Taxation of Pinoys abroad

By Shirley S. Go

Filipinos or Pinoys are very hardworking and talented individuals; various multinational companies send them abroad to conduct training or provide support to its other foreign offices. They will usually be offered two-year secondment assignments. However, before a decision could be made on whether or not to go abroad, one of the questions usually raised by employees to their employers is “How about my Philippine tax obligation?”.

Filipino employees who are sent abroad on foreign assignments may either be classified as resident citizens or nonresident citizens. What is the difference, you may ask? Both resident citizen and nonresident citizen are taxed based on the graduated tax rates ranging from 5% to 32%. However, a resident citizen is taxed on his income from worldwide sources, i.e., Philippine-sourced income and foreign-sourced income. On the other hand, a nonresident citizen is taxable only on his income from Philippine sources.

What is then a foreign-sourced income? It is the compensation received for services rendered abroad, and such income will not be taxable if earned by a nonresident citizen. Under Section 22 (E) of the Tax Code, a nonresident citizen is a citizen of the Philippines who:

a. Establishes, to the satisfaction of the Commissioner of the Bureau of Internal Revenue (BIR), the fact of his physical presence abroad with a definite intention to reside in that country

b. Leaves the Philippines during the taxable year to reside abroad, either for immigration or for permanent employment

c. Works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. The phase “most of the time” is interpreted to mean physical presence abroad of at least 183 days during the taxable year.

d. Has been previously considered as a nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines. Hence, he will be classified as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income from sources abroad until the date of his arrival in the Philippines.

For example, Pinoy A left the Philippines for Singapore on August 1, 2005 and shall return to the Philippines on April 1, 2007. How will he be classified for Philippine taxation for years 2005, 2006 and 2007? For the year 2005, he will be considered a resident citizen for he was abroad for only152 days and thus, income he received worldwide (including the income he received while working for the Singapore office) will still be subject to Philippine tax. On the other hand, for year 2006, he will be considered a nonresident citizen and thus, income received from work performed for the Singapore office will be exempt from Philippine taxes. For year 2007, he is still considered a nonresident citizen from January 1 to March 31. Why? He may be out of Philippines for 89 days but since he was considered a nonresident citizen in 2006, he will remain a nonresident citizen until the date of his arrival in the Philippines.

It is therefore crucial for the employer to plan the assignment of a Filipino employee sent abroad, especially if the employer has agreed to shoulder the employee’s income taxes as a result of the foreign assignment. To the extent possible, the timing of his departure may be arranged in order for him to qualify as a nonresident citizen.

But how about those Overseas Filipino Workers (OFWs) who bring in the dollars and are now called the new heroes of our economy? An OFW is one whose employment contract passes through the Philippine Overseas Employment Agency (POEA). Since their contracts, at a particular time, would usually last for only 6 months or less, are they to pay taxes as well on the dollars remitted home? No. Just like a nonresident citizen, a Filipino who works abroad as an OFW is also taxed only on his Philippine-sourced income, regardless of the period that he is outside the Philippines.

The tax exemption privilege given to OFWs and nonresident citizens is relief most welcome, given the personal sacrifices that they make in earning a living for their families. There are, however, practical issues that they are faced with in relation to this privilege. At present, these individuals are no longer required to file income tax returns if they are fully-exempt. Thus, many have difficulty applying for home loans with banks due to their inability to present any tax return establishing their income and their capability to pay their obligations. Income tax returns, too, are usually required in dealing with other government agencies. Explanations by an OFW or a nonresident citizen to a bank or government employee with limited knowledge on taxation that he is exempt from tax would, expectedly, be quite a long discussion.

Given that the number of Pinoys working abroad is increasing everyday, the BIR may wish to address this need by issuing an alternative document that can equally be acceptable as the income tax return. Such initiative may entail some cost on the part of government, but it would surely be viewed as a positive way of showing OFWs and nonresident citizens that it truly has their best interests at heart.

(The author is a tax manager at Punongbayan & Araullo, member of Grant Thornton International. For comments and inquiries, please e-mail the author or call 886-5511,)