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
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.
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.
matter how they are classified, aliens are taxable only on income derived from
sources within the Philippines.
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.
there are different modes of compensation payments for different expatriate
assignments, there is confusion on how they will treat their income.
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?
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
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
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.
“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
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
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).
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.
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.
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