Nowadays, having an Overseas Filipino Worker (OFW) in the family is a common denominator among a large number of households in the Philippines. It might be a parent or a sibling who has gone overseas to earn better wages and support the entire family financially.
Philippine Statistics Authority (PSA) data shows that in 2016, there were roughly 2.2 million OFWs. Overseas Contract Workers (OCWs), or those with existing work contracts, comprised 97.5 percent of that total. According to a report issued by the Bangko Sentral ng Pilipinas (BSP), monthly cash remittances coursed through banks by Filipinos overseas hit a new record high of $2.6 billion in December 2016, bringing total remittances that year to $26.9 billion, which exceeded the government’s projected growth of 4 percent.
Despite working abroad, often for long periods, OCWs are still considered Filipino citizens. Thus, they are still entitled to the basic rights available to all Filipinos as cited in Article III of the Philippine Constitution, such as the right to vote, the right to due process, and equal protection under the law. Similarly, OCWs have the responsibility to pay the correct taxes to the Bureau of Internal Revenue (BIR). Not to mention in our society, people tend to think that OCWs steadily bring home unimaginable wealth, which begs the question: how are these riches being taxed?
Definition of an OCW
According to Revenue Regulations (RR) No. 01-2011, as amended by RR No. 11-2012, an OCW refers to a Filipino citizen employed and physically present in a foreign country as a consequence of his or her employment thereat. Commonly referred to as OFW, the worker’s salary/wage is paid by the employer abroad and not borne by any entity or person in the Philippines. To be considered an OCW, one must be duly registered with the Philippine Overseas Employment Administration (POEA) and hold a valid Overseas Employment Certificate (OEC).
In addition, Filipino seafarers who receive compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade are also considered OCWs. As such, they must be registered with the POEA and have a valid OEC and Seafarers Identification Record Book (SIRB), or Seaman’s Book, issued by the Maritime Industry Authority (MARINA).
Taxation of income received by an OCW
Generally, under Section 23(C) of the Tax Code, an individual citizen of the Philippines who is working and deriving income from abroad as an OCW is taxable only on income from sources within the Philippines. Thus, an OCW’s income arising from overseas employment is exempt from income tax in the Philippines, while regular income earned in the Philippines shall be taxed at the progressive rate of 5 to 32 percent of the taxable income.
In addition, passive income earned by OCWs in the Philippines shall be subject to the applicable rates.
If an OCW earns income within the Philippines, the same should be subject to the applicable tax and should be reported and remitted accordingly to the BIR.
Are OCWs subject to Value-Added Tax (VAT)?
An OCW may be subjected to VAT if in the course of his business, he sells, barters, exchanges, leases goods or properties, renders services in the Philippines, or imports goods into the country. Otherwise, he shall be liable, instead, to pay a 3 percent percentage tax based on his sales or receipts.
Documentary Stamp Tax (DST) on remittances
Exemptions from DST for the OCW’s remittances may be granted upon presentation of the OEC, valid Overseas Workers Welfare Administration (OWWA) Membership Certificate, or electronic receipt issued by the POEA.
Additionally, when the Migrant Workers Act, or Republic Act 10022, lapsed into law on March 8, 2010, additional exemption on travel tax and airport fee were accorded to OCWs. These tax privileges are given in grateful recognition of the OCWs’ contributions to the economy.
However, the overseas assignments of some OCWs are not permanent. Many of them eventually have to come home, and when they do, who will help them achieve long-term financial stability?
Setting up businesses in the Philippines might help them maximize their earnings. Relative thereto, it may be recalled that an ordinance in Manila granting tax incentives to OCWs investing in small- and medium-scale enterprises exempts them from the payment of business tax for a period of two to three years.
Is it possible to extend the same nationwide? How about not just exempting OCWs from business taxes but also exempting them from income taxes on their first few years in business?
If the blueprint for the country’s development involves comprehensive tax reform with a focus on shifting the tax burden to higher income earners, perhaps our current administration should also take into consideration the OCWs – our true modern-day heroes.
The author is a senior with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.