“Maximizing OFW remittances” by Francis J. Ricamora (May 9, 2011)

SUITS THE C-SUITE By Francis J. Ricamora
Business World (05/09/2011)

“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

So said Jean Baptiste Colbert, French economist and Minister of Finance under King Louis XIV of France.

And this insight may be apt when one considers the recent Bureau of Internal Revenue (BIR) issuance that applies to our modern-day heroes — our overseas Filipino workers (OFWs). Revenue Regulations (RR) No. 1-2011 was issued to clarify the tax treatment of the income and money remittances of Overseas Contract Workers (OCWs), as OFWs are also called. As part of the moves to improve tax administration, eliminate confusion and clarify the tax treatment of our OCWs/OFWs, RR 1-2011 defined the tax treatment of their income earned within and outside the Philippines.

The rules define the term OCWs or OFWs as Filipino citizens employed in foreign countries and who are physically present in a foreign country as a consequence of their employment thereat. Their salaries and wages are paid by an employer abroad and not borne by any entity or person in the Philippines.

To be considered OCWs/OFWs, they must be duly registered as such with the Philippine Overseas Employment Administration (POEA) with a valid Overseas Employment Certificate (OEC).

Seafarers or seamen are similarly treated as OFWs if they are Filipino citizens who receive compensation for services rendered abroad as a member of the crew of a vessel engaged exclusively in international trade. Similar to land-based OCWs/OFWs, they must be duly registered with the POEA with a valid OEC, Seafarers Identification Record Book (SIRB) or seaman’s book issued by the Maritime Industry Authority.

This definition adopted by the BIR is consistent with Section 2 of Republic Act (RA) No. 10022, amending Section 3 of the RA 8042 or the Migrant Workers and Overseas Filipinos Act of 1995, which defines the term “Overseas Filipino worker” or “migrant worker” as a person who is engaged or has been engaged in a remunerated activity in a state of which he or she is not a citizen, or on board a vessel navigating the foreign seas, other than a government ship used for military or non-commercial purposes, or on an installation located offshore or on the high seas.

In outlining the income tax rules applicable to OFWs, the BIR applied the general rules on the taxation of individuals provided for under the Tax Code. A citizen of the Philippines who is working and deriving income from abroad as an OCW is taxable only on income sourced within the Philippines (e.g., compensation for labor or personal services performed in the Philippines).

Thus, an OFW’s income from overseas employment is exempt from income tax.

However, if an OCW or OFW has income earnings from business activities or properties within the Philippines, such income is subject to the applicable Philippine income tax (i.e., 5%-32% of taxable income; 6% final tax on capital gains from the sale, exchange or other disposition of real property in the Philippines classified as capital assets based on gross selling price or current fair market value, whichever is higher; and 10% final tax on cash or property dividends).

With regard to business taxes, OFWs/OCWs may be subject to 12% value-added tax (VAT) if, in the course of business, they sell, barter, exchange, lease goods or properties, render services in the Philippines or import goods into the Philippines.

However, if gross annual sales and/or receipts do not exceed P1.5 million and an OFW opted not to register as a VAT taxpayer, he or she shall be liable to pay 3% percentage tax of his or her gross quarterly sales or receipts.

Pursuant to RA 8042, as amended, all migrant workers shall continue to be exempt from travel tax and airport fees upon showing proof of entitlement issued by the POEA (i.e., OEC). The remittances of all OFWs, including those sent through the banking system, credited to an account in the Philippines and withdrawn through an automatic teller machine (ATM), shall be exempt from documentary stamp tax (DST) upon presenting the OEC or valid OWWA Membership Certificate. Prior to RA 10022, all money transfers from abroad and payable in the Philippines, including those wired home by OFWs, were subject to the DST at a rate of P0.30 for every P200.

RR 1-2011 does not tax the earnings of OCWs/OFWs from their work outside the Philippines, nor does it impose new taxes on OCWs or OFWs.

What is clear, however, that there will be tax implications on the income (in the case of income tax) and on gross receipts (in the case of VAT) of these earnings as they are invested by the OFWs in business undertakings or activities in the Philippines. This is to ensure a level playing field for both OFWs and resident citizens who chose to remain in the Philippines to do business or practice their profession.

Very soon, the Aquino administration will be celebrating its first year in office. It has remained true to its promise not to impose new taxes.

However, if the imposition of new taxes or higher rates should become absolutely necessary, the government should carefully consider whose “feathers” to ruffle. Our OFWs contributed $18.76 billion, equivalent to 10% of the country’s gross domestic product last year. Placing the burden on millions of migrant workers will definitely result in tremendous hissing.

(Francis J. Ricamora is a Tax Senior Director of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.