Income tax and remittance taxation rules for OFWs

Filipinos working abroad, also known as Overseas Filipino Workers (OFW), never lose their basic rights as citizens of the Philippines despite being present physically in another country. OFWs retain, among others, the right to vote, the right to be protected by the State, and the right to freely enter and exit the Philippines, their home country.

With these rights, however, come the obligations and responsibilities associated with being Filipino. And one of these is the obligation to pay taxes to the Philippine government.

The Bureau of Internal Revenue (BIR) reiterated the tax treatment of income earnings and money remittances of OFWs in Revenue Regulation No. 1-2011 signed on February 2011, and amended in part by Revenue Regulation No. 11-2012 issued on August 2012.

Definition of an “OFW”

As per the BIR, an OFW is a Filipino citizen employed outside the Philippines and is physically present in that country or territory in order to perform work. Their wages and salaries are paid by an employer based abroad and is not borne by any entity or employer in the Philippines.

To be officially recognized as an OFW, the Filipino must be duly registered as such with the Philippine Overseas Employment Administration (POEA) and must possess a valid Overseas Employment Certificate (OEC).

Income taxation for OFWs

Philippine taxation laws require all Filipino citizens to be taxed based on the taxable income derived within and outside the Philippines. That means, regardless of source and its location, all incomes earned by citizens of the Philippines are taxable.

However, as reiterated in the BIR’s Revenue Memorandum No. 1-2011, the wage or income of an OFW “ arising out of his overseas employment is exempt from income tax.”

Since OFWs usually pay income taxes already in the country they are working in, the Philippines exempts those taxable income of Filipinos through the virtue of tax reciprocity. With the tax reciprocity rule, Filipinos working abroad are taxed for incomes received there and are exempt from paying income taxes in the Philippines, in the same way that foreigners working in the Philippines are taxed here for incomes sourced within the Philippines and are also not required to pay income taxes anymore to their home country.

Taxation of earnings from the Philippines

However, income earnings of OFWs from business activities or properties within the Philippines are still subject to Philippine income tax. That means even if OFWs are abroad, as long as they receive income from sources within the Philippines, these incomes must be reported to the BIR and OFWs must pay appropriate taxes.

The tax rates for incomes received within the Philippines are as follows.

For regular income, the tax rate is 5-32% depending on the Philippine income tax table.

Tax rates on passive income from the Philippines

On the interest income from any bank deposit and yield or any monetary benefit from deposit substitutes and from trust funds and similar arrangements: 20% final tax

On interest income from long-term deposits or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts, and other investments, if terminated or preterminated by the holder before the 5th year: 5% / 12% / 20% final tax

On any royalties: 20% final tax

On any royalties received on books, as well as literary works and musical composition: 10% final tax

On prizes and winnings amounting to P10,000 or less  (except Philippine Charity Sweepstakes and Lotto winnings): Regular income tax rate of 5 to 32%

On all other prizes and winnings (except Philippine Charity Sweepstakes and Lotto winnings): 20% final tax

On cash or property dividends: 10% final tax

On capital gains from the sale, exchange, or other disposition of real property in the Philippines classified as capital asset, based on gross selling price or current fair market value, whichever is higher: 6% final tax

Tax exemptions for OFWs

In addition to the tax exemption on incomes from sources outside the Philippines, OFWs are also entitled to a tax exemption on the travel tax, airport fee, and documentary stamp taxes (DST).

The BIR, however, recently required banks and non-bank remittance companies to submit to their office a quarterly summary of OFW remittances. This report includes the name of the OFW sender, name of recipient in the Philippines, the amount of remittance, and the proof of entitlement to DST exemption. This is supposedly to ensure that only legitimate OFWs are receiving the exemption privilege on paying the DST.

Documentary proof for DST tax exemption

In order to avail of the DST exemption, senders or recipients of the remittance must show proof that they are entitled to the exemption. Among the documents that may be shown to banks or remittance companies are:

• the OFW’s Overseas Employment Certificate (OEC); or
• valid membership certificate from the Overseas Workers Welfare Administration (OWWA); or
• electronic receipt (e-receipt) issued by the POEA

Banks and remittance companies have been reminded by the BIR to strictly implement the presentation of required documentary proof before allowing OFWs and their recipients to avail of the tax exemption on the DST.

Thus if you are an OFW sending remittance or a recipient of an OFW remittance, make sure that you prepare any of those documents prior to your remittance transaction in order to be exempted from the payment of documentary stamp taxes (DST).

See also:

• Philippine income taxation rules and tax table
• Tax exemptions for OFWs
• Real estate taxes and fees in the Philippines

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