U.S. Income Tax Return Preparation and Advice for American Citizen (Expatriates) Living in Philippines
At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in Philippines for over 8 years. Our clients hail from all parts of the country - Quezon Cityand Manila, Caloocan and Davao City, Cebu City and Zamboanga City.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.
We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS.
The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
We have many clients living in Philippines and know how to integrate your U.S. taxes into the local income taxes you pay. Any Philippine income tax you already pay can be claimed as against the tax liability on your U.S. return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in Philippines for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.
Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.
Below we include information on the Philippine Tax System for the American Expatriates.
Income of residents in Philippines is taxed progressively up to 32%.
|Taxable Income||Tax Rate|
|PhP 0 - PhP 10,000:||-||5%|
|PhP 10,000 - PhP 30,000:||PhP 500||10%|
|PhP 30,000 - PhP 70,000:||PhP 2,500||15%|
|PhP 70,000 - PhP 140,000:||PhP 8,500||20%|
|PhP 140,000 - PhP 250,000:||PhP 22,500||25%|
|PhP 250,000 - PhP 500,000:||PhP 50,000||30%|
|Over PhP 500,000:||PhP 125,000||32%|
The above rates also apply to individuals who derive income from business (including capital gains from the sale transfer or exchange of shares in a foreign corporation) or from the practice of a profession.
Individuals occupying managerial and highly technical positions employed by RHQs, ROHQs, multinational companies, offshore business units and petroleum service contractors/subcontractors are taxed at 15% on their gross income.
Income is divided into the following three categories which are taxed separately, as summarised below.
Compensation employment income: This income is taxed at progressive rates on gross income after deduction of personal and additional exemptions but without deductions for expenses.
Passive income: This income (i.e. dividends, certain interest, royalties, etc.) is subject to final withholding tax only.
Business income and professional income: This income is taxed at progressive rates on net business income, or income from the practice of a profession, i.e. after deduction of certain specified expenses and any excess of personal and additional exemptions over compensation income.
Resident citizens of the Philippines are taxed on all their net income derived from sources within and without the Philippines.
An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. Resident aliens are taxed in the same manner as resident citizens on income sourced within the Philippines.
Tax is generally withheld in sufficient amounts from salary and wages to satisfy the final tax liability. If not, then the balance must be paid when filing the return, which is required on or before 15 April of the year following the year of income. In some cases, income tax liability may be paid in two equal installments.
OPTIONAL STANDARD DEDUCTION (OSD)
Except for individuals earning compensation income, resident citizens, non-resident citizens, and resident aliens shall be allowed to claim OSD in lieu of the itemised deductions of ordinary and necessary expenses paid or incurred during the year. The OSD allowed shall be a maximum of 40% of gross sales or gross receipts without deduction of the cost of sales or cost of services.
The computation and the payment using the OSD shall likewise apply at the time of filing of the quarterly income tax return.
Basis Â Resident citizens are taxed on worldwide income; resident aliens and nonresidents pay tax only on Philippine source income. However, foreign individuals can avail themselves of preferential tax treatment or may be exempt from income tax under applicable tax treaties, subject to a confirmatory ruling from the BIR.
Residence Â All citizens are ordinarily considered resident unless they meet the requirements to be deemed nonresident. The residence of foreign workers is generally established when the aggregate length of stay in any calendar year exceeds 180 days.
Tax Filing status Â Married couples in the Philippines who do not derive income purely from compensation always must file a joint income tax return.
Taxable income Â Taxable personal income is all income less allowable deductions and personal exemptions. It includes compensation, business income, capital gains (arising from the sale of real property and share transactions), dividends, interest, rents, royalties, annuities, pensions and a partner's distributive share of the net income of general professional partnerships. Minimum wage earners (MWEs) are exempt from the payment of income tax on their taxable income. Holiday pay, overtime pay, night shift differential pay and hazard pay received by such MWEs also is exempt.
However, an employee who receives/earns additional compensation, such as commissions, honoraria, fringe benefits, benefits in excess of the non-taxable ceiling of PHP 30,000 taxable allowances and taxable income other than the exempt remuneration mentioned above do not qualify as an MWE and, therefore, his/her entire earnings are not exempt from income tax.
In lieu of itemised deductions, an individual may elect to use the optional standard deduction (OSD), which may not exceed 40% of the total gross income, in computing taxable income for the taxable quarter/year. However, once an election is made to use the OSD, it is irrevocable for the taxable year for which the return is made.
Capital gains Â An individual is subject to capital gains tax on the sale of real property at a rate of 6% of the gross sales price or current fair market value, whichever is higher. An individual is also subject to capital gains tax on the sale of shares not traded on the stock exchange at a rate of 5% of the net gain not exceeding PHP 100,000, and 10% on the excess. Gains derived from the sale of shares listed and traded on the stock exchange are taxed at one-half of 1% of the gross sales price.
Tax Deductions and tax allowances Â Subject to certain restrictions, deductions are granted for premium payments on health and/or hospitalisation insurance. Personal allowances are available to the taxpayer and his/her spouse, and qualified dependent children.
Other taxes on individuals:
Capital duty Â No
Stamp duty Â Various rates of duty apply depending on the type of document.
Capital acquisitions tax Â No
Real property tax Â A property tax is imposed on real property at a rate that depends on the property's location. The tax should not exceed 3% of the assessed value per the tax declaration.
Inheritance/estate tax Â Tax is imposed on the net estate of both residents and nonresidents at rates between 5% and 20%.
Net wealth/net worth tax Â No
Social security contributions Â The employee is required to pay monthly contributions (ranging from PHP 33.30 to PHP 500) to the social security system based on his/her salary bracket.
Administration and compliance:
Philippines Tax year Â Philippines tax year is the calendar year
Tax Filing and payment of tax Â Tax returns are due on or before 15 April after the close of the tax year. Tax on compensation income is withheld monthly by the employer either manually or through the Electronic Filing and Payment System on or before the 10th day of the month following the month in which withholding was made for the months of January to November, and on or before 15 January of the following year for the month of December.
Individuals receiving only compensation income from one employer during the taxable year may qualify for substituted filing provided the amount of tax due equals the amount of tax withheld by the employer at the end of the taxable calendar year. In case of married individuals, the same requirements must be met to qualify for substituted filing.
Penalties Â Late payments incur a penalty equal to 25% of the amount due. Annual interest of 20% is assessed on the unpaid amount from the due date until fully paid. A compromise penalty will be based on the tax due exclusive of the 25% surcharge and 20% interest.
Philippines Corporate TaxCorporate income tax rate both for domestic and resident foreign corporations in Philippines is 30%.
Company tax is payable by domestic companies on all income derived from sources within and without the Philippines. Foreign corporations, whether resident or nonresident, are taxable only on income derived from sources within the Philippines.
However, non-resident foreign corporations are, in certain circumstances, subject to a final withholding tax on passive (investment) incomes at rates generally higher than the applicable tax rates applying to domestic and resident foreign corporations. Resident companies are those that are created or organised under the laws of the Philippines or foreign companies duly licensed to engage in trade or business in the Philippines.
The corporate income tax rate both for domestic and resident foreign corporations is 30% based on net taxable income. Excluded from the income tax are dividends received from domestic corporations; interest on Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; and other passive income previously subject to final taxes.
Interest income derived from the expanded foreign currency deposit is subject to a final tax of 7.5%. All other interest earned by domestic and resident foreign corporations is subject to a 20% final withholding tax.
Regional operating headquarters are taxed at 10% on taxable income.
Special economic zone enterprises duly registered with the Philippines Economic Zone Authority are taxed at the rate of 5% on gross income in lieu of national and local taxes, except real property tax. The term 'gross income' refers to gross sales or gross revenue derived from the business activity within the Ecozone, net of sales discount, sales returns and allowances, less the cost of sales or direct costs but before deduction is made for administrative expenses and incidental losses during the taxable period.
Philippines tax year runs for the calendar year although approval of the Commissioner of Internal Revenue can be obtained for the adoption of a fiscal year. Tax is payable in four quarterly instalments, with every corporation filing quarterly income tax returns for the first three quarters and tax being payable 60 days following the end of each quarter. A final return covering the full year is required to be lodged 105 days after year end at which time the balance of tax, after deducting the prior three instalments and creditable withholding tax, is payable. Any excess is refundable or can be claimed as tax credit against future tax payments.
MINIMUM CORPORATE INCOME TAX
A minimum corporate income tax of 2% based on the gross income is imposed beginning on the fourth taxable year immediately following the commencement of the business operation of the corporation. Any excess of the minimum corporate income tax over the normal income tax may be carried forward and credited against the normal income tax for the three taxable years immediately succeeding. The computation and the payment of MCIT shall likewise apply at the time of filing of the quarterly corporate income tax. The term 'gross income' for the purpose of applying the minimum corporate income tax shall mean the gross sales less sales returns, discounts and allowances and cost of goods sold.
The Secretary of Finance, however, may suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labour dispute, or because of force majeure or because of legitimate business reverses.
CAPITAL GAINS TAX ON SHARES OF STOCK
The net capital gains from the sale of shares of stock of a domestic corporation not listed and traded through the Philippine Stock Exchange are taxed on a per transaction basis at the rate of 5% on the first PhP 100,000 and 10% in excess of said amount. On the other hand, the sale of shares of stock of a domestic corporation through the Philippine Stock Exchange or through the initial public offering is subject to a percentage tax on the transaction at the rate of 1/2 of 1% of the selling price. Any gain or loss from said transaction is not considered for income tax purposes.
CAPITAL GAINS TAX ON SALE OF REAL PROPERTY
The sale of land, building and other real properties classified as capital asset is subject to 6% final capital gains tax based on the gross selling price, current fair market value or zonal value at the time of sale, whichever is higher.
IMPROPERLY ACCUMULATED EARNINGS TAX
The 10% improperly accumulated earnings tax (IAET) is imposed on improperly accumulated taxable income earned by closely-held corporations. The term 'closelyheld corporation' refers to corporations where at least 50% of the capital stock or voting power is owned directly or indirectly by or for not more than 20 individuals.
The tax base of the 10% IAET is the taxable income of the current year plus income exempt from tax, income excluded from gross income, income subject to final tax, and the amount of net operating loss carry-over deducted. It is reduced by income tax paid for the current year, dividends actually or constructively paid, and amount reserved for the reasonable needs of the business.
The IAET does not apply to the following corporations:
(a) Banks and other nonbank financial intermediaries
(b) Insurance companies
(c) Publicly-held corporations
(d) Taxable partnerships
(e) General professional partnerships
(f) Non-taxable joint ventures,
(g) Duly registered enterprises located within the special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local.
BRANCH PROFITS TAX
A branch is classified as a resident foreign corporation. As such, it is subject to income tax at the rate of 30% on its net income derived within the Philippines. Any branch profit to be remitted to the Head Office is additionally taxed at the rate of 15%. For purposes of branch profit remittance, income items which are not effectively connected with the conduct of its trade or business in the Philippines are not considered branch profits. Such income items include interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received during each taxable year from all sources within the Philippines.
To be 'effectively connected', it is not necessary that the income be derived from the actual operation of the branch's trade or business. It is sufficient that the income arises from the business activity in which the branch is engaged. However, the 15% branch profit tax does not apply to profits remitted by a branch coming from those activities duly registered with the Philippine Economic Zone Authority (PEZA).
FRINGE BENEFITS TAX
Fringe benefits furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees) are taxed at the rate of 32% based on the grossed-up monetary value of the fringe benefits.
There are no local taxes other than local authority rates and local (business) taxes and permit fees.
Other taxes include the following.
Percentage taxes are imposed on carriers (domestic or international), franchises, banks, financial intermediaries, finance companies, life insurance companies, agents of foreign insurance companies, overseas communications, amusement, winnings and stock transactions.
INITIAL PUBLIC OFFERING (IPO) TAX
Sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations is taxed at the rates provided below based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed of in accordance to the total outstanding shares of stock after the listing in local stock exchange:
|Up to 25%||4%|
|Over 25% but not over 33.33%||2%|
Excise taxes are imposed on alcohol and tobacco products, petroleum and mineral products, automobiles and certain non-essential goods.
DOCUMENTARY STAMP TAX
Documentary stamp tax is imposed on certain documents including shares certificates, bank cheques, bonds, sales documents of real properties and mortgages.
REAL PROPERTY TAX
Real property tax is imposed on owners of real property and is calculated on the assessed value of the property.
DETERMINATION OF TAXABLE INCOME
A company's taxable profit is calculated by deducting ordinary and necessary expenses paid or incurred during the tax year in carrying on business. Typical expenses include salaries, travelling expenses and rentals, all of which need to be substantiated to be deductible. Additionally, taxes that relate to the business other than income, estate, gift and energy taxes and taxes charged to local benefits of a kind likely to increase the value of property are deductible. In calculating taxable income, special rules and exemptions apply in the circumstances outlined below.
Tax incentives available to enterprises registered with the Board of Investments (BOI) or the Philippine Economic Zone Authority (PEZA) include six years' income tax holidays for pioneer firms and four years for non-pioneer firms with expanding firms granted three years. For PEZA registered enterprises, a 5% tax on the modified gross income is imposed after the end of the income tax holiday.
The tax holiday may be extended for an additional year in specified circumstances but in no case may the aggregate period of the tax holiday exceed eight years. For the first five years, an enterprise registered with the BOI or PEZA is, in specified circumstances, allowed an additional deduction from the taxable income of 50% of the wage expense corresponding to the increment in the number of direct labour for skilled and unskilled workers.
Enterprises located in less developed areas are, in specified circumstances, allowed a 100% deduction of said wages and a 100% deduction for construction costs. Enterprises located in export processing zones and special economic zones are likewise entitled to income tax holidays and tax and duty-free importation of raw materials and equipment.
'Gross income earned' shall refer to gross sales or revenues derived from business activity within the respective zones, net of sales discounts, sales returns and allowances and minus cost of sales or direct costs but before any deduction is made for administrative, marketing, selling and/or operating expenses or incidental losses during a given taxable period.
Any recognised depreciation method may be used if it is 'reasonable'. The annual depreciation allowance is determined on the basis of depreciable property, estimated useful life and salvage value.
For extraction industries, a distinction is made between petroleum and other mining activities. Distinctions are also made for different categories of expense (e.g. tangible or intangible, exploration or drilling etc), and different methods apply (e.g. expenditure, cost depletion etc).
For taxpayers engaged in a trade or business, the valuation of inventories must meet the following conditions:
- it must conform as nearly as possible to the best accounting practice in the trade or business; and
- it must clearly reflect the income
As such, although it cannot be uniform for all taxpayers, the system used must come within the scope of the best accounting practice in the particular trade or business. In order to clearly reflect income, the inventory practice of a taxpayer should be consistent from year to year as greater weight is given to consistency than to any particular method or basis of valuation. As long as the method is substantially in accord with these regulations, it is likely to be accepted.
The basis of valuation which is most commonly used by business concerns and which meets the requirements of the tax laws is the cost price or the lower of cost or market price.
Regardless of the basis of valuation, inventories are subject to investigation by the Commissioner of Internal Revenue and the taxpayer must satisfy the Commissioner of the correctness of the price adopted.
CAPITAL GAINS AND LOSSES
See discussions above. Ordinary assets include:
(a) Stock in trade of the taxpayers, or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the end of the taxable year
(b) Property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business
(c) Property used in trade or business of a character which is subject to allowance for depreciation
(d) Real property used in trade or business.
All properties held by the taxpayer, whether or not connected with trade or business, not included in the enumeration of ordinary assets are capital assets. Capital gains arise from the disposal of 'capital assets'.
Dividends received by a Philippine corporation or by a resident foreign corporation from a Philippine corporation are not subject to income tax. However, resident individuals receiving dividends are subject to 10% final income tax.
No credit is granted for underlying corporate profits out of which the dividends are declared. However, a domestic corporation that owns a majority of the voting stock of a foreign corporation from which it receives dividends is deemed to have paid the underlying foreign taxes.
Interest is deductible on a cash or accrual basis depending upon the taxpayer's method of accounting but shall be reduced by 33% to the extent that a portion of interest income has been subjected to final tax. Where interest is paid to a foreign lender, it will remain deductible so long as it is incurred in connection with the trade or business of the taxpayer.
Losses may be offset against all income and capital gains in the same tax year. Losses must be sustained by the taxpayer during the taxable year and must be incurred in relation to the trade and business and evidenced by completed transaction.
Operating loss for any taxable year immediately preceding the current taxable year which had not been previously offset as deduction from gross income may be carried over as a deduction from gross income for the next three consecutive years immediately following the year of such loss. This is known as the Net Operating Loss Carryover or the excess of allowable deduction over gross income in a taxable year.
However, there are certain limitations to be followed:
(a) any net loss incurred in a taxable year during which the taxpayer is exempt from income tax shall not be allowed as deduction
(b) allowed only if no substantial change in the ownership in that:
. not less than 75% in nominal value of the outstanding issued shares, if the business is in the name of the corporation, is held by or on behalf of the same persons; or
. not less than 75% of the paid in capital of the corporation, if the business is in the name of the corporation, is held by or on behalf of the same persons.
For mines other than oils and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investment Code of 1987, incurred in any of the first ten years of operation may be carried over as a deduction from gross income for the next five years immediately following the year of loss.
FOREIGN SOURCED INCOME
A Philippine (domestic) corporation is taxed on worldwide income. Foreign income is taxed when earned or received, depending on the accounting method used by the taxpayer. Resident foreign corporations are taxed in the Philippines only on Philippine source income.
Tax credits are available for taxes and duties paid on purchases of raw materials of products for export, domestic capital equipment, domestic breeding stock and genetic materials. A number of Special Economic Zones, some of which are operated as separate customs territories also exist. (Refer also to 'Investment incentives' above.)
OPTIONAL STANDARD DEDUCTION (OSD)
In lieu of the itemised deduction of ordinary and necessary expenses paid or incurred to calculate the net taxable profit, domestic and foreign corporations are allowed an OSD in the amount not exceeding 40% of gross income. The computation and the payment using the OSD shall likewise apply at the time of filing of the quarterly corporate income tax.
FOREIGN TAX RELIEF
Relief from double taxation is provided by way of tax treaties and/or by means of foreign tax credits. The treaties generally define when a taxpayer will be deemed for income tax purposes to be doing business in the Philippines.
Group taxation is not permitted. The grouping of corporations has no tax implications as the tax laws treat each corporation in isolation.
RELATED PARTY TRANSACTIONS
Philippine corporations can claim a deduction for royalties, management services and interest charges paid to foreign affiliates provided the amount represents an arm's length price and the appropriate withholding taxes are withheld and remitted. Some interest deductions can be affected by related party transactions involving nonresidents.
NON-RESIDENT FOREIGN CORPORATIONS
Interests on foreign loans, royalties and dividends paid to non-resident foreign corporations are subject to withholding tax at source at the time of their accrual in the taxpayer's books. The only exemption to this rule is when, at the time of the accrual of the income, there is a governmental restriction which prevents the actual remittances of the income due to the non-resident.
Dividends received by non-resident foreign corporations from domestic corporations are subject to a final tax of 30%. However, tax is withheld at the reduced rate of 15% in certain circumstances.
Interest received by non-resident foreign corporations is subject to the following final withholding tax:
(a) 20% on interest paid or accrued from foreign loans contracted on or after 1 August 1986
(b) 30% on other interest.
Royalties received by non-resident foreign corporations are subject to a final withholding tax of 30%. However, said tax rate may be reduced under applicable tax treaties.
TECHNICAL ASSISTANCE AND SERVICE FEES
Technical assistance and service fees received by non-resident foreign corporations are subject to the final withholding tax of 30%.
RENTAL AND LEASING INCOME
Rental and leasing income received by non-resident foreign corporations is subject to the following final withholding tax:
- 25% of the gross amount on film rentals from sources within the Philippines
- 4.5% of the gross amount on charter feer or rentals in respect of foreign vessels
- 7.5% of the gross amount on rentals and other fees in respect of aircraft, machinery and other equipment.
The following income received by non-resident aliens (not engaged in trade or business in the Philippines) are subject to a final withholding tax of 25% of the gross amount of:
(a) Dividends, interest and royalties
(b) Technical assistance and service fees (no tax is withheld in certain circumstances)
(c) Rental and leasing income
(d) Capital gains (special rules apply to residents of double tax treaty states).
FINAL WITHHOLDING TAX
The following income received by Philippine citizens and resident aliens are subject to a final withholding tax of 20% of the gross amount of:
(b) Royalties, except royalties on books, literary works and musical compositions which are subject to 10%
(c) Technical assistance and service fees.
The Bangko Sentral ng Pilipinas (BSP) administers the exchange control laws of the Philippines including establishing minimum and maximum rates for the foreign exchange dealings of banks. However, banks may set their own rates for trading foreign exchange with the public. The value of the peso generally floats freely, although intervention by the BSP does occur when deemed necessary.
Sales taxes / Value Added Tax (VAT)A 12% value added tax (VAT) of the gross selling price or gross value in money of the goods is imposed to all importation, sale, barter, exchange or lease of goods or properties and sale of services.
'Gross selling price' means the total amount of money or its equivalent that the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price.