For the tax implication of software payments, the Bureau of Internal Revenue (BIR) has issued guidelines under Revenue Memorandum Circular No. 44-2005 dated September 1, 2005 (RMC 44-05). Hereunder are the basic rules on taxable transactions under RMC 44-05:
Transfer of software is classified as a transfer of copyright if, as a result of the transaction, the buyer acquires any one or more of the following rights:
The determination of the whether the transfer of a copyright right in a software is a sale or exchange of property is made on the basis of whether, taking into account, all facts and circumstances, that there has been a transfer of all or substantial rights in the copyright. When only copyright rights are transferred, payments made in consideration therefore are royalties. On the other hand, when copyright ownership is transferred, payments made in consideration is business income.
A copyrighted article incorporating the software includes a copy of the software from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. It may be fixed in the magnetic medium of a floppy disk or CD-ROM, or in the main memory or hard drive of a computer, or in any medium.
If a person acquires a copy of the software but does acquire any of the above rights over the copyright or only de minimis grant of such rights, and the transaction does not involve provision of services or of know-how, it is a transfer of copyrighted article and payments constitute business income or rental income.
This refers to the provision of services such as installation, maintenance, and customization of the software, by personnel of foreign licensor/owner or of the local subsidiary, reseller, and distributor. Payments are income from services and not royalties. Accordingly, apportionment could be made to segregate the payments attributable to services and for the software itself so te corresponding tax implication would be applied. If the service is an ancillary and largely unimportant, apportionment may not apply.
This refers to the arrangement in which the transferee obtains rights to make multiple copies of the program for operation only within its own business necessary in enabling the operation of the program on the licensee’s computers or network, and reproduction for any other purpose is not permitted. Payments are considered as business income.
Under this, the software house or computer programmer agrees to supply information about the ideas and principles underlying the program, such as logic, algorithms or programming languages or techniques. Payments are considered as royalties.
Where consideration for the transfer of full or partial ownership of the rights in the copyright, the payments made therefore are, in general, not royalties but business income or capital gains.
Based on the above, software related payments could fall under any of the following:
We suggest you double check the classification of your company’s software payments in the Philippines to apply the appropriate classification.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at firstname.lastname@example.org.)
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