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OFWs in the UAE: How Philippine expats calculate taxes on income earned overseas and back home. Image Credit: Bloomberg

Dubai: Overseas Filipino Workers (OFWs), a term often used to refer to Filipino migrant workers, are people with citizenship of Philippines, who reside in another country for a fixed period of employment.

What is the tax residency status of OFWs?

For the purpose of taxation, an OFW is considered as a non-resident citizen as per the National Internal Revenue Code (NIRC) of Philippines. The country’s tax norms provides a wide range of tax incentives for OFWs.

As per the NIRC, OFWs are only liable to pay taxes on their income earned within the Philippines, and not their overseas income. This means that the income derived by these individuals from working abroad is not subject to income tax in the Philippines.

What taxes OFWs have to pay in the Philippines?

The government’s revenue regulation outlines important guidelines about the tax treatment of income earnings and remittances sent by Overseas Contract Workers (OCWs) or OFWs.

What is the difference between Overseas Contract Workers (OCWs) or OFWs?
For technical purposes such as government statistics, the term Overseas Contract Workers or OCWs refers to OFWs with an active employment contract.

On the other hand, OFWs who are not OCWs are migrant workers currently without a contract who had one within a given period of time.

Although the income an OFW earns overseas is exempt from income tax within the Philippines, if an OFW realises income from business activities, investments or properties within the country, such earnings are subject to income taxes in the Philippines.

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What taxes OFWs have to pay in the Philippines?

While regular income is taxed at a tax rate from 5 per cent to 32 per cent, passive income – which is applicable to most OFWs, is taxed as follows:

• A tax rate of 20 per cent is levied on interest income from bank deposits.

• A tax rate of 20 per cent is levied on royalties, a benefit for people who create intangible assets or work of art. (Musicians owning music rights, cinema rights, and authors often grant the right to use their copyrighted material and earn income.)

• A tax rate of 20 per cent is levied on prizes, lotteries and lotto winnings, unless prizes less than 10,000 Philippine pesos (Php) – which are taxed at the regular income tax rate of 5 per cent to 32 per cent.

• A tax rate of 10 per cent is tax levied on cash dividends from property investments, which are simply a proportion of profits received from his or her real estate investment.

• A tax rate of 5 per cent to 10 per cent is levied on disposal or sale of shares of stock held in Philippine-based companies

• A tax rate of 6 per cent is levied on capital asset gains i.e. increase in an asset's value realized when the asset is sold. (It applies to any asset, be it investments and those purchased for personal use. The gain may be short-term, one year or less, or long-term, more than one year.)

• A tax rate of 5 per cent, 12 per cent or 20 per cent is categorically levied on long term deposits and investments in trust funds or certificates, depending on the involved amount.

Are there any tax exemptions for income earned from foreign currency deposits?

Any income earned by OFWs from foreign currency deposits is exempt from the usual withholding tax (i.e. the amount withheld when making a payment) known as FWT or Final Withholding Tax, which is charged at 7.5 per cent, as per government guidelines revenue regulations.

To avail this benefit, the OFW must execute a written permission to the bank to inform that the depositor is exempt from tax as a non-resident.

In case the deposit account is jointly held by the OFW with a resident of the Philippines, 50 per cent of the interest income from such bank deposit will be treated as exempt while the other 50 per cent shall be subject to the Final Withholding Tax (FWT) charged at 7.5 per cent.

All OFWs also enjoy exemption from paying travel tax and airport fees, although they are required to show proof that they are legal migrant workers.

Philippine pesos
Do OFWs have to pay Documentary Stamp Tax (DST) in the Philippines?

Do OFWs have to pay Documentary Stamp Tax (DST) in the Philippines?

Remittances from OFWs are also exempted from the Documentary Stamp Tax (DST).

Documentary Stamp Tax, commonly known as DST, is a tax in the Philippines regularly applied to the execution of transaction documents. Common transactions where DST will apply include the issuance or sale of stocks, execution of loan or debt agreements, or the sale and transfer of properties.

However, according to tax norms, in the case of OFW remittances sent through banks, the recipient is required to show proof of eligibility for exemption of DST, such as Overseas Employment Certificate (OEC) or Overseas Worker Welfare Administration (OWWA) certificate.

What taxes apply to OFWs doing business in the Philippines?

The existing income tax rates that apply to residents and non-residents doing business in the Philippines, which applies from January 1, 2018 to December 31, 2022, are as follows:

• No income tax rate is applied on income of up to Php250,000 (Dh17,900).

• Income tax rate of 20 per cent is applied on income from Php250,00 (Dh17,900) to Php400,000 (Dh28,640).

• Income tax rate of 25 per cent is applied on income from Php400,000 (Dh28,640) to Php800,000 (Dh57,280).

• Income tax rate of 30 per cent is applied on income from Php800,000 (Dh57,280) to Php2 million (Dh143,202).

• Income tax rate of 32 per cent is applied on income from Php2 million (Dh143,202) to Php8 million (Dh572,808).

• Income tax rate of 35 per cent is applied on income from Php8 million (Dh572,808) and above.

From January 1, 2023, a new tax rate regime will be adopted in the Philippines, reducing income tax by 5 per cent for low-income group.

Residents and non-residents doing business in the Asian country, and earning Php250,000 (Dh17,900) or less will pay zero taxes.

Those who earn Php28,600 (Dh2,390) per month or up to Php400,000 (Dh28,640) per year will be taxed 15 per cent (down from the existing 20 per cent).

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Do OFWs have to pay Value Added Tax (VAT) on their businesses in the Philippines?

Do OFWs have to pay Value Added Tax (VAT) on their businesses in the Philippines?

The earnings of an OFW from a business venture or any other property in the Philippines is subject to tax obligations.

The income of a business that is owned by an OFW can be exempted from the 12 per cent value-added Tax (VAT) provided that the OFW opts not to be registered as a VAT taxpayer and if the annual gross business income does not exceed Php1.5 million (Dh107,401).

The business of an OFW that is not VAT-registered is subject to the quarterly 3 per cent (annual 12 per cent) revenue tax.

Key takeaways

Rates of tax on income of expatriates— resident or not — depend on the nature of their income (i.e. compensation income, income subject to final tax, or other income).

The Philippines taxes its resident citizens (people who live in the country) on their worldwide income (both in the Philippines and overseas). However, non-resident citizens as well as expatriates, whether or not they reside in the Philippines, are taxed only on income sourced in the Philippines.

For residents and non-residents engaged in trade or business in the Philippines, the maximum rate on income subject to tax (usually passive investment income) is generally 20 per cent.

Meanwhile, 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 Php8 million (Dh572,808) and above are taxed higher.

OFW savings and investments have supported the Philippine economy in a significant way. The government has sought to bring more overseas earnings of OFWs into the country, including a favourable tax treatment to further incentivise OFWs to save and invest in the Philippines.