I am constantly meeting entrepreneurs and business owners who are running great businesses online. They tell me that US taxes are a nightmare for them. They are unable to find one place where they can get all the answers they seek –
- If I’m a digital nomad, spending time in Bali or Chiang Mai or Penang – what, if any, is my tax exposure in the jurisdiction in which I am spending time?
- If I’m a US citizen or green card holder, what, if any is my tax exposure given that I am spending months or years away from the US?
- If I’m British, Australian, Italian, French etc. - what, if any is my tax exposure given that I am spending months or years away from my country of origin?
- If I am based in Asia but I’m running a Drop Shipping business focusing on the US market. What is my US tax exposure?
- If I am based in Asia but I’m running a business using Amazon FBA, focusing on the US market. What is my US tax exposure?
- I think that my Drop Shipping or Amazon FBA business has US tax exposure, is there one firm that can help me with US tax planning and compliance for sales taxes, use taxes, city taxes, state taxes, Federal taxes?
- Software companies are selling me US tax compliance services, but they are not licensed tax practitioners so what happens to me and my business if the software company gets something wrong with my US taxes?
These are all valid questions and it is near impossible for a single individual to know all these answers. It is also unusual for a single firm to have all these answers as well. That’s where we come in. We are an international tax team with accredited and qualified cross border tax professionals. With that in mind, here are some answers.
Read our thoughts here - http://www.mooresrowland.tax/2018/04/tax-responsibilities-of-digital-nomads.html
The key tax to pay attention to would be sales and use tax. Unfortunately, this is one of the most complex tax structures in the US and everyone needs help in planning and compliance. This is more of an issue since the rules changed in summer 2018.
On June 21, 2018, the U.S. Supreme Court overturned decades of established law that required vendors to have a physical presence in a state before that state could require them to collect and remit sales tax on purchases by customers within the jurisdiction. The Court overturned its 1992 decision, Quill Corp. v. North Dakota, with its recent decision in South Dakota v. Wayfair, Inc., noting that "the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause." While it will take some time to completely understand the full effects of this decision, it is safe to say that this is the most important development in the sales tax world in at least 25 years.
What about US Income Taxes for Amazon Sellers or Drop Shippers who are not American and who live outside of the US?
More Questions? Drop us an email on email@example.com today
More on Pre Immigration US Tax Planning
Part I- the Split family
Many of our clients moving from Asia to the US, tend to split their family in two. Some family members (especially the father) remain in Asia and others (particularly the mom and kids) make the move to the US. In such situations, it is important for them to understand the definition of residency from a tax perspective.
Section 138, Division A, of H.R. 4170 (the Tax Reform Act of 1984) amends Section 7701 of the Internal Revenue Code of 1954, as amended (“Code”), to include, as new Subsection 7701(b), a definition of resident alien and nonresident alien for Federal income tax purposes.
President Reagan signed H.R. 4170 into law on July 18, 1984. Thus, effective for tax years beginning after 1984, objective definitions of the terms residents aliens (“RAs”) and nonresidents aliens (“NRAs”) for Federal income tax purposes are incorporated into the Code.
It is very important to note however, that the new definitions do not affect the determination of residence for Federal estate and gift tax purposes (discussed later). In addition, the Joint Explanatory Statement of the Committee of Conference (the “Joint Statement”) also makes it clear that it is not intended that the definitions of RA and NRA affect the determination of whether an estate or trust is a U.S. or foreign estate or trust, “except insofar as that determination itself turns on the residence or non-residence of particular alien individuals.”RESIDENCE TESTS
Code Section 7701(b) sets forth the following two (2) tests pursuant to which an alien individual will be considered a RA with respect to any calendar year if he:
- is a lawful permanent resident of the United States at any time during the calendar year (the “Green Card Test”); or
- is present in the U.S. for thirty-one (31) days or more during the current calendar year and has been present in the United States for a substantial period of time--one hundred eighty-three (183) days or more during a three (3) year period weighted toward the present year (the “Substantial Presence Test”).
Pursuant to Section 7701(b)(1)(A), an alien individual is to be considered a RA for any calendar year, if and only if, he satisfies the requirements of the Green Card Test, the Substantial Presence Test or the First Year Election.
- The Green Card Test: A lawful permanent resident is defined as an individual who has the status of having been lawfully accorded the privilege of residing permanently in the United States in accordance with the immigration laws, and if such status has not been revoked (and has not been administratively or judicially determined to have been abandoned). Thus, a lawful permanent resident continues to be a resident for income tax purposes until he officially loses or abandons the status of lawful permanent resident.
- The Substantial Presence Test: An alien individual is classified as a RA as to a calendar year (the “current year”) if he is present in the United States for thirty-one (31) or more days in the current year and has been present in the United States for one hundred eighty three (183) days or more during a three (3) year period, weighted toward the current year. This weighting takes place as follows: an alien is considered a RA during the current year if the sum of the days he is present in the United States during the current year, plus one-third (1/3) of the days present during the first preceding year, plus one-sixth (1/6) of the days present during the second preceding year, equals or exceeds one hundred eighty-three (183) days. Exceptions will be discussed later.
A United States (“U.S.”) taxpayer is subject to income, gift and estate tax on a worldwide basis with reporting obligations relating to worldwide income, gifts and assets as well. Conversely, a foreign taxpayer is subject to a more limited U.S. tax regime and to a more limited reporting regime.
U.S. Income Tax
If an individual is not a citizen of the U.S., and such individual does not satisfy the Green Card Test (the “GCT”) or the Substantial Presence Test ( the “SPT”), or does not qualify for and in addition make the First Year Election, such individual will be a U.S. income tax nonresident alien (“NRA”). If the individual does satisfy the GCT or the SPT, or qualifies for and makes the First Year Election, such individual will instead be a U.S. income tax resident (“RA”). It is also important to note that for U.S. income tax purposes, the definition of a U.S. Taxpayer includes an RA as well as a U.S. citizen.
U.S. Gift, Estate and Generation Skipping Transfer Tax (U.S. Transfer Tax)
Unlike the statutory definition that can be found to determine RA versus NRA status, there is no such definition for U.S. Transfer Tax purposes and instead the “facts and circumstances” must be reviewed in detail to determine if a client is a U.S. resident alien domiciliary (“RAD”) versus a nonresident alien domiciliary (“NRAD”).Domestic Versus Foreign Legal Entities
Pre-Check-the-Box rules, the place of organization controlled in distinguishing domestic from foreign corporations. A domestic corporation is a corporation created or organized in the U.S., or under the law of the U.S. (including the District of Columbia), or of any State. §7701(a)(4). In contrast, a foreign corporation is one which is neither created nor organized in the U.S. nor under the law of the U.S. or any State. §§7701(a)(4), (5) and (9).Domestic Versus Foreign Partnerships
A foreign partnership is defined in the negative, as a partnership which is not domestic. §7701(a)(5). A domestic partnership is in turn defined as one created or organized in the U.S., or under the law of the U.S. or of any State, unless the Secretary provides otherwise by regulations. §7701(a)(4). See, PLR 8635064 and PLR 8701017. Effective January 1, 1997, the Check-the-Box rules state that when
distinguishing a domestic versus a foreign entity, an entity is domestic if it is created or organized in the U.S. or under the law of the U.S. or any state, and an entity is foreign if it is not domestic. Reg. §301.7701-1(d).Domestic Versus Foreign Situs Trusts
Before the enactment of The Small Business Job Protection Act (SBJPA) on August 20, 1996, the inquiry as to whether a trust was a foreign trust was of greater consequence than the determination of whether a partnership was a foreign partnership because, unlike a partnership, the trust itself may be a taxable entity. Thus, foreign situs may determine whether and to what extent a trust is subject to tax. Because of the difficulty in determining the status of a trust as domestic versus foreign, and the importance of that determination for federal tax purposes, SBJPA enacted a two-part objective test. A domestic trust is any trust if a court within the U.S. is able to exercise primary supervision over the administration of the trust, and one or more U.S. fiduciaries have the authority to control all substantial decisions of the trust. A foreign trust means any trust other than a domestic trust. See §§7701(a)(30)(E) and (31)(B). The new objective test applies to tax years beginning after December 31, 1996.Domestic Versus Foreign Estates
Upon the death of an individual, estate administration will generally begin. Although an estate does not present the entity classification issues generally involved with the creation of a trust (e.g., associations taxable as corporations), an estate's situs as domestic versus foreign is an extremely important consideration when determining the appropriate U.S. tax consequences and planning alternatives. Many of the pre-SBJPA "trust" considerations continue to apply with equal weight when determining an estate's situs. As to the situs of an estate as domestic versus foreign, consider Rev. Rul. 64-307, 1964-2 C.B. 163 (placing emphasis on the residence of the decedent at the time of death); Rev. Rul. 81-112, PLR 8524010 (the estate of a U.S. citizen who resided continuously in a foreign country during several years prior to his death was held to be a foreign estate); and Rev. Rul. 62-154, 1962-2 C.B. 148, PLR 7917087 and PLR 7918118 (the citizenship, residence and activities of the ancillary administrator must also be considered).
The U.S. Taxation of Foreign Persons
Going back many years, Congress enacted legislation to tighten perceived tax avoidance benefitting U.S. citizens and eventually specifically defined long-term lawful permanent residents who chose to expatriate, i.e., give up such U.S. citizenship or lawful permanent resident status and convert to NRA status. Most recently, the Heroes Earnings Assistance and Relief Tax Act of 2008 introduced the most aggressive expatriation tax changes yet, which changes are oftentimes referred to as the Exit Tax with respect to U.S. income tax and the Inheritance Tax with respect to gifts and bequests received by certain U.S. taxpayers from a covered expatriate. The Exit Tax and Inheritance Tax provisions apply to any individual who expatriates on or after June 17, 2008. Consider Notice 2009-85, and more recently, the proposed regulations which appeared in the September 28, 2015 edition of the Internal Revenue Bulletin.B. A Special Exclusion For Foreign-Earned Income
As an inducement for U.S. taxpayer individuals to accept employment abroad and to help U.S. businesses strengthen their foreign presence, consider §911.C. Avoiding or Minimizing the Potential for Double Taxation
When a U.S. taxpayer generates income or gain from abroad, the possibility of double taxation exists and thus the U.S. taxpayer must be familiar with the foreign tax credit. Consider §§901-909.D. Congressional Efforts to Eliminate or Minimize Tax Avoidance and Perceived Abuses and Unwarranted Deferrals
Since the introduction of taxes, taxpayers and the government have long disputed what constitutes legitimate tax planning with resulting tax avoidance or minimization versus what constitutes actual or perceived abuses. Congress has enacted and revised numerous provisions over time which comprise part of the Service’s arsenal in the Service’s efforts to “control” taxpayers. Consider the code sections dealing with outbound transfers of property and corporate inversions, Controlled Foreign Corporation (“CFC”), Passive Foreign Investment Company (“PFIC”), and the §482 transfer-pricing rules.Part III - Transfer tax planning for NRA vs RA
U.S. Residence for U.S. Estate and Gift Tax Purposes.
The concept of “residence” for income tax purposes should not be equated with “residence” for estate and gift tax purposes. The objective residence definitions under §7701(b) (and the final regulations thereunder issued on April 24, 1992) do not affect the definition of residence for Federal estate and gift tax purposes. For estate and gift tax purposes, residence in the U.S. requires physical presence in some place in the U.S. and the intention to make that place a fixed and permanent home. Christina de Bourbon Patino, 51-1 USTC ¶9123 (4th Cir.), aff’g, 13 T.C. 816 (1949). Therefore, the determination of residence in this context must be made independently from the determination of residence for income tax purposes. Also, one’s immigration status is not determinative of such person’s U.S. estate and gift tax residence, but is merely a factor in that determination. Because the estate and gift tax regulations in this area are unclear and inconclusive, the determination of a person’s residence for estate and gift tax purposes constitutes a difficult and subjective factual determination.
- Intention and Overt Act.
The estate and gift tax regulations define “residence” in terms of domicile: “A ‘resident’ decedent is a decedent who, at the time of his death, had a domicile in the United States . . . A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal.” See Regs. §§20.0-1(b)(1) and 25.2501-1(b).
- Illustrative Cases.
“Domicile” for estate and gift tax purposes is a rather nebulous concept. Thus, although many cases have dealt with the issue, no clear-cut rule has evolved. However, even though most of such cases are old, the decisive factors noted therein may serve as useful guidelines.A. In Fifth Ave. Bank of New York, Ex’r., 36 B.T.A. 534 (1937):
The decedent, a U.S. citizen, was born in New York in 1870. Between 1912 and 1920 she traveled back and forth between the U.S. and France. In March 1920 she returned to France, and lived there until her death in 1932. The decedent’s purpose for remaining in France was to seek medical advice for her diabetes and to help her cousin who was experiencing marital difficulties. In addition, she had often stated to a cousin that she intended to return to the U.S. when she regained her health and her cousin’s problems were resolved. Whenever she renewed her passports, she stated her reason to travel abroad to be “temporary residence and travel” but in later renewals she stated her foreign stay to be “indefinite.” She always stated her domicile as the U.S., paid U.S. taxes until her death, and never claimed foreign citizenship. The Service attempted to classify her as a nonresident decedent for estate tax purposes by arguing that her prolonged stay in France caused her domicile to change. Under the applicable rules at the time of her death, non-resident decedent status would have adversely affected her estate’s right to an exemption and deduction of certain expenses. The Court, in finding her to be a resident decedent, stated: “Two facts must exist to effect a change over to a new domicile of choice, both residence in the new place and an intention to make the new residence a permanent home. There must be both the fact and the intent.” (at p. 538).B. In Estate of Bloch-Sulzberger, 6 T.C.M. 1201 (1947):
The decedent, who was born in Switzerland in 1883 and died there in 1941, had stated under oath in various documents and in visas, reentry permits, and tax returns, that he was a U.S. resident. Upon the decedent’s death, the Service attempted to tax him as a U.S. resident. In addition to his dying in Switzerland, the decedent had retained his home and business interests there, and had remained active with Swiss charities and civic organizations. To the Court, the problem was not whether or not the decedent had obtained various benefits by perjured statements, but whether or not he was a resident for U.S. estate tax purposes. In finding him not to be, the Court stated: “[a] resident for estate tax purposes . . . is one who at the time of his death had his domicile in the United States. Intention of the person is extremely important. Domicile is the place which he regards as his home, and where he intends to live. His old domicile continues until it appears that he intends to live there no longer but has an intention to make his home henceforth at some other place and to remain there indefinitely.” (at p. 1203). Because the decedent died in Switzerland, retained his home and business interests there, and remained active with Swiss charities and civic organizations, the Court concluded that he intended for that country to remain his domicile.C. In Estate of Paquette, 46 T.C.M. 1400 (1983):
The decedent, a Canadian citizen, was born in Canada in 1897. He operated two retail stores in Montreal. In addition, he owned two houses in Canada, one of which was located near his stores in Montreal. The other house was utilized by the decedent as a country house. Beginning in 1950 and up to the time of his death in 1975, the decedent made yearly vacation trips to Florida, generally during the winter months. Thus, the decedent would generally remain in Florida from October through April, returning to Canada for the summer. In 1955, the decedent retired and sold his business. In 1956, the decedent sold his house in Montreal, and in the early part of 1957 he purchased a house in Florida which was furnished with the contents of the house he had sold in Montreal. After 1971, the decedent’s wife became ill and was not able to accompany the decedent when he returned to Canada for the summer. In the fall of 1971, the decedent sold his country house because it required too much work to maintain and he intended to buy a small house or rent an apartment in Montreal. In 1972, the decedent began to experience a series of illnesses and he was hospitalized and treated in Florida. However, he continued to return to Canada to meet with his professional advisors and friends. In 1974, the decedent executed his Last Will and Testament while in Montreal and stated therein that he was a resident of Canada. He returned to Florida in November 1974, and he remained there until he died in January 1975. In concluding that the decedent was domiciled in Canada, the Court stated: “In addition to his yearly visits to Canada, decedent maintained numerous contacts with his country of citizenship which evidenced his intention to retain his Canadian domicile. Up until the date of his death, he filed income tax returns in Canada, he voted in Canada, and he maintained a valid Canadian driver’s license as well as a valid Canadian passport. In addition, decedent’s automobile was purchased, registered, and insured in Canada. Moreover, it is not without significance that most of decedent’s assets, valued at $556,351.76, were located in Canada. He met with Mr. Larouche and Mr. Bourgeois regularly in Canada concerning his investments. In order to keep his assets liquid, decedent’s portfolio was divided between deposits in Canadian banks and stocks and bonds of Canadian corporations. Decedent returned yearly to actively manage his investments. Decedent met at least twice a year with Mr. Larouche at which time he personally made the decisions of when and where to invest his money. In fact, Mr. Larouche was prohibited from making changes in decedent’s portfolio unless he received personal authorization.* * *
After careful evaluation of all the evidence, including testimony by those who were well acquainted with decedent, we find that decedent never had any intention to establish a United States domicile.
Decedent maintained many contacts with his native country, and followed a 25-year old practice of spending winters in Florida. We find that decedent never intended to remain in the United States
indefinitely.” (at p. 1404).D. In Estate of Barkat A. Khan, T.C. Memo 1998-22:
The decedent, a Pakistani citizen, had obtained an immigration long-term permanent resident alien green card and a social security number in part to help preserve certain U.S. subsidies, but the decedent died in Pakistan in 1991 and although the 1986 through 1990 U.S. Individual Income Tax Returns for the decedent had incorrectly been filed as nonresident Forms 1040NR, amended Forms 1040 were filed subsequent to decedent’s death. Decedent’s estate was desirous of resident alien domiciliary status (e.g., it wanted to use the larger unified exemption available to an estate of a U.S. citizen or resident alien domiciliary, but not to an estate of a nonresident alien domiciliary) and based its argument largely on decedent’s possession of a green card. However, the Service’s position was that decedent and his wife were not resident alien domiciliaries of the U.S. at the time of his death and that decedent’s estate was not entitled to the full unified credit or the marital deduction. In a decision which, in the authors’ opinion, had numerous factors both for and against resident alien domiciliary status, the court, in finding resident alien domiciliary status, placed significant weight in the decedent’s obtaining a permanent resident alien “green card” plus a re-entry permit when he left the U.S. to return to Pakistan. The case further substantiates that possession of a green card is not conclusive in determining resident alien domiciliary status, although when taking into account all of the facts and circumstances, it can be an adverse factor.E . In Estate of Jack, 54 Fed. Cl. 590 (2002):
The parties filed cross-motions for summary judgment to determine whether a Canadian citizen employed in the U.S. on the date of his death, having been admitted to the U.S. under a non-immigration, temporary professional classification, was legally capable of forming an intent to be domiciled in the U.S. for Federal estate tax purposes. The decedent’s estate argued that the intent to establish domicile by the holder of a temporary professional visa would be in direct violation of the terms of the visa, so that such an intent would be precluded. The Court granted summary judgment to the Service holding that for Federal estate tax purposes, a Canadian citizen employed in the U.S. on the date of his death, who was admitted to the U.S. under non-immigrant, temporary professional classifications, was legally capable of forming an intent to be domiciled in the United States.
- Immigration Status--Illegal Aliens.
With respect to the impact of immigration status upon residence status for purposes of estate and gift taxation, so long as the individual in fact resides in the U.S. with no definite present intention of leaving [regardless of what “legal ability” or “disability” the immigration law places him under (compare Rev. Rul. 80-363, 1980-2 C.B. 249 with Rev. Rul. 74-364, 1974-2 C.B. 321 revoked by Rev. Rul. 80-363, 1980-2 C.B. 249, which it revoked, and which are discussed below)], he has formed the necessary intent to become a U.S. domiciliary.
In Elkins v. Moreno, 435 U.S. 647 (1978), the U.S. Supreme Court held in a non-tax related decision that under Federal law, a non-immigrant alien holding a G-4 visa has the legal capacity to establish domicile in the U.S. when the Federal law which governs the granting of the visa does not impose restrictions on intent or duration of stay. The Supreme Court continued to note that even though permanent immigration would normally occur through immigration channels, nonrestricted non-immigrant aliens could adopt the U.S. as their domicile under certain circumstances. Following the Elkins decision, the Service issued Rev. Rul. 80-363, above, in which it concluded that the decedent therein formed the intent and did in fact reside in the U.S. with no definite present intention of leaving, and was therefore a resident decedent (i.e., domiciled in the U.S.): “The Supreme Court of the United States, in Elkins v. Moreno, 435 U.S. 647 (1978), held that, under federal law, a nonimmigrant alien holding a ‘G-4’ visa has the legal capacity to establish domicile within the United States. The Court concluded that when federal law, such as the statute that governs the granting of ‘G-4’ visas, did not impose restrictions on intent or duration of stay, Congress intended that, while permanent immigration would normally occur through immigrant channels, nonrestricted nonimmigrant aliens could adopt the United States as their domicile under certain circumstances.
The question of domicile depends on whether the decedent had formed the intent to remain in the United States indefinitely. In the present situation, decedent was a resident decedent since, at the time of death, domicile had been established in the United States, and decedent had formed the intent and did, in fact, reside in the United States with no definite, present intention of leaving. This is true notwithstanding that decedent had entered and remained in the United States with a ‘G-4’ visa.” (at 1980-2 C.B. 250). See also, TAM 8137027 (a National Office Technical Advice Memorandum which further discussed the relevant issues). In connection with illegal aliens, in Rev. Rul. 80-209, 1980-2 C.B. 248, the Service concluded that an illegal alien who lived in the U.S. for 19 years with his family, had purchased a U.S. residence and had established strong community ties, was domiciled in the U.S. at the time of his death: “The requirements for acquiring a domicile are (1) legal capacity to do so; (2) physical presence; and (3) a current intention to make a home in the place. . .
* * *
. . . Some of the factors used in determining such requisite intention are home ownership, local community ties and living with one’s family in the claimed domicile. See Farmer’s Loan & Trust Co. v. United States, 60 F.2d 618 (S.D.N.Y. 1932). In the present case, the fact that the decedent lived in the United States for a long time with the decedent’s family and that the decedent established strong community ties indicates an absence of any fixed intention of returning to the native country.* * *
. . . The facts in the present case thus indicate that the decedent intended to remain in the United States indefinitely.” (at 1980-2 C.B. 249).
- Factors Indicative of Domicile.
As indicated by the illustrative cases above, the factors which are considered in making the determination of whether an alien is a resident for U.S. estate and gift taxation must demonstrate a certain degree of permanence in the U.S. on the part of the alien before he is classified as having a U.S. domicile. As expressed by the Court in Safe Deposit & Trust Co. of Baltimore, 42 B.T.A. 145 (1940), rev’d on other grounds, 316 U.S. 56 (1942):
“. . . the acquisition of a domicile of choice involves actual physical presence at a dwelling place in another state, coupled with the concurrent intent to make it a home. Intention involves the idea of fixity, of some degree of permanence in the new abode, and must be more than the mere intention to acquire a new domicile.” (citing Restatement of Conflicts §§15, 16, 18, and 19 at pp. 162 and 163).
In connection with the determination of domicile, some of the most common factors analyzed in the estate and gift tax context are:
- The amount of time spent by the decedent in the U.S., in other countries, and the frequency of travel both between the U.S. and other countries and between places abroad. However, a period of extended physical presence in the U.S. alone will not suffice to establish U.S. domicile.
- The size, cost and nature of houses or other dwellings, and whether those places were owned or rented by the decedent. In Estate of Fokker, 10 T.C. 1225 (1948), the decedent maintained a large home in New York and a smaller home in Switzerland. The Tax Court found the decedent to be a U.S. domiciliary. The Court compared the size of the houses and their localities, and stressed that the location of the Swiss home (in St. Moritz) constituted a resort, pleasure oriented community with international appeal.
- The area or locality in which the houses and dwelling places are located. See, Estate of Fokker, above.
- The location of expensive and cherished personal possessions of the decedent. See, Farmers’ Loan & Trust Co. v. U.S., 60 F.2d 618 (S.D.N.Y. 1932).
- The location of the decedent’s family and close friends. See, Estate of Nienhuys, 17 T.C. 1149 (1952).
- The places where the decedent has maintained and participated in civic leagues, churches, clubs, etc. See, Farmers’ Loan & Trust Co., above, and Estate of Nienhuys, above.
- The location of the decedent’s business interests. See, Estate of Fokker, above.
- The location of the bulk of the decedent’s assets, and the location of his professional advisors. See, Estate of Paquette, above.
- Where did the decedent file tax returns up until his death. See, Estate of Paquette, above.
- Declarations of residence or intent made in visa applications for reentry permits, wills, deeds of gift, trust instruments, letters, and oral statements made by the decedent. For example, in Bank of New York & Trust Co., 21 B.T.A. 197 (1930), the decedent, a U.S. citizen, spent the last 5 years of her life traveling in France, Italy and other countries in Europe. The Court found that she was a U.S. resident, and that she did not have the intention to abandon her U.S. residence while in Europe since her purposes for being there were pleasure and health. The decedent’s declarations and actions indicated that her home was in the U.S. (e.g., when applying for passport renewals she stated that she was abroad only temporarily, and in two trust instruments and a Will executed by her she described herself as a resident of Washington, D.C.). See also, Estate of Fokker, above, Frederick Rodiek, 33 B.T.A. 1020 (1936), aff’d, 37-1 USTC ¶9032 (2d Cir.), Estate of Bloch-Sulzberger, above.
- Whether the decedent used traveler’s checks and international credit cards while in the U.S. rather than U.S. issued credit cards and local accounts.
- Whether the decedent obtained and used a U.S. driver’s license as opposed to an international one.
- Whether the decedent acquired in his own name (as opposed to renting) an automobile in the U.S.
- Whether the decedent spent holiday periods with his family, and if so, where.
- Whether the decedent brought his family to the U.S.
- Whether the decedent was engaged in political activity such as voting, public, or military service, abroad.
- Reasons or motivation for presence of the decedent in the U.S., e.g. health, pleasure, business, war or terrorism in home country or avoidance of political repression or instability in home country.
- Only subject to gift tax on transfer of property situated in the U.S. (“U.S. situs property”) and excluding the transfer of intangible property. Examples: U.S. real estate, tangible personal property, currency, deposits bank accounts? LLCs?
- No unified credit
- Marital deduction. Depends on citizenship of spouse. If spouse is U.S. citizen, the deduction is unlimited. If spouse is not U.S. citizen, the deduction is not unlimited §2523(i). However limited inflation adjusted $100,000 per year exclusion ($149,000 for 2017) if the gift otherwise qualifies for marital deduction. Examples: NRAT to U.S. citizen. U.S. citizen to Non-U.S. citizen. NRAT to non-U.S.citizen.
- Annual inflation adjusted $10,000 ($14,000 for 2017) and certain transfers for educational or medical expenses are also available. §§2503(b) and 2503(e). May use irrevocable trust with Crummey powers and discounts. E.g., planning for U.S. real estate.
- Gift splitting is not allowed unless both spouses are U.S. citizens or RATs. Gift splitting is allowed even for RAT spouses even though one could not gift to another gift tax free except as explained in II.A.3. above.
- Charitable deductions limited to domestic corporations and/or domestic use.
- Treaties may change domicile, unified credit, marital deduction and other deductions.
- Consider change of domicile. Consider making complete gifts of foreign real and foreign tangible personal property, and intangible property wherever situated, before you attain RAT status.
- Gross estate only includes property situated within the U.S. (so-called “U.S. situs” property). §§2103 and 2106. Consider §2104(b) incorporating §§2035 to 2038 to transfers of U.S. situs if property was U.S. situs when transferred or upon death, e.g., real estate transferred to foreign revocable trust, trust sells real estate and buys real estate in Brazil? How about transfers to foreign corporations?
(a) Unified - $13,000. Special rules may apply for NRADs from U.S. possessions or certain treaty countries. §2102(c).
(b) State death taxes. §§2102(a) and 2011.
(c) For certain pre-1977 gifts made within 3 years of death (is a full credit). §§2102(a) and 2012.
(d) Tax on prior transfers. §2013. If a U.S. citizen decedent or RAD has a non-U.S. citizen spouse, the marital deduction is not allowed in the absence of a qualified domestic trust (“QDT”) or a treaty. If the non-U.S. citizen spouse is ultimately subject to U.S. estate tax on this “same” property, a full §2013 credit will be available regardless of when the first decedent spouse died.
- Marital deduction. Depends on citizenship of surviving spouse and not on status of decedent. If spouse is a U.S. citizen, the deduction is unlimited. If spouse is not a U.S. citizen, there is no deduction unless through a QDT or under a treaty. A QDT requires U.S. citizen or domestic corporation Trustee with right to withhold estate tax on distribution of principal. §2056A. There are other requirements including an election. The surviving spouse can create a QDT or it can be created by decedent’s documents and decedent’s documents can also be reformed. Big drawback is that the QDT tax is imposed as if the property was part of the estate of the first to die so no benefit from surviving spouse tax brackets, credits, etc.
- Limited deductions. Deductions are allowed in relation to the value of the U.S. gross estate versus the worldwide gross estate.
- Joint tenancies. §2040(b) 50% inclusion rule does not apply if surviving spouse is not U.S. citizen and instead the contribution rule applies. Be careful with joint tenancies and consider community property issues.
- Other benefits not available. Foreign death tax credit; special use valuation for farms and closely held business realty; the family-owned business exclusion.; extensions to pay estate tax.
- Always consider treaties. May override certain provisions.
- Expatriates. Certain expatriates - special rules apply. §§2107 and 6039G. Also, expatriates include not only former U.S. citizens but also certain specifically defined former long-term permanent resident aliens as defined in § 877(e). See also §2801 for expatriates who expatriate after June 16, 2008.
There are certain exceptions to the Substantial Presence Test:
(a) the closer connection/tax home exception; and
(b) the exception for exempt individuals or for certain medical conditions.
The closer connection/tax home exception provides that if an alien:
(i) is present in the United States for fewer than one hundred eighty-three (183) days during the current year; and
(ii) establishes that he has a “closer connection” with a foreign country and a “tax home” in that country, then he will not be treated as a RA under the Substantial Presence Test for the current year [Section 7701(b)(3)(B)]. The commentary to Section 451 of H.R. 4170 by the House Ways and Means Committee (the “House Commentary”) clarifies somewhat the interpretation to be given to the “closer connection/tax home” exception by providing that the “maintenance of a United States abode will not automatically prevent an individual from establishing a tax home in a foreign country.”
Significantly, the “closer connection/tax home” exception will not apply with respect to an alien who has at any time during the current year, an application pending to change his status to permanent resident or who has taken other affirmative steps to apply for status as a lawful permanent U.S. resident.
The exception for exempt individuals provides that under certain circumstances, “foreign government-related individuals”, students and teachers or trainees are defined as exempt individuals and may avoid application of the Substantial Presence Test. However, the application of this exception in the case of students and teachers or trainees is limited to a certain number of years.
In addition, an alien individual who is unable to leave the United States because of a medical condition which arose while the individual was present in the United States is not treated as being present in the United States for purposes of the Substantial Presence Test on any day that such individual was unable to leave the United States because of the medical condition. It should be noted that this is a narrow exception limited to persons who require medical attention after arriving in the United States and are “unable” to leave the United States.
Finally, the Joint Statement notes that the residence definition contained is not intended to override treaty obligations of the United States. Therefore, in the event of a conflict, the treaty definition of residence will prevail. However, the Joint Statement also stated that: “...notwithstanding the treatment of the alien as a resident of the other country for treaty purposes, the Conference Agreement will treat the alien as a U.S. resident for purposes of the internal tax laws of the United States. For example, if the alien owns more than fifty percent (50%) of the voting power of a foreign corporation, the foreign corporation will be a controlled foreign corporation.”Part V - First year elections
Section 7701(b)(2) contains special rules that relate to an alien’s “first year of residency” and “last year of residency” and delineate during what portion of such years the alien will be considered a RA or a NRA. Thus, these rules clarify that in the case of an alien who was a NRA during the entire preceding calendar year, but who is a RA for the current year (the “first year of residency”), the alien will be considered a RA beginning on the “residency starting date”, which may not necessarily be the beginning of the current year. In the case of an alien who is considered a RA under the Green Card Test, the “residency starting date” is the first day in the calendar year on which the alien is present in the United States while a permanent lawful resident of the United States (subject, however, to the third transitional rule discussed in § II.A. above); and, in the case of an alien who is considered a RA under the Substantial Presence Test, the “residency starting date” is the first day on which the alien is present in the United States during the calendar year in which the alien meets such test.
In addition, for purposes of determining an alien individual’s “residency starting date” in the “first year of residency” and the alien’s “last year of residency”, an exception to the Substantial Presence Test is also provided for certain nominal presence in the United States during the year. Thus, for purposes of an alien individual’s “residency starting date” or “last year of residency”, the individual will not be treated as present in the United States during any period not exceeding ten (10) days for which period the individual establishes that he has both a tax home in a foreign country, and a closer connection to that foreign country than to the United States. In this connection, the Joint Statement states that: “[d]e minimis presence before start or after termination of substantial presence will generally be disregarded under the substantial presence test.” Thus, the Joint Statement appears to confirm that this provision was not intended to allow multiple periods of nominal presence in the United States without triggering residence status, but intended to permit, without triggering residence status, brief presence in the United States (for example, for business or to find a house) before the alien moves to the United States.
Similarly, these special rules define, in the case of an alien who is a RA during the current year, but who is NRA for the following year, the alien’s residence status in the “last year of residency.”
With respect to the first year of residency, last year of residency and related rules, the House Commentary states that “aliens should not be able to switch back and forth between resident and nonresident status for short periods, and that there should be no gap in resident status when an alien is a resident for part of two consecutive years.”Part VI – Considerations for International Estate Planning
A. Gift Tax Rules for Non Resident Alien Transferor / Domiciliary (NRAT)
- No unified credit
- Gift splitting is not allowed unless both spouses are U.S. citizens or RATs.
- Charitable deductions limited to domestic corporations and/or domestic use.
- Treaties may change domicile, unified credit, marital deduction and other deductions.
B. Estate Tax Rules.
(b) State death taxes. §§2102(a) and 2011.
(c) For certain pre-1977 gifts made within 3 years of death (is a full credit). §§2102(a) and 2012.
- Always consider treaties. May override certain provisions.
Streamlined Compliance Procedure
There are so many myths to dispel -
- If you are US exposed (citizen, green card or substantial presence), you are usually taxed on your worldwide income;
- These tax obligations do not stop because you reside outside of the US;
- Even if your earnings are under the threshold of the foreign earned income exclusion, and you reside outside of the US, you may still have to file US tax returns;
- Since the early 1970s, US persons have been obligated to report any foreign financial assets once the maximum aggregate balance exceeds a certain threshold.
FATCA and CRS have, among other things made these requirements more widely known. If any of the above is news to you? Then you may have to do some catchup filings. Pleading ignorance is no longer a credible excuse.
Most professionals agree on three things -
- It is critical to contact the IRS before they contact you.
- The idea of a "quiet disclosure" involves quietly filing prior year returns outside of any amnesty program. This is not advisable.
- Technology means that it is both possible and probable that any "quiet disclosure" will not go unnoticed.
Nanette Davis, a Department of Justice (DOJ), Tax senior litigation counsel, is on record cautioning taxpayers about quiet disclosures, with the threat that additional enforcement action may follow because
(i) the DOJ program is helping identify quiet disclosures and (ii) "the patterns of late returns and FBARs are clear in the data."
The 'data' referenced in that quote is apparently the data in the IRS records when entering the filing of delinquent or amended income tax returns and delinquent FBARs
Whether or not the streamlined procedures are right for your case depends on a number of factors. One of these factors is willfulness. Read more here - http://www.mooresrowland.tax/2015/11/willfulness.html
First, we would like to thank you for taking the time to get to know us. We are Hayden T Joseph & Co (http://www.htj.tax) and we are an independent member firm of the Moores Rowland Asia Pacific Network (http://mooresrowland-asiapac.com). The group has over 30 offices in 11 countries.
We work on International Tax in general, and United States International Tax in particular.
- We can help your family or your firm with international tax planning as well as international tax compliance. Especially within -
- The UK
- The USA
- Parts of the Caribbean and
- Hayden T Joseph & Co does business as (DBA) Advanced American Tax and here is our US Tax brochure - http://htj.tax/usabrochure.pdf
- We are listed in the IRS directory here - http://irs.treasury.gov/rpo/rpo.jsf
- We are on the US Commerce Department website - http://2016.export.gov/singapore/businessserviceproviders/eg_sg_106919.asp
- We are also listed on the US Embassy website - https://sg.usembassy.gov/u-s-citizen-services/tax-preparer-singapore/
Here's more on the streamlined procedures - http://www.mooresrowland.tax/2015/02/streamlined-foreign-offshore-procedures.html
- We would need to prepare 3 years Federal returns. The most recent 3 years for which the due date has already passed.
- We would need to prepare 6 years of FBARs http://www.mooresrowland.tax/2014/11/fbars-and-form-8938.html
- If you have more than 10% in any non-US entities, we would need to prepare an information return such as Form 5471 declaring your interest -http://www.mooresrowland.tax/2014/03/the-scariest-us-tax-form-ever.html
- A cover letter is also required. 95% of our clients write it themselves but if you require an attorney to assist, we can recommend accordingly.
Let me know if you have more questions - email HTJ@help.tax
What would your life be like if you did not have to think about all the details of your investments and family resources?
How would it be if you could simply lean back and relax without thinking about your assets because you know a trustworthy team with a true understanding of your family and expectations is taking care of your finances?
What if you could receive independent guidance without conflict of interest, with the sole purpose of upholding and implementing your personal and financial goals?
Our team can make this a reality. We specialize in providing families with qualified professional services to safeguard and optimize their investments.
We offer independent guidance without conflict of interest, with the sole purpose of upholding and implementing our clients’ personal and financial goals.
We work in sync with our clients’ existing advisers. If necessary, we can access the services of a pool of external experts to complement our team in special tasks.
As a trustworthy and reliable contact person at site with a true understanding of our clients’ expectations we take care of their finances and all other matters with transparency and discretion.
Email firstname.lastname@example.org today
Headquartered in Singapore, Hayden T Joseph & Co (DBA Advanced American Tax) is a member of the Moores Rowland Asia Pacific network of firms with offices in 11 countries across Asia (www.HTJ.tax).
Among the services that we as an accounting group offers, is outsourcing.
Outsourcing reduces cost, gives you access to qualified and experienced international talent, while enabling you to focus on your core competencies. Functions that can be outsourced, includes accounting, payroll, special back office services, out-patient medical administration and other human resources related outsourcing services such as searching for, engaging and arranging employment of staff on behalf of clients.
- Accounting Outsourcing
- Book keeping
- Management of Account Payable/Receivable
- System Review & Staffing
- Human Resources Outsourcing
- HR Supports and Staff Employment
- Employment Agreement Preparation
- Travel and 'Expenditure Advances' Management
- Medical Reimbursement Management
- Payroll Services -
- Payroll is not only about numbers but is about compliance to payroll related regulations;
- We offer complete payroll outsourcing packages/services with flexibility to customize the services
- Outpatient Medical Outsourcing
- Special Back Office Services (Customized)
- Recruitment Services
Thank you for taking the time to get to know us. We are Hayden T Joseph CPA LLP (http://www.htj.tax) and we are an independent member firm of the Moores Rowland Asia Pacific Network (http://mooresrowland-asiapac.com). The group has over 30 offices in 11 countries.
In the Philippines, offering auditing, accounting, outsourcing, tax, legal and advisory services is the Moores Rowland firm -
Our Singapore based team works closely with all our Filipino colleagues.
Hayden T Joseph CPA LLP works on International Tax in general, and United States International Tax in particular. Our Singapore based firm is a proud member of the Moores Rowland family.
- We can help your family or your firm with international tax planning as well as international tax compliance. Especially between -
• The Philippines and other Asian countries including Singapore and Hong Kong .
• The Philippines and Caribbean territories such as the BVI.
• The Philippines and the USA.
• The Philippines and the UK
- 2.Hayden T Joseph CPA LLP does business as (DBA) Advanced American Tax and here is our US Tax brochure - http://htj.tax/usabrochure.pdf
- 3.We are listed in the IRS directory here -http://irs.treasury.gov/rpo/rpo.jsf
- 4.We are on the US Commerce Department website -http://2016.export.gov/singapore/businessserviceproviders/eg_sg_106919.asp
- 5.We are also listed on the US Embassy website- https://sg.usembassy.gov/u-s-citizen-services/tax-preparer-singapore/
Our US returns start at $500 and there's a complete fee schedule on the last page of the engagement letter https://drive.google.com/file/d/1c-yxYbRk52UOoooAJknXqzbzx_kNsF3A/view. To get an accurate fee quote, please submit your last filed tax return. Once engaged, our fees include unlimited emails and phone calls during the year (subject to a fair use policy).
If you want to ask a few questions, before engaging us, we're happy to jump on a call. Email email@example.com to set up an appointment today.
Salamat sa paglaan ng oras upang makilala kami. Kami ay Hayden T Joseph CPA LLP (http://www.htj.tax) at kami ay isang malayang miyembro ng kumpanya ng Moores Rowland Asia Pacific Network (http://mooresrowland-asiapac.com). Ang grupo ay mayroon higit sa 30 mga tanggapan sa 11 bansa.
Sa Pilipinas, ang pagbibigay ng audit, accounting, outsourcing, buwis, legal at advisory services ay ang Moores Rowland firm. Ang aming kompanya na nakabase sa Singapore ay nakikipagtulungan sa aming mga kasamahan sa Pilipinas.
Ang Hayden T Joseph CPA LLP ay eksperto sa International Tax, at partikular na Buwis sa Estados Unidos. Ang aming kompanya na base sa Singapore ay isang miyembro ng kilalang kompanya na Moores Rowland.
- Maaari naming tulungan ang iyong pamilya o iyong kompanya na may internasyonal na pagpaplano ng buwis pati na rin ang internasyonal na pagsunod sa buwis. Lalo na sa pagitan-
- Ang Pilipinas at iba pang mga bansa sa -Asya kabilang ang Singapore at Hong Kong.
- Ang mga teritoryo ng Pilipinas at -Caribbean tulad ng BVI.
- Ang Pilipinas at ang USA.
- Ang Pilipinas at ang UK.
2.Hayden T Joseph CPA LLP ay nagbibigay serbisyo patungkol sa (DBA) Advanced American Tax at ito ang aming US Tax brochure - http://htj.tax/usabrochure.pdf
3.Nakalista kami sa direktoryo ng IRS- http://irs.treasury.gov/rpo/rpo.jsf
4.Matatagpuan rin ang aming kompanya sa website ng US Commerce Department - http://2016.export.gov/singapore/businessserviceproviders/eg_sg_106919.asp
5.Kami ay kabilang rin sa website ng Embahada ng Estados Unidos- https://sg.usembassy.gov/u-s-citizen-services/tax-preparer-singapore/
Ang panimulang bayad ay $500 at mayroong kumpletong iskedyul ng bayad sa huling pahina ng sulat ng pakikipag-ugnayan.-https://drive.google.com/file/d/1c-yxYbRk52UOoooAJknXqzbzx_kNsF3A/view.
Para makuha ng saktong halaga ng kabayaran, mangyaring isumite ang iyong huling na-file na tax return. Sa sandaling kumpirmado, ang aming serbisyo ay walang limitasyong mga email at mga tawag sa telepono sa buong taon (nakabatay sa patakaran sa patas na paggamit).
Kung kayo ay may katanungan maaari namin kayong tawagan. Maaari rin kayong makipag-ugnayan at mag-email sa amin sa firstname.lastname@example.org upang magtalaga ng usapan ngayon.
The Philippines is an amazing country. This week, the Philippines was deemed the "best country to invest in," based on rankings released by US News and World Report. The study gauged the countries based on 65 attributes and included 21,000 respondents worldwide. US News and World Report said it used criteria developed by The Wharton School of the University of Pennsylvania and Y&R's BAV Group.
Despite this, The Philippines has a mere four percent share in the FDI figures as against topnotcher Singapore’s 52 percent and second placer Indonesia’s 13 percent. The Philippines has also been ranked sixth in terms of “tax regimes and overall competitiveness,” the statistics also said.
It’s amazing how much there are parallels between tax reform in the Philippines and in the USA. Both countries have populist leaders who advocate economic nationalism. Driven by the Executive, in December 2017, both nations somewhat hastily and controversially passed legislation that promised to dramatically change the tax landscape.
I’ve already spoken about US tax reform here –
Individuals - http://www.derrenjoseph.com/2018/01/an-act-to-provide-for-reconciliation.html
Corporations - http://www.derrenjoseph.com/2018/02/us-exposed-owner-of-international.html
In the Philippines, the Comprehensive Tax Reform Program (CTRP) aims to raise revenues for the administration's infrastructure programs. The administration’s priorities are build, build, build. The Tax Reform for Acceleration and Inclusion (Train) Law or Republic Act No 10963 took effect on January 1, 2018. Or more accurately package 1 (or Train 1) took effect from January 1st as the government seeks to overhaul the outdated National Internal Revenue Code (NIRC) which was adopted 20 years ago. It is expected that the tax code would be reformed using 6 or so Train packages. Package 1 dealt with individual taxes and excise duties. Package 2 should deal with corporate tax reform.
Train relatively decreases the tax on personal income, estate, and donation. However, it also increases the tax on certain passive incomes, documents (documentary stamp tax) as well as excise tax on petroleum products, minerals, automobiles, and cigarettes. The Train law also imposes new taxes in the form of excise tax on sweetened beverages and non-essential services (invasive cosmetic procedures) and removes the tax exemption of Lotto and other PCSO winnings amounting to more than P10,000.
To international investors however, there has been some concern over –
- The veto on the 15% special tax rate for employees of Regional Headquarters (RHQ), Regional Operating Headquarters (ROHQ), Offshore Banking Units, and Petroleum Service Contractors and Subcontractors. These employees will be taxed using the regular income tax table
- The veto on the excise tax exemption of petroleum products used as input, feedstock, or as raw material in the manufacturing of petrochemical products, or in the refining of petroleum products, or as replacement fuel for natural gas fired combined cycle power plants.
- The veto on the zero rating of sales of goods and services to separate customs territory and tourism enterprise zones, specifically, the areas under the Tourism Infrastructure Enterprise Zone Authority (Tieza).
Impact on Expatriates in the Philippines:
- Possible reduction in the number of topmost managerial positions of regional operating headquarters (ROHQs). High earning ROHQ employees (earning PHP975,000 and up) have been disallowed from enjoying a 15% special tax rate, putting them in the regular tax schedule at par with non-alien resident taxpayers.
- Possible adjustments to housing budgets of expatriates. Affected companies may become creative on relocation packages – i.e. ratios between house rental and monthly utilities.
- Probable rise in housing choices.
- Possible requests for increased salaries from domestic help and drivers.
- Surge in rental car services and rates.
Package 2 or Train 2 was laid before Congress this week. It proposes to gradually lower the Corporate Income Tax (CIT) rate from 30 to 25 percent while modernizing incentives for companies to make these “performance-based, targeted, time-bound, and transparent”. At the moment, the Philippine Economic Zone Authority (PEZA) has much autonomy in negotiating incentives for inbound investors. Going forward, the government takes more control of the process. There is much concern about the extent to which a shift in, or elimination of incentives, would affect investor sentiment and behavior.
Will this range of reform impact on investment in the Philippines. Time will tell but there is a hope that while tax is considered by investors, there are more important criteria.
Taxation in Philippines
The sections below provide the basic information on taxation in Philippines.
- Tax AuthorityBureau of Internal Revenue (BIR)
- Tax Year1 January to 31 December
- Tax Return due date15 April
- Is joint filing possibleYes
- Are tax return extensions possibleNo
2016/17 income tax rates for residents
|TAXABLE INCOME BAND||NATIONAL INCOME TAX RATES|
|1 - 10,000||5%|
|10,001 - 30,000||10%|
|30,001 - 70,000||15%|
|70,001 - 140,000||20%|
|140,001 - 250,000||25%|
|250,001 - 500,000||30%|
Net taxable compensation and business income of resident and non-resident citizens, resident aliens, and non-resident aliens engaged in a trade or business are consolidated and taxed at the above rates.
For non-resident aliens engaged in a trade or business in the Philippines, dividends, shares in profits of partnerships taxed as corporations, interest, royalties, prizes in excess of PHP10,000 and other winnings are subject to final withholding tax at a rate of 20% of the gross amount. Royalties on musical compositions, books and other literary works are subject to a final withholding tax at a rate of 10%.
Non-resident aliens not engaged in a trade or business in the Philippines are subject to a final withholding tax of 25% on gross income, including fringe benefits, from all sources in the Philippines.
Who is liable?
Resident citizens are subject to tax on worldwide income. Non-resident citizens, resident aliens and non-resident aliens are subject to tax on income from Philippine sources.
Bureau of Internal Revenue (BIR) Ruling 517-2011 declared that employees of a Philippine entity who are working abroad for most of the tax year but remain on the local payroll are not non-resident citizens. Accordingly, payments to them are subject to withholding tax in the Philippines.
Income subject to tax
Gross income includes compensation, income from the conduct of a trade, business or profession, and other income, including gains from dealings in property, interest, rent, dividends, annuities, prizes, pensions and partners’ distributive shares.
Employment income - Employment income includes all remuneration for services performed by an employee for his or her employer under an employer-employee relationship. The name by which compensation is designated is immaterial. It includes salaries, wages, emoluments and honoraria, allowances, commissions, fees including director's fees for a director who is also an employee of the firm, bonuses, fringe benefits, taxable pensions and retirement pay and other income of a similar nature. Emergency cost-of-living allowances received by employees are also included in their compensation income.
Employment income received for services provided in the Philippines is subject to tax in the Philippines regardless of where the compensation is paid. Remuneration for services remains classified as compensation even if paid after the employer-employee relationship is ended.
Business income - Gross income from the conduct of a trade or business or the exercise of a profession may be reduced by certain allowable deductions and by personal and additional exemptions. However, an individual who has both compensation and business income may claim personal and additional exemptions only once.
Professional fees are subject to a 15% creditable expanded withholding tax if such fees for the year exceed PHP720,000. Otherwise the rate is 10%.
Under certain circumstances, self-employed persons may carry forward business losses for three years, unless a 25% change in the ownership of the business occurs. Carry-backs are not permitted.
Directors' fees - Directors' fees derived by individuals who are employees of the same company are taxed as income from employment and are subject to creditable withholding tax on wages. Directors' fees derived by individuals who are not employees of the same company are included in the recipients' business income and are subject to a creditable withholding tax. The rate of withholding tax is 15% if the gross income for the current year exceeds PHP720,000. Otherwise, the rate is 10%. Directors' fees derived by non-resident aliens deemed to be not engaged in a trade or business are subject to a final withholding tax at a rate of 25%.
Investment income - In general, interest on peso deposits and yields, or any other monetary benefit derived from deposit substitutes, trust funds and similar arrangements, is subject to a final 20% withholding tax. However, interest on certain long-term deposits or investments evidenced by qualifying certificates is exempt from the final 20% withholding tax. Final tax is imposed at rates ranging from 5% to 20% on the income from long-term deposits if the investment is withdrawn before the end of the fifth year. Interest received by residents on foreign-currency deposits is subject to a final 7.5% withholding tax. Interest received by non-resident individuals on foreign-currency deposits is exempt from tax.
Cash or property dividends actually or constructively received by citizens and resident aliens from domestic corporations, as well as a partner's share in the after-tax profits of a partnership (except a general professional partnership), are subject to final withholding tax at a rate of 10%. Non-resident aliens engaged in a trade or business in the Philippines are subject to final withholding tax on these types of income at a rate of 20%. For non-resident aliens not engaged in a trade or business in the Philippines, investment income is generally taxed at a rate of 25%, except for gains from sales of real estate and sales of shares of domestic corporations.
Rental income - Rental income is considered business income and is taxed at the standard rates.
Taxation of employer-provided stock options - In general, employer-provided stock options are taxable to the employee as additional compensation at the time the option is exercised. This has been the trend in the treatment of stock options regardless of whether the recipient employee was a rank-and-file employee, or a supervisory or managerial employee. This trend ensued despite the introduction of the fringe benefit tax (FBT) on certain benefits received by supervisory or managerial employees. In other rulings, the BIR subjected the stock options to fringe benefits tax.
Tax filing and payment procedures
An income tax return must be filed, and the tax due paid, on or before 15 April for income derived in the preceding year. If tax due exceeds PHP2,000, it may be paid in two equal instalments, the first at the time of filing the return and the second by 15 July following the end of the relevant tax year.
In prior years, the BIR allowed the manual filing of income tax returns. However, with the issuance of RR 5-2015, which amends RR 6-2014, it is now mandatory for taxpayers enumerated under RR 6-2014 to use the eBIR Forms facility. This means that the tax returns, including individual income tax returns (BIR Forms 1700 and 1701), must be prepared using eBIR Forms. The returns must be filed through the online eBIR Forms System. A penalty of PHP1,000 is imposed for each return not filed electronically. The taxpayer is also liable for a surcharge amounting to 25% of the tax due to be paid. Other individual taxpayers who do not fall in the categories in RR 6-2014 or are exempted may still file manually by using the printed BIR Form or using the form generated from the Offline eBIR Forms either manually or electronically by online submission or e-Filing.
A separate return must be filed, and any tax due paid, within 30 days after each sale of shares not traded on a local stock exchange; a final consolidated return must be filed by 15 April for all stock transactions of the preceding year. For a sale of real property, a separate return must be filed, and any tax due paid, within 30 days after each sale.
Non-resident aliens engaged in trade or business must file income tax returns.
For income subject to final withholding tax, the taxpayer is not required to file a tax return if such income is their sole income from the Philippines. The withholding agent is responsible for reporting the income and remitting the tax withheld.
Residence status for tax purposes
For foreign nationals, residence is determined by the length and nature of an individual's stay in the Philippines. An alien who comes to the Philippines for a definite purpose that is promptly accomplished is not deemed to be resident. However, if an alien makes their home temporarily in the Philippines because an extended stay may be necessary for the accomplishment of the alien's purpose for coming to the Philippines, the alien becomes a resident even though it may be the alien's intention at all times to return to the alien's domicile abroad when the alien consummates or abandons the purpose of the stay in the Philippines. Aliens who reside in the Philippines with the intention to remain permanently are considered resident. Aliens who acquire residence in the Philippines remain residents until they depart with the intention of abandoning that residence.
Non-resident aliens are classified as either engaged or not engaged in trade or business in the Philippines. A non-resident alien who stays in the Philippines for more than a total of 180 days during any calendar year is deemed to be engaged in trade or business in the Philippines; any other non-resident alien is deemed to be not engaged in trade or business in the Philippines.
Capital gains and losses
In general, capital gains are included in an individuals’ regular taxable income and are subject to tax at the usual rates. The gain is the excess of the amount realised from the disposal of the asset over the adjusted basis. If the asset is held for 12 months or less prior to disposal, the entire gain or loss is reported. For assets held longer than 12 months, 50% of the gain or loss is reported. The holding period rules do not apply to capital gains derived from the sale of real property in the Philippines or shares of stock in a domestic corporation.
Capital losses are deductible only to the extent of capital gains. Losses carried over are treated as short-term capital losses. Losses incurred from wash sales of stocks or securities are not deductible, unless incurred by a dealer in the ordinary course of business. This rule does not apply to shares of stock in a domestic corporation or to sale of real property described below.
A final tax of 6% is imposed on capital gains derived from transfers of real property located in the Philippines. The tax is based on the higher of the gross sales price and the fair market value.
Capital gains derived from the sale of shares in unlisted domestic corporations are taxed at a rate of 5% on the first PHP100,000 of the gain and at a rate of 10% on the excess over PHP100,000. The amount of the taxable gain is the excess of the sale price over the cost of the shares.
Gains derived from the sale of listed shares are exempt from capital gains tax. However, a percentage tax (stock transaction tax) is imposed at a rate of 0.5% on the gross selling price of the shares.
Gains derived by resident citizens from the sale of shares in foreign corporations are taxed as capital gains, subject to the regular income tax rates.
Estate and gift taxes
An estate tax is imposed at graduated rates ranging from 5% to 20% on the transfer of a decedent's net estate valued in excess of PHP200,000. Citizens, regardless of whether resident at the time of death, and resident aliens are taxed on their worldwide estates.
For estate tax purposes, only that part of a non-resident alien decedent's estate located in the Philippines is included in the taxable estate. Under specified conditions, deductions may be permitted for certain items, including expenses, losses, indebtedness, taxes and the value of property previously subject to estate or gift tax or of property transferred for public use.
Estate tax rates range from 0% to 20%. To prevent double taxation of estates, the Philippines has concluded an estate tax treaty with Denmark.
Residents and non-residents are subject to gift tax, which is payable by the donor on total net gifts made in a calendar year. Citizens and resident aliens are subject to gift tax on worldwide assets. Non-resident aliens are subject to gift tax on their Philippine assets only. Gift tax rates range from 0% to 15% for relatives by consanguinity, up to the fourth degree of relationship in the collateral line. Other donees and beneficiaries are considered strangers and are taxed at a flat rate of 30%.
All individuals working in the Philippines must pay social security contributions. The employee's contribution is approximately 3.69% of salary and is withheld by the employer. The employer's contribution is approximately 7.67% of employees' salaries. Self-employed persons must be covered. The minimum monthly salary subject to social security contributions is PHP1,000. The maximum monthly contributions are PHP1,208.70 for employers and PHP581.30 for employees, which apply to employees receiving monthly compensation of PHP15,750 or more.
Employees age 60 or younger and their employers are compulsorily covered by the Social Security System (SSS). Individuals who are covered by the SSS are compulsorily covered by the Philippine National Health Insurance Program (Philhealth) and the Home Development Mutual Fund (HDMF). Compulsory contributions to the SSS, Philhealth and HDMF are deductible from the gross income of an individual. Voluntary contributions to these institutions in excess of the amount considered compulsory are not deductible and, accordingly, not exempt from income tax and withholding tax.
For the 2017 calendar year, the employee’s total maximum compulsory monthly contribution to these entities amounts to PHP1,118.80. The monthly contribution varies depending on the salary bracket of the individual.
Double tax relief and tax treaties
Foreign taxes paid or incurred in connections with a taxpayer's profession, trade or business may be deducted from gross income, subject to exceptions. Resident Filipino citizens may claim a credit for income tax due to any foreign country; the credit may not exceed the Philippine income tax payable on the same income multiplied by a fraction, the numerator of which is the taxable income from foreign countries and the denominator of which is worldwide taxable income.
The Philippines has entered into double tax treaties with 44 countries, and is negotiating tax treaties with a further seven countries.