ITR compliance for expatriates

When you stroll around your neighborhood, chances are you will bump into a foreigner. They are present everywhere: in parks, malls, restaurants, and public transportation. You also encounter them in economic zones in Laguna, Cavite, Cebu, and Batangas and even in the central business districts of Makati, Oritigas, Bonifacio Global City, and Cebu. A significant number of these foreigners are here not for vacation, but as expatriate employees. There are also reports that foreigners are now employed not as executives, but as rank and file.

Due to the influx of foreigners working in the country, the government recently launched a campaign to target foreign workers who are not filing their income tax returns (ITRs) and paying the corresponding income taxes. The Bureau of Internal Revenue (BIR) is coordinating with other government agencies to ensure that expatriates pay the correct taxes.

In addition, the Philippine Economic Zone Authority (PEZA) issued Memorandum Circular No. 2019-016, requiring all its economic zone (ecozone) locators to submit the following information to PEZA’s Foreign National Unit (PNU):

1. The Taxpayer’s Identification Number (TIN) of all foreign nationals employed by the ecozone locator enterprises; and

2. The ITRs of all foreign nationals employed by the said locators for the calendar year 2018.

The computation of individual income tax was simplified under Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act (TRAIN Law). For expatriates, however, determining their taxable income is not a walk in the park. There are factors that expatriates should consider, especially if the expatriates are under split payroll or tax equalization. Even claiming exemption from filing may be burdensome. Notwithstanding this, we know a lot of expatriates are complying.

One of the issues that expatriates should consider is whether they are required to file their ITR.

Aliens residing in the Philippines or deriving income in the Philippines are generally required to file an income tax return in the Philippines, except for expatriates covered by substituted filing.

Under substituted filing, a resident expatriate earning purely compensation income from a single employer on which withholding tax on compensation has been properly withheld shall no longer be required to file an income tax return. The Certificate of Withholding Taxes on Compensation (BIR Form 2316) issued by the local employer will suffice.

BIR Revenue Regulations No. 11-2018, however, specifically provides that non-resident aliens doing business in the Philippines are not qualified for substituted filing. Accordingly, expatriates are generally required to file their ITR, even if their taxes have been fully withheld by their employers, except for resident aliens.

In many cases, however, expatriates are on a split pay arrangement or under a tax equalization scheme. Split pay means that expatriates receive compensation from a foreign affiliate of the local employer, in addition to the salaries received from the local employer. Tax equalization, on the other hand, means that the foreign employer will be responsible for paying all related worldwide effective taxes for the expatriates, and the expatriates will be responsible only for paying their home country taxes.

If the foreign-paid salary and benefits received under a split pay arrangement or tax equalization scheme are given on account of the assignment or work in the Philippines, such income paid by the foreign company is also taxable in the Philippines. In most cases, however, the foreign-paid salaries and benefits are not subject to withholding tax, since the salaries are not shouldered by the local employer and not paid through them. If these are not subject to withholding tax, the expatriates are not qualified for substituted filing. Hence, they are required to file their ITR.

Some expatriates believe that the amount received abroad is not taxable in the Philippines. Please note that aliens are taxable in the Philippines only on Philippine-sourced income. The situs of taxation for services is the place where the services are rendered or performed and the place of payment. Accordingly, the income from employment, such as salaries, allowances, benefits and other forms of compensation for labor or personal services performed in the Philippines, are treated as Philippine-sourced income, regardless of where the payment is made, i.e., whether it is paid in the Philippines or abroad. For expatriates under a split pay arrangement, tax equalization scheme, or other type of arrangements, they have to determine how much of the salaries and benefits they received abroad relate to their services performed in the Philippines. Such income should also be considered in computing their Philippine income taxes.

Expatriates may also be entitled to income tax relief in accordance with international tax treaties entered into by the Philippine government. Under most tax treaties, an expatriate who is a resident of a treaty country shall not be liable to pay income tax on employment exercised in the Philippines if the employee is present in the Philippines for an aggregate period of less than 180 or 90 days for the taxable year, depending on the alien’s country of origin. Availing of the exemption under tax treaties, however, is not automatic. They have to file a tax treaty relief application (TTRA) with the BIR before the first taxable transaction/payment is made. Securing such exemption may take several months or even a year. This puts an additional burden on expatriates.

To encourage taxpayers to comply, the BIR should consider simplifying the process of availing a tax treaty exemption. It could even dispense with the filing of a TTRA.

In GR Nos. 193383-84 & 193407-08 [CBK Power Company Ltd. vs. Commissioner of Internal Revenue (CIR)], the Supreme Court (SC) categorically held that the BIR should not impose additional requirements that would negate the availment of the reliefs provided for under international agreements, especially since the said tax treaties do not provide for any prerequisite at all for the availment of the benefits under the said agreements. This decision was reiterated by the SC in the case of CBK Power Co. Ltd vs. CIR (GR Nos. 193383-84).

It is about time that the BIR considered revisiting the requirement of a TTRA. The Bureau may consider, at the very least, requiring taxpayers to file a Certificate of Residence for Tax Treaty Relief (CORTT). Filing a CORTT should suffice for availing of an exemption under the tax treaty. This procedure is already being implemented in availing the preferential tax treaty rates applicable to interest, dividends and royalties. Why not apply it too in securing tax exemption. This would not only ease the burden of the taxpayers, but the tax authority as well since, to this day, there is a significant volume of TTRAs pending approval from the BIR.

Foreigners working in the Philippines continues to grow, and we are seeing that government regulations are beginning to be mindful of having more control. In the news, we read about the Bureau of Immigration and other government agencies moving towards stricter regulations and the BIR enforcing its tax collection functions. The challenge is for the BIR to encourage their compliance with tax laws. One key to compliance is for the BIR to implement a tax system that is simple, convenient, and less cumbersome to taxpayers. Foreigners, on the other hand, should exert extra effort to know our tax regulations, especially those that would impact them.

All taxpayers, including foreigners, should ensure compliance with tax laws not only to avoid penalties, but because it is our responsibility. We should all do our share to ensure that the government has funds that will support public spending on education, health care, public transport, infrastructure, and social programs and, eventually, uplift the lives of Filipinos.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Edward L. Roguel is a partner from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

As published in BusinessWorld, dated 04 June 2019