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  • Service: Tax, Global Mobility Services
  • Type: Regulatory update, Survey report
  • Date: 2/26/2014

Income Tax 

Taxation of international executives
Tax returns and compliance
Tax rates
Residence rules
Termination of residence
Economic employer approach
Types of taxable compensation
Tax-exempt income
Health insurance
Expatriate concessions
Salary earned from working abroad
Taxation of investment income and capital gains
Additional capital gains tax (CGT) issues and exceptions
General deductions from income
Tax reimbursement methods
Calculation of estimates/prepayments/withholding
Relief for foreign taxes
General tax credits
Sample tax calculation


All income tax information is summarized by R.G. Manabat & Co., the Philippine member firm of KPMG International, based on the Republic of the Philippines Bureau of Internal Revenue.


Tax returns and compliance

When are tax returns due? That is, what is the tax return due date?


The Philippine Annual Income Tax Return (BIR Form 1700) is filed and taxes are due to the Philippine Bureau of Internal Revenue on or before 15 April of the year following the applicable calendar year.


What is the tax year-end?


The tax year is a calendar year which ends 31 December of each year.


What are the compliance requirements for tax returns in the Philippines?


Residents and non-residents


Every individual citizen, alien residing in the Philippines, and every non-resident alien engaged in a trade or business in the Philippines, who is receiving income, whether it constitutes the sole source of his/her income or in combination with salaries, wages, and other fixed or determinable income, is required to file an income tax return on or before 15 April of each year covering income for the preceding taxable year. The tax year runs from 1 January to 31 December of each year. The tax return to be filed declares the total amount of income earned by the individual and any unpaid tax is settled at the time the return is filed. A citizen or a resident alien is not required to file the annual individual income tax return if he/she qualifies for the substituted filing. A non-resident alien engaged in trade or business, however, does not qualify for substituted filing.


Substituted filing applies to citizens or resident individuals who meet all the following conditions:


  • the employee receives purely compensation income
  • the employee receives the income from one employer in the Philippines
  • the amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer
  • the employee's spouse, if earning income, also complies with all the three conditions stated earlier
  • the employer files the annual information return of income taxes withheld on compensation and final withholding taxes (BIR Form 1604CF)
  • the employer issues the certificate of compensation payment/tax withheld (BIR Form 2316) to each employee.

Tax returns need not be filed by the following categories of individual:


  • those whose sole income has been subjected to final withholding tax such as interest, prizes, winnings, royalties, and dividends
  • non-resident aliens not engaged in trade or business on their compensation income
  • alien employees of regional or area headquarters or regional operating headquarters of multinational corporations on income from that employment
  • alien employed by offshore banking units on income from that employment
  • alien employees of service contractors and subcontractors engaged in petroleum operations on income from that employment
  • minimum wage earners as defined under the Tax Code.

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Tax rates

What are the current income tax rates for residents and non-residents in the Philippines?


As of 2013, the income tax rates on employment income and from a business or exercise of a profession are as follows.


Residents


Income tax table for 2013


Taxable income bracket Total tax on income below bracket Tax rate on income in bracket

From PHP

To PHP PHP Percent

0

10,000 0 5

10,001

30,000 500 10

30,001

70,000 2,500 15

70,001

140,000 8,500 20

140,001

250,000 225,00 25

250,001

500,000 50,000 30

500,001

Over 125,000 32

Non-residents


Same rates apply as Residents section above, except non-resident aliens not engaged in trade or business in the Philippines which are subject to a flat rate of 25 percent based on gross income.


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Residence rules

For the purposes of taxation, how is an individual defined as a resident of the Philippines?


For tax purposes, an individual may be classified as one of the following:


  • resident citizen
  • non-resident citizen
  • resident alien
  • non-resident alien engaged in trade or business
  • non-resident alien not engaged in trade or business.

A resident citizen is taxable on all income derived from worldwide sources. For the other categories, the individual is taxable only on income derived from sources within the Philippines. For employment income, the source of income is the place where the services are rendered, regardless of the place of payment, the place where contract was negotiated, or the payer’s place of residence.


A non-resident alien is deemed engaged in trade or business if, during the calendar year, he/she stays in the Philippines for more than 180 days. If the non-resident alien individual’s stay does not exceed 180 days during the taxable year, then he/she is deemed not engaged in trade or business.


For resident citizens, non-resident citizens, resident aliens, and non-resident aliens engaged in trade or business, income tax is calculated on the basis of net taxable income at graduated rates ranging from 5 percent to a maximum of 32 percent. (Please see the discussion on General Deductions from Income for what constitutes net taxable income.)


Non-resident aliens not engaged in trade or business are subject to tax at 25 percent of their gross income.


Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.


Aliens on assignment in the Philippines for a period of two years or more are generally considered as residents at the start of their assignment in the Philippines and remain as such until departure from the Philippines at the end of the assignment.


What if the assignee enters the country before their assignment begins?


If the assignee arrives in the Philippines prior to his/her assignment, his/her actual days spent in the Philippines (that is, physical presence in the Philippines) will determine his/her residency/non-residency status, notwithstanding the start date of his/her Philippine assignment.


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Termination of residence

Are there any tax compliance requirements when leaving the Philippines?


An alien who has acquired a resident status in the Philippines for tax purposes retains such tax status until he/she actually departs from the Philippines at the end of his/her assignment. There are no special requirements to be observed for tax purposes on leaving the Philippines other than those described in the section above.


What if the assignee comes back for a trip after residency has terminated?


If the assignee comes back to the Philippines after his/her residency status in the Philippines has terminated, the determination of his/her new residency status will commence from the day the individual actually arrives in the country.


Communication between immigration and taxation authorities


Do the immigration authorities in the Philippines provide information to the local taxation authorities regarding when a person enters or leaves the Philippines?


No, although the two agencies may coordinate on certain transactions such as visa renewal. The immigration authorities usually require the submission of income tax return filed with the tax authorities.


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Economic employer approach1

Do the taxation authorities in the Philippines adopt the economic employer approach to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in the Philippines considering the adoption of this interpretation of economic employer in the future?


Yes, the economic employer approach is being adopted by tax authorities such that when there is a recharge to the Philippines entity, then the host entity is considered to be the economic employer and the employee cannot claim tax exemption, regardless of the duration of his/her stay in the Philippines.


De minimus number of days2


Are there a de minimus number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?


None. Theoretically, the compensation charged to the local employer is taxable to the employee regardless of the number of days he/she is present in the Philippines during the fiscal year.


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Types of taxable compensation

What categories are subject to income tax in general situations?


Gross compensation income is defined as taxable income arising from an employer/employee relationship and includes the following:


  • salaries, wages, compensation, commissions, emoluments, and honoraria
  • bonuses exceeding PHP30,000
  • allowances for transportation, representation, entertainment, and other similar items
  • fees (including director’s fees paid to a director who is at the same time an employee of the payer)
  • taxable pensions
  • taxable retirement pay
  • other income of a similar nature, including compensation paid in-kind.

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Tax-exempt income

Are there any areas of income that are exempt from taxation in the Philippines? If so, please provide a general definition of these areas.


Gross income subject to tax does not include the following:


  • statutory minimum wage
  • damages received by an employee or his/her heirs following a judgment or agreement arising out of or related to an employer-employee relationship
  • proceeds of life insurance policies
  • gifts, bequests, and devises
  • compensation for injuries or sickness
  • retirement benefits, pensions, and gratuities
  • interest on tax-exempt government securities
  • thirteenth-month pay and other benefits such as productivity incentives and Christmas bonus subject to the PHP30,000 limit
  • certain other items specifically provided as not taxable including the following:
    1. amount received by the insured as return of premium
    2. income exempt from treaty
    3. certain prizes and awards exempted by law
    4. certain prizes and awards in sports competition
    5. GSIS, SSS, Medicare, and other contribution
    6. gain from sale of bonds, debentures, or other certificate of indebtedness with a maturity of more than five years
    7. gains from redemption of shares in mutual fund
    8. interest income from long-term deposits or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts, and other investments
    9. income of non-residents from transactions with offshore banking units and depository banks under the expanded foreign currency depository system.

Certain employer provided housing allowances (employer’s contribution to rent)


Housing allowances provided to expatriates are generally considered as fringe benefits subject to FBT. If the housing allowance is higher than the actual rent, the excess is considered as part of compensation subject to withholding tax on compensation.


Certain employer provided housing allowances (cost of utilities)


The full amount of the utilities paid by the employer to or on behalf of the employee is a taxable fringe benefit.


Living away from home allowance (LAFHA)


The full amount of the LAFHA paid by the employer to or on behalf of the employee is taxable compensation subject to withholding tax on compensation.


Certain employer provided tax reimbursements


The grossed-up tax is included in the taxable compensation of the expatriate-employee.


Certain employer provided relocation reimbursements


Airfare and other transportation expenses incurred by the taxpayer and his/her family for moving from old post to new post (such as the Philippines) as well as the costs of shipment of household goods and personal effects are generally exempt from tax, subject to certain substantiation requirement. On the other hand, moving allowance or unsubstantiated expenses are taxable.


Home leave


The full amount of the home leave paid by the employer to or on behalf of the employee is a taxable fringe benefit.


Certain employer provided education costs


The cost of the educational assistance to the employee which is borne by the employer shall, in general, be treated as taxable fringe benefit. However, a scholarship grant to the employee by the employer shall not be treated as taxable fringe benefit if the education or study involved is directly connected with the employer's trade, business or profession, and there is a written contract between them that the employee is under obligation to remain in the employ of the employer for period of time that they have mutually agreed upon. In this case, the expenditure shall be treated as incurred for the convenience and furtherance of the employer's trade or business.


The cost of educational assistance extended by an employer to the dependents of an employee shall be treated as taxable fringe benefits of the employee unless the assistance was provided through a competitive scheme under the scholarship program of the company.


Certain bonus payments


Thirteenth-month pay and other benefits such as productivity incentives and Christmas bonus up to PHP30,000 are considered an exclusion from gross income. The portion thereof in excess of PHP30,000 forms part of taxable compensation.


Certain interest subsidies


If the employer lends money to his/her employee free of interest or at a rate lower than 12 percent per year, such interest foregone by the employer or the difference of the interest assumed by the employee and the 12 percent interest rate shall be treated as a taxable fringe benefit.


Certain auto allowances


A cash auto-allowance provided to the employee will form part of his/her taxable compensation income unless it is shown that the allowance is used by the employee in the performance of his/her duties, in which case the allowance is considered as ordinary and necessary business expense of the company.


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Health insurance

The cost of life or health insurance and other non-life insurance premiums borne by the employer for the group insurance of his/her employees is treated as non taxable fringe benefit and likewise not included in the taxable compensation of the employee.


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Expatriate concessions

Are there any concessions made for expatriates in the Philippines?


Gross income received by an alien individual employed by the following entities is subject to a tax of 15 percent of such gross income:


  • regional or area headquarters or regional operating headquarters established in the Philippines by a multinational corporation
  • offshore banking units
  • service contractors or subcontractors engaged in petroleum operations in the Philippines.

Moreover, an alien expatriate of a regional or area headquarter enjoys duty-free importation of personal and household effects (with the exception of motor vehicle).


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Salary earned from working abroad

Is salary earned from working abroad taxed in the Philippines? If so, how?


Citizens who are working abroad are generally considered non-resident citizens of the Philippines and hence are exempt from Philippine income tax on salary earned from working abroad as well as other income from foreign-sources. An alien individual, whether resident or not of the Philippines, is taxable only on income from sources within the Philippines; hence, aliens are exempt from Philippine income tax on salaries earned from working abroad.


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Taxation of investment income and capital gains

Are investment income and capital gains taxed in the Philippines? If so, how?


Business income, which is a broadly defined term covering all gains, profit and income of whatever kind and in whatever form derived from any source within the Philippines is generally taxable at graduated tax rates of 5 percent to 32 percent.


Gains arising from the disposal of capital assets are also subject to income tax. Capital assets are defined as property held by the taxpayer (whether or not connected with his/her trade or business), but do not include stock-in-trade of the taxpayer or other similarly held property or property used in trade or business of the taxpayer, real or personal, which may be subject to allowance for depreciation.


If the property which is disposed of by a taxpayer has been held for not more than 12 months, the gain is taxed in full. If held for more than 12 months, only 50 percent of the gain is subject to tax.


The following capital gains are not subject to a holding period and are subject to special capital gains tax rates:


  • capital gains realized from the sale, exchange, or disposition of shares of stock in any domestic corporation are taxed as follows:
    1. on net capital gains for shares of stock not traded through a local stock exchange, which are not over PHP100,000 the rate, is 5 percent; on net gains in excess of PHP100,000 the rate is 10 percent
    2. on shares of stock listed and traded through a local stock exchange, the rate is 0.50 percent of the gross selling price.
  • capital gains from the sale of real property located in the Philippines classified as capital assets by individuals are subject to a capital gains tax of 6 percent based on gross selling price or the current fair market value, whichever is higher at the time of sale.

Dividends, interest, and rental income


On sources from within the Philippines, certain passive income like interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements, royalties, prizes exceeding PHP10,000, and other winnings are subject to a final withholding tax of 20 percent. The tax is 25 percent if the recipient is a non-resident alien not engaged in trade or business.


Dividends from a domestic corporation or the share of an individual partner in a partnership subject to tax received by citizens and residents are subject to income tax at 10 percent. The tax is 20 percent if the recipient is a non-resident alien engaged in trade or business, and 25 percent if the recipient is a non-resident alien not engaged in trade or business.


Interest income from long-term deposit or investment in the term of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments is exempt from income tax. However, if received by a non-resident alien not engaged in trade or business, it is subject to 25 percent tax.


On rental income, please see previous discussion under the taxation of investment income and capital gains.


Gains from stock option exercises


Generally, gains from stock option exercise are considered as taxable compensation if they are attributable to services rendered in the Philippines.


Moreover, for migrating employees, a portion of the income from the exercise of stock option would be considered as taxable compensation subject to Philippine income tax if at any time during the period between the grant and vesting dates, the employee had performed personal services in the Philippines (such as assigned in the Philippines).


Residency status Taxable at:
Grant Vest Exercise
Resident N N Y
Non-resident N N Y
Other (if applicable) N/A N/A N/A

Foreign exchange gains and losses


In relation to business income of the taxpayer, only those that are realized are taxable gains and tax deductible losses.


Principal residence gains and losses


See discussion on capital gains from sale of real property under the taxation of investment income and capital gains.


Capital losses


Losses resulting from the sale or exchange of capital assets shall be allowed as deduction only to the extent of the gains from such sales or exchanges.


Personal use items


See discussion on gains arising from the disposal of capital assets under the taxation of investment income and capital gains.


Gifts


Gifts are subject to donor's tax. The tax is levied, assessed, collected and paid upon the transfer by any person, resident, or non-resident, of the property by gift, at 2 percent to 15 percent graduated rates.


However, when the donee or beneficiary is a stranger, the tax payable by the donor shall be 30 percent of the net gifts. A stranger is a person who is not a brother, sister (whether by whole or half-blood), spouse, ancestor, and lineal descendant; or relative by consanguinity in the collateral line within the fourth degree of relationship.


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Additional capital gains tax (CGT) issues and exceptions

Are there additional capital gains tax (CGT) issues in the Philippines? If so, please discuss?


None.


Are there capital gains tax exceptions in the Philippines? If so, please discuss?


The Philippines has tax treaties with several countries. Under these tax treaties, capital gains derived by residents of the other contracting states from the alienation of properties (other than immovable properties) are not taxable in the Philippines.


Pre-CGT assets


Not applicable.


Deemed disposal and acquisition


Not applicable.


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General deductions from income

What are the general deductions from income allowed in the Philippines?


Net taxable income is determined by deducting the allowable deductions from gross income. For individual taxpayers who earn solely compensation income, they are entitled to deduct from their gross earnings the allowable personal exemption and certain additional exemptions.


In the case of a non-resident alien engaged in trade or business, the reciprocity rule applies to the claiming of the personal exemption (that is the amount of personal exemption allowed to a non-resident alien is limited to the amount of personal exemption granted by his/her home-country to Filipinos working in that country). Moreover, non-resident aliens are not entitled to the additional exemption for dependent children.


Individuals deriving business income are allowed to deduct all the ordinary and necessary expenses paid or incurred in carrying on or which are directly attributable to the carrying on of the development, management, operation, and/or conduct of his/her trade, business, or profession. Any amount of allowable personal or additional exemptions not fully utilized (that is not fully applied) against the compensation income shall likewise be allowed as deduction.


The amounts of basic personal exemption allowable to citizens, resident aliens, and/or non-resident aliens engaged in trade or business for 2013 are as follows.


Classification

Exemption (PHP)

Single or married individual judicially decreed as legally separated with no qualified dependents

50,000

Head of the family

50,000

For each married individual

50,000


An additional exemption of PHP25,000 for each qualified dependent, up to four dependents can also be claimed by citizens and residents.


In the case of married individuals electing to compute their income tax liabilities separately, only one spouse can claim the additional exemption for dependents.


An additional deduction of PHP2,400 per family or PHP200 per month paid for health and/or hospitalization insurance will be allowed if the gross income of the family does not exceed the aggregate amount of PHP250,000 for the taxable year.


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Tax reimbursement methods

What are the tax reimbursement methods generally used by employers in the Philippines?


Most multinational companies in the Philippines adopt the tax equalization policy on their inbound and/or outbound assignees.


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Calculation of estimates/prepayments/withholding

Pay-as-you-go (PAYG) withholding


There are no estimates/prepayments in the Philippines. Generally, the employer withholds taxes upon payment of the compensation to the employee based on a graduated withholding tax table with rates from 5 percent to 32 percent on net taxable compensation.


PAYG installments


The Philippines adopt the pay-as-you-file system with regard to income taxes.


When the tax due is in excess of PHP2,000, the individual taxpayer may elect to pay the tax in two equal installments. The first installment shall be paid at the time the return is filed and the second installment is paid on or before 15 July following the close of the calendar year.


When are estimates/prepayments/withholding of tax due in the Philippines? For example: monthly, annually, both, and so on.


Local employers are responsible for the withholding and remittance of the correct amount of tax from the compensation income of his/her employees. The tax withheld has to be remitted to the BIR within 10 days after the close of each calendar month, except for the withholding tax for the month of December, which must be paid not later than 15 January of the following year, to the authorized agent bank or collection agent of the BIR. However, if the local employer is enrolled under the Electronic Filing and Payment System (EFPS), the deadline for electronically filing the applicable withholding tax returns and paying the taxes due thereon shall be five days later than the deadline set above. If the employer fails to withhold and remit the correct amount of tax, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable.


The local employer is required to report the amount of compensation income tax withheld for the year using BIR Form 1604CF (Annual Information Return of Income Tax Withheld on Compensation and Final Withholding Taxes) on or before 31 January of the year following the taxable year.


The amount of taxes withheld by the employer is creditable against the annual income tax due of the employee.


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Relief for foreign taxes

Is there any Relief for Foreign Taxes in the Philippines? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?


In case of citizens of the Philippines, the amount of income taxes paid during the taxable year to any foreign country may be used as credits against Philippine income taxes.


The Philippines has tax treaties with 37 countries. There are complex regulations and rates vary depending upon the status of the recipient and the nature of the income. Tax treaty relief, however, is not automatic. A tax treaty relief application process should be complied with.


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General tax credits

What are the general tax credits that may be claimed in the Philippines? Please list below.


Tax credits that may be claimed in the Philippines are:


  • compensation income tax withheld by the employer
  • income taxes paid by citizens to any foreign country.

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Sample tax calculation3

This calculation assumes a married taxpayer resident in the Philippines with two children whose three-year assignment begins 1 January 2011 and ends 31 December 2013. The taxpayer’s base salary is USD100,000 and the calculation covers three years.


2011
USD
2012
USD
2013
USD
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car 6,000 6,000 6,000
Moving expense reimbursement 20,000 0 20,000
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Exchange rate used for calculation: USD1 = PHP50.


Other assumptions


  • All earned income is attributable to local sources.
  • Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
  • Interest income is not remitted to the Philippines.
  • The company car is used for business and private purposes and originally cost USD50,000.
  • The employee is deemed resident throughout the assignment.
  • Tax treaties and totalization agreements are ignored for the purpose of this calculation.

Calculation of taxable income


Year-ended 2011
PHP
2012
PHP
2013
PHP
Days in the Philippines during year 365 366 365
Earned income subject to income tax
Salary 5,000,000 5,000,000 5,000,000
Bonus* 970,000 970,000 970,000
Cost-of-living allowance 500,000 500,000 500,000
Net housing allowance 0 0 0
Company car 0 0 0
Moving expense reimbursement 0 0 0
Home leave 0 0 0
Education allowance 0 0 0
Total earned income 6,470,000 6,470,000 6,470,000
Other income 0 0 0
Total income 6,470,000 6,470,000 6,470,000
Deductions (Personal exemption as married individual PHP50,000 plus additional exemption for each qualified dependent child PHP25,000) 100,000 100,000 100,000
Total taxable income 6,370,000 6,370,000 6,370,000

* Net of non-taxable portion of bonus amounting to PHP30,000.


Calculation of tax liability


2011
PHP
2012
PHP
2013
PHP
Taxable income as above 6,370,000 6,370,000 6,370,000
Philippine tax thereon 2,003,400 2,003,400 2,003,400
Less:
Domestic tax rebates (dependent spouse rebate) 0 0 0
Foreign tax credits 0 0 0
Total Philippine tax 2,003,400 2,003,400 2,003,400

  • Housing allowance, home leave, company car and education allowance are subject to Fringe Benefit Tax (FBT), which is a tax borne by the employer.
  • Moving expense reimbursement is an exempt income of the employee. The employer can claim the same as a business expense, subject to the substantiation requirements.
  • Interest income from non-local sources (that is, foreign-source) is nontaxable income to an alien individual.



1Certain tax authorities adopt an "economic employer" approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home country employer but the employee’s salary and costs are recharged to the host entity, then the host country tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.


2For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.


3Sample calculation generated by R.G. Manabat & Co., the Philippine member firm of KPMG International, based on the Republic of the Philippines Bureau of Internal Rev enue.



© 2014 Manabat Sanagustin & Co., CPAs, a Philippines partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

 

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Taxation of international executives