Taxes – What US Expat in the Philippines Should Know

The Philippines contains over seven thousand islands. Its people hail from more than a hundred different ethnic groups, making the country a very unique place.

If you are planning to become a U.S. expat in Philippines, or have been one for a while, it’s important to know the tax laws of the country and the potential impact on your U.S. tax return. Expat taxes can get complicated. Fortunately, we have outlined the key points below.

Photo by: Jojo Nicdao

Taxation in Philippines

Let’s start by reviewing who is required to pay taxes in the Philippines. Foreigners are taxed on Philippines-source income only. They are grouped into 3 categories for tax purposes:

• Resident Aliens: Foreigners intending to stay permanently (in practice, more than 2 years);
• Non-resident Aliens: Foreigners who have lived more than 180 days in the country during a calendar year; and
• Non-residents: Present less than 180 days in the country.

Income tax rates for resident and non-resident aliens are progressive, ranging from 5% to 32%. Employees of regional HQ of multinational companies are subject to a favorable 15% rate. Non-residents are subject to a flat tax rate of 25%.

The Philippines and the U.S. have an income tax treaty in-place. International tax treaties clarify tax jurisdiction. These treaties can provide U.S. citizens and residents with reductions in foreign income taxes. However, a reduction in U.S. taxes is generally not available under these treaties as a result of “tax saving” clauses that allow the U.S. government to impose taxes on U.S. expats as if there were no treaty.

Note that the Philippines and the U.S. do not have a social security tax agreement in-place. This means that certain U.S. expats will be required to pay into both social security programs.

How Living in Philippines Impacts US Taxes

As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in Philippines. Plus, if you have assets in foreign financial accounts (e.g., foreign banks), there are informational reports you may be required to file. For example, U.S. Expats Living in Philippines with $10,000 or more in foreign banks must file the FBAR (now known as FinCen 114).

Fortunately, the U.S. government provides various forms of tax relief that can lower or eliminate U.S. tax obligations

• The Foreign Earned Income Exclusion – It allows you to exclude a certain amount of income earned outside the U.S.
• The Foreign Housing Exclusion/Deduction – This one relates to additional income that can be excluded for household-related expenses tied to living abroad.
• The Foreign Tax Credit – It allows you to offset foreign taxes paid against U.S. tax obligations.

In most cases, the foreign earned income exclusion is preferable to the foreign tax credit if you live in a country with a lower tax rate than the U.S. (assuming your income is not above the applicable threshold). However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.

FATCA and Philippines

The U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. As a result, it has been busy inking deals with other countries whereby foreign financial institutions (FFIs) will be required to:

• Identify accounts of U.S. persons;
• Report certain information to the IRS regarding those accounts;
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information

As of the publication of this article, roughly 80 countries have either signed intergovernmental agreements with the United States or are in discussions. The Philippines and the U.S. do not yet have a FATCA agreement in-place. However, you should be aware of the implications given that the IRS intends to expand FATCA’s reach in the upcoming years.

If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.