RMC No. 77-2003: Classifies payments for software programs for income tax purposes

Summary

RMC No. 77-2003 classifies payments for software for income tax purposes and states the tax treatment for each mode of acquiring software.

Key points

1. Software from local subsidiaries, resellers and distributors. Royalty payments by the local end-user are business income subject to 32% Income Tax. The end-user withholds 2% of the gross amount, creditable against the recipient’s tax due. If the payments are not income from the ordinary conduct or active pursuit of the recipient’s business, the royalties are passive income subject to 20% final income tax on the gross amount, withheld by the end-user.
2. Payments to the foreign licensor or owner. Royalties paid by local subsidiaries, resellers or distributors to the foreign licensor or owner are subject to 32% Income Tax on the gross amount, as for a non-resident foreign corporation. The payer withholds and collects it.
3. Software bought directly from the foreign owner. Royalties paid by the end-user directly to the licensor or owner are subject to 32% Income Tax on the gross amount, withheld and collected by the end-user.
4. Tax treaty rates. If the foreign licensor or owner resides in a country with an existing tax treaty with the Philippines, the reduced treaty rates on royalties apply, provided the treaty conditions are met.
5. Mixed contracts with after-sales service. These payments are not royalties alone. The stipulated payments are broken down by contract terms or reasonable apportionment, and each part gets its proper treatment. The part for use of software copyright is royalties, and the part for services is income from services.
6. Software bundled with hardware. Payments for software, or the portion apportioned to it, bundled with computer hardware in the Philippines are taxed under this Circular. Software bundled with hardware outside the Philippines is dealt with in a separate revenue issuance.

Who is affected

• Local end-users of software
• Local subsidiaries, resellers and distributors
• Foreign licensors or owners of software

Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.