Philippines Taxes for Retirees, Entrepreneurs and Expats

This podcast channel is about you, successful international entrepreneurs, successful expats, and successful investors sponsored by HTJ.Tax. 

DERREN JOSEPH 

Okay, so for those joining us for the first time, welcome HTJ.Tax, member Moores Rowland in Asia Pacific. We’re going to have Moores Rowland colleagues in the Philippines, who will join us for what I’m sure will be a very interesting conversation about international taxes in general, when it comes to the Philippines, but a US-Philippines perspective in particular, trying to demystify the sometimes-confusing world of taxes. There are so many misunderstandings out there, and I’m hoping that we’ll inject a healthy dose of sanity into an otherwise quite interesting conversation. 

This is being recorded, so if you don’t want your image to be reflected in the recorded video, you just need to keep your camera switched off. We do have an allowance for Q and A at the end. We have some questions that we are going to talk through. And if you’d like, feel free to key in your questions and the box below if you’re on Zoom or in one of the other chat boxes of any of the other platforms this is being live-streamed to. So, without any further ado, May I introduce Myra and Aleli. Myra, Aleli, would you like to introduce yourselves, please? 

ALELI GLORIOSO 

Hi, evening/ good afternoon, everyone. Hi, I’m Aleli, a tax partner from Sison Corillo Parone & Company. I have with me Ms. Myra Oliva, our partner also in tax. 

MYRA OLIVA 

Good evening everyone. 

DERREN JOSEPH 

Okay, all short and sweet. Yeah, we like that. All right, so let’s jump in. So, you know, there are some questions that when I’m speaking with clients, it just pops up all the time, so I sort, I’ll just throw those in. The first thing is the tax system in the Philippines. Is it territorial or not? Is it a worldwide tax, or is it a territorial tax? I’m sure it’s somewhere in between, but could you use that as a jump-off point to educate us on how it works? Either of you is fine. 

ALELI GLORIOSO 

Is it the registration, investment, and taxation of foreign individuals and corporations? 

DERREN JOSEPH 

Right. So, is it a territorial tax or a worldwide tax? 

MYRA OLIVA 

Well, for Filipinos, those who are residents and citizens of the Philippines are taxed worldwide. But if you are not a resident, if you are just a resident of the Philippines but not a citizen, you are called an alien or a foreigner. In simple terms, you are taxed only with all your earnings sourced in the Philippines. So that is the difference between the two types of income earners. So, to be taxed worldwide, you need to be a resident and a citizen of the Philippines. 

DERREN JOSEPH 

Okay, fantastic. To be clear, there’s similar terminology in the Philippines that is also used in the US. That’s probably because of the history. So, there’s also a concept of an alien, resident alien, non-resident alien, and so on, right? So, if someone is a citizen of the Philippines, as you said, and they’re based in the Philippines, they will be taxed on their worldwide income. However, if someone is a resident of the Philippines but is not a citizen, they’re taxed only on the income arising from within the Philippines. The foreign-sourced income is generally speaking untouched. Am I correct in saying that? 

MYRA OLIVA 

Yes. 

DERREN JOSEPH 

Okay. This leads me to my second question. The concept of a place of effective management, or in some jurisdictions, has been known as Nexus or, if you’re talking about treat tax treaties, the idea of a permanent establishment. So, let’s say that someone has a company set up elsewhere outside of the Philippines, and they run that company from within the Philippines. And it doesn’t matter where the income is collected, whether it’s into a Filipino or a Hong Kong bank account. The point is they’re running that company from within the Philippines. My question is, of course, there’ll be nuances, but generally speaking, is that company subject to taxes by the BIR? 

MYRA OLIVA 

So the company is situated here in the Philippines, am I right? 

DERREN JOSEPH 

No. So that’s the thing, the company is incorporated elsewhere, but the team that’s running it is sitting in Manila. 

MYRA OLIVA 

Oh. So, there is a team that is running the business here in the Philippines. I think that is what we call a permanent establishment, that is when a foreign company operates here in the Philippines either by employees or by an office, that is considered a permanent establishment, which makes them taxable and liable here in the Philippines. 

DERREN JOSEPH 

Absolutely. This comes up all the time. I actually had this guy get upset with me. He incorporated a company in both Hong Kong and, I think, in Taiwan, but his main thing was in Hong Kong, and he flew in, he flew into the Philippines during Covid, and he’s running this company from the Philippines. He didn’t leave. When he came in for a consult, I said, hey, you’re running your company from the Philippines. I mean, I know we can get into a critical conversation about who will find out and how they will know. Still, just by being completely honest and following the law, if you’re running that company from the Philippines, you need to have a conversation with the BIR, so he got upset with me. But I’m glad that you’re echoing those sentiments. It is commonly misunderstood. People seem to think that just by incorporating a company somewhere else, whether in Timbuktu or wherever they can go somewhere else and then be completely tax-free. So. I’m glad we clarified that. Another issue that comes up pretty often is retirement issues–people who retire in the Philippines. So, they live off foreign pensions, whether from the US, the UK, or Australia? 

I think you answered that when you responded to the first point, but just to be crystal clear, would the foreign pensions be subject to tax when received by the retiree in the Philippines? 

MYRA OLIVA 

Can you repeat the question? 

DERREN JOSEPH 

So, someone has retired and then had one of the visas that allow them to live in the Philippines, like the retirement visa, and they’re still receiving a pension from Australia or US or the UK, and it’s being paid into the Filipino bank account from a foreign financial institution, is that pension free of tax in the Philippines? 

MYRA OLIVA 

As for retirement, I think the law is clear that whatever they earn here in the Philippines but if it comes from other countries, I don’t think it would be taxable here also. 

DERREN JOSEPH 

Okay. Absolutely. And this is consistent with what we also hear from other credible sources: retirement pension, once it’s not arising from within the Philippines and arising from outside, is free of tax. Of course, we must assume that the person did not take Filipino citizenship because that may make it more complicated. But let’s assume that they’re just here on a visa or they’re just a long-term resident. That pension should be free of tax. 

Another question, of course, you know, people move to the Philippines, and some of them might be quite entrepreneurial and see a business opportunity in the Philippines. Generally speaking, can a foreigner form a company in the Philippines? 

ALELI GLORIOSO 

Can you repeat the question, please? 

DERREN JOSEPH 

I was asking about foreigners coming to the Philippines. Are they legally able to form a company in the Philippines? 

ALELI GLORIOSO 

Yes. It can be one person, a corporation, or the four types of foreign corporations: the representative office; the branch office; the regional operating headquarters, or the regional area headquarters. 

DERREN JOSEPH 

Okay, great. And especially since a one-person company is a relatively new development in the Philippines, right? 

ALELI GLORIOSO 

Yes

DERREN JOSEPH 

Oh yeah. Could you talk us through the process of forming a company, as we’re on it? There are a lot of options. But let’s stick with the one-person company. Could you walk us through what that involves, please? 

ALELI GLORIOSO 

Here. Okay. One person corporation is a business entity with just one stockholder. The single stockholder is also the director and the president of the company. So, for foreign corporations, we have the branch office, the representative office, the regional operating headquarters, and the regional area headquarters. As mentioned earlier, a one-person corporation has a single stockholder or sole director and president. So, within 15 days from the issuance of the certificate of incorporation, the treasurer, corporate secretary, and other officers must be appointed. The nominee or alternate nominee can take over the management upon the death or incapacity of the stockholder.

 Who can form an OPC (one-person corporation)? It’s a natural person or foreigners who wanted to invest in the Philippines with limitations in areas of investment, personally or completely restricted from foreign involvement as are specified in the foreign investment negative list. 

The following cannot form or are not allowed to form an OPC:

  • Banks.
  • Non-bank financial institutions.
  • Pre-need, trust.
  • Insurance companies.
  • Publicly listed companies.
  • Non-chartered government-owned and controlled corporation.
  • A natural person, licensed to exercise a profession to exercise his profession.  

What are the other features of an OPC or one-person corporation? It has a limited liability or direct obligation. Any personal or external asset is separate from the entity. 

Corporations are allowed to exist with no minimum capital requirements perpetually. 

Other documents required to register are articles of incorporation, written consent from the nominee, and an alternate nominee. Other requirements are proof of authority to Act on behalf of the Trust or Estate (for trusts and estates incorporating as OPC), Foreign Investment Application Form (for foreign natural persons), Affidavit of Undertaking to Change Company name, and tax Identification Number (TIN) for Filipino single stockholder and Tax Identification Number or passport number for the foreign single stockholder. 

So, for foreign corporations, we have branch office. Branch office are foreign, carries out the business activities of the head office, and derives income from the host country. In contrast, the representative office handles activities not limited to information dissemination and promotion of the company’s product and quality control of the product. It also deals directly with the clients of the parent company but does not derive income from the host country. The regional operating headquarters is a foreign business entity allowed to derive income in the Philippines by performing qualifying services to its affiliate, subsidiaries, or branches in the Philippines, Asia Pacific region, or other foreign markets. 

The regional or area headquarters is the administrative branch of a multinational company engaged in international trade, which principally serves as a supervision communication and coordination center for each subsidiary branches in all affiliates in the Asia-Pacific region and other foreign markets. Also, it does not derive income in the Philippines. 

What about the ways to register with the Securities and Exchange Commission? They are open for online filing or online registration with the minimum requirements of proposed business name and articles of incorporation, depending on the registration requirements and the capital contribution. 

The application for licensing of a foreign corporation is exempted from the uploading of processed documents. But the submission of four sets of required documents to the selected SEC processing office should be made within 30 calendar days from the date of payment of the processing fee. Once the application is approved, the SEC will issue a certificate of incorporation. 

DERREN JOSEPH 

Okay. As we were saying at the beginning, this whole idea of a one-person company is a huge step forward for the Philippines in terms of ease of doing business. Before that, you’d need four or five shareholders/ directors, which was quite cumbersome. Even though the picture you paint makes you think it’s quite a smooth process, I would imagine that anything to do with the SEC and the BIR tends to be challenging sometimes. I would imagine that people would still benefit from using a local advisory team like yourself rather than someone trying to figure it out on their own. 

DERREN JOSEPH 

Am I correct in saying that? 

ALELI GLORIOSO 

Yes.

DERREN JOSEPH 

Yeah. Okay, cool. And basically, of course, it all depends on what the person’s trying to do, but generally speaking, how much would the cost of assistance for incorporating a One-Person Company be? If it is, you who are helping a client with the process? Generally speaking, I know it can vary. 

MYRA OLIVA 

Generally, we offer services at a minimum price of at least PhP20 25, up to 30,000, to set up a business here in the Philippines. That is from end to end. 

DERREN JOSEPH 

Okay. All right. That’s great! Between 20 and 30,000 Pesos. And, of course, the rules are very specific as to what sort of activities a foreigner is allowed to engage in, as opposed to a local company in terms of licensing requirements. Am I correct in saying that as well? 

MYRA OLIVA 

Yeah, same with other foreign entities or corporations. They’re also limited as to what kind of industry they are allowed to put up. 

DERREN JOSEPH 

Right. And could you say a few words while we are on the idea of a company? Could you say a few words about the PEZA regime? Not, not too much! Because I know that’s a huge thing on its own, but basically, what is it all about? 

ALELI GLORIOSO 

As for the PEZA entity, they are exempt, or they may be required to re-register or apply to acquire zero rating certification. 

DERREN JOSEPH 

Okay. So, generally speaking, the Philippines has created certain special economic zones that allow 100% foreign ownership of companies, and typically, there are exceptions; there’s a lot of variation, but typically, these will be companies that are focused on export. So not necessarily making money from within the Philippines, but using the Philippines as a base to export a product. And as a result of that, they may get certain incentives which may include tax breaks. Is that a fair summary of it? 

ALELI GLORIOSO 

Yes. 

DERREN JOSEPH 

Okay. Is that something that your firm gets involved in? Or not really? 

ALELI GLORIOSO 

Not yet, 

DERREN JOSEPH 

No. Okay. All right, fair enough. Another question is about FATCA and CRS. So, there are these two frameworks for information exchange. One’s the Foreign Accounts Tax Compliance Act, which means that financial institutions in the Philippines would report the activity of individuals in the Philippines that have banking or financial, not just banks but brokerage accounts or maybe some big insurance policies at investment funds if they believe, that the owner or manager of this of the account is US exposed. 

22m 50s

DERREN JOSEPH 

So, if they have either a US passport or a green card, the banks in the Philippines are obligated to report that. Under FATCA, they’re required to report the activity of anyone in the Philippines who’s doing some sort of financial activity if that person is US-exposed. 

So that’s that. Did the Philippines sign an agreement with the United States that facilitates the exchange of information? Now, there’s another one called the C RS, which is similar in that the common reporting set is another framework for exchange where it’s multilateral and where the Philippines and other nations around Asia, such as Singapore or Indonesia or wherever, they’ve signed these agreements where if an account in a financial institution is owned or managed by a foreigner, let’s say it’s someone from Australia, the bank, through the tax office would share those records with Australia, or wherever. But my understanding is that the Philippines has not signed CRS. Can you comment on that? Is that something you’re aware of? 

MYRA OLIVA 

We are not one hundred percent sure about the FATCA or the CRS agreement between the US and the Philippines, but as far as I know, the Philippines is still holding onto the Data Privacy Act. So, I’m not sure of the extent how or what is the extent of the disclosure being done by the banks to the US. 

DERREN JOSEPH 

Yeah, so I thought that with the US, it’s fine. That the Philippines did agree, and of course, because of the historical relationship with the United States, it was like one of the early adapters that the Philippines had to share information with the US. So, the question was about the other one, which is based on the factor arrangement, called the common reporting standard or the automatic exchange of information. So, that one is just like the factor is an exchange of information with the US–the CRS or the automatic exchange of information with the rest of the world. 

So, I was just curious whether there’s been any discussion. When I last checked, sometime during covid, I don’t think the Philippines was involved, but yeah, I would imagine that situation is probably unchanged, as you pointed out, that the Philippines does hold fast to its financial secrecy rules and at this point in time they decided not to proceed in that. 

Okay. Another question concerns Controlled Foreign Corp. What are the rules around controlled foreign Corp? 

So, if there’s a Filipino company with a subsidiary in, say, Singapore or Malaysia or elsewhere, if it is in some of the jurisdictions, let’s say it was an Australian company, and they had a subsidiary in Singapore, a fully owned subsidiary because that’s deemed to be a Controlled Foreign Corp, therefore the tax office in Australia may have something to say about their taxability of what happens in Singapore even though it’s a separate company. It’s the same with Indonesia. So, if an Indonesian company has a subsidiary in Malaysia or Singapore, the subsidiary, even though it’s a separate legal entity in law, may have some tax responsibilities back to Indonesia. 

As far as we know, there are no CFC or Control Foreign Corp rules for Filipinos or Filipino companies with subsidiaries elsewhere. Am I correct in saying that? 

MYRA OLIVA 

As far as I know, yes, you are correct. Based on the tax laws, I haven’t encountered corporations being affiliates or subsidiaries of Philippine companies outside the Philippines that are being taxed here in the Philippines. The income earned by those companies outside the Philippines was not taxed here in the Philippines. 

DERREN JOSEPH 

Okay, fantastic. Another relatively new development, at least in the greater scheme of things, has been transfer pricing. So, even though there may not be any CFC rules, if there are related party transactions, let’s say a Filipino company has a related entity/ related being /common ownership, for example, with a company in another country like Hong Kong or Singapore, especially in a lower tax jurisdiction, the B I R is now insisting on transfer pricing documentation without going into details, I know it’s quite complex, but do you want to comment on just very high level on how that works with the Philippines and the BIR. 

MYRA OLIVA 

Last 2013, the BIR released a regulation about transfer pricing guidelines. A few years back, it was revived and implemented–mandating taxpayers to report or submit a form or BIR form or return indicating their relationship, foreign or local relationship in the Philippines. And then it was later revised for certain companies with particular threshold, so it has been implemented since then. Ms. Lei, can you provide more details? 

ALELI GLORIOSO 

The related party transactions are already disclosed on the audited financial statement, and are also required to submit a BIR form to declare the related budget transactions. 

DERREN JOSEPH 

And as you pointed out, there is a threshold involved. So, I think the thresholds are pretty high, like PhP150 Million or Php 90 Million. So, in US dollars, this is way over 1 $1.5 million to $3 Million. So, it is for the larger companies and doesn’t really impact SMEs. Is that a fair statement? 

ALELI GLORIOSO 

Actually, the primary requirement for the declaration of related party transactions is included the large taxpayer and others registered with the Bureau of Investment. 

DERREN JOSEPH 

And so last question in terms of what I have prepared about BIR reinforcement, you know, like certain tax offices tend to be more aggressive than others, like in South Asia, when people think of really aggressive tax offices, I think everybody thinks about India because they do some quite interesting things, also Indonesia can be quite aggressive, you know, in the greater scheme of things. What is your experience with enforcement from the B I R? Are they pretty aggressive? 

Do they welcome negotiation? Are they reasonable when you approach them with certain things? Do They play hardball, take things to court? You know what, what is your experience? What is your general perspective? 

MYRA OLIVA 

Well, generally, they are aggressive, especially nowadays. 

DERREN JOSEPH 

Okay. 

MYRA OLIVA 

But some of our dealings with them, for example, during an assessment or audit–some of their findings are refutable. They’re up for negotiation as long as there is full documentation available. So, as long as there is full support: invoices, ORs contracts, etcetera, then everything else will be refutable and will be negotiable, but they’re aggressive. 

DERREN JOSEPH 

So you’re saying that it’s super important? They’re really aggressive now because, like most countries in the world post-pandemic, money is an important issue. You know, there are holes in balance sheets to be plugged. So, everybody’s picked up the pace. So, it’s very important now to ensure you have your official receipts and contract and that you engage in proper record-keeping to answer questions as quickly and as accurately as possible. 

MYRA OLIVA 

Yes. Compliance is always important here in the Philippines. That’s one of the things that whoever wants to establish or set up a business here in the Philippines must consider–full compliance with the tax and regulations. 

DERREN JOSEPH 

Okay. And what about those who come to the Philippines and describe themselves as digital nomads? So, these are people who are basically freelancers. So, they’re able to work independently. They may not even be employees of any company; they’re just maybe independent contractors; they get a short project to do, they do the project, they hand it over, and that’s it. You see a lot of them. Well, at least I haven’t really been back and moved around since the pandemic, but before the pandemic, you had all these co-working spaces in Manila and Cebu, and you see people from all over the world doing projects for clients from all over the world as well. 

So, if someone spends a lot of time in the Philippines, let’s say they spend more than 183 days. They may be considered tax residents, but They are freelancers. They’re working from co-working spaces, their Airbnb, or whatever accommodation they may have in the Philippines. Would they be taxable in theory on that income? Should they be considering paying taxes to the Philippines on that income? And if so, how would they go about registering themselves as freelancers and independent contractors 

MYRA OLIVA 

As to the co-working spaces, I’m not sure if there is a specific ruling if co-working spaces would be considered a foreign establishment or what, but at least at the minimum, any alien or any foreigners who work here in the Philippines for more than 183 days are required or is considered already engaged in business here in the Philippines and thus, they are required to file tax returns and pay the tax due, that is based on their income he or she earns in the Philippines. 

Of course, he or she needs to register as a business leader or professional here in the Philippines. So that is a little tricky as some professionals do not really stay here for long or may have stayed here for more than 180 days, but they are not usually here for a year. So that’s one big thing that is still a gray area. But if you follow the rules, strictly speaking, then the foreign national who does business in the Philippines must file an income tax return here in the Philippines. 

DERREN JOSEPH 

Yes, and it is the same for most jurisdictions across Southeast Asia. Yes, you may have a visa that allows you to stay, and therefore you may actually be a tax resident according to the rules because you’ve done time. But then, if you say, hey, I want to do the right thing, I am working remotely from this country, so I want to register and pay my fair share. The process for doing that can be, as you said, quite challenging, and it’s not very straightforward at all. But I want to go back to another point you raised previously. You said that the BIR is becoming more aggressive. 

DERREN JOSEPH 

So, are you seeing more of a specific type of enforcement action, and what specifically are they looking at now that they perhaps didn’t pay as much attention to before? Or is it just they’re looking at everything? What are the top three things they seem more sensitive about right now than they were previously? 

MYRA OLIVA 

Well, I guess it’s still corporations. They’re still focused on corporations. As with professionals, they are being encouraged by the BIR to comply with the tax rules and regulations, but I think for most of the professionals or sole proprietors who had been on their threshold for audit, or those who are high-income earning individuals they’re one of those audit targets. 

MYRA OLIVA 

But for the small freelancers, I don’t think the BIR is focused on them. 

DERREN JOSEPH 

So it’s all about corporations right now. I’ve just had a quick look, and I’m not seeing any more questions. On that note, if someone wants to get in touch with you and your team, wants to set up a company in the Philippines, and wants to find out more about taxes in the Philippines, what’s the best way for them to reach you? 

MYRA OLIVA 

They can reach us through our website, scp-ph.com. We have a certain portion there for inquiries. They can send their inquiries there, or they can email us or visit us in our office at Tektite Towers in Ortigas. 

But most of us are already on hybrid, so they can reach us via email or mobile. 

DERREN JOSEPH 

Okay, that’s great. So just repeat scp.ph-ph.com. Wonderful. Myra Aleli, thank you so much for sharing your time and expertise, not just for those who are watching this, wherever they may be, but also for those who will watch our recording afterward because we are going to record this. It’s going to be uploaded on about 25 podcast platforms. So, anyone can get it from their favorite podcast like iTunes, Spotify, Google Play, Amazon, SoundCloud, basically everywhere. 

DERREN JOSEPH 

Perfect. So, you guys will be internet famous soon. Thank you for your time. Have a good evening, and see you next time. 

VOICEOVER 

So if you’re a six, seven, or eight-figure investor, entrepreneur, or business owner who needs a tailor-made solution from a qualified team of professionals, we can help you achieve the international lifestyle, the freedom, and even the tax savings you’re looking for. Visit us at htj.tax and live that international life. 

 

Table of Contents: Philippines Taxes for Retirees, Entrepreneurs and Expats

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