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“Up to P200k/year in tax savings:” Salceda wants PH-US tax deal to lower withholding taxes for freelancers, as Asia-Pacific marketers report shows freelancing growth; House tax chair says freelancing could be “future of service sector” in PH

November 6th, 2022

House Ways and Means Chair Joey Sarte Salceda (Albay, 2nd district) says that the House tax panel is working with the Department of Finance and the Bureau of Internal Revenue (BIR) to lower the tax withheld by US companies from their contract-hired Filipino freelance workers, as a report by Hire Digital, a platform that matches leading businesses with digital experts, showed that 59% of Asia-Pacific marketers saw growth in the freelancing sector over the past five years.

“Freelancing, particularly freelancing for foreign clients, is the future of the services sector in the country. It’s basically micro-BPO, and it will change purchasing power and employment conditions in the countryside. It’s already changing the landscape in towns in Albay,” Salceda said.

Salceda says his office estimates as much as 2 million Filipino workers work part-time or full-time as freelancers with foreign income, and that “the sector could be as large as the BPO sector within the decade.”

As such, Salceda says that his committee is working with the Department of Finance to lower the withholding tax on Filipino freelancers employed by US companies.

Currently, most types of U.S. sourced income received by a Filipino freelancers and content creators are subject to U.S. tax of 30%. A reduced rate or exemption if there is a tax treaty between the foreign person’s country of residence and the United States.

“There is a PH-US Double Taxation Agreement, but it does not yet operate for Filipino freelancers and content creators, such as Youtubers, who pay 30% of their US-derived income as US tax.”

“We don’t get any of that tax, and our tax rates are of course much lower for personal income.”

“We are lowering tax rates in the Philippines next year, by around 5% across the board, for personal income taxes,” Salceda said, citing a provision in the TRAIN Law that reduces basic tax rates starting 1 January 2023.

“It this becomes even more crucial to negotiate a tax deal with the US that allows Filipino freelancers to be taxed at our lower tax rates, instead of the US rate of 30%.”

“The effective tax rate for anyone earning under P2 million, which is typically the income of our Pinoy freelancers, is 20.1%. So, they will save around 10% of their income if they get taxed at PH rates instead of US rates. That’s as much as P200,000 more that they can provide their families.”

“We would also at least have a share of those taxes, instead of just the US benefiting from the labor of Philippine freelancers.”

Salceda estimates that the Philippines could also earn as much as P26 billion in revenues, as opposed to the US earning as much as P75 billion in taxes from Filipino freelancers.

“It will mean higher take-home pay for freelancers, a new revenue stream for the Philippines, and we will be better able to protect freelancers as well.”

Senate ok of international tax agreement could be necessary

Salceda says he is also working with the tax agencies to determine whether the ratification of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters or MCMAAT, pending in the Philippine Senate since 2014, when the country signed on to the measure, is necessary for the tax-lowering move.

“That treaty makes exchange of information automatic between tax authorities. So, that basically allows us to identify PH taxpayers who are taxed under US law, so we can lower their taxes.”

“I hope it’s no longer needed, but if it is, I hope the Senate, perhaps with the urging of my counterpart, Sen. Win Gatchalian, ratifies the treaty.”

Future of service sector

Salceda also thinks that the foreign-employed freelancing sector could be “the future of the Philippine services sector.”

“They’re OFWs without travelling or living abroad. They get to take care of their families while earning foreign currency. It’s a win for us. And I hope we can nurture this sector more.”

Salceda says he is working with companies like Amazon to establish “digital jobs centers” in the country, facilities where there is stable internet, uninterrupted power, and other amenities that allow freelancers in rural communities to serve their contracts.

“Internet access remains a challenge in many rural communities, so I am also working with their employers to provide facilities where they can provide high-standard service despite internet connectivity challenges in their communities.”

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