Extended business travelers are likely to be taxed on employment income relating to their Philippines workdays. Income tax returns are due by 15 April in the year following the tax year ending 31 December. Employers are required to withhold tax from the employee’s compensation.
Liability for income tax
The liability of aliens for Philippines tax is determined by their residence status. An alien who is present in the Philippines for at least 2 years is a resident alien. An alien who stays in the Philippines for less than 2 years is considered a non-resident alien. There are two classifications of a non-resident alien:
- engaged in trade or business in the Philippines
- not engaged in trade or business in the Philippines.
A non-resident alien engaged in trade or business (NRAETB) is one who stays in the Philippines for more than 180 days during any calendar year. If the individual stays in the Philippines for less than 180 days, the individual is considered a non-resident alien not engaged in trade or business (NRANETB). The taxable income of citizens, resident aliens, and NRAETB is defined as gross compensation and net business income less personal allowances. The taxable income of NRANETBs is their gross income.
Non-resident citizens and aliens are subject to income tax on Philippines-sourced income only.
Resident citizens are subject to Philippines income tax on worldwide income. Non-resident citizens and aliens are subject to Philippines income tax on their Philippines-sourced income only, such as employment income and passive income.
Definition of source
Employment income is generally treated as Philippines-sourced compensation where the individual performs the services while physically located in the Philippines.
NRANETBs are taxed at a flat rate of 25 percent.
Tax trigger points
Extended business travelers will be taxable in the Philippines on income derived from services rendered in the Philippines. It is important to ascertain whether they will be taxed as NRAETBs or NRANETBs, that is, whether they were in the Philippines for more or less than 180 days, as this will determine the applicable tax rate.
Types of taxable income
For extended business travelers, the types of income that are generally taxed are employment income and other Philippines-sourced income.
Net taxable income of citizens, resident aliens, and NRAETBs are taxed at graduated rates ranging from 5 percent to 32 percent. The maximum rate is currently 32 percent on income earned over 500,000 Philippine pesos (PHP). NRANETBs are taxed at a flat rate of 25 percent of gross income unless a lower rate is applicable under a double tax treaty or special law.
Liability for social security
Each employer is required to deduct an amount from the salary of each employee for premium contributions remittable to a social security fund and the PhilHealth coverage to finance the retirement, sickness, disability, health, and other social security benefits of the employee. The employer is also required to remit a counterpart contribution for the employee. The amount of premium contributions by the employer and employee depends on the salary bracket of each employee, based on a pre-calculated table of contributions.
Employee compliance obligations
An individual taxpayer is taxable on a calendar year basis. In general, every citizen, resident alien, and NRAETB in the Philippines is required to file an income tax return and an annual information return. The said returns should be filed and the net tax on the income tax return should be paid on or before 15 April following the close of the year covered by the return.
Employer compliance obligations
The employer is required to withhold the tax due from the employee’s compensation income and remit the same to the tax authorities. If the correct amount of tax due has been properly withheld during the calendar year, the employee may qualify for substituted filing, in which case there is no need for the employee to file an annual income tax return.
A NRAETB, however, does not qualify for substituted filing.
The employer reports the tax withheld using BIR Form 1601-C (Monthly Remittance Return of Income Taxes Withheld on Compensation) and BIR Form 1604-CF (Annual Information Return of Income Tax Withheld on Compensation and Final Withholding Taxes).
Work permit/visa requirements
Business travellers who are classified as non-restricted nationals have a 30-day visa free entry privilege to the Philippines and an additonal 29-day visa-free stay where a visa waiver is applied for. On the other hand, business travellers who are classified as a restricted nationals are required to secure their proper Philippine visas prior to entry.
A visa and a work permit must be applied for when an individual enters the Philippines to engage into a professional undertaking, commercial operation or gainful employment. The type of visa required will depend on the purpose of an individual’s entry to the Philippines.
For aliens renewing their Philippines visas, the Philippines Bureau of Immigration and Deportation requires them to show proof that they paid their income taxes in the preceding year. For individuals who are required to file a return, the proof would be their Philippine income tax return. For those not required to file a return, a certificate of taxes withheld issued by the withholding agent may suffice.
Double taxation treaties
In addition to the Philippines’ domestic arrangements that provide relief from international double taxation, the Philippines has entered into double taxation treaties with 37 countries to prevent double taxation and allow cooperation between the Philippines and overseas tax authorities in enforcing their respective tax laws. Tax treaty relief, however, is not automatic. A tax treaty relief application process should be complied with.
Permanent establishment implications
Under the double taxation treaties of the Philippines with other countries, there is the potential that a permanent establishment could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has.
Value-added tax (VAT) of 12 percent is imposed on sales made in the course of trade or business on goods, properties, and services in the Philippines and on the importation of goods to the Philippines (regardless of whether the importation is for business use).
The Philippines, as a matter of policy, subscribes to the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines as its interim transfer pricing guidelines while the draft of the Revenue Regulations on Transfer Pricing is still pending. Until the revenue regulations on transfer pricing are issued, any and all concerns/issues in the interim related to transfer pricing shall be resolved in accordance with the principles laid down by the OECD Transfer Pricing Guidelines.
Local data privacy requirements
The Philippines currently does not have data privacy laws.
The Philippines has liberalized foreign exchange rules and regulations. Generally, foreign exchange receipts, acquisition, or earnings may be sold to or outside the banking system or may be brought in or out of the country. Domestic contracts entered into by Filipino citizens can be settled in any currency.
Nondeductible costs for assignees
The personal and additional exemptions of PHP50,000 and PHP25,000 for each qualified dependent are not deductible to the employer. The said exemptions are deductible only from the gross compensation income of the assignee for the purposes of calculating personal income tax liability in the Philippines.