Tax for OFWs, expats in the Philippines? Know the key changes to happen

TAX REFORM: President Rodrigo Duterte signed Republic Act (RA) 10963, also known as TRAIN (Tax Reform for Acceleration and Inclusion), which took effect on January 1, 2018. It was aimed to simplify taxation, making it more equitable and effective, according to the Philippines’ Department of Finance (DOF). RA 10963 amended both RA 11467 (excise "sin" taxes on alcohol, e-cigarettes) as well as RA 8424, the National Internal Revenue Code of 1997. As part of TRAIN, fresh changes in the way income tax is calculated are set to take place from January 1, 2023.

$164.7 BILLION FOR ‘BUILD BUILD BUILD’: Under TRAIN, a priority reform programme of the Duterte administration, every citizen is enabled to take part in funding the numerous infrastructure projects and social services to curb poverty and reduce inequalities. The “Build Build Build” (BBB) drive consists of flagship infrastructure projects with a budget of $164.7 billion (Php8 trillion, Dh586 billion). It's an aggressive push to usher in a so-called "Golden Age" of infrastructure development, much of it bankrolled by government borrowings. In the 2021 national budget, P1.1 trillion ($21.9 billion) was earmarked for BBB. This is good while market confidence in the country's ability to repay its obligations remains high, which means lower interest rates for sovereign loans: S&P rates the Philippines as "BB+" (positive), while Fitch currently rates the Philippines as BBB- (stable).

TO-DO LIST: There are 4,000 infrastructure projects on the government’s to-do list, of which 75 are multi-billion “flagship projects”. Manila earlier said foreign loans will account for “only” 15% of the BBB spending warchest. A closer look shows that of the 75 flagships approved by the National Economic and Development Authority (NEDA), almost half (48%) will be sourced from foreign lenders. The initial lenders’ list shows the following: Japan (3 projects worth P226.89 billion); China (3 projects worth P164.55 billion); South Korea (2 projects, P14.06 billion); World Bank (1 project, P4.79 billion). | File photo shows passengers on board a train in Manila.

NATIONAL DEBT: There are concerns, however, the Philippines could face a debt-driven economic challenge: The national debt under the current administration is set to more than double during his six-year term to Php13.7 trillion by 2022, from Php6.1 trillion in 2016. With BBB, there are also concerns about “credit grabbing”: for example, the MRT-7, which runs 22.8km from North Avenue (Quezon City) to San Jose del Monte (Bulacan) with 14 stations and is set to fully open on December 2022. It’s not built with government money. The $1.54-billion project, hatched before Duterte came to power, is bankrolled by a San Miguel Corp-led group. There are at least 10 such pre-Duterte, big-ticket projects now listed as part of BBB.

FOUR MAIN TAXES IN THE PHILIPPINES: There are four main types of national internal revenue taxes in the Philippines: (1) income, (2) indirect (value-added and percentage taxes), (3) excise and (4) documentary stamp taxes. All these taxes are administered by the Bureau of Internal Revenue (BIR).

INCOME TAX IN THE PHILIPPINES: Income of residents in Philippines is taxed “progressively”, i.e. those who belong to lower income groups don’t pay income taxes at all; those who earn P8 million and above are taxed higher.

TAX FOR RESIDENT CITIZENS AND EXPATS: The Philippines taxes its resident citizens (people who live in the country) on their worldwide income (both in the Philippines and overseas). Non-resident citizens as well as expatriates, whether or not resident in the Philippines, are taxed only on income sourced in the Philippines. Rates of tax on income of expatriates (“aliens”) — resident or not — depend on the nature of their income (i.e. compensation income, income subject to final tax, or other income). A scene in Manila's Chinatown near the district of Binondo.

TAXES OFWs MUST PAY IN THE PHILIPPINES: For non-resident citizens (i.e. Overseas Filipino Workers, OFWs) — income is taxable only when derived from sources within the Philippines. The Tax Code (Section 23) provides that an OFW's income from abroad (income from overseas employment) is exempt from income tax. The OFW tax exemptions stay under TRAIN law. But while OFW income from overseas are tax-exempt, income derived in the Philippines (investments, capital gains tax) are not. | File photo of OFWs flying back to the Philippines.

TRAVEL TAX, AIRPORT FEES, REMITTANCES: OFWs are also exempt from travel tax, airport fees, and documentary stamp tax on their remittances. To be officially recognised as an OFW, however, a Filipino citizen must be duly registered with the Philippine Overseas Labour Office (agency attached to Philippine embassy/consulate) as an OFW. | A scene at the Ninoy Aquino International Airport.

TRAIN IMPACT: The new tax regime also simplifies estate and donor’s tax, widens and coverage of value-added tax, and raises taxes on fossil fuel and vehicles. Under RA 10963, electric vehicle sales are expected to maintain their momentum in the Philippines, benefiting from the EV’s exemption from excise taxes. | Photo shows Bonifacio Global City (BGC), a Manila suburb, by night.

SUGAR TAX: TRAIN law taxes sugar-sweetened beverages. The Philippine government implemented an “excise tax” on sugary drinks equivalent to P6 per litre for beverages using purely caloric sweeteners — and a higher P12 per litre for those using high fructose corn syrup (HFCS) — as mandated under TRAIN. Diabetes is increasing at an alarming rate in the Philippines, according to the WHO, with 22.3% of the country’s population considered “overweight”. (https://bit.ly/30aGRoc)

TAX FOR RESIDENT ALIENS: The existing income tax rates that apply to resident aliens and non-resident aliens doing business and receiving compensation income in the Philippines, are as follows: 0% for income not over P250,000; 20% for income from P250,00 to P400,000; 25% for income from P400,000 to P800,000; 30% for those earning P800,000 to P2 million; 32% for those earning from P2 million to P8 million; and 35% for those earning P8 million and above. These rates apply from January 1, 2018 to December 31, 2022. From January 1, 2023, a new compensation tax rate regime will be adopted in the Philippines, reducing income tax by 5% for low-income group. Resident aliens and non-resident aliens doing business and receiving compensation income in Asian country, and earning P250,000 (about $5,000) or less will pay zero taxes. Those who earn Php28,600 ($670 or Dh2,390) per month or up to Php400,000 per year will be taxed 15% (down from the existing 20% under TRAIN). https://bit.ly/3bTyEqJ

TAX RATES FOR BUSINESS INCOME: A resident citizen or resident alien, who is self-employed or practices a profession, is also subject to the graduated income tax rates. However, an individual who has gross sales/receipts and other non-operating income not exceeding the value-added tax (VAT) threshold (currently pegged at Ph3,000,000) may opt to be taxed either at: 8% tax on gross sales/receipts and other non-operating income in excess of P250,000 in lieu of the graduated income tax rates and percentage tax (business tax), or the graduated tax rates. Business income subjected to graduated tax rates shall also be subject to business tax (i.e. 12% VAT or 1%* percentage tax, as applicable), according to a PWC briefing. | Photo shows the Port of Davao (Sasa International Seaport), which is largely dominated by container cargo, raw materials exportation, bulk cargo, general cargo, and passenger traffic facilities.. https://pwc.to/3H0vOP0

WHAT IS A FINAL TAX? Final tax is also known as final withholding tax (FWT) prescribed on certain income payments. Under TRAIN law, FWT is not creditable against the income tax due of the payee or receiver of the income. Income subject to FWT tax include: Cash dividend (10%); property dividend (10%); cash payment to non-resident alien engaged in trade or business individuals within the Philippines (20%); on prizes exceeding P10,000 and other winnings paid to individuals (20%); payments to oil exploration service contractors/sub-contractors; Informers cash reward to individuals (10%); cash or property dividend paid by a Real Estate Investment Trust to an individual, among others. Once an income is subjected to FWT, it will not be furthered taxed under the income tax and/or capital gains tax.

GRADUATED TAX RATES FOR BUSINESS INCOME: Business income subjected to graduated tax rates shall also be subject to business tax (i.e. 12% VAT or 1% percentage tax, as applicable). The 1% percentage tax shall only be applied from July 1, 2020 until June 30, 2023. | Photo shows a phone repair shop in the Philippines.

TAX CALCULATOR: The Philippines’ Finance Department stated that TRAIN seeks to set aright the complicated and unjust taxation system as it lowers personal income tax. For example, a couple with a combined income of P100,000/month and 4 dependents would have a monthly tax savings of P7,582.85 or about P90,000 per year under TRAIN law. A tax calculator can be found here: https://taxcalculator.dof.gov.ph/