Taxation of employees assigned abroad

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With globalization continuing to open up the Philippine economy to foreign trade and investment, the practice of sending employees to affiliates abroad either on a short- or long-term basis is becoming more common. Not only does it facilitate the learning and development of employees, it also allows firms to build a reputation as a good employer, eventually attracting more investors, business partners, and new employees.

However, a concern now is the tax implication for those Filipino employees who are on overseas assignment.
The critical factor here is whether the employee is a resident or nonresident citizen of the Philippines. Under the Philippine Tax Code, resident citizens are subject to tax on income earned within and outside the Philippines. On the other hand, nonresident citizens are subject to tax only on income earned within the Philippines.

Section 22 of the Philippine Tax Code defines a nonresident citizen as follows:

A citizen of the Philippines who establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his physical presence abroad with a definite intention to reside therein

A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis

A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year

A citizen who has been previously considered a nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.

Prior to the passage of the above provision defining a non-resident citizen, Section 2 of Revenue Regulations (RR) No. 01-79 dated 8 January 1979 enumerated those who are considered non-resident citizens. A non-resident citizen shall establish to the satisfaction of the Commissioner of Internal Revenue the fact of his physical presence abroad with the definite intention to reside therein. The term ‘non-resident citizen’ shall also apply to any Filipino who leaves the country during the taxable year as:

Immigrant—one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa as such has been secured

Permanent employee—one who leaves the Philippines to reside abroad for employment on a more or less permanent basis

Contract worker—one who leaves the Philippines on account of a contract of employment, which is renewed from time to time within or during the taxable year under such circumstances as to require him to be physically present abroad most of the time during the taxable year. To be considered physically present abroad most of the time during the taxable year, a contract worker must have been outside the Philippines for not less than 183 days during such taxable year.

Apparently, the current Section 22 of the Philippine Tax Code was derived from the above-defined ‘contract worker’. Stated otherwise, to be a non-resident citizen, one must leave on account of a contract of employment under such circumstances that require him to be physically present abroad most of the time.

Meanwhile, in Section 2 of RR No. 1-79, the term “most of the time” was construed as presence outside the
Philippines for more than 183 days during the taxable year. These provisions have been the bases of Bureau of Internal Revenue (BIR) rulings stating that the income of Filipino employees who are assigned abroad are not taxable in the Philippines, being a non-resident citizen, under either of the following premises:

Employees who are registered with the Philippine Overseas Employment Administration (POEA) are considered Overseas Contract Workers (OCWs), regardless of the number of days spent abroad during the taxable year.

Employees who are not registered with the POEA but who are physically present outside the Philippines for not more than 183 days during the taxable year.

In relation to this, in BIR Ruling [DA-(I-003) 081-09] dated 16 February 2009, the BIR confirmed that an employee who was assigned abroad and stayed therein for more than 183 days during the taxable year is considered a non-resident citizen who is taxable only on income derived from sources within the Philippines. It was further clarified that although the employee’s compensation income was paid by the entity in the Philippines, the same shall still be considered derived from outside the Philippines since the situs of taxation is the place where the services are rendered regardless of the manner of payment. This has been the consistent ruling of the BIR regarding Filipino employees working abroad.

Looking at the provisions of the Philippine Tax Code and as interpreted by previous BIR rulings, it can be inferred that the 183-day rule was used in determining the non-residency status and eligibility for tax exemption of a Filipino regardless of where the salary will be paid. This is based on the principle that the situs of the income derived from services performed by a taxpayer is the place where said taxpayer performed such services.

However, in BIR Ruling No. 517-11 dated 22 December 2011, the BIR held that a local company’s employees assigned to render services abroad who were present in the foreign country for more than 183 days do not qualify as non-resident citizens and are thus subject to Philippine income tax in relation to their compensation income from their assignment abroad.

In this ruling, the BIR held that the employees cannot qualify as non-resident citizens because they remained employees of the local company, despite their overseas assignment. They were still under an employer-employee relationship with the local company and the latter had the right to control and direct the individual with regard to which services will be performed, what targets have to be accomplished, and ultimately, it is the entity that receives the benefit of the services. Accordingly, the compensation received by the employees still pertained to their employment with the local entity, which should be subject to withholding taxes on compensation. In this ruling, emphasis was given on who holds the employment contract and who pays the payroll costs in order to determine taxability.

Recently, the BIR issued a ruling concerning a government employee who was appointed to a post in the Association of Southeast Asian Nations (ASEAN) Secretariat that had her holding office abroad for a period of three years with no intention to reside therein either as an immigrant or on a permanent basis. The worker continued to be employed by the Philippine government agency while her remuneration and other benefits were shouldered by the ASEAN Secretariat.

The BIR considered her resident citizen who is taxable on all income derived from sources within and outside the Philippines. In its ruling, the BIR held that while the employee stayed abroad for more than 183 days, the employee cannot qualify as a non-resident citizen because she remained employed locally. The BIR further clarified that for someone to be considered a non-resident citizen, the Tax Code not only requires presence of more than 183 days outside the Philippines, but also that the employee works and derives income from abroad and is “employed thereat.”

The term “employed thereat” was interpreted by the BIR as requiring a foreign employment contract. Impliedly,
a mere secondment of an employee, regardless of the length of term, would not satisfy the condition of having an “employment thereat.” This new interpretation of the BIR has serious implications to the increasingly global Filipino employees who are now faced with having to pay taxes both abroad and in the Philippines.

Aside from promoting the global mobilization of employees, taxpayers and employers should also consider the provisions of secondment agreements and its impact on the tax obligations of both the employee and the employer. This will guide taxpayers on the appropriate remittance of taxes on income earned from work abroad.

The author is an assistant manager with the tax and corporate services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

ROSE ANNE APOSTOL

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