Foreign nationals and the taxman

Foreign nationals working in the Philippines are governed by at least three sets of rules — those of taxation, immigration and labor. Only by fully complying with each set of rules can foreign nationals ensure a fruitful and worry-free stay in the Philippines. This article focuses on taxation.

For regular Filipino employees, taxes due on salaries are withheld by their employers and remitted to the tax authorities during the year. Foreign nationals, however, may be covered by Philippine tax rules but are unaware that they have tax reporting obligations. Certain tax obligations pertain to foreign nationals on home payment arrangements, whether partially or in full, and to those who come to the Philippines as short-term business travelers.

There are foreign nationals who work in the Philippines under a split-payroll arrangement, i.e., their salaries are paid both from their home countries and from their Philippine employers. Some foreigners come to the Philippines for a specific business purpose within a short time period with wages usually paid from their home payrolls. Under both circumstances, there are fewer issues to consider if the home country payments are recharged to a Philippine entity as these will eventually be subject to withholding tax. However, in instances when the payroll costs remain with the home country, it is more difficult for the Philippine government to tax the foreign national. This is because no local entity or agency is privy to the amount that they receive from abroad. This is further complicated by existing tax rules governing foreign nationals that relate more to their presence and privilege to work in the country, but not to their tax obligations.

The question arises: Are these foreign nationals really subject to Philippine income tax on offshore wage payments?

The answer may seem to be a straightforward “no” since the income or part of it is not paid by a Philippine company. However, the reality is not that simple. We will need to take into account the basic principles on situs (or place) of taxation.

FOREIGN-SOURCED INCOME
As a general rule, the basis for taxation of foreign nationals is on Philippine-sourced income only. The issue may lie in what constitutes foreign-sourced income. Employment income is considered Philippine-sourced if it pertains to services performed in the country. This is regardless of where the income was paid, where the contract was perfected, or where the payor resided. Thus, in determining the extent to which foreign nationals are subject to tax, the basic consideration is where the work for which the income is earned was performed.

The paying entity need not be a Philippine company; there does not even have to be a performance agreement between the foreign national and the local office. As long as the work is rendered in the country, the income derived from such work is generally subject to Philippine income tax. We say “generally” as there may be income tax exemptions for foreign nationals who are tax residents of countries with which the Philippines has bilateral agreements on double taxation.

TAX ISSUANCES FOCUSING ON FOREIGN NATIONALS
Adding to the ambiguity is the absence of other government rules on how foreign nationals are to be taxed. However, in 2019, following the sudden and steady influx of foreign nationals working in the Philippines (not to mention the lost revenue from this working group) the government released four issuances directed towards subjecting foreign nationals to tax.

At the forefront is the Joint Memorandum Circular (JMC) No. 001, series of 2019, Rules and Procedures Governing Foreign Nationals Intending to Work in the Philippines. Drafted by nine government agencies, the JMC aims to harmonize the regulations and policy guidelines on the issuance of work permits and work visas to foreign nationals as well as the authority to hire and employ foreign nationals. Such permits are usually issued by various government agencies, including the Department of Labor and Employment (DoLE), Professional Regulation Commission, Bureau of Immigration (BI), and others. The JMC requires foreign nationals and/or the employer/withholding agent to secure a Tax Identification Number (TIN) from the Bureau of Internal Revenue (BIR) as a precondition for permits and visas. A special task force (composed of the DoLE, the BI and the BIR) was also created to conduct joint inspection of establishments employing foreign nationals. Moreover, a database will be created to record all issued work permits and authority to employ and hire foreign nationals.

Aside from the JMC, the BIR also issued Revenue Memorandum Order (RMO) 28-2019, which prescribed the registration requirements for foreign individuals not engaged and/or engaged in trade or business or gainful employment in the country. The BI then issued two Operations Orders, both dealing with the TIN as a requirement for work permits and non-immigrant visa applications.

CONSIDERATIONS FOR TAX COMPLIANCE
To allow strict monitoring of the presence of and tax compliance among foreign nationals, it would be helpful for the government to clarify the definition of “taxable work or services” for foreign nationals. To illustrate, there are short-term business travelers who stay in the Philippines for only a few days or months under a 9a visa and perform activities even without a Special Work Permit (SWP). Securing a 9a business visa does not require a TIN, and these individuals may assume that they do not have tax obligations (either to report any income and pay tax, or to file any applications for tax treaty relief), even if their activities in the country qualify as work or performance of a service.

Furthermore, compliance with TIN registration of foreign nationals may be difficult, especially if additional documents are required. For example, foreign nationals married to Filipinos and who apply for a TIN used to be required to submit English-translated and authenticated/consularized marriage certificates with their application.

REVISITING TAX OBLIGATIONS FOR FOREIGN NATIONALS
Policies should be reviewed to consider the changes that come with the fast-evolving world of workforce mobility, such as with the Emigration Clearance Certificate (ECC). An ECC is required from foreign nationals departing from the Philippines (either temporarily or for good) to ensure they have no pending obligation with the government. Current BI rules on ECC issuance, however, do not mention any need for the foreign national to submit documentary clearance of unfulfilled responsibilities from other government agencies.

There appears to be no solid coordination process among government institutions. There is also no database to provide the information necessary to support an ECC application. With the JMC mentioned previously, it may help all concerned agencies to look into the ECC process and develop a method to cover the tax compliance obligations of departing foreign nationals. It would also be worth looking into the best practices of tax jurisdictions like Singapore, the US and Canada on their exit permits and non-residency status upon departure of foreign nationals.

While the government is undoubtedly concerned about regulating the activities and rightful tax obligations of foreign nationals, there is much that can be done in terms of efficient implementation. We can hope that, given the number of government agencies involved in legalizing the affairs of foreign nationals, forthcoming guidelines will facilitate compliance. Moreover, with a TIN now a pre-requisite for work permit application, it may be advisable for foreign nationals and their employers to revisit their actual tax obligations arising from locally-sourced income. This is an opportune time to do so, as the April 15 tax filing deadline quickly approaches. Surely, no one wants the additional burden of stiff penalties, a BIR examination, or reputational peril that may be brought about by failure to comply with tax obligations.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Marlynda I. Masangcay is a lawyer and Tax Senior Director from the People Advisory Service Line of SGV & Co.