For many individuals and businesses, expanding across borders or earning income from another country opens exciting opportunities. However, it also introduces a potential financial issue: double taxation. If you’re earning income outside the Philippines or receiving money from foreign sources, it’s important to understand how double taxation works and how to avoid it.
What Is Double Taxation
Double taxation occurs when the same income is taxed by two different jurisdictions, typically the country where the income is earned and the country where the taxpayer resides. In the Philippine context, this can affect both individuals and corporations earning income from foreign sources and foreign entities doing business within the country.
For example, a Filipino agency working with a U.S.-based client may be subject to U.S. withholding tax and then taxed again by the Philippine Bureau of Internal Revenue (BIR) on the same income.
How Double Taxation Happens
There are two main ways that countries impose taxes:
- Source-based taxation – The country where the income originates claims the right to tax it.
- Residence-based taxation – The taxpayer’s home country taxes their worldwide income.
When both countries apply these rules without coordination, the taxpayer is taxed twice on the same income. This situation is common in global employment, business transactions, or cross-border investments.
Who is at Risk of Double Taxation: Corporate vs. Individual
Both individuals and corporations are susceptible, including:
- Individual Double Taxation
This applies when a person earns income abroad. For example:
- Overseas Filipino Workers (OFWs)
- Freelancers or remote workers paid by foreign clients
- Filipinos receiving dividends or royalties from abroad
Even if the foreign country has already taxed income, the Philippines may still tax it again, unless relief is available.
- Corporate Double Taxation
Corporations can also be affected, especially when they operate across borders. For instance:
- A Philippine company with branches overseas may face taxes in both countries.
- A foreign company earning income in the Philippines may be taxed locally and again in its home country.
Additionally, dividends paid by a foreign subsidiary to a Philippine parent company may be taxed twice, once by the foreign country and again by the Philippines.
Examples of Double Taxation
Here are some example scenarios when double taxation could occur:
- A Philippine corporation with a subsidiary in Japan may face corporate income tax in Japan on the subsidiary’s profits. When those profits are repatriated as dividends to the parent company in the Philippines, they may be taxed again.
- A foreign company providing services in the Philippines may be taxed on its local earnings through withholding tax, while also being subject to corporate tax in its home country on the same income.
- Royalties or technical fees paid by Philippine firms to foreign licensors are subject to withholding tax in the Philippines. At the same time, the foreign country may also tax the same income.
- An individual freelancer working for an international client may face foreign withholding and Philippine income tax, but corporate structures typically face larger exposure and higher tax amounts.
How to Avoid Double Taxation: Tax Treaties and Other Solutions
Here are some ways to avoid or reduce double taxation:
– Claim Tax Treaty Relief
The good news is that the Philippines has tax treaties with over 40 countries, including the U.S., Japan, China, and many EU nations. These agreements are designed to prevent double taxation and reduce withholding tax rates on dividends, interest, and royalties.
If you’re eligible, you can apply for tax treaty relief with the BIR to benefit from reduced tax rates or exemptions. This usually requires:
- Submitting a Tax Residency Certificate (TRC) from a foreign country
- Filing the BIR Form 0901 series and gathering supporting documents
- Meeting BIR deadlines and procedural requirements
Tax treaties are called Double Taxation Agreements (DTAs) or Double Tax Treaties (DTTs).
– Use Foreign Tax Credits
If no tax treaty exists between the Philippines and the country where income is earned, a Foreign Tax Credit (FTC) may offer some relief. The Philippine Tax Code allows resident citizens and domestic corporations to claim a credit for income taxes paid to foreign governments, provided the income is also subject to Philippine tax.
This means that if a Filipino business pays income tax abroad (for example, on profits earned from a project in a non-treaty country), it may deduct that amount from its Philippine tax due on the same income. The goal is to prevent economic double taxation, even without a formal agreement between countries.
However, FTCs come with limitations:
- The credit is only up to the amount of Philippine tax due on that same foreign income.
- Proper documentation (proof of payment, foreign tax return, etc.) is often stricter.
- The credit must be claimed in the same taxable year the foreign income was earned.
While more complex than claiming tax treaty relief, FTCs are often the only option to reduce double taxation in countries without tax treaties with the Philippines.
Triple i Consulting’s Professional Services
Claiming treaty tax relief or foreign tax credits can be complicated. The requirements are strict, and missing a deadline could result in a denial, leaving you at risk of double taxation.
Fortunately, Triple I Consulting is here to help. We offer expert tax consultations and assistance with securing relief. From gathering the necessary documents to filing with the BIR, our team will guide you through every step of the process.
Final Thoughts
Double taxation can quietly eat into your earnings if you’re not careful. Fortunately, the Philippines offers legal avenues to avoid or minimize this burden, preferably through tax treaties but also through credits. If you’re working with clients abroad, investing overseas, or taking your business international, it’s important to know how double taxation works and how to protect your income from it.
Do You Need Assistance Avoiding Double Taxation?
Applying for tax treaty relief or tax credits in the Philippines can be complicated, especially with strict documentation requirements and deadlines set by the Bureau of Internal Revenue (BIR). Missing a requirement or filing late may result in a denied application and double taxation.
That’s where Triple i Consulting comes in. Our team of experienced lawyers and accountants provides comprehensive support for your business registration, so you don’t have to stress over the paperwork.
Contact us today to schedule an initial consultation with one of our experts:
- Fill out the form below
- Call us at: +63 (02) 8540-9623
- Send an email to: info@tripleiconsulting.com
