OFW Savings and Investment Options and Tax Treatment

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Published Dec 20, 2020

By RemitFinder

What taxes OFWs must pay for their investments and savings in the Philippines?

Conclusion

Savings and Investment Options Available for Overseas Filipino Workers (OFWs)

We are no stranger to the stories of Overseas Filipino Workers (OFWs) who choose to work in other countries to tap into better opportunities for themselves and their families. However, even after years of hard work in other countries, many Filipinos struggle financially. Some of them also go back home with almost nothing to show for all of their long years of hard work, which is sad.

To avoid that from happening, we will present several savings and investment options suited for OFWs. If you are interested in knowing what these are, continue reading below!

What are some common mistakes OFWs make when returning home from abroad?

Before going into details about the available savings and investment options for OFWs, you first need to know the common mistakes OFWs make when returning home from abroad. Knowing these mistakes will help you to avoid them if you decide to be an OFW or have family members who are already OFWs.

Reckless spending

Some OFWs tend to spend recklessly because they know that they have money in hand. However, money can go by quickly, and the next thing they know, they are quickly running out of funds.

Vacation here, vacation there

OFWs love bonding with their families through traveling. However, some OFW do not anticipate how much a vacation in another city or foreign country actually costs and how big of an impact it can have on their savings.

Too much generosity

The generosity of OFWs does not only end in buying pasalubong. Many OFWs will throw lavish welcome home parties with all the members of the barangay invited.

Why should OFWs start investing?

Being an OFW will not last forever, especially if you are a seaman or an OFW with a limited-time contract abroad. When you stop being an OFW, you need to have something to show for it, especially because you know how difficult it is to earn money in the Philippines. Hence investing your hard earned money should be a priority.

Investing while you are still an OFW will ultimately give you financial security so that you will not have a hard time sustaining your needs and lifestyle when you go back home. Your investment should also provide you with a safety net if your employment abroad is terminated due to unforeseen circumstances.

What are some popular savings and investment options for OFWs in the Philippines?

A person holding a bundle of US Dollar banknotes in their hand

Below we present some of the savings and investment options that are best suited for OFWs.

Real Estate

Many of you are already familiar with the term Real Estate Investment. It is basically any investment in real estate that will generate an income for you.

You may be thinking that if you are an OFW, investing in real estate would require you to have millions of pesos in capital. However, you're mistaken. There are ways to invest in real estate without giving millions upfront. One example of that is buying pre-selling condos or property to rent it out or resell it for a profit.

This is a great idea for OFWs because the loan payments or other expenses that go into the managing the property will act as "forced savings". Once the property is paid off, the income you get from the same can be used as spare cash or put to use for other investments. Later on, if you want to sell your property, chances are that you will be able to sell for much more than how much you acquired it for; this will give you a decent profit margin.

Stock Market

Another investment option for OFWs is the stock market. There are two ways OFW can earn from stock investments - either through dividends or capital. You can earn dividends if you are a shareholder of a company depending on how well it performs. Meanwhile, you can also earn capital gains if the value of your stock rises after some time.

However, investing in the stock market can be quite confusing for beginners, especially since the market can be highly volatile. If you plan on investing in the stock market, equip yourself with the right financial information. You can also choose to have stockbrokers who can assist you.

Some of the popular stockbrokers in the Philippines whose services are also accessible online are COL Financial, BDO Nomura, Philstocks, BPI Trade, and First Metro Sec.

Mutual Funds

As an OFW, opting for mutual funds investment is a good idea because mutual funds grows your money faster than just putting it in a bank.

Good examples of mutual funds that OFWs can consider are the Pag-ibig MP2 Savings Fund and the SSS P.E.S.O Fund. These investments are specially designed for Pag-ibig and SSS members who wish to save and grow their money faster. Since Pag-ibig and SSS are both government owned agencies, your investment in their mutual funds is also tax free!

You can also consider private companies that offer mutual funds investments. Sun Life and Philam Life are two of the leading companies for mutual funds because they have some of the highest ROI in the market.

Cryptocurrency

As an OFW, you might want to consider investing in cryptocurrency, a digital asset that you can access anywhere in the world. It is designed to be a medium of coin ownership which is stored in a ledger in a computerized database. The value of cryptocurrency fluctuates with time. Therefore, you can earn money from selling the coins you bought at a value higher than your purchase price.

Small Business

A small business can be a sari-sari store, a laundry shop, or a water purifying station. These are businesses that are sure to earn you money on a regular basis.

If you have family members that you can trust, investing in a small business is definitely a good idea. All you have to do is provide the initial capital, and they can do the rest of the day-to-day operations for you.

Savings in Bank Accounts

Putting savings in a bank account is the most commonly known way of saving in the Philippines. If you are an OFW, you should definitely have a bank account with savings to secure your money. Read our comprehensive analysis on various savings accounts available to OFWs and their pros and cons to be able to make the best decisions to save your hard earned money.

However, do not expect that your savings in bank accounts will grow significantly because the interest rates on savings accounts are not that high. However, having savings in bank accounts is better than having no savings at all. Additionally, savings in bank accounts are totally risk free and your money is safe.

Fixed Deposits

Fixed Deposits are also commonly known as "time deposits" in the Philippines. They are very similar to a bank savings account, except you will be unable to withdraw your money for a specific amount of time. The interest on fixed deposits is also a lot higher compared to that on regular savings accounts.

Fixed Deposits is a savings option that you should consider as an OFW if you want to establish funds for your children's education. It will mitigate the temptation to spend your money on other things as well.

What taxes OFWs must pay for their investments and savings in the Philippines?

In this section, we cover the all-important topic of taxes on OFW savings and investments in the Philippines. It's great to save and invest your money back home in the Philippines, but without a clear knowledge of taxes, your money will only grow so far. As such, its critical to understand tax treatment so you can carefully plan your investment choices.

What is the tax residency status of Overseas Filipino Workers (OFWs)?

For the purpose of taxation, an OFW is considered as a non-resident citizen as per Section 22(E) of the National Internal Revenue Code (NIRC). The Tax Reform Act of 1997 provided a wide range of tax incentives for OFWs. Section 23(B) of the NIRC provides that OFWs are only liable to pay taxes on their income derived within the Philippines, and not their overseas income. The income derived by these individuals from working abroad is not subject to Philippine income tax.

What is the tax treatment for OFW savings and investments in the Philippines?

The Revenue Regulations No. 1-2011 advisory issued by the Bureau of Internal Revenue (BIR) on February 24, 2011 outlines important guidelines about the tax treatment of income earnings and remittances sent by Overseas Contract Workers (OCWs) or OFWs. According to this advisory, the wage or income of an OFW that is earned out of the country is exempted from income tax.

What are the taxes that OFWs have to pay in the Philippines?

As noted above, the income an OFW earns overseas is exempt from income tax within the Philippines. However, if the OFW realizes income from business activities, investments or properties within the Philippines, such earnings are subject to Philippine Income Tax as below.

Taxes on Regular Income

Regular Income is taxed at a tax rate of 5%-32%.

Taxes on Passive Income

Passive Income is taxed as follows.

20% Final Tax on bank deposit interest income
20% Final Tax on royalties
20% Final Tax on prizes, lotteries and lotto winnings, unless prizes of less than PHP 10,000 which are taxed at the regular income tax rate of 5%-32%
10% Final Tax on cash or property dividends
5%/10% Final Tax on disposition of shares of stock held in domestic companies
6% Final Tax on capital asset gains
5%/12%/20% Final Tax on long term deposits and investments in trust funds or certificates

Do OFWs have to pay Final Withholding Tax (FWT) in the Philippines?

Income derived by OFWs from foreign currency deposits is also exempt from the usual Final Withholding Tax (FWT) charged at 7.5% as per guidelines of Revenue Regulations (RR) No. 10-98. To avail this benefit, the OFW must execute a written permission to the bank to inform the Commissioner of the BIR that the depositor is exempt from tax as a non-resident. In case the deposit account is jointly held by the OFW with a resident of the Philippines, 50% of the interest income from such bank deposit will be treated as exempt while the other 50% shall be subject to the Final Withholding Tax (FWT) charged at 7.5%.

Do OFWs have to pay Documentary Stamp Tax (DST) in the Philippines?

Remittances from OFWs are also exempted from the Documentary Stamp Tax (DST). However, according to BIR rules, in the case of OFW remittances sent through banks, the recipient is required to show proof of entitlement to DST exemption such as Overseas Employment Certificate (OEC) or Overseas Worker Welfare Administration (OWWA) certificate.

Do OFWs have to pay Value Added Tax (VAT) on their businesses in the Philippines?

The earnings of an OFW from a business venture or any other property in the Philippines is subject to tax obligations. The income of a business that is owned by an OFW can be exempted from the 12% Value Added Tax (VAT) provided that the OFW opts not to be registered as a VAT taxpayer and if the annual gross business income does not exceed PHP 1.5 million. The business of an OFW that is not VAT-registered is subject to the quarterly 3% (annual 12%) gross revenue tax.

Are there any additional tax benefits or exemptions for OFWs in the Philippines?

All OFWs also enjoy exemption from paying travel tax and airport fees, although they are required to show proof that they are legal migrant workers.

Conclusion

There is no doubt that having savings and investment as an OFW should be a priority. It will help maximize your hard work and fast-track your journey to achieving the financial security that you have always dreamed of. Also, it can act as a safety net in case something unfavorable happens.

Regardless of what option you choose, make sure it will work best for you and your needs. You must also take a close look at its benefits and risks so that you make an educated financial decision.

The Government of the Philippines has been undertaking numerous initiatives to encourage OFWs to save and invest their overseas earnings in their home country; this includes highly favorable tax treatment to further incentivize OFWs to save and invest in the Philippines. It is, thus, no surprise that OFW savings and investments have also supported the Philippine economy in a significant way. From that standpoint, it's a win-win situation for both OFWs and their home country!