Classification of Software Payments in Philippines

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 copyright rights

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:

1. The right to make copies of the software for the purpose of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending;
2. The right to prepare derivative computer programs based on copyrighted software;
3. The right to make public performance of the software;
4. The right to publicly display the computed program; or,
5. Any other rights of the copyright owner, the exercise of which by another without his authority shall constitute infringement of copyright.

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.

• Transfer of copyrighted articles

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.

• After-sales services 

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. 

• Site license/enterprise license/network license agreements 

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.

• Supply of information

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. 

• Transfer of ownership 

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:

1. Royalties –payments of any kind received as a consideration for the use of, or the right to use, any copyright or literary, artistic or scientific work including cinematographic films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.
2. Business income,
3. Income from services, or
4. Rental income