The Language Filter field in the Item Selection tab only controls the list layout, as stated as info.
These settings control which items get selected in the Tagged Items list layouts.

In fact, the filtering in the tag field does also work in frontend when editing an item, but not in backend.

		$app       = Factory::getApplication();
		$tag       = $app->getLanguage()->getTag();

and further

		// Limit Options in multilanguage
		if ($app->isClient('site') && Multilanguage::isEnabled())
		{
			$lang = ComponentHelper::getParams('com_tags')->get('tag_list_language_filter');

			if ($lang == 'current_language')
			{
				$query->where('a.language in (' . $db->quote($tag) . ',' . $db->quote('*') . ')');
			}
		}

I.e. it filters by the site language and All languages in site only.
Maybe because in backend, the item language may not be set and therefore set to All, even when multilanguage is on as we can't base the language used in frontend on the language used in backend.

Ok, I see more clearly whats happen now, thank you for pointing that.

Yes this works fine for the frontend, I had made the assumption that the filter worked based on the language selection made in the backend for both (front and backend) in Extensions > Languages > Installed.

Thank you.