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Tax responsibilities of expatriates

Tax responsibilities of expatriates

by Edward L. Roguel

As 2007 ended, corporations and individuals engaged in business take on the task of completing their records to ensure the easy and smooth preparation of the income tax returns. For many individuals, this difficult task ended when they qualified for substituted filing. Under the substituted filing system, the requirement to file an annual income tax return has  been waived for individuals deriving purely compensation income if they only have one employer for the year and all their income had been fully subjected to withholding tax by their employer.

Under the substituted filing system, BIR Form No. 2316 issued by the employer serves the same purpose as the income tax return. In BIR form 2316, the employer attests that the information reported therein have been reported under BIR Form 1604-CF which has
been filed with the BIR. The employee, on the other hand, attests that he is qualified for substituted filing, i.e. he receives purely compensation income from one employer during the year and the total tax due has been correctly withheld by his employer.

How about expatriates working in the Philippines? Can they also qualify for substituted filing? Are they required to file their income tax returns?

Expatriate employees also have Philippine income tax liabilities. They are subject to tax in the Philippines on their income earned from performing services within the Philippines regardless of their classification, that is, whether they are considered resident aliens or non-resident aliens engaged in business in the Philippines or nonresident aliens not engaged in business in the Philippines. In general, they are required the file their annual income tax returns and report all income earned within Philippines, except those income already subjected to final tax; exempt from tax under the existing tax rules and regulations; or existing tax treaty between the Philippines and the country where such expatriate employees are residents. Just like us, their income tax returns are required to be filed on or before April 15.

Expat employees, in certain cases may also qualify for substituted filing, in which case the filing requirement shall also be waived just like Filipino employers. Expatriate employees falling under the following classifications are no longer required to file income tax returns provided (1) they only have one employer during the year; (2) they received purely compensation income, and (3) their income has been subjected to the correct withholding tax by their employer (i.e., tax due is equal to tax withheld):

  1. Resident Aliens. These include expatriates who are staying in the Philippines for the purpose of a continued employment for an indefinite time as may be required by the exigency of his position.
  2. Aliens employed by Regional Area or Operating Headquarters of multinational companies, petroleum service contractors and offshore banking units who enjoy the preferential tax of 15% on gross income. This is considered a final tax and the employee is no longer required to file an annual income tax to report such income.
  3. Non-resident Alien Not Engaged in Trade or Business in the Philippines whose income has already been subjected to the 25% final tax.

In certain cases, however, an expatriate receives supplemental compensation, sometimes referred to as split-pay arrangement, from a company in a foreign country, usually an affiliate of their local employer. Such foreign portion of the payroll, if given as compensation for the work performed in the Philippines, are also considered income derived from within the Philippines and, thus, taxable in the Philippines. In most cases, such income is not subjected to Philippine withholding tax by the local employer, in which case the expatriate employee loses his qualification for substituted filing.

On the other hand, expatriate employees who are deemed to be Non-resident Aliens Engaged in Trade or Business in the Philippines are still required to f ile their in c ome tax return, regardless of whether or not the tax due on his compensation has been correctly withheld by the employer. An expat is considered a Non-resident Alien Engaged in Trade or Business if he stays in the Philippines for more than 180 days but has not established their intention to make the Philippines as his place of residence. One who comes to the Philippines for a definite purpose which can be promptly accomplished is not a resident.

When an expatriate desires to credit his Philippine tax against his home country tax, the annual income tax return is generally the required proof of foreign income tax payment. It is not always the case that the tax office in the home country of the expatriate would accept BIR Form No. 2316 in lieu of the annual income return. This is understandable because the form was only issued by the employer and there is no indication whatsoever that the validity of the form has been confirmed by the BIR or that the form was at least filed with the BIR. Hence, even if an expatriate qualifies for substituted filing, he may also consider filing an annual income tax return. It may prove useful in such cases.

(The author is a senior tax manager at Punongbayan & Araullo, member of Grant Thornton International. For comments and inquiries, please e-mail Edward.L.Roguel@pna.ph or call 886-5511.)