by Dennice Clyte M Ramirez
With the increase in the number of foreign nationals working in the Philippines over the past years also comes challenges for the government to keep track of their compliance of the law of the land. As there have been reports of illegal foreign nationals being deported out of the Philippines in the past few months for not following the country’s regulations, it is only natural for the government to keep an eye on foreign national workers.
In line with the President’s ordinance to monitor income tax payments of working foreign nationals, the Philippine Economic Zone Authority (PEZA) issued Memorandum Circular No. 2019-016 on May 21 requiring economic zone locator enterprises to submit tax-related information i.e. Taxpayer’s Identification Number (TIN) and Income Tax Return for calendar year 2018 of their foreign national employees to the agency’s Foreign National Unit (FNU). Although some enterprises are quite taken aback by the sudden requirement, they have no choice but to comply as failure to do so will result to penalties. The submission deadline is on 24 May 2019 covering tax returns for year 2018. It is uncertain if the requirement shall be imposed in the years ahead covering future years’ tax returns.
Following the issuance of the memorandum circular, it is advisable for both the employers and foreign national workers to be aware of the tax compliance rules.
Taxpayer’s Identification Number (TIN)
Foreign national workers who are required to obtain working permits from the Department of Labor and Employment (DOLE) and Bureau of Immigration (BI) are also required to obtain a TIN from the Bureau of Internal Revenue (BIR) since this is one of the requirements in applying for the work permits. The TIN should also be indicated in the return, statement or document to be filed with the BIR for proper identification for tax purposes.
As the BIR strictly supervises the TIN application of foreign nationals, it requires that foreign nationals, regardless of their place of residency and employment, to be registered under Revenue District Office (RDO) No. 39 - South Quezon City.
In obtaining a TIN from the BIR, various application forms are available from which an individual taxpayer must choose depending on applicability: BIR Form No. 1901 is for registration of Self-Employed and Mixed Income Individuals, Non-Resident Aliens Engaged in Trade/Business, Estates/Trusts; BIR Form No. 1902 is for registration of Individuals Earning Purely Compensation Income - Local and Alien Employees; and BIR Form No. 1904 is for registration of One-Time Taxpayers and Persons Registering under E.O. 98. Further, supporting documents must be submitted such as any identification issued by an authorized government body (e.g. Birth Certificate, passport, driver’s license), Marriage Contract (if applicable), and notarized Special Power of Attorney (SPA) and ID of authorized person, in case an authorized representative will transact with the BIR on an applicant’s behalf. It is also worth noting that since the RDO is stricter when it comes to the TIN application of foreign nationals, they may require additional documentation which they may deem as necessary, such as a copy of the stamped page of the passport which indicates the date of their arrival in the Philippines.
Income Tax Return
Foreign nationals are required to report their income from sources within the Philippines, unless they qualify for an income tax exemption by virtue of a double tax treaty agreement.
For tax purposes, foreign nationals can be classified as: 1. Resident Alien (RA); 2. Non-Resident Alien Engaged in Trade or Business (NRAETB); or 3. Non-Resident Alien Not Engaged in Trade or Business (NRANETB).
RAs and NRAETBs are subject to the graduated income tax rates of 0% to 35% on their compensation income. Income from self-employment (business or professional) is subject to tax at either the graduated income tax rates or a flat rate of 8% on gross sales or receipts and other non-operating income, subject to limitations. On the other hand, NRANETB is subject to a flat rate of 25% on their gross income.
Substituted filing,” whereby a taxpayer will no longer have to file an income tax return but instead the filed employer’s annual information return will be considered as the employee’s “substitute” income tax return is available to RAs, subject to the following conditions: (1) employee and his/her spouse receive/s purely compensation income from only one employer in the Philippines; (2) the amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer; (3) the employer files their annual information return - BIR Form No. 1604-CF and issues a BIR Form No. 2316 to the employee. An NRANETB whose sole income has been subjected to final withholding tax is no longer required to file an annual income tax return. It should be noted however that since NRAETBs are not qualified for substituted filing, they are still required to file an annual income tax return if their gross compensation income exceeded two hundred fifty thousand pesos (Php250,000).
There are various annual income tax return forms which taxpayers can use depending on the type of income they are earning: BIR Form No. 1700 is for individuals earning purely compensation income; BIR Form No. 1701A is for individuals earning income purely from business/profession who are under the graduated income tax rates with OSD as mode of deduction or those who opted to avail of the 8% flat income tax rate; and BIR Form No. 1701 is for purely self-employed individuals with itemized deduction claims and mixed income earners.
No payment income tax returns should be filed in the RDO while tax returns with income tax due should be filed to the respective Authorized Agent Bank (AAB) of the RDO where the foreign national is registered.
Dealing with the government’s requirements may not be a walk in the park for foreign national workers. The requirements are a bit tedious to comply with, but it will be less vexing for some if they are at least aware of the basic rules. After all, although people can’t follow the rules they are not aware of, ignorance of the law excuses no one.
Dennice Clyte M. Ramirez is an Assistant Manager from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.
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