If it’s the first time you’re navigating the tax system in the Philippines, it might feel a little daunting. It’s important to understand the process, though, as how you’re taxed depends on your personal circumstances. For example, you could be taxed according to different rules depending on whether you’re an expatriate ‘engaged in trade or business’, or someone who might be living on savings or a pension, for example.
This overview of income tax in the Philippines is a great way to get more familiar with the system. If you think you might need to pay tax on some or all of your income in the Philippines, getting professional advice to make sure you pay the right amount, is advisable.
Tax in the Philippines is managed by the Bureau of Internal Revenue - BIR. There are several different types of income which must be reported in the Philippines for tax purposes. However, they’re each taxed in a different way.
Any income from employment - so your salary - must be reported and is subject to income tax. However, you also have to report other benefits you might get from your employer, which could be subject to fringe benefit tax (FBT). The definition of benefits here is rather complex - basically benefits which aren't necessary to allow you to perform your job are likely to be taxable, while things which are needed in order for you to work, could be exempt.
There are also taxes on investment income and capital gains, which vary depending on the exact source of the income.
(Source 18 December 2017)
What income tax you’ll be required to pay in the Philippines depends on whether you’re classified as:
- A resident citizen taxpayer
- A non-resident citizen taxpayer
- A resident alien
- A non-resident alien engaged in trade or business
- A non-resident alien not engaged in trade or business.
In the Philippines, there are several different classifications of taxpayer. Citizens of the Philippines can be deemed either resident or non-resident, but in general terms foreigners and expats will fall into one of the other categories.
A resident citizen is taxed in the Philippines on worldwide income. A non-resident citizen is likely to be taxed on only Philippine-sourced income in the Philippines.
Expats who go to the Philippines for work on a defined length contract will be classified as non-resident aliens, engaged in trade or business. That’s because their contract has an end date, and the ultimate expectation is that they’ll move on after some time. If the contract is open-ended, you fall into the third category, of resident alien - more on that in a moment.
If you’re a non-resident alien, engaged in trade or business, and stay in the Philippines for more than 180 days in a tax year, you'll have to pay tax according to the graduated tax scale set out below, on any earnings which come from work or services based in the Philippines. This is the case even if the payment isn't remitted to the Philippines.
If you’re defined as a non-resident alien not engaged in trade or business, you’re taxed a flat rate of 25% on income generated in the Philippines. This might apply if you’re living mainly off income generated by a rental property, savings, or a pension for example.
If you're a foreigner in the Philippines but have moved for a long period, and have no intention to leave, then you might be classed as a resident alien. In this case you’ll have to pay tax according to the progressive tax scale set out below, on any earnings which come from work or services based in the Philippines.
This will depend on whether or not you’re considered to be a resident of the Philippines. Even if you’re working away from the country, you could still be considered resident for tax purposes, in which case you'll still have to pay tax on your worldwide income. However, if you’re a non-resident citizen it’s likely that you have to declare and pay tax in the Philippines, on only the income which has been sourced in the Philippines.
(Source, 20 December 2017)
The Philippines has a progressive tax system, so a progressively higher tax rate is applied based on how much you earn. The same rates apply to residents and non-residents, apart from those defined as a non-resident alien not engaged in trade or business. People in this category are taxed a flat rate of 25% on income generated in the Philippines.
The most up to date rates available are as follows:
|Income range||The Philippines income tax rate (%) 2017|
|Up to PHP10,000||5%|
|PHP10,001 - PHP30,000||10%|
|PHP30,001 - PHP70,000||15%|
|PHP70,001 - PHP140,000||20%|
|PHP140,001 - PHP250,000||25%|
|PHP250,001 - PHP500,000||30%|
(Source 18 December 2017)
If you’re considered to be a resident alien - or, under certain conditions, a non-resident alien engaged in trade or business in the Philippines - you’re allowed a personal allowance or exemption of PHP 50,000. This is removed from your income before calculating tax. You can also qualify for an additional exemption of PHP 25,000 each, for up to 4 dependants.
(Source 21 December 2017)
The Philippine tax system allows for some deductions as well as the exemptions above - but not all are applicable to all category of taxpayer. Aliens aren't entitled to all of the benefits that citizens are, for example.
Social security contributions, up to the maximum mandatory contributions, are excluded from gross income for tax purposes. If your family unit has a combined gross income of not more than PHP 250,000 you can also deduct annual premium payments for health insurance up to a maximum of PHP 2,400.
You can remove some business costs from your gross income before calculating tax. For example, you can remove the cost of buying materials for your business or profession, any losses incurred, or some entertainment expenses linked to your work. However, if you’re a salaried, employed individual, you’re not likely to be eligible for these deductions, and it’s important to remember that there are caps and limits in place for these items.
(Source 20 December 2017)
Double taxation agreements help to ensure that you only pay tax once on your earnings, even if you’re considered to be a qualifying taxpayer in more than one country.
The Philippines has double taxation agreements with the following countries:
The Philippines double taxation agreements
(Source, 20 December 2017)
All of the forms you need to file your tax declaration and pay any outstanding tax, are available on the BIR website. Forms must be downloaded, completed in triplicate and then filed. If you need to make a payment you can do so at an authorised agent bank, or directly at the tax office. You have to get a stamped receipt to prove payment and submission of your tax declaration.
(Source 20 December 2017)
If you’re an expatriate, and need to pay taxes in the Philippines, you might need to transfer some money from a bank account held in a different country or currency, to your bank account in the Philippines. If you’re doing this, make sure you take into consideration any charges that will be added to the transfer, and also check that the exchange rate used when converting your money is fair.
It pays to check, because banks and money exchange services often don’t give customers the real, mid-market rate, which you’d find on Google. In fact, they mark up the rate by an average of 4-5%, and keep the difference as their profit.
If your usual bank is ripping you off, see if you could get a better deal if you use TransferWise. TransferWise works differently to banks. Because they don’t use the pricey SWIFT system for making bank transfers, the cost of making international transfers via TransferWise tends to be cheaper. That means that the savings can be passed on to you - the customer.
If you need to move your money across borders to pay your taxes, you don’t want to be bit by unfair fees added when you change your currency. The good news is that TransferWise might be able to help you save money on cross-border transactions. See if you can get a better deal from TransferWise if you find yourself needing to pay your taxes abroad.
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