Alongside looking at income taxes for individuals, we will also focus on other forms of tax, including for firms and on capital gains overseas.
Whilst it shouldn’t be considered as tax advice, it is correct as far as we are aware at the time of writing.
With the ongoing covid situation, some of the information in this article is subject to change, including expat taxes and work permits.
If you are looking for portable expat tailored investment solutions, which is what we specialise in, you can contact me on this form.
Often investing as an expat can be done much more tax-efficiently than people think.
Table of Contents
The Philippines is a state in Southeast Asia, located on 7 thousand islands.
The main tourist advantages, like many neighboring countries, are beaches, diving and visa-free travel for Russians.
English is one of the official languages here, so it will be easy to negotiate with waiters and sellers in big cities and tourist places.
Now in the Philippines, the rainy season officially continues, which should end in January, but many still go there for the winter or New Year’s holidays.
Most of the population does not live well. Based on the latest statistics, the average income of the population (per family) is 200-300 US dollars per month.
The Philippine state is very corrupt, or rather, the concept of corruption is so deep in the genes that it is taken by the locals for granted.
I’m not talking about the fact that money can buy everything, but practically any official, one way or another, can be “appeased” with this or that gift or service.
Local opinions about the state come down to making acquaintances with influential officials or, best of all, with congressmen / senators, i.e. the vast majority of the population believes in solving all problems through communications. This has a national peculiarity.
In spite of all this, there are a lot of expats living in Philippines and having their own businesses, paying taxes and this is why we are here. In this article we will discuss and learn all types of taxes that are valid in Philippines, and also learn what taxes the expats have to pay.
- General principles
When moving to the Philippines, especially if you are looking to work or start a business there, you are likely to have questions about the local tax system.
Indeed, as with most countries, in the Philippines you are more likely to pay income tax as well as other types of taxes.
However, the tax is levied under several conditions and at different rates for different categories of foreigners. It is best to know about this in advance.
Expatriates residing in the Philippines who are not yet citizens are considered resident aliens, while foreigners who do not live in the Philippines are considered non-resident aliens. If you are already a citizen but do not reside in the country, you are a non-resident citizen.
Generally, the following principles apply to individual taxation in the Philippines:
- Citizens residing in the country are taxed on all income derived from sources in the Philippines and beyond;
- non-resident aliens and non-resident citizens are taxed only on their income in the Philippines; and
- Philippine Nationals Overseas Workers (OFW) are taxed only on their income in the Philippines.
From a business point of view:
- domestic corporations (established in the Philippines) are taxed on all income within and outside the country; and
- Foreign corporations, whether they are engaged in trade or business in the Philippines, are taxed only on income derived from domestic sources.
- Taxable income
Resident citizens – Residents of the Philippines are taxed on all of their net income derived from sources inside and outside the Philippines.
Foreign citizens – A foreign individual, whether resident in the Philippines or not, is taxed only on income derived from sources in the Philippines. Resident aliens are taxed on income earned in the Philippines in the same way as resident citizens.
The tax is usually withheld in sufficient amounts from wages and salaries to cover the final tax liability. If not, the balance must be paid upon filing a return, which is required no later than April 15 of the year following the year of income. In some cases, the obligation to pay income tax may be paid in two equal installments.
Optional standard deduction (OSD) – With the exception of individuals receiving compensatory income, resident citizens, non-resident citizens and resident aliens are allowed to claim an OSD in lieu of itemized deductions for ordinary and necessary expenses paid or incurred during the year. The allowed OSD must be a maximum of 40% of gross sales or gross receipts without deducting cost of sales or service charges.
Calculation and payment using OSD is similarly applied at the time of quarterly tax return filing.
Basis – resident citizens are taxed on world income; Resident and non-resident foreigners pay tax only on the Philippine source of income. However, foreign individuals may benefit from preferential tax treatment or may be exempt from paying income tax in accordance with applicable tax treaties, subject to confirmation of the BIR regulation.
Place of Residence – All citizens are usually considered resident if they do not meet the requirements to be considered non-resident. As a rule, the residence of foreign workers is established when the total duration of stay in any calendar year exceeds 180 days.
Tax filing status – Married couples in the Philippines who do not derive income solely from compensation must always file a joint tax return.
Taxable Income – Taxable Personal Income is all income minus allowable deductions and personal benefits.
It includes compensation, business income, capital gains (arising from the sale of real estate and transactions in stocks), dividends, interest, rents, royalties, annuities, pensions, and the partner’s distribution share in the net income of general professional partnerships. Individuals with a minimum wage (MWE) are exempt from paying income tax on their taxable income.
Holiday pay, overtime pay, night shift pay, and hazard pay received by these MWEs are also tax deductible.
However, an employee who receives / earns additional compensation such as commissions, royalties, fringe benefits, benefits in excess of the non-taxable ceiling of taxable benefits of Philippine Pesos 30,000 and taxable income other than the exempt remuneration mentioned above is not qualifies as MWE and therefore all his / her earnings are not exempt from income tax.
Instead of detailed deductions, an individual may choose to use an additional standard deduction (OSD), which cannot exceed 40% of total gross income, when calculating taxable income for the taxable quarter / year. However, once a choice has been made to use an OSD, it cannot be canceled for the tax year for which the refund was made.
Capital Gains – An individual is subject to capital gains tax on the sale of real estate at a rate of 6% of the total selling price or current fair market value, whichever is higher. An individual is also subject to Capital Gains Tax on the sale of unlisted shares at a rate of 5% on net income not exceeding PHP 100,000 and 10% on the excess. Gains on the sale of stock traded on the stock exchange are taxed at half 1% of the total selling price.
Tax deductions and tax credits – Subject to certain restrictions, deductions are provided for premiums for health insurance and / or hospitalization. Personal benefits are available to the taxpayer and his / her spouse, and qualified dependent children.
- Personal taxes
The income of residents in the Philippines is taxed progressively up to 35%.
The rates also apply to individuals who receive income from a business (including capital gains from the sale, transfer or exchange of shares in a foreign corporation) or from professional activities.
Individuals in management and high-tech positions employed by headquarters, ROHQ, multinational companies, offshore business units and oilfield service contractors / subcontractors are taxed at 15% of their gross income.
Income is divided into the following three categories, which are taxed separately:
- Compensation income for employment: This income is taxed at a progressive rate on gross income after deducting personal benefits and fringe benefits, but no deductions for expenses.
- Passive income: This income (i.e. dividends, certain interest, royalties, etc.) is only subject to final withholding tax.
- Business and professional income: This income is taxed at progressive rates on net business or professional income, that is, after deducting certain specified expenses and any excess of personal and additional exemptions over compensatory income.
- Corporative taxes
The income tax rate for both local and foreign resident corporations in the Philippines is 30%.
Company tax is paid by local companies on all income derived from sources in the Philippines and beyond. Foreign corporations, both resident and non-resident, are taxed only on income derived from sources in the Philippines.
However, foreign non-resident corporations are subject to final withholding tax on passive (investment) income under certain circumstances at rates generally higher than the applicable tax rates applicable to local and foreign resident corporations.
Resident companies are those that are incorporated or organized under the laws of the Philippines, or foreign companies duly licensed to do business or conduct business in the Philippines.
The corporate income tax rate for both local and foreign resident corporations is 30% of net taxable income.
Dividends received from domestic corporations are not subject to income tax; interest on the deposit and income of a Philippine bank in foreign currency or any other monetary benefits from deposit substitutes, as well as from trust funds and similar arrangements; and other passive income previously subject to final taxes.
The interest income from the extended foreign currency deposit is subject to a final tax of 7.5%. All other interest earned by domestic and foreign resident corporations is subject to a final withholding tax of 20%.
Regional operating headquarters are taxed at 10% on taxable profits.
Special Economic Zone businesses duly registered with the Philippine Economic Zone Authority are taxed at a rate of 5% on gross income in lieu of national and local taxes, excluding property tax.
The term “gross income” refers to gross sales or gross income derived from business activities in the Ecozone less sales discounts, refunds and surcharges, less cost of sales or direct costs, but excluding administrative expenses and incidental losses in the tax period.
The tax year in the Philippines is based on the calendar year, although the approval of the tax inspector can be obtained to adopt the fiscal year.
The tax is paid in four quarterly installments, with each corporation filing quarterly tax returns for the first three quarters, and the tax is payable 60 days after the end of each quarter.
The final report for the full year must be filed 105 days after the end of the year in which the balance of tax is due after deducting the three previous payments and the income tax payable. Any surplus is recoverable or reclaimable as a tax credit against future tax payments.
*About the minimum tax on corporate income
A minimum corporate income tax of 2% on gross profit is levied from the fourth tax year immediately after the start of business.
Any excess of the minimum corporate income tax over ordinary income tax may be carried forward and credited to the ordinary income tax account for the three tax years immediately following.
The calculation and payment of MCIT is similarly applied at the time of filing the quarterly corporate income tax. The term “gross income”, for purposes of applying the minimum corporate income tax, means gross sales less sales proceeds, discounts and surcharges, and the value of goods sold.
However, the Secretary of the Treasury may suspend the introduction of a minimum corporate income tax for any corporation that suffers losses due to a lengthy employment dispute, force majeure or legitimate business failure.
- VAT taxes
Value Added Tax (VAT) of 12% of the gross selling price or gross monetary value of goods is levied on all imports, sales, barter, exchange or lease of goods or property and sale of services.
“Gross Sale Price” means the total amount of money or its equivalent that the buyer pays or is obligated to pay to the seller on account of the sale, barter or exchange of goods or property, excluding value added tax. Excise tax, if any, on such goods or property must form part of the gross sales price.
- Other taxes
Capital income tax on shares – Net capital gains from the sale of non-listed shares of a local corporation traded on the Philippine Stock Exchange are taxed on each transaction at the rate of 5% of the first 100,000 Philippine pesos and 10% in excess of that amount. On the other hand, the sale of shares of a domestic corporation through the Philippine Stock Exchange or through an initial public offering is subject to interest tax on the transaction at a rate of 1/2 of 1% of the selling price. Any gain or loss from the specified transaction is excluded for income tax purposes.
Capital income tax on real estate sale – Sale of land, buildings and other real estate classified as property, plant and equipment is subject to 6% capital gains tax based on gross sale price, current fair market value or zonal value at the time of sale, whichever is greater.
Fringe benefit tax – Ancillary benefits provided or provided by an employer in cash or in kind to selected employees (excluding ordinary employees) are taxed at a rate of 32% based on the total cash value of the fringe benefits.
Tax on incorrectly accumulated profits – Illegal Accumulated Income Tax of 10% (IAET) is imposed on improperly accumulated taxable income earned by closed corporations. The term “private corporation” refers to corporations in which at least 50% of the share capital or voting rights are held directly or indirectly by no more than 20 individuals or for them.
The tax base of 10% IAET represents taxable profit for the current year plus tax-exempt profit, profit excluded from gross profit, profit subject to final taxation and net operating loss carried forward less. It is reduced by the amount of income tax paid for the current year, dividends actually or constructively paid and the amount reserved for reasonable business needs.
- Capital gains and losses
Ordinary assets include:
- Taxpayer inventory or other property that would be properly included in the taxpayer’s inventory if it were in stock at the end of the tax year
- Property held by a taxpayer principally for sale to customers in the ordinary course of a business or business
- Property used in trade or business that is depreciated.
- Real estate used in trade or business.
All property owned by a taxpayer, regardless of whether it is related to trade or business, not included in the list of ordinary assets, is capital assets. Capital gains arise from the disposal of ‘property, plant and equipment’.
Dividends received by a Philippine corporation or a resident foreign corporation from a Philippine corporation are not subject to income tax. However, resident individuals receiving dividends are subject to income tax of 10%.
No credit is granted against the underlying corporate income from which dividends are declared. However, a domestic corporation that owns a majority of the voting shares of the foreign corporation from which it receives dividends is deemed to have paid the relevant foreign taxes.
Interest is deducted on a cash basis or on an accrual basis depending on the taxpayer’s accounting method, but must be reduced by 33% to the extent that a portion of the interest income is ultimately taxable. If interest is paid to a foreign creditor, it will remain deductible as long as it is accrued in connection with the taxpayer’s trade or business.
Losses can be offset against all income and capital gains in the same tax year. Losses must be incurred by the taxpayer during the tax year and must be incurred in connection with trade and business and must be verified by a completed transaction.
An operating loss for any tax year immediately preceding the current tax year that was not previously recognized as a deduction from gross profit may be carried forward as a deduction from gross profit for the next three consecutive years immediately following the year in which the loss occurred. This is known as net operating loss carry-over or excess of the allowable deduction over gross profit in the tax year.
Philippine (domestic) corporation is taxed on global income. Foreign income is taxed as it is earned or received, depending on the accounting method used by the taxpayer. Resident foreign corporations are taxed in the Philippines only on income from Filipino sources.
Tax incentives are granted for taxes and fees paid on the purchase of raw materials for export products, domestic basic equipment, and domestic breeding stock and genetic materials. There are also a number of special economic zones, some of which operate as separate customs territories. (See also ‘Investment Incentives’ above.)
Optional standard deduction (OSD)
In lieu of an itemized deduction of ordinary and necessary expenses paid or incurred to calculate net taxable profit, domestic and foreign corporations are allowed an OSD up to 40% of gross income. Calculation and payment by OSD is similarly applied at the time of quarterly corporate income tax filing.
Help from foreign taxes
Avoidance of double taxation is provided by tax treaties and / or foreign tax incentives. Treaties usually define when a taxpayer will be deemed to be doing business in the Philippines for income tax purposes.
Group taxation is not allowed. Grouping of corporations has no tax implications because tax law treats each corporation separately.
Living in Manila or another part of the country isn’t like living in a tax-efficient place like Singapore, Monaco or the UAE.
Yet this can be a tax-efficient place to live. Overseas income is charged at 0% in most situations, which can make this a good alternative in Asia.
So it depends where your income is being sourced from.
What is the best option for most expat investors? This article will speak about this very topic.