AS freelancing could be “future of the service sector” in the Philippines, the House Committee on Ways and Means is now working with the Department of Finance and the Bureau of Internal Revenue (BIR) to lower the withholding tax on Filipino freelancers employed by US companies.
Citing a report by New York, US-headquartered Hire Digital Corp., House Committee on Ways and Means Chairman Joey Sarte Salceda said that 59 percent 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 [business process outsourcing] and it will change purchasing power and employment conditions in the countryside,” Salceda was quoted in a statement as saying. “It’s already changing the landscape in towns in Albay.”
The lawmaker estimates that as much as two 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.
Salceda said that, currently, most types of US sourced income received by Filipino freelancers and content creators are subject to tax of 30 percent in the United States of America. This, he added, there’s “a reduced rate or exemption if there is a tax treaty between the foreign person’s country of residence and the United States.”
Salceda said that there is a US-Philippines “double taxation agreement.” However, he added, this does not yet operate for Filipino freelancers and content creators, such as Youtubers, who pay 30 percent 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.”
Citing a provision in the Train Law (Republic Act 10963) that reduces basic tax rates starting January 1, 2023, Salceda said the Philippines is lowering its tax rates next year by around 5 percent across the board for personal income taxes.
“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,” Salceda said.
He explained that the effective tax rate for anyone earning under P2 million, which is typically the income of Filipino freelancers, is 20.1 percent.
“So, they will save around 10 percent of their income if they get taxed at Philippine rates instead of US rates,” he added. “That’s as much as P200,000 more that they can provide their families.”
Salceda estimated 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.”
Salceda said Senate approval of an international tax agreement could be necessary.
The lawmaker said he is also working with tax agencies to determine whether the ratification of the “Multilateral Convention on Mutual Administrative Assistance in Tax Matters” or “MCMAAT,” is necessary for the tax-lowering move. The MCMAAT has been pending in the Philippine Senate since 2014 when the country signed on to the measure.
“That treaty makes exchange of information automatic between tax authorities,” Salceda said. “That basically allows us to identify Philippine 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.”
Service sector
MEANWHILE, Salceda also thinks that the foreign-employed freelancing sector could be “the future of the Philippine services sector.”
“They’re OFWs [overseas Filipino workers] 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,” he added.
The lawmaker said he is working with companies like Amazon.com Inc. to establish “digital jobs centers” in the country and build facilities where there is stable Internet and uninterrupted power. He also hopes Jeff Bezos’s firm could establish 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.”