Filipinos worldwide were dismayed by the outcome of the match between Manny Pacquiao and Floyd Mayweather, Jr. But the Filipino ring icon earned the respect of fans for his valiant stand despite suffering a shoulder injury in training. Pacquiao will of course still take home unimaginable riches from what was touted as the highest-grossing bout in boxing history. Unfortunately, from the tax point of view, such earnings mean he has an appointment with the BIR.
Like Pacquiao, many other Filipinos earn income from overseas -- e.g., athletic prize money; artists’ performance fees; consultancy fees for professionals; dividend income from a foreign investment; the sale of property abroad; and compensation income for overseas Filipino workers (OFW).
Filipinos earning income abroad can be classified into two types as defined by the Tax Code: (a) resident citizens and (b) non-resident citizens. It is important to know whether the citizen is a resident or non-resident of the Philippines. A resident citizen will be taxable on his worldwide income; while a non-resident shall be exempt on his income from sources abroad.
A resident citizen refers to a person who has the Philippines as his habitual place of abode to which, whenever away, he has the intention of returning. Belonging to this type are Filipinos who have investments abroad, artists (theater, film and arts) performing on short-term projects in foreign countries, athletes competing in foreign events, and professionals (consultants) rendering consulting services to foreign clients. They are required to pay the corresponding taxes on their income whether generated within the Philippines or from outside the Philippines.
On the other hand, non-resident means: (a) a citizen who establishes his physical presence overseas with the definite intention to reside therein; (b) who leaves the country to reside abroad either as an immigrant or for employment on a permanent basis; (c) who works and derives income overseas and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.
Belonging in this group are the OFWs and overseas contract workers (OCWs). They are taxed only on income earned within the Philippines.
The rule on income taxation for resident and non-resident citizens is embodied under the general principles of income taxation in the Philippine Tax Code. On the other hand, the rules on determining whether income is from within the Philippines or from outside the Philippines are embodied in the basic concept of situs of taxation. The related issue that a Filipino citizen should be cautious of is the possibility of double taxation, which happens when a Filipino citizen is taxed by a foreign jurisdiction on the same income that is also being taxed by the Philippine government.
HOW CAN A FILIPINO TAXED IN THE PHILIPPINES ON WORLDWIDE INCOME AVOID DOUBLE TAXATION?
Tax treaties between the Philippines and the country where the income was earned generally provide conditions for the exemption of income of Filipinos who still qualify as Philippine residents.
For example, the Philippines-Australia Tax Treaty provides that income generated in Australia by a Philippine national in the nature of independent personal services shall only be taxable in the Philippines, except if a) the Filipino citizen has a fixed base regularly available to him in Australia for the purpose of performing his activities; b) the Filipino citizen stays in Australia for a period aggregating 183 days for the purpose of performing his activities; and c) the Filipino citizen derives a gross income exceeding 10,000 Australian dollars in a year of income or taxable year.
Likewise, the Philippines-US Tax Treaty provides that income generated from United States by a Filipino citizen in the nature of independent personal services shall be taxable only in the Philippines except if (a) the Filipino citizen has fixed base regularly available to him in the US for the purpose of performing his activities, (b) he is present in the US for a period or periods aggregating 90 days or more in the taxable year, and (c) gross income derived in the taxable year for the performance of such services in the US exceeds $10,000.
The Filipino earning income from overseas will generally be required to apply or register with the foreign tax office to avail of the tax treaty relief provisions.
There are also tax treaties addressing the double taxation issue through the concept of tax crediting. Crediting of taxes paid in other countries is also allowed under Philippine tax laws. This means that, a Filipino who generated income in another country during a temporary visit and remitted the corresponding income tax to that country’s government would be able to use the amount paid in the foreign country as a deduction against his income tax due to the Philippine government.
In this case, it is critical to secure the original documentary evidence that the corresponding taxes have been paid to the foreign government. This will be a prerequisite of the Bureau of Internal Revenue (BIR) for allowing the tax credit.
HOW ABOUT THE NON-RESIDENT FILIPINO?
Non-resident citizens working and deriving overseas income as OCWs are taxable only on income from sources within the Philippines. Thus, if a non-resident Filipino is not earning income in the Philippines, then he is supposed to have no income tax due to the Philippine BIR.
Under Revenue Regulation No. 01-2011, OFWs and OCWs refer to Filipino citizens employed overseas, who are physically present there as a consequence of their employment. To be considered as an OFW or OCW, they must be registered with the Philippine Overseas Employment Administration (POEA) and must have a valid Overseas Employment Certificate (OEC).
For Filipino seafarers or seamen who receive compensation for services as members of the complement of a vessel engaged exclusively in international trade, they must also have a valid Seafarers Identification Record Book or Seaman’s Book issued by the Maritime Industry Authority, in addition to the POEA registration.
Regardless of whether Filipinos are resident or non-resident citizens for tax purposes, they must always bear in mind the basic requirements and documents that need to be secured and maintained to avoid double taxation, whether through tax exemption or tax crediting. After all, Manny Pacquiao and all Filipinos earning income abroad should be fully entitled to the fruits of their labor and sacrifices, net of the correct taxes.
source: Punongbayan & Araullo
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