(Almost) Tax Free in Paradise [Infographic]
Tax Free in the Philippines
Manila. Traffic. Beautiful Beaches. Boracay. Pork Sisig. The Land of Single Mothers. Angeles City. Cebu. Outsourcing. Davao. Spanish Gold. San Miguel. Pinoy. Pinay. Pirates. Palawan. The Last Frontier. The Philippines.
I’ve written about the Philippines before, and included a detailed analysis of the tax treaties, and different corporate structures that are available when starting a business there.
In this vignette, I’ll present a story of a friend who moved from Australia to the archipelago that is the Philippines and was able to legally minimize tax through the proper use of an offshore entity.
But first, I want to explain why this country has so much damn potential and why you should consider starting up a business in the Philippines.
It’s More Fun in the Philippines.
The Philippines is like a mold of clay. Some ignore it, mistaking it as unpolished or ugly. However, the beauty lies in the potential. The country has some of the best human resources in the world, as the majority of the young people tend to be college educated and English speaking. Even the movie theaters show first run American movies without subtitles.
However, there hasn’t been a huge boom of businesses to spring up in the Philippines, besides business process outsourcing (call centers). But the slow trickle of other business opportunities has turned into a steady stream in recent years.
However, there are also some downsides…
- Relatively high tax
- Potentially difficult local governments
- Foreign ownership laws
These things are not problems, they are obstacles to be overcome.
What follows is how one Australian managed to achieve about a 10% tax rate.
First things first, Australians have a similar tax dealing to Britain and Canada in that in order for you to relinquish your tax obligations to your home country – an entirely new residence and “tax home” must be established.
In other words, you can’t just leave and expect not to file taxes, and be “off the hook” for taxes in your home country. After the infographic, I’ll dig in deep, and show you some questions you may be asked by the Australian taxman in this situation.
(In summation: A new tax residence and domicile must be established. As a disclaimer: the tax laws are constantly changing, and you should always perform your own due diligence and talk to a lawyer before taking action. This post is for informational purposes only and is not tax or legal advice.)
FLAG 1: Australian Passport
In order to relinquish your Australian tax obligations, you need to prove to the tax-man that you no longer have ties to the country. The following are factors indicating non-resident status that the commissioner will consider.
There does not exist a set of laws that are set in stone, but (as if often the case) interpretations and precedent case law that determines residency.
The following will most likely be considered:
- Personal/Family/Social Ties
- Economic Ties
- Business Ties
Essentially, the totality of the circumstances surrounding your Australian tax residency based on your intended as well as the actual length of stay overseas. An important aspect of this factor includes your intention (or non-intention) to return to Australia.
Again, it should not be understated that your intention seems to be a key factor, spread across the other 3 factors: family, economic and business.
For instance, if you decide to return regularly, particularly within a short period of departing Australia, then you may not pass this test. Or if you hadn’t intended to stay abroad, but just continued a vacation.
Key Questions In Determining Your Tax Liability in Australia Based on “Intentions Factor”:
- What date did your intention change, or even if you had a change in your intentions?
- Was the period you spent outside of Australia for a minimum period of two to three years or was it indefinite?
- When and how often did you return to Australia and for what purpose?
- What was the overall intention of the time spent outside of Australia?
- Did you intend to make your permanent home at your new location, and develop your home to the equivalent of the one you left in Australia?
2. Personal/Family/Social Ties
Where your immediate family accompanies you to the new location, there is little difficulty in explaining to the Commissioner of Taxation that you permanently departed Australia (taken with the other tests).
This being said, if your husband or wife needs to remain in or return to Australia for a period, you may have a reasonable argument if this is for family/children’s educational commitments, but you’ll likely need to show a cessation of residence independently from your spouse.
Each taxpayer’s residence is determined separately by law, but it is more difficult to prove cessation of Australian tax residence in a situation where your spouse remains living in/returns to Australia, especially if your spouse lives in the family home.
In general here are some points to follow:
- Limit your trips to Australia as much as possible – especially during the first 12 months. An exception would be for trips necessary for work purposes.
- If you leave the pets at a kennel in Australia, your intention to leave Australia indefinitely may be questionable. Consider taking family pets with you or giving them away. Sorry, Fiddo!
- Write letters or emails to your extended family, friends and work colleagues informing them of your intention to reside overseas and keep copies of such correspondence. Be sure to include the long term/permanent intention.
- Inform your doctors and dentist, as well as your health fund, of your departure in writing and suspend your family health fund membership.
- Stop accessing the Medicare system in Australia and avoid using Medicare benefits during any subsequent visits you make to Australia. You better not live off social benefits if you don’t pay taxes there! If you aren’t paying taxes in Australia, this is only right. Expat health insurance is better, cheaper and has better coverage anyway.
- Join a library or a gym. Make sure to collect documentation of new memberships and find new, but equivalent, medical practitioners and educational institutions.
- Take your personal belongings with you and sell any unneeded belongings. The idea is to indicate a desire to form a new home in the foreign location. If you use a sea freight to transport your belongings, make sure you keep that all-important documentation.
- Register as a non-resident voter on the Australian electoral roll.
- Make sure to change your mailing address to a new overseas address for all mail where practicable.
- Cancel your utilities and services, such as internet/cable/mobile phone accounts and set up new accounts in the new foreign location, with matching addresses of your new home.
- If practical, attempt to obtain an appropriate driver’s license in your new location and consider not renewing your Australian driver’s license when it comes up for renewal.
- If you do need to maintain any goods back home, such as antiques, you could arrange for long-term storage and, in writing, advise the storage company of your intended long-term absence.
3. Economic Ties
- Close any surplus bank accounts, credit card accounts and any subscriptions you might have.
- You’ll have to pay taxes if you have money wired into your Aussie account, so it is best to set-up an offshore company and bank account where you’ve relocated to. Again: keep documentary evidence of account closures.
- Open equivalent credit card accounts and bank accounts as possible in a new location.
- Get rid of cars and marine vessels, or transfer them out of your name.
- Real Estate: sell it. You’ll be taxed at the same rate if you are abroad. While you are at it, write to your real estate agent indicating your intention to leave Australia long term. Fewer assets equals more paper showing your intention.
Bank and Brokerage Accounts You Maintain
- Instruct, in writing, any banks with interest-bearing accounts of your non-resident status so that they deduct 10% withholding tax.
- Instruct, in writing, share registrars of your non-resident status so that 15% withholding tax can be deducted from dividends.
- If you have any domestic investment portfolios purchased through an Australian broker, you may want to close these based on sound investment advice.
- If you need to keep these accounts open, at least have a new financial plan drawn up in your new location (documentation!) and maintain your Australia investments as only a portion of your portfolio.
4. Business Ties
- If you have a superannuation fund make sure that you inform them of your intended long-term absence in writing and suspend contributions to the fund.
- You could also write to professional associations where you are a member and advise them of your long-term absence, whilst joining equivalent groups in your new location.
- Consider continuing professional education in your new foreign location, which should be undertaken locally in preference to classes by correspondence.
- Appoint a tax adviser in your new location to assist you with tax issues on income derived in your new location.
FLAG 2: Residence
For other options of Philippines corporations, such as a branch, subsidiary, or domestic, please read my other write up –> Starting a Business Abroad? It’s more fun in the Philippines
Another option for business owners and entrepreneurs is a regional operating headquarters (“ROHQ”). This is usually established in the Philippines to centralize services. Often used for financial management, business management and joint-venture management, this is used in conjunction with a foreign parent company and offshore operations.
An ROHQ of a multinational company is a branch office established in the Philippines engaged in any one of the following qualifying services:
- general administration and planning
- business planning and coordination
- sourcing and procurement of raw materials and components
- corporate finance advisory services
- marketing control and sales promotion
- logistics services (that’s fairly broad!)
- research and development services and product development
- technical support and maintenance
- data processing and communication
- business development
- training and personnel management
An ROHQ is prohibited from offering qualifying services to entities other than its affiliates, branches or subsidiaries as will be declared in its registration with the SEC. This is a key point to remember!
Neither is it allowed to, directly and indirectly, to solicit or market goods and services whether on behalf of their mother company, branches, affiliates, subsidiaries or any other company. [THE COMPANY MUST BE “RUN” FROM THE UAE.]
Section 50 of the Tax Code provides that: “in the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the BIR is authorized to distribute, apportion, or allocate gross income or deductions between or among such organization, trade or business, if it determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trades, or businesses.”
Thus, considering that the ROHQ will be dealing with other affiliates, the transfer pricing strategy must comply with the arm’s length standard and must be supported by sufficient documentation to avoid any issues which may be raised in an audit by the BIR.
An ROHQ is required to initially have a capitalization of US$200,000 or its equivalent in other foreign currencies. Within 30 days you are required to submit to the SEC a statement from a local bank showing inward remittance of at least US$200,000. This capital can be used to operate your business in the country. This capitalization requirement can be waived if the company does not generate revenue from the domestic Philippine market.
ROHQs are subject to the preferential income tax rate of 10% on their taxable income.
10% preferential tax rate is only applicable to its income from qualifying services. Any income derived from services other than ROHQ qualifying services is subject to the regular corporate income tax rate of 30%. In other words, as long as you get the transfer pricing right, you’ll pay only 10% tax.
Profit remittances by an ROHQ to its head office is subject to the 15% BPRT which is based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof.
Preferential Tax for Certain Employees
Filipinos and alien individuals occupying managerial and highly technical positions in the ROHQ of multinational companies shall be taxed at 15% of their gross income.
An ROHQ is entitled to the following incentives:
- NO local taxes, fees, and charges except for real property tax on land improvements and equipment;
- Tax and duty-free importation of training materials and equipment
For purposes of taxation of the income of the ROHQ, the parent foreign corporation can allocate to its ROHQ a proportional part of its expenses, losses, interest payments and similar expenses relating to the conduct of business in the Philippines.
FLAG 3: Offshore Company
The good relations between UAE and Philippines have led to a favorable tax treaty – so while this set-up could function similarly with a BVI company, or really any other offshore company, it makes sense to utilize transfer pricing with a UAE entity if you set up shop in the Philippines. A tax treaty is only available for FZ and local Companies. The main difference between an FZ company and an offshore entity in UAE is the setup cost and the requirement to rent a physical space (in some FZ such as Fujairah Creative City this is not mandatory)
You can catch a direct flight on Emirates from Clark to Dubai. You might think this is a random flight pattern, but consider that there are 700,000 Filipinos who reside full-time in UAE.
If you also wish to establish a residency, UAE may be a good option. However, this can be done through either an onshore company or “Freezone” entity that is allowed to transact business in UAE. Learn more about UAE’s Freezone and offshore companies.
An “offshore” entity is allowed to open up a bank account in UAE, although there are many off-shore banking options available.
====== Residency in the Emirates with an ONSHORE UAE entity. ======
You could (hypothetically) set up a residence in UAE and establish a company there. Getting the equivalent of a green card in Dubai costs about USD $20,000 and can be done and approved in principle in just 7 days. This would not be granted with an offshore entity, only an onshore entity.
A UAE limited liability company (LLC) requires a minimum 51% shareholding by UAE citizens and a minimum of two shareholders. If the 49% shareholder in the LLC is a foreign corporate entity, the corporate documents of the foreign company (must be notarized and legalized in the country of incorporation of the parent company, and legalized at the Ministry of Foreign Affairs in the UAE and translated into Arabic.
Another option is to utilize a Freezone company in one of the many special economic zone set-ups throughout the Emirates. These companies are regulated through special licenses and are only allowed to transact business with other free zones or internationally. You can receive up to two business visas (each good for 2 years and renewable). Directors of Freezone companies that hold the associated business visa can purchase property in the UAE as well.
======= You don’t need to get residency; this is to illustrate the point that it is available. =======
Benefits of an FZ or an OFFSHORE entity in UAE
To be clear – the entity used in the set up shown in the infographic is either offshore or an FZ entity. The tax rate in UAE is 0% for both type of companies, and the tax rate in the Philippines can be as low as 10% with an effective rate that could be even lower.
With offshore and FZ entities in UAE, the laws are very pro-business.
For instance, they do not need to have a local shareholding.
The company should be set up in a Freezone – for example, the Ras Al Khaimah FZ. Only one shareholder and one director are needed.
Tax benefits of UAE OFFSHORE/FZ COMPANY
- 100% income tax exemption
- 100% corporate tax exemption
- 100% capital and profit repatriation
- 0% capital gains tax
- 0% VAT
- 0% Withholding tax
- May not carry on business within the UAE.
- Only one corporate shareholder/corporate director required – you could even have another entity, such as a BVI company, Belize Company, or Nevis LLC be the sole shareholder and director in the UAE entity.
- Does not require the shareholder/director to be physically present in the UAE for incorporation.
- It may maintain bank accounts and deposits worldwide.
- It is not obliged to file its books and records.
- It may hold shares in other UAE and worldwide companies, such as a Filipino company.
FLAG 4: Banking in St Vincent
A small island in the Caribbean, St Vincent and the Grenadines could be easily overlooked as merely a playgrounds destination, a place to snorkel and catch a tan.
However, this small chain of islands will grant a Class-A banking license and is home to one of the most private and secure banks in the World: Euro-Pacific Bank, owned by Peter Schiff. You can apply for a Euro Pacific Bank account at bankaccounts.io.
This bank is not available to Americans, as the bank is not compliant with the recent FATCA laws of the US and has decided to not accept US clients.
Europac Bank and their Gold Backed Debit Card present a great option to anyone who is looking to secure a private banking relationship. Their products continue to impress me, and I highly recommend their services. Check them out here.
FLAG 5: Playgrounds & Health
Singapore has the best healthcare in Asia. Period.
Depending on who you ask, it’s reasonable to make the argument that Singapore has the best healthcare in the world. Generally, healthcare attributes can be boiled down to 3 categorical objectives:
- Availability – are there enough doctors, hospitals and beds to meet demand?
- Cost – what is the cost of healthcare from surgical procedures to outpatient appointments?
- Quality – what does the qualitative data say about say about the patient experience as well as the quantitative statistics regarding patient outcomes, HRI (hospital rate of infection), re-admission rates, as well as the facilities and technology available?
It’s not as cheap to go to a hospital in Singapore as it is in neighboring Thailand or Malaysia, but all of the doctors speak English, the robotic surgery is top notch and the cost is about 1/4 of what you’d pay in the United States.
If you have a health problem and are living on the outskirts of society in the Philippines, it might make sense to catch a 2 hr flight to Changi airport.
FLAG 6: Data Protection and Security
Switzerland is one of the best places in the world for housing servers. I’ve written about this before in Asset Protection for web business.
You can get a hosting account anywhere, so why not own your websites and host servers in a secure, stable jurisdiction that maximizes freedom. Switzerland fits that mold.
This can further help the case being made that the mind and management (as well as tangible assets) lie outside of the Philippines or UAE or Australia – should that case ever need to be made.
It’s my hope that this case study helps illustrate the point that internationalization can dramatically impact the bottom line of a business and that corporate structure is a good basis for tax minimization. If you liked this, imagine what you’ll have access to behind the wall with your Flag Theory PT and 2nd-passport membership.
The set up described here is for illustrative purposes only and is not tax or legal advice.
Always speak with a tax lawyer in your relevant jurisdiction before establishing a legal entity.