The Philippines is often an attractive choice for foreigners who want to invest or start a business. Although it may still fall behind its neighboring countries like Singapore and Japan, Philippines is still experiencing a steady fast economic growth. With a growth rate of 3.9% in 2011 up to 6.6% in 2012, the World Bank tagged the Philippines as one of the fastest growing economies in East Asia.
However, setting up a business in the Philippines is very complicated. If you are a foreigner who wants to work or start up a business in the Philippines, the process is not going to be easy. Things like registration and the country’s taxation is something that you need to have an understanding if you want your business to succeed.
Here is a quick guide to general laws and restrictions about taxation.
Who are considered as non-resident alien?
According to the National Internal Revenue Code of the Philippines Section 22 (D), a non-resident alien individual is defined as an individual whose residence is not within the Philippines and who is not a citizen thereof.
Non-residents are classified into two (2) categories:
If you are a non-resident individual who stays only for less than 180 days within the year, you will be taxed at a fixed rate of 25% on your income derived within the Philippines only.
What are considered as Foreign Corporations?
A foreign corporation is corporation organized, authorized, or existing under the laws of any foreign country according to Sec 22 (D) of NIRC. A foreign corporation is either a resident – a corporation engaged in trade or business in the Philippines, or a non-resident – a corporation not engaged in trade or business in the Philippines.
The term ‘resident foreign corporation’ applies to a foreign corporation engaged in trade or business within the Philippines. (NIRC Sec 22 H).
A resident foreign corporation is taxed on their net income derived within the Philippines at a fixed rate of 30%. However, some corporations may be subject to a preferential tax rate.
The term ‘nonresident foreign corporation’ applies to a foreign corporation not engaged in trade or business within the Philippines. (NIRC Sec 22 I). Generally, non-resident foreign corporations are subject to a final tax of 30% on their gross income derived from within the Philippines.
However, lower rates or exemption may be available under an applicable tax treaty.