I'm Giancarlo Enrico S. Pozon, a Wushu instructor, investor and Barrister... That's right, Barrister; I graduated from law school and took the Bar Exams, now I'm waiting for the results. I created this blog to make Philippine Law easy to understand for the average person. It's all about free legal advice. There are many law blogs. But the problem is that many of them are written for lawyers and law students. They use words that can't be understood by ordinary people.
Many lawyers, judges and law students consider themselves as superior to most human beings because of their knowledge of the law. It bothers me since the law is supposed to serve society. Since the law is meant to serve society as a whole, it is important that is must be understood by everybody.
This does not mean that we should all become lawyers. It means that although law is a highly specialized profession, the first duty of everybody in this profession is to make the law understandable to all; that's why all these articles are free legal advice.
Like I said, this blog is about law -but it's for the ordinary people, not the lawyers. It's for the ordinary folk so they will know what is good and bad for them, and that making them aware of the law will help us all improve society as a whole. This is free legal advice for everybody!
Foreign income taxes can be deducted from your taxable income if you claim them as a tax credit or a deduction. The purpose is to protect the taxpayer from international double/multiple taxation. If claimed as a tax credit, the foreign income tax is deducted from the Philippine income tax; if claimed as a deduction, deduct the foreign income tax from your gross income. Depending on your financial situation, choose either of the two to address your tax concerns.
The following people can claim foreign income taxes as deductions if they have foreign sources of income:
1.) Resident citizens
2.) Domestic corporations
3.) Members of general professional partnerships
4.) Beneficiaries of an estate or trust
The following can't claim foreign income taxes as tax credits because they're not liable to the Philippine government for taxes on foreign income sources; with some exceptions to be discussed within this article as well:
1.) Non-resident citizens
2.) OFWs/OCWs
3.) Resident aliens
4.) Non-resident aliens whether engaged in trade/business in the Philippines or not
5.) Resident foreign corporations
6.) Non-resident foreign corporations
Non-resident aliens and resident foreign corporations can claim taxes as a deduction from their gross income but only if these taxes are connected with their Philippine income sources and only to such extent. Regarding resident aliens, they can claim a deduction of the foreign taxes paid only to the extent that their Philippine net incomes bear to their total income from within and outside the Philippines. The formula is given here below:
Deductibe Foreign Taxes = Net Income from Within the Philippines x Foreign Taxes Paid
Net Income from All Sources
"All sources" means income sources from both inside and outside the Philippines.
There are 2 limits on the tax credit on foreign income taxes. These are the computations:
First Limit = Taxable Income (per foreign country) x Philippine Income Tax
Total Taxable Income
Second Limit = Taxable Income (all foreign countries) x Philippine Income Tax
Total Taxable Income
If the source of foreign income is only 1 foreign country, the tax credit is either the First Limit or the actual foreign income tax paid -whichever is lower!
If income comes from 2 or more foreign countries, the same "whichever is lower" rule applies, but it's between the total of the First Limit (do the same computation for every country) and the Second Limit after comparing both First and Second limits with the actual foreign income tax paid.
The "whichever is lower" rule is the government's idea to make sure it gets as much money from you as possible.
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