

As expat tax issues can also be very confusing, the easiest and safest way for expats to properly comply with Philippine tax rules and regulations is to seek out expat tax experts to get some first-hand expat tax advice and information on expat tax planning and preparation.  

With this, it is hoped that the coming tax filing season will be seamless not only for expatriates, but for all taxpayers.