Planning to send money to the Philippines from the United States? Don't get caught off guard. Here's what you and your recipient need to know about taxes.
February 2, 2021 — 5 min read
In 1980, foreign remittances accounted for about 2 percent of the Philippines’ Gross Domestic Product (GDP). Today, this proportion has increased about 500 percent. Filipinos living overseas send over $400 billion USD a year to friends and family back home.
Now, what happens if you’re sending large transfers to the Philippines, or sending large transfers? Will you be taxed?
At this time, there is no VAT (Value Added Tax) in the Philippines. However, many tax laws still apply, and they come with penalties. We’ll get to that later in the guide.
Depending on why and to whom you’re sending money, you or your recipient may be responsible for the following:
Business Remittance Taxes
Business remittance payments are usually large transactions, particularly in comparison to personal remittances. Instead of $500 USD, the transfer might be $500,000 USD.
Because these transactions are cheaper, and because businesses do not rely as heavily on these payments as individuals, the government takes 15 percent of any after-tax profits sent from an overseas branch to a home office in the Philippines.
Businesses in Philippine Economic Zone Authorities are exempt from this tax.
Occasionally, personal remittances are much larger. Life insurance proceeds and other financial windfalls are a good example. Additionally, small transfers add up over time. If migrant workers in America send $500 USD every two weeks for a year, that’s $13,000 USD.
Senders and recipients usually do not think remittance payments are “gifts”, but that’s how the taxing authority views them. If your remittances exceed $15,000 USD in a single year, the excess could be subject to the gift tax. This amount is the aggregate of all gifts, and not just remittance payments.
Gift tax amounts vary in different circumstances, but they are usually much higher than income taxes. Fortunately, most U.S.-based remittance senders are exempt from the gift tax, as follows:
Minor Dependent Child: If the remittance goes directly to a minor child, it is exempt from the gift tax. If the remittance is exclusively for the benefit of a minor child, such as a child support payment, the remittance is probably exempt.
Family Members: This one is a bit complex. Technically, family member remittances could be subject to the gift tax. But in these situations, senders can avoid the gift tax by dividing the remittances between family members (e.g. $7,500 USD to Mom and $7,500 USD to Dad). This workaround is only available if the remittance funds are for family support purposes. In other contexts, such a division could be tax fraud.
Your Own Bank Account: You cannot give a gift to yourself, at least in this context. So, even if someone else pulls out the money and spends it, the remittance is not subject to the gift tax. However, senders must report these transactions to the IRS if they exceed $10,000. Other FBAR (Foreign Bank and Financial Account) restrictions might apply as well.
Filipino recipients generally are exempt from the gift tax as well. The exemption applies if the remittance came from people who “reside abroad, either as an immigrant or for employment on a permanent basis” or “citizens of the Philippines who work and derive income from abroad and whose employment thereat requires them to be physically present abroad most of the time during the taxable year.”
On a related note, if you send or receive a large amount of money, even if the gift tax is inapplicable, expect some additional scrutiny. That scrutiny could delay the transfer and/or prompt government investigators to ask pointed questions.
In the Philippines, income tax levels vary between 5 and 33 percent, at least in most cases. Remittance receipts are income, so they must be reported.
Remittance receipts are in a different category. Irrespective of the recipient’s income tax level, the failure to declare penalty is 25 percent of the remittance. The government adds an additional 20 percent in penalties and interest. Furthermore, Filipino laws regarding willful tax evasion are rather broad. So, even if the recipient mistakenly failed to file, the 50 percent tax fraud penalty could apply.
What about Filipino nationals who send remittances back home? Generally, once these individuals register with the Philippine Overseas Employment Administration (POEA), the government labels them as Overseas Filipino Workers (OFWs). OFWs must pay taxes in the United States or wherever they live, but they are exempt from all Filipino income taxes.
To establish OFW status, these workers must normally provide certain documents, such as an overseas employment certificate, an Overseas Workers Welfare Administration membership certificate, and a POEA receipt.
Most senders and recipients do not pay direct taxes on remittances to the Philippines. However, the income tax laws normally apply, at least to recipients. People should be well aware of these rules, in order to avoid higher penalties.
At Xe, we focus entirely on cost-effective international funds transfers (unlike your local bank). The Philippines is just one of the over 130 countries that we send money to every day. Your friends and family back home count on remittance payments to make ends meet, and you can count on us to give you a great rate (so you can send more home) and get your money to the Philippines as quickly as possible.