What Expats Need to Know About Philippine Taxation

When planning on having a new address either for residency or business, financial institutions and similar elements are just some of the essential items you need to know about. In setting up shop, especially if you are a foreign investor, the local taxation system is an important aspect to study.

Similar to any other country, setting up shop or living in the Philippines will require one to pay income taxes and other kinds of taxes. Similarly, tax incentives and exemptions are also made available by the government in the Philippine market.

Putting up a business in the Philippines has been attractive to foreign investors in recent years. However, there are still differences in how taxes work for non-Filipino citizens. In general terms, individual taxation in the Philippines goes this way:

•      Citizens residing within the country are taxable on all income, may it be made within or outside the country
•      Non-resident aliens (foreigners who do not reside in the Philippines) and non-resident citizens (citizens but are not living in the country) are taxable only on their income made in the Philippines; and
•      Citizens who work overseas are only taxable in terms of their income earned in the Philippines.

For businesses, corporations created and are running in the Philippines are taxable on all income made within and outside the country. Foreign corporations, on the other hand, are taxable only on income from transactions within the country.

Tax Treaties

Tax treaties originate from bilateral agreements between two states as a way to solve issues on double taxation and tax evasion. You can know more about that here.

Taxation in the Philippines

Philippine taxation is an area that needs familiarization especially if you want your business in the country to succeed. While the subject is quite complicated to talk about, Philippine laws categorize national taxes into the following:

Corporate Income Tax

The income of resident foreign corporations from sources in the Philippines is taxed by 30%. Non-resident foreign corporations, on the other hand, are made answerable to a final withholding tax of 30% from its gross income.

Individual Income Tax

A foreigner or a non-resident alien (someone who has already stayed in the country for more than 180 days in any calendar year) who does business in the country can be taxed from 5 to 32 percent.

Withholding of Taxes

This means that the taxes, as a non-resident alien and owner of a foreign corporation, are withheld at source.

Fringe Benefits Tax

Fringe benefit taxes are imposed benefits given to employees on top of their salaries. These may include medical insurance and allowances among others.

Business Taxes

These come in many forms, and among those here are some essential kinds to take note of:

Value Added Tax (VAT)

The VAT is a form of sales tax, added to the original price of goods, properties and services in and on the importation of goods in the country. VAT returns are required to be filed if the actual gross income of a company exceeds PHP 1,919,500.

Excise Tax

This comes in two forms which are imposed on the production and consumption of a commodity. Specific taxes are imposed based on any physical unit of measurement (e.g., weight, volume, height) while Ad Valorem taxes are based on their selling prices or specified values.

Percentage Tax

This is imposed on transactions which are declared VAT-exempt (e.g., international shipping companies in the Philippines, insurance businesses, etc.).

Documentary Stamp Tax

Documents are not exempted. The stamp tax is imposed on important papers which serve as proof of transaction.

 

Foreign Exchange Regulations

In addition to the kinds of taxes mentioned above, the government through the central bank regulates foreign exchange dealings to ensure a safe financial system for all as well as an attractive local stock market.

Buying and Selling Forex

Foreign exchange can be bought by residents and non-residents for free, through authorized agent banks (AABs), connected subsidiary forex corporations, and other institutions allowed by law to operate as forex dealers and money changers.

Foreign Trade Transactions

Many types of merchandise can be brought in and out of the Philippines, and that includes foreign exchange.

Importers may buy forex from AABs and other institutions as advance payment without the approval of the central bank but with documentary requirements. The same institutions could also sell forex for imports once they have settled all that is necessary with the central bank.

Non-Trade Transactions

Non-trade transactions include foreign loans and foreign investments. Payments for non-trade businesses could be made through selling forex to residents, without the approval of the central bank. Documentary requirements set by the central bank, however, will be needed once the foreign exchange exceeds USD 120,000.

Tax Incentives

With the long list of taxation know hows in its laws, the Philippines also gives a generous amount of business and tax incentives to foreign investors to make it a great launch pad for businesses.

1. Tax exemptions

These come in forms of Income Tax Holidays, duty-free importation of capital equipment and breeding stocks, for example. It also includes exemptions from wharfage dues and export taxes, duties, imposts, and fees.

2. Tax credits

These cover purchases made on domestic breeding stocks and other genetic materials, as well as on raw materials and supplies.

3. Additional deductions from taxable income

Further deductions on taxable incomes are imposed for labor expenses and other major infrastructure works.

4. Zero-rated VAT

This means that the 12% VAT is not imposed on the buyers, and thus won’t appear on the side of the seller. The seller could then make use of the passed on VAT for importation. You can know more here.

5. Residency incentives

Some incentives granted to foreign investors under specific laws include either a permanent residency status not only to investors themselves but also to their spouses and dependents at most, or a special investor’s resident visa.

6. Tax and duty-free importation fees

This includes importation of capital investment, equipment, goods, spare parts, accessories, all subject to certain conditions.

7. Social responsibility incentive

As part of the general rule, any establishment that takes responsibility for the impacts of its activities are incentivized under compelling circumstances. This is how most corporations give back to society, too.

What’s Next?

After knowing such relevant information, do not worry about the complexity of the processes. However, being able to do the following will also be helpful for you and your business:

Determine your eligibility for any form of incentives

To identify your eligibility, you may visit and read more about the processes on tax incentive registration through the Philippine Economic Zone Authority, Board of Investments, Cagayan Economic Zone Authority, and Tourism Infrastructure and Enterprise Zone Authority, or other programs.

 

Identify an efficient and effective tax structure for your enterprise

Knowing more is better. Knowing a good tax scheme for your business is a must. That way, you can maximize your resources and be able to identify tax risks, too!

 

Process all important documents.

In dealing with government processes in the Philippines, situations are often made better by having necessary documents prepared in advance, and with extra copies.

 

Address international and double taxation issues

This is a vital issue when you are trying to set up shop in a foreign land. Paying in double will not only prevent a significant inflow of investments but might also bring on several security issues.

Depending on the kind of business you want to put up, taxation and business registration may seem like a hassle. At FLA Law Offices, hassles are solved with the hustles of professional and efficient lawyers who will help you with your various business registration needs.

 

References

Bureau of Internal Revenue. (n.d.). Double tax agreements. Retrieved February 27, 2019, from https://www.bir.gov.ph/index.php/international-tax-matters/international-tax-agreements.html

Chan, R. (2017). Incentives for foreign investors in the Philippines. Retrieved from http://enterph.com/blog/incentives-foreign-investors-philippines/

Expat. (2015). Tax in the Philippines. Retrieved from https://www.expat.com/en/guide/asia/philippines/12878-tax-in-the-philippines.html

Full Suite. (2016). Guide to Philippine taxation for foreign investors. Retrieved from https://www.full-suite.com/blog/guide-philippine-taxation-foreign-investors/

Tax and Accounting Center, Inc. (n.d.). Value added tax zero-rating on sale of services Philippines. Retrieved from https://taxacctgcenter.ph/value-added-tax-zero-rating-on-sale-of-services-philippines/