When moving to the Philippines, especially if you are going to work or set up a business there, you will probably have questions regarding the local tax system. Indeed, as in most countries, you are likely to pay income tax, as well as other types of taxes, in the Philippines. However, tax is deducted under several conditions and at varied rates for different categories of foreigners. It is best to double-check beforehand. Tax does not have to be taxing! Find out the answers to your queries in this article.
Who has to pay income tax in the Philippines?
Expats/ foreigners living in the Philippines who are not yet citizens are considered resident aliens, while expats/foreigners who do not live in the Philippines are considered non-resident aliens. If you're already a citizen but you are not living in the country, you're a non-resident citizen.
Generally, the following principles apply in terms of individual taxation in the Philippines:
- citizens living in the country are taxable on all income derived from sources within and outside the Philippines;
- non-resident aliens and non-resident citizens are taxable only on their income within the Philippines;
- Philippine citizens working as overseas contract workers (OFW) is only taxable from their income within the Philippines.
In terms of businesses:
- domestic corporations (created within the Philippines) are taxable on all income inside and outside the country; and
- foreign corporations, whether engaged or not in trade or business in the Philippines, are taxable only on income derived from revenue within the country.
Good to know:
Filing your tax returns in the Philippines as an expat can still be done the traditional way — manually by visiting your nearest Revenue District Office (RDO) or online. The Philippines tax year runs from 1 January to 31 December for personal income or businesses.
Tax rates in the Philippines
Foreign residents in the Philippines are required to pay taxes on their net taxable income at different rates ranging from 5% to 32% (this is standard for all taxable individuals). In their case, the employer deducts taxes at the source. Thus, they do not have to go to the Tax Office.
In short, tax rates in the Philippines vary from 0% to 32% depending on the amount of income:
- 5% - 0 to 10,000 pesos
- P500 10% of the excess over P10,000 - 10,001 to 30,000 pesos
- P2,500 15% of the excess over P30,000 - 30,001 to 70,000 pesos
- P8,500 20% of the excess over P70,000 - 70,001 to 140,000 pesos
- P22,500 25% of the excess over P140,000 - 140,001 to 250,000 pesos
- P50,000 30% of the excess over P250,000 - 250,001 to 500,000 pesos
- P125,000 32% of the excess over P500,000 - more than 500,000 pesos
Most foreigners in the country are classified as resident aliens due to the duration of their stay and employment period in the Philippines. Hence, as foreign residents, income received in the country is treated in the same way as those of Filipino nationals.
Foreign residents, for their part, will pay taxes according to their passive income from Philippine sources (dividends, interest, royalties, annuities, wages, real estate profits, etc.).
Non-resident expats/foreigners involved in a trade or business in the Philippines will also have to pay income tax at the same rates. A final tax is applied at a rate of 20% on dividends received by non-resident foreigners from companies within the Philippines.
Regarding non-resident aliens who are not involved in trade or business in the Philippines, they have to pay taxes at a rate of 25% on gross income received in the Philippines unless these are plus-values received from the sale of shares in a national company or from real estate. In this case, capital gains taxes will apply.
Finally, foreigners employed by regional head offices of multinational companies, offshore banking and oil contractors have to pay a 15% tax based on their gross income.
Personal income tax in the Philippines
Resident citizens of the Philippines are taxed on their worldwide income, while non-resident citizens and aliens are only taxed on revenue and earnings within the Philippines. Please note that the tax rate will vary depending on where the income comes from.
Fringe benefits tax (FBT)
Fringe benefits awarded to managerial and supervisory-level employees by the employer are subject to a final FBT of 35%* (in general) on the grossed-up monetary value of the benefits.
The FBT is a final tax payable on a quarterly basis by the employer and deductible as part of fringe benefit expense. Benefits subject to FBT are no longer included in the employees' taxable income. Please note that the Fringe Benefit Tax is 25% for non-resident aliens not engaged in trade or business.
Tax rates for income subject to final tax in the Philippines
The following rates apply to income subject to final tax in the Philippines:
- Income subject to final tax (usually passive investment income) is a maximum of 20% for resident and non-resident aliens engaged in trade or business in the Philippines.
- A flat rate of 25% is applied for non-resident aliens not engaged in trade or business in the Philippines.
Tax rates for business income in the Philippines
An individual, whether citizen or resident alien, who is self-employed or practices a profession in the Philippines, is also subject to graduated income tax rates.
On the other hand, an individual who has gross sales/receipts and other non-operating income not exceeding the VAT threshold (which is currently fixed at PHP 3 million) may choose to be taxed at either of the following options:
- 8% tax on gross sales/receipts and other non-operating income in excess of PHP 250,000 instead of the graduated (starting lower and increasing) income tax rates and percentage tax (business tax), or
- the graduated tax rates.
Business income subjected to graduated tax rates in the Philippines will also be liable for business tax (i.e., 12% VAT or 3%* percentage tax, starting 1 July 2023).
Corporate income tax
Philippine corporations are taxed at a rate of 25% (reduced from 30%), except for corporations having net taxable revenue of less than 5 million PHP and total assets of less than 100 million PHP, which is taxed at a rate of 20%. This also applies to “resident foreign companies”, i.e., SMEs/ foreign companies engaged in a trade or business within the Philippines.
The documents required to register for corporate tax for foreign companies are a Treasurer's Affidavit, a Bank Certificate of proof of Inward remittance and notarized articles of Incorporation and by laws.
For companies with more than 40% foreign equity a SEC form F-100 is required.
To register you must comply with the Securities and Exchange Commission.
VAT in the Philippines
Value-added tax (VAT) in the Philippines is currently equivalent to a standard rate of 12%, based on the gross selling price of goods or properties sold or gross receipts from the sale of services.
Property tax in the Philippines
Property tax in the Philippines varies according to the location. In general, it does not exceed 3% of the estimated value. Based on Section 218 of the Local Government Code, these are the typical assessment levels: Residential: 20% Agricultural: 40% Commercial, Industrial, and Mineral: 50%
If the property is a capital asset, the purchase is subject to capital gains tax (CGT) of 6% of the gross selling price or current fair market value, whichever is higher, and documentary stamp tax (DST) of 1.5% of the actual consideration for the sale.
Social security contribution in the Philippines
The new law regarding social security contributions in the Philippines states that the minimum monthly salary credit (MSC) will be from ₱3,000 in 2021 to ₱4,000 in 2023, of which the employee pays 4.5% through monthly salary deductions, while the employer shoulders the remaining 9.5%.
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