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Expatriate taxation

Expatriate taxation by: Alfredo Q. Merto

Expatriates contribute to the Philippine economy by paying their taxes due to the government. As such, expatriates must be aware of certain tax provisions under the Philippine tax laws not only for the payment of correct taxes but also for the incentives they could get.

The incentives or privileges available to expatriates under Philippine laws depend on the industries the Philippines gives priority to, the employment status of the expatriates, and the nature of services they provide. These incentives or privileges may be in the form of relief or total exemption from income tax. Both forms, however, are discouraged in taxation. Thus, incentives in the form of relief or exemption must find basis in and be expressly provided under Philippine laws. 

There are specific tax provisions which are also applicable to expatriates, such as exclusions or deductions from gross income. However, a simple understanding of their tax classification status could play an important role in terms of savings when it comes to expatriate taxation in the Philippines.

To have a better understanding of the tax incentives available to expatriates, let me discuss a few basic tax provisions under the Tax Code.  Expatriates are taxed on their Philippine-sourced income and the tax rate depends on whether they are residents of or are doing business in the Philippines. While a resident alien is defined as an individual who is a resident in the Philippines, but is not a Filipino citizen; a nonresident alien is neither a resident nor a citizen of the Philippines.  A nonresident alien may or may not be engaged in business/trade in the Philippines. However, a nonresident alien who comes to the Philippines and stays therein for more than 180 days in any calendar year shall be deemed doing business in the Philippines (Sec. 25 of the Tax Code). This means that the tax rate to be applied shall be the graduated income tax rates similar to that of a regular Filipino citizen.

For example, expatriates who render employment services in the Philippines will be taxed using the graduated rates — i.e., 5 percent to 32 percent, depending on their income bracket — to be applied to the taxable compensation income from such employment but net of the personal and additional exemptions.  Their employers in the Philippines withhold taxes and remit the same to the government.  This is not far from how local employees are taxed, assuming the latter receives no other income except for the salaries from their employment in the Philippines.  

Expatriates generally receive significantly higher compensation and benefits when they are on an international assignment. Hence, in most cases, their Philippine-sourced compensation income will be taxed at the maximum rate. Consequently, certain exclusions or deductions from its Philippine-sourced income could provide reduction of their Philippine income tax. 

Do expatriates also pay social security contributions, pensions or the so-called statutory contributions in their home country? Although these may be excluded from the taxable compensation income they receive abroad for services rendered in the Philippines, it is advisable to take some precautionary measures to check any existing bilateral agreement between the Philippines and its home country.  

How about those benefits furnished to expatriate? Will these benefits be exempt from tax on compensation and fringe benefits tax (FBT)?  Under Revenue Regulations (RR) No. 03-1998, as amended, de minimis benefits are exempt from FBT and tax on compensation. However, these benefits shall be limited to facilities or privileges that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees.  These tax-exempt benefits are enumerated in the tax regulations. 

There are also certain tax-exempt benefits that are not included in the enumeration but could s till qualify as non-taxable — e.g., mobile allowance (BIR Ruling [DA-233-07]), outstation allowance (BIR Ruling No. 013-02), and grant of housing privilege (BIR Ruling No. 055-99).  In each of the said tax rulings, the Bureau of Internal Revenue (BIR) confirmed that the grant of such benefits are not subject to FBT or tax on compensation because such benefits are for the convenience or the advantage of the employer, where the employees receiving such benefits are compelled or required to be on call or available 24 hours a day, in case of power failure or trouble shooting or when the exigency arises. 

In conclusion, since expatriates have their fair share in boosting the Philippine economy, it is only justifiable that the government rewards their contribution through tax incentives — whether in the form of exclusions or deductions from their income, or a lower tax rate, as provided under Philippine tax laws, rules and regulations.

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at Alfredo.Merto@ph.gt.com.  For other tax concerns, please check out our other tax services.