BIR to intensify collection of royalty tax on software

The Bureau of Internal Revenue (BIR) is set to release this week a circular that will define exact and uniform guidelines on taxes imposed on software firms and local distributors that remit royalties abroad.

Under the bureau’s current tax regulations, local subsidiaries of software vendors such as Microsoft Corp., as well as their distributors and resellers in the country, are required to withhold as tax to the Philippine government around 10 per cent-15 per cent (depending on which country) of the royalties they remit every year.

Although this provision is stated in the Tax Reform Act of 1997, not all vendors or suppliers pay the royalty tax to the government.

BIR assistant commissioner Alberto Pio de Roda admitted that the present regulations are general in nature, noting that the pending circular will state specific provisions on how royalty taxes will apply.

Local companies that are granted the “right to use” by foreign vendors (which own the copyright to the software) are required to pay royalty taxes.

On the other hand, firms that are explicitly given by copyright owners the right to sell software “for free” are not subject to the royalty tax.

Roda, however, admitted that the former licensing arrangement applies to most vendors like Sun Microsystems and IBM, which are also hardware vendors.

Hardware is not covered by royalty.

BIR has been consulting with representatives from the information technology sector prior to releasing the circular.

BIR commissioner Guillermo Parayno and other officials met with the Information Technology Association of the Philippines (ITAP), which is composed of some of the major technology firms operating in the country, to finalize the guidelines.

“Basically, it’s the industry that wants it,” said Roda, who also heads BIR’s management and information systems group. He noted that several companies do not pay their royalty taxes because they have no concrete basis to show to their “principal” companies abroad.

Roda explained that the circular does not entail additional taxes for software suppliers, but is intended to “clarify an existing law.” An industry source, whose company is an ITAP member, agreed, saying that the pending circular seeks to “define clearly what they (software vendors) have to pay” and “to ensure that there is standard compliance by all.”

The source added that ITAP is supporting the circular, noting that a number of vendors – Oracle and Computer Associates, for example – have been paying the required tax to the government.

Technically, the BIR can go after companies which have not paid their royalty taxes in the last five years since the law was enacted in 1997, said Roda, who expressed pessimism about the possibility that local companies would be willing to shoulder the tax payment for their principals.

“But from the feedback we got, there are principal companies willing to pay their dues to the Philippines since they can subtract this anyway to the taxes they will pay to their respective countries,” Roda said.

Nonetheless, most local companies remain apprehensive since their principals have already closed their financial books, he said.

Another issue to be resolved is how to apply the royalty tax to “bundled” hardware and software, such as desktop computers bundled with the operating system.

Unless the copyright owner explicitly states that the software license can be sold for free, Roda said suppliers would have to ascertain what percentage of the bundled cost is software from which the royalty tax would be derived.

Through the circular, the BIR seeks to cover the loopholes that suppliers use to avoid paying the royalty taxes on software products to the government.

“If there is no way for them to account what percentage of the cost is software, the BIR will tax them for the entire amount,” Roda said.