The Bureau of Internal Revenue (BIR) of the Philippines requires that all resident citizens receiving income from sources within or outside the Philippines, are mandated by law to pay income tax.
The BIR defines Income Tax as “… a tax on a person’s income, emoluments, profits arising from property, practice of profession, conduct of trade or business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income, by the Tax Code, as amended, or other special laws”.
The BIR specifies these Resident citizens as those receiving income from sources within or outside the Philippines such as:
• employees deriving purely compensation income from 2 or more employers, concurrently or successively at anytime during the taxable year
• employees deriving purely compensation income regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to collectible or refundable return
• self-employed individuals receiving income from the conduct of trade or business and/or practice of profession
• individuals deriving mixed income, i.e., compensation income and income from the conduct of trade or business and/or practice of profession
• individuals deriving other non-business, non-professional related income in addition to compensation income not otherwise subject to a final tax
• individuals receiving purely compensation income from a single employer, although the income of which has been correctly withheld, but whose spouse is not entitled to substituted filing
• marginal income earners
The big dilemma now that faces online workers like the virtual assistants in the Philippines is whether they fall under this taxation law as defined by the BIR. This question was the main topic in the seminar on “Online Freelancing Tax 101, The Game-changing Tax Strategy for Online Freelance Professionals” which was held at the Philippine Trade Training Centre on April 20, 2013.
In that seminar, it is asserted that the phrase “Professionally Self-employed” used by the BIR specifically refers only to those professionals whose income from their conduct or trade are not derived from employment by others. Among those who fall under this provision are professionals such as doctors, consultants, lawyers, and accountants.
It is argued, therefore, that internet workers cannot be considered as “self-employed” professionals since they are not required to be licensed nor certified. Also, online workers do not physically conduct business with customers directly as doctors do with their patients or lawyers with their clients.
Unfortunately, even online workers have to show proof of their income like the ITR or they will not be able to transact any business, especially with banks, or to apply for loan from any government or private institutions. In their ITR, therefore, they have to write “self-employed” as their profession or status which makes them subject to taxation.
As the issue stands with the BIR, as residents of the Philippines, online workers are required to pay taxes for income they derived in the place they live despite the ambiguity of their status as “selfemployed” professionals. This may amount to10% to 20% depending on the BIR’s computations or discretion.
Meanwhile, online workers still comply with this mandate of the Philippine government of paying taxes on almost everything through the VAT, property tax, sales tax, etc. exacted from them.
NOTE: The cases of overseas workers will not be the subject of this article since the discussion is focused on the taxation problem of local resident online workers. Also, the BIR should not put its finger into income it has nothing to do about.