Taxation: From expatriation to repatriation

If Harold Camping was right and the Rapture happened last Saturday, 21 May 2011, I would have booked that dream vacation and stayed there while waiting for the world to be destroyed five months later. Fortunately, life goes on and so will expatriation and taxation. 

You may be an expatriate who has been recently assigned to the Philippines, or an expat about to leave the country. You may be one in the accounting department or one in the human resources department who will handle their benefits and tax payments. This article aims to give you a general understanding on the most common benefits related to expatriation and repatriation and how these are taxed in the Philippines.

Upon reading the assignment contract, you may be awed by different assignment related benefits. In general, all benefits received for services rendered in the Philippines are subject to income tax unless specifically exempted by law. The following are some of the general rules on benefits given during an international assignment:

* Since the situs of taxation is the place where the service is rendered, it does not matter whether the benefit is borne by the home or host company. The benefits are nevertheless subject to Philippine income tax. If the home company pays for the benefit, the host company has no obligation to withhold tax on benefits. However, if the benefits are charged back or billed subsequently to the host company, the host company is required to withhold tax on the benefits. Benefits provided locally by the host company are normally subject to fringe benefits tax.

* Expenses like airfare tickets, shipping of household and other personal effects, visa application, and costs incurred to find a house for the expat are generally not considered compensation income of the expat. These expenses are paid by the company to third party service providers and are receipted for and in the name of the employer; hence, are properly classified as ordinary business expenses.

* If a one-time or lump sum relocation allowance is given in the form of cash to the expat, the whole amount is generally subject to income tax. If the expatriate is required to liquidate the amount and the amount is claimed as a business related expense by the host company, then the amount is not taxable to the expat. Any amount not supported by a valid official receipt is reported as compensation income of the expat.

* While looking for a permanent housing an expat is normally provided a temporary place to stay, usually a hotel, temporary housing given to any employee whether an expat or a local employee for three months or less is not considered a taxable fringe benefit. If the housing unit is situated or is adjacent to the premises of a business or factory, it

is not considered a taxable fringe benefit regardless of the length of stay of the expat. A housing unit is considered adjacent to the premises of the business if it is located within the maximum of 50 meters from the perimeter of the business premises.

* At the end of the assignment or repatriation, some expat’s are given separation pay or retirement pay. These income items are exempt from income tax if the following conditions are met: 1) the benefit is given under a reasonable benefit plan approved by the Bureau of Internal Revenue; 2) the retiring expat must have been in the service of the host company for at least 10 years and is not less than 50 years of age at the time of retirement and 3) the retiring expat should not have previously availed of the privilege under the retirement benefit plan of the same or another employer. Separation pay received by reason of involuntary separation remain exempt from income tax even if the employee, at the time of separation, had rendered less than 10 years of service and/or is below 50 years of age.

* Income earned during the year must be reported on or before the 15th of April the following year. Although the expats are not required to pay or settle their income tax liabilities before leaving the country, surcharges and interest penalties will be levied if the deadline to file tax return is missed. 

The Philippine tax liability is just one facet of the whole tax liability of an expat. Depending on the rules of his home country, the expat may also be liable for taxes in his home country. If the end of world does not happen any time soon, you can always bet that nothing is certain but death and taxes.

(Cecille A. Fernando, CPA is a Supervisor for Tax of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email mailto:[email protected]or mailto:[email protected].)