Tax Reform Act of 1997

The enactment of Republic Act 8424 or the Tax Reform Act of 1997 provides wide-ranging tax break to different groups of individual including overseas Filipinos. According to Section 23 of the law, a non-resident citizen will be taxed only on income derived from sources within the Philippines.

I. Non-resident Citizen

II.Tax Exemption

III. Filing of Information Returns

IV. Exemption from Tax on Interest from Foreign Currency Deposits

I. Who May Be Adopted

A non-resident citizen is defined under the law as any of the following:

1. A Citizen of the Philippines who establishes to the satisfaction of the Commissioner of the Bureau of Internal Revenue the fact of his physical presence abroad with a definite intention to reside therein
2. A Citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis

3. A Citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present most of the time during the taxable year

4. A Citizen who has been previously considered as non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines

II. Tax Exemption

Filipinos overseas are exempted from paying taxes on their earnings from foreign sources.

III. Filing of Information Returns

Under Revenue Regulation No. 9-99 (Bureau of Internal Revenue 19 April 1999) non-resident citizens, overseas Filipino workers, and seamen should file information returns by accomplishing BIR Form 1701C, or the new BIR Form 1703.

The accomplished BIR Form 1701C or new BIR Form 1703, together with relevant supporting documents such as the Employer’s Declaration of Income Earned, Financial Statements, should be filed not later that 15 April following the taxable year at the Foreign Post (Philippine Embassy or Philippine Consulate) or the Revenue District Office which has jurisdiction over the place or residence of the taxpayer.

IV. Exemption from Tax on Interest from Foreign Currency Deposits

Revenue Regulation 10-98 (Bureau of Internal Revenue, 25 August 1998) contains provisions that exempt nonresidents and overseas Filipino workers from payment of taxes on income derived from foreign currency deposits.

Under said regulation, interest income which is actually or constructively received by a resident citizen of the Philippines on interest income from a foreign currency deposit shall be subject to a final withholding tax of seven and one-half percent (7.5%). However, nonresident citizens who have foreign currency deposit accounts are exempt from payment of taxes on interest income derived from said deposits.

On the other hand, for a bank account that is jointly in the name of a nonresident citizen such as a overseas contract worker or a Filipino seaman, and his spouse or dependent who is a resident in the Philippines, fifty percent (50%) of the interest income form such bank deposit shall be treated as exempt while the other fifty percent (50%) shall be subject to a final withholding tax of seven and one-half percent (7.5%).

To be entitled to this exemption, the foreign currency bank account should be in the name of the nonresident individual. He/She should also present any of the following documentary evidences:

1. Immigration visa issued by the foreign government in the country where he/she is a resident of
2. Certificate of residency which is issued by the Philippine Embassy or Consulate in the foreign country of his/her residence

3. Certificate of the contract of employment of an overseas contract worker which is duly registered with the Philippine Overseas Employment Administration (POEA); or a Seaman’s Certificate, in the case of a Filipino seaman

In addition, the nonresident citizen or OFW should also execute a written permission allowing the depository bank to inform the Commissioner of Internal Revenue that as a nonresident, he/she is exempt from the tax on income form foreign currency deposit. A depositor who fails to comply with this requirement shall be entitled to the exemption privilege.