UNDER our tax laws, an individual taxpayer may be classified as citizen or non-citizen (alien) and as resident or nonresident.

Filipino taxpayers who reside in the Philippines are taxable on income earned within and outside the Philippines. Citizens who reside abroad are only taxable to the extent of income earned within the Philippines.

Non-Filipinos or alien taxpayers are also subject to Philippine income tax only to the extent of what they earn within the country. This is because income earned abroad is beyond the tax jurisdiction of the Philippine government.

An alien taxpayer may be classified as a resident alien, nonresident alien engaged in trade or business (NRA-ETB) or a nonresident alien not engaged in trade or business (NRA-NETB).

The difference between an NRA-ETB and an NRA-NETB depends on their length of stay in the Philippines. Section 25(A)(1) of the National Internal Revenue Code, as amended, provides that an NRA-ETB is classified as such if he or she will stay in the Philippines for an aggregate period of more than 180 days during any calendar year. Otherwise, he or she is deemed an NRA-ETB.

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It is important to appropriately identify the classification of an individual taxpayer since they are subject to different income tax rates. The individual citizen, resident alien individual and NRA-ETB are subject to graduated income tax rates of zero to 35 percent of net taxable income while an NRA-NETB is subject to 25-percent income tax based on his or her gross income.

While the resident alien and NRA-ETB are subject to the same tax rate, different rules apply to each, such as the manner of filing of tax returns. A resident alien earning purely compensation income is qualified for substituted filing while an NRA-ETB is not (Section 2.83.4, Revenue Regulations 2-98, as amended). In a substituted filing, the employer withholds the tax, remits the payment to the Bureau of Internal Revenue (BIR) and thereafter issues a certification of withholding to the taxpayer. Such certification is already sufficient compliance with the income tax return filing requirement of the resident alien. On the other hand, NRA-ETBs must still file their corresponding income tax returns.

The question now is: When is an alien considered a resident of the Philippines for income tax purposes? Section 5 of the income tax regulations (dated Feb. 10, 1940) provides the following criteria for a foreign individual to be categorized as a resident alien:

– He or she is not a mere transient or sojourner;

– He or she has no definite intention as to his stay; or

– His or her purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his or her home temporarily in the Philippines.

The above provision has been cited by the BIR and the Court of Tax Appeals (CTA) as basis in deciding the status of foreign nationals for income tax purposes.

In one ruling, the BIR classified a Japanese citizen as a resident foreign individual, and thus subject to income and withholding tax, because he was president of a corporation in the Philippines and stayed most of his time in the country to manage day-to-day operations. Such circumstances established his intention to stay in the country. (BIR Ruling [DA-(C-074) 239-08, Sept. 19, 2008)

In another ruling, a Japanese citizen who entered the Philippines through a temporary visitor's visa and eventually applied for a conversion to a pre-arranged employment visa in the Philippines was considered a resident alien individual. In this case, the CTA also found that the foreigner continued to reside with his family in the Philippines for four years until he was assigned to another foreign employment and held that there was an intention to reside in the Philippines. (Katsuhiro Ota vs Commissioner of Internal Revenue [CIR], CTA Case 3161, March 21, 1982).

In another case, an American citizen who frequented the Philippines to oversee his various investments was classified as a resident alien for income tax purposes. The CTA held that the establishment of a home even temporarily in the Philippines for a specific purpose even if he had intention to return to his domicile abroad still qualified him to be a resident alien. (Ishwar Jethmal Ramnani and Sonya Jethmal Ramnani vs CIR, CTA Case 5108, Sept. 13, 1996).

These rulings show that it is the intention of the alien that determines his or her classification as either resident or non-resident. Thus, for as long as the above criteria are met, an alien may be classified as a resident regardless of the number of days he or she stays in the Philippines (even if he or she just stayed in the Philippines for less than 180 days in a given year).

It is thus important for aliens to properly identify their status for income tax purposes so that they may file the correct tax returns and pay the appropriate amount of taxes due.

Aziza Hannah A. Bacay is an associate of Mata-Perez, Tamayo and Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at [email protected] or visit the MTF Counsel website at www.mtfcounsel.com.