The paper provides a profile of the country’s overseas remittance industry and highlights its contribution to the economy. It examines the taxes imposed on the industry as well as the tax incentives granted to overseas Filipino workers (OFWs) remittances.
Overseas remittance is an important source of income of household recipients and a stable source of foreign exchange for the country. It helps lower the country’s fiscal deficit, raise investors’ confidence on the country’s ability to pay its debts, and serves as remedy to the persistent trade imbalances and scant foreign direct investments (FDIs). It also drives higher consumption, boosts domestic consumer demand and helps the country’s economy to become more resilient to economic shocks. The remittances generally come from a large number of Filipinos who in view of the increasing demand for professional and skilled workers were enticed to work overseas. In 2010, an estimated 9.45 million Filipino migrants and overseas workers representing over 10 percent of the country’s total population were residing in different parts of the world.
Overseas remittance continuously increased over the years. From only US$105 million in 1975, or about the time the Philippines started its overseas employment program, annual remittances skyrocketed to US$18.8 billion in 2010, equivalent to nine percent of the country’s Gross Domestic Product (GDP) and seven percent of the country’s Gross National Product (GNP). As remittances provide a significant source of foreign exchange and uplift the standard of living of a number of Filipino families, these will continue to have an ever-increasing role in the Philippine economy in the coming years.
Overseas Filipinos may have permanent, temporary or irregular status abroad. Overseas Filipinos with permanent status are immigrants, dual citizens or legal permanent residents abroad whose stay does not depend on work contracts. Overseas Filipinos with temporary status are those whose stay overseas is employment related, and who are expected to return at the end of their work contracts. Overseas Filipinos with irregular status are those who are not properly documented, or without valid residence, without work permits or who are overstaying in a foreign country.
Total count of overseas Filipinos reached 9.45 million in 2010 from only 7.41 million in 2001. From 2001-2007, overseas Filipinos were mostly of temporary status; followed by those with permanent status and a few with irregular status. In 2008-2010, many of them became legal permanent residents abroad, although there was still a sizeable number with temporary status. It is noted, though, that overseas Filipinos with irregular status displayed a declining proportion over the years.
Total remittances sent by overseas Filipinos to the Philippines more than tripled from US$6.03 billion in 2001 to US$18.70 billion in 2010. On the average, 82.55 percent came from land-based workers and 17.45 percent from sea-based overseas Filipinos. The bulk of remittance inflows to the country in 2010 came from the US. Aside from having a big number of overseas Filipinos in the US, the high remittance is partly because most of the banks in the Middle East use the clearing system in US banks, making the source traceable thereto. Next to the US were Canada, Saudi Arabia, United Kingdom, and Japan in that order. The next five sources were United Arab Emirates (UAE), Singapore, Italy, Germany and Norway. Based on the 2010 estimates of the World Bank, the Philippines is the fourth largest recipient of remittances, receiving five percent or US$21.3 billion of the US$440.1 billion total world remittances. The Philippines is behind India, China and Mexico but ahead of France, Germany, Bangladesh, Belgium, Spain, and Nigeria.
In the Philippines, the business of remittance is generally carried out by banks and non-bank financial intermediaries (NBFIs), money transfer operators (MTOs), pawnshops, telecommunications companies, and travel agencies, among others. It is worthy to mention that remittance agents are being regulated by the BSP. BSP Circular No. 471 provides that qualified persons or non-bank institutions wishing to act as remittance agents should register with the BSP before they can operate as such. One peculiar feature of the Philippine remittance industry is the inclusion of the mobile network operators. The BSP has approved mobile remittance services to achieve lower transaction cost and faster delivery time for the remitters and the beneficiaries.
Other than transferring through formal channels such as banks, post office banks, NBFIs, and MTOs, remittances may also be coursed through informal money transfer system (IMTS) or money transfer services that do not involve formal contracts and hence are unlikely to be recorded in the national accounts. Said IMTS include money sent through friends, co-workers, families, relatives or brought home personally by the migrants. Based on estimates made by the BSP on overseas Filipinos remittances from 2001-2007, the preference for informal channels over formal channels continuously decreased annually.
The remittance industry is subject to the income tax and the gross receipts tax (GRT). Gross receipts refer to the compensation for all financial and non-financial services, or combination thereof, performed by financial institutions within the Philippines, which include financial intermediation service fee, commissions, service fees and other charges or fees received as compensation for services, among others. The fee and commission income of banks are derived from providing transaction services that are linked to a certain performance which include the acceptance of remittance. Thus, the income derived from the remittance services of banks and NBFIs forms part of their service fees, which is subject to the GRT.
A documentary stamp tax (DST) at a rate of Php0.30 for every PhP200.00 is collected on all money transfer and remittances from abroad and payable in the Philippines as prescribed under the NIRC, as amended, except the remittances of all OFWs pursuant to RA 10022 (Migrant Workers and Overseas Filipinos Act of 1995, approved on March 8, 2010). The DST collections from overseas Filipinos’ remittances were on an upward trend from 2001 to 2009 and contributed about three percent to four percent of the total DST collection.
In recognition of the valuable contribution of OFWs in nation building, tax incentives were extended to OFW remittances pursuant to RA 10022 . Prior to the passage of RA 10022, it is alleged that the imposition of the DST on OFW remittances forced them to send money through informal channels. The exemption from the DST of OFWs’ remittances to the Philippines, while reducing the revenue of the government, is expected to encourage more money transfers through formal avenues. In addition, the DST exemption would likewise compensate for the loss brought about by the reduction in the value of OFWs’ earnings when converted into the local currency.
OFWs are likewise exempt from the 7.5 percent final withholding tax (FWT) on interest income from a depository bank under the expanded foreign currency deposit system. Said tax exemption reduces government revenues, however, it gives OFWs an option to maintain foreign currency deposits instead of immediately exchanging their remittance proceeds into pesos. Said savings can be channeled to specialized investments that can help stimulate economic activities.
The tax exemption given to OFWs’ remittances is a means not only to attract higher inflows of overseas remittances but also to encourage remitters to transfer their money through the formal channels. It is also a way of giving back the benefits that the government derives from overseas remittances as a major source of the country’s regular foreign exchange income which not only push the peso up but also spur the country’s economic growth.
