US Expat Taxes Explained: Filing Taxes as an American in the Philippines
How Working in the Philippines Impacts Your Expatriate Tax Return
You are going to be required to file an expatriate tax return no matter which country you live in, but how will your US expat taxes be affected if you’ve chosen to live in the Philippines? While the Philippines is among the most similar tax structures to the US in Asia, it is important to understand how your US expatriate tax return is going to be affected by your residing there. You should also be aware of your filing requirements and what US expat taxes you can expect to pay to the Philippines.
US Expat Taxes in the Philippines
If you are a citizen or permanent resident of the United States, then you are obligated to file an expatriate tax return with the US Federal government each year no matter the country in which you reside.
In addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with Foreign Bank and Other Account Reporting (FBAR) Form 114, in addition to Form 8938 Statement of Specified Foreign Financial Assets.
While the US is one of the few governments that tax the international income of their citizens and permanent residents who reside overseas, it does have special provisions to help protect them from double taxation including:
- The foreign earned income exclusion allows you to decrease your taxable income on US expat taxes by the first $108,700 for 2021 ($107,600 for 2020) earned as a result of your labors while a resident of a foreign country.
- A foreign tax credit that could allow lower your tax bill on your remaining income by certain amounts paid to a foreign government, and
- A foreign housing exclusion that allows an additional exclusion from income for certain amounts paid for household expenses that occur as a consequence of living abroad.
With proper planning and quality tax preparation you should be able to take advantage of these and other strategies to minimize or even eliminate your tax liability. Please do note that even if you do not believe that you owe any US income taxes you will, most likely, still be required to file a return.
Who is Considered a Filipino Resident?
Expatriates are classified as residents or nonresidents for tax purposes. Nonresidents are then further classified as being engaged in a trade or business, not being engaged in a trade or business, or employed by regional MNC headquarters, including offshore banking and service contractors in petroleum operations.
Residents are those expatriates who do not have a defined date of exiting the company, and may not have plans to leave the country long term. If you are in the country for more than 180 days in a calendar year, you are considered a resident alien and subject to higher tax rates than those who stay less than 180 days.
Philippines Tax Rates
Tax rates in the Philippines depend on what type of resident (or non-resident) you are considered by the Bureau of Internal Revenue. The tax rates on income in the Philippines are progressive and capped at 32% for those who are deemed to be engaged in business activities in the Philippines (or a permanent resident). For those who are not considered involved in business activities in the Philippines, there is a flat tax rate of 25%. For those who are employed at regional headquarters, there is a flat tax rate of 15%. These tax rates are applied to your income, minus allowable deductions.
Interest income and income on royalties is taxed at a flat 20%. Other tax rates include dividends, which are taxed at 10%, and gains on non-primary residencies, which are taxed at 6%.
US – Philippines Tax Treaty
The US – Philippines Tax Treaty is in place to alleviate taxation on US citizens living and working in the Philippines and Filipino citizens with income derived from the US. It is important to identify to which country you should pay taxes. If you have any questions regarding the language of the treaty, you should seek expatriate tax help.
Philippines Tax Due Date
One aspect of your us expat taxes that will be easy to keep organize are the tax dates; the Philippines has the same primary tax dates as the US. This makes reporting income earned in the Philippines easier as you will not have to prorate it for your US return as many expatriates need to do in other countries. The tax year is from January 1st to December 31st, and taxes are to be filed and paid by the 15th of April each year.
Social Security in the Philippines
If you are employed by an employer, you will be required to make contributions to the Social Security System of the Philippines. These payments are to be made monthly, and will also include a contribution from your employer. If you are self-employed in the Philippines, paying into social security is optional.
The US and Philippines do not have any type of agreement regarding social security. For that reason, this may be one area of taxation in which expatriates see double taxation. If you are self-employed, you may opt to continue to pay into US Social Security. It would be best to talk to an expat tax advisor regarding your long-term plans and options regarding social security.
Is Foreign Income Taxed Within the Philippines?
If you are considered a resident of the Philippines, you are going to be taxed on worldwide income. If you are considered a non-resident, you are only going to be liable to pay taxes on income derived from the Philippines.
Taxes in the Philippines
In addition to income tax on salaries paid, there are other forms of income that are taxed in the Philippines.
Non-cash compensation is considered taxable, including benefits or taxes paid on your behalf by your employer. These benefits are given a monetary value, and then taxed at a lower rate than regular income. There are no exceptions for foreign nationals.
Saving on US Expat Taxes
The Philippines is one of the most popular locations for outsourcing low-cost labor, and is among the most popular destinations for American expatriates in Asia. It is important to be aware of your taxation requirements in the Philippines and how it affects your expatriate tax return to the US.