Payment of the applicable taxes on software payments based on the classification of the income payment (income tax and/or value added tax), is accounted for as follows depending upon the tax classification of the seller as follows:
I. Royalty payments to non-resident foreign licensor
Royalty payments for software purchases from foreign licensor is subject to the following taxes:
Royalty payments for the use of a copyright over a softwares are subject to 12% VAT imposed upon the foreign licensor seller. The payor in control of the payment of VAT on the software payments shall be responsible for the withholding of VAT in behalf of the non-resident payee. For the purpose, the payor shall file a separate for and in behalf of the non-resident payee using BIR Form No. 1600 – Monthly Remittance Return of Value-added Tax and Other Percentage Tax Withheld. The duly filed BIR Form No. 1600 and proof of payment shall serve as sufficient basis of the payor’s claim for input VAT.
In addition, the payor shall issue BIR Form No. 2307 – Certificate of Creditable tax Withheld at Source in quadruplet (three copies for the payee and one file copy for payor) upon the request of non-resident foreign payee.
Payments made by the local subsidiaries/resellers/distributors/retailers of a non-resident foreign licensor/owner of the software are royalties subject to 30% final income tax based on the gross amount thereof in furtherance of Section 28(B)(1) of the Tax Code as amended. The 30% final withholding tax shall withheld and collected by the local subsidiaries/resellers/distributors/retailers making the payment using BIR Form No. 1601-F.
If the foreign licensor/owner is a resident of the country which has an existing tax treaty with the Philippines, royalties paid to such licensor/owner are subject to the reduced tax rates on royalties under the tax treaty. Pursuant to Article 12 of the Rp-Singapore Tax Treaty, and hereunder we quote:
“Article 12 – ROYALTIES
1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed:
a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting;
b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt;
c) in all other cases, 25 per cent of the gross amount of the royalties.
Based on the above, royalty income of foreign licensor or owner is subject to final withholding tax at either 15%, if the payor is an enterprise registered with the Board of Investments (BOI), or 25% if non-BOI registered. For such lower tax rates under the RP-Singapore Tax Treaty, the Bureau of Internal Revenue (BIR) requires, as condition precedent a Tax Treaty Relief Application (TTRA) with the BIR – International Tax Affairs Division (ITAD).In the absence of such TTRA application, the BIR will impose the 30% final withholding tax.
II. Local software sales of local subsidiaries, resellers and distributors
Payments to local subsidiaries, resellers, and distributors for the purchase of copyrighted articles are business profits of the subsidiaries, resellers, and distributors. As such, the same is subject to 12% value added tax and to 30% income tax.
Payments of the local buyers to the local subsidiaries, resellers and distributors are subject to 2% creditable withholding tax and will issue a BIR Form No. 2307. Said amounts withheld shall in turn be used by the local subsidiaries, resellers, and distributors as tax credits to reduce their income tax liabilities at the end of the taxable quarter and/or calendar year.
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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