RMC No. 44-2005: Provides guidelines for the taxation of payments for computer software

Key points

1. Scope. Hardware bundled with software where the software is bundled abroad will be covered by another revenue issuance.
2. Local copyright owners. A resident individual owner is subject to graduated income tax rates (5% – 32%) on amounts received for a full or partial copyright transfer. A domestic corporation owner includes the amount in gross income, subject to 32% Income Tax.
3. Foreign copyright owners. A non-resident alien individual engaged in trade or business in the Philippines is taxed like a resident individual. A resident foreign corporation engaged in trade or business is taxed at 32% on taxable income. A non-resident foreign corporation is subject to a final tax of 32% on gross income, or reduced tax treaty rates on royalties if the owner is a resident of a treaty country and the treaty conditions are met.
4. Payments by resellers and distributors. Payments by a local subsidiary, reseller, distributor or retailer to a domestic corporation owner or reseller/distributor licensee are subject to a 20% final income tax on gross royalties, withheld by the payor. Payments to a non-resident foreign licensor/owner are royalties subject to 32% final income tax on the gross amount, withheld by the payor, or treaty rates where applicable.
5. Payments by end-users. Payments by an end-user to local subsidiaries, resellers or distributors are business income subject to 32% Income Tax on net taxable income. The end-user withholds 2% of the gross payment, creditable against the payee, if the end-user is a juridical person, an individual paying in connection with trade or business, or a government office. Payments by an end-user directly to a foreign licensor are royalties subject to 32% Income Tax on the gross amount, withheld by the end-user, or treaty rates where applicable.
6. VAT on software transactions. The 10% VAT applies to royalty payments for use of a software copyright, payments to resellers/distributors/retailers of software, and payments for services rendered in the Philippines on purchased software. The payor files BIR Form No. 1600 for the non-resident payee, which with proof of payment supports the input tax claim. The payor issues BIR Form No. 2307 in quadruplicate on the payee’s request.

Who is affected

• Copyright owners and licensors of software
• Local subsidiaries, resellers, distributors and retailers
• End-users of software

Deadlines and effectivity

• Issued September 8, 2005