Weekly Tax Updates [May 20, 2025]

Go lauds new hospital laws

Other Relevant Tax Updates:

• TAX & BUSINESS-RELATED NEWS [MAY 12-19]
• BIR ITAD RULINGS
• BIR FURTHER CLARIFIES PROVISIONS IN RELATION TO THE IMPLEMENTATION OF VALUE-ADDED TAX ON DIGITAL SERVICES

I. TAX & BUSINESS-RELATED NEWS [MAY 12-19]

1. DMW shuts down 3 training centers
2. Go lauds new hospital laws
3. DTI, Jollibee team up to help small enterprises join big supply chains
4. DOT hopes for ASEAN visa for smoother tourism
5. Another HMO placed under conservatorship
6. PEZA partners with Japan firm to push decarbonization in ecozones
7. HMO profitability boosted by entry of gov’t workers
8. SC rules employee-employer relationship starts when job offer is signed
9. Nickel producers back SC decision to nullify mining ban in Occidental Mindoro
10. NPC probing possible privacy breach in public display of voters’ info
11. Peza rule on 50% remote work out soon
12. DOTr, ARTA, Denmark back PH shipbuilding
13. Capital gains tax hike expected to make land more costly, deterring investment
14. SAP ends diversity programs to comply with Trump administration

 

II.BIR ITAD RULINGS

FOR FAILURE TO ESTABLISH FULL COMPLIANCE WITH THE CONDITIONS SET BY LAW, THE MOST-FAVORED-NATION CLAUSE CANNOT BE INVOKED

Summit Publishing Company Inc. (Summit), a corporation organized and existing under the Philippine laws, is seeking confirmation that the royalties paid to Hearst Magazine Media Inc. (Hearst), a US-based corporation, should be subject to the preferential income tax rate of 10% pursuant to the Most-Favored-Nation (MFN) clause found in Article 13(2)(b)(iii) of the Philippine-United States (PH-US) Tax Treaty, in connection to Article 12(2) of the Philippines-United Arab Emirates (PH-UAE) Tax Treaty. This request stems from a Trademark and Copyright License Agreement entered into between Summit and Hearst, wherein Summit was granted the exclusive right and license to use Hearst’s trademark for the publication, printing, promotion, distribution, and sale of Cosmopolitan magazine in the Philippines. The agreement also granted Summit the exclusive rights to develop and operate a mobile domain site and use the domain name www.cosmo.ph. An amendment to the agreement later extended these rights to include the Esquire brand and the domain www.esquiremagazine.ph. In consideration of these rights, Summit pays royalties to Hearst. In reply, Section 28(B)(1) of the Tax Code of 1997, as amended, imposes a 25% income tax on income earned in the Philippines by non-resident foreign corporations not engaged in trade or business in the country. However, Section 32(B)(5) of the same Code provides for treaty-based exemptions or preferential rates when applicable. Summit seeks to apply the MFN clause under the PH-US Treaty, which allows for a reduced withholding tax rate if a Third Country is granted a more favorable rate under similar conditions, in relation to PH-UAE Tax Treaty. The BIR cited the Supreme Court ruling in Cargill Philippines Inc. vs Commissioner of Internal Revenue, which provides two (2) conditions that must be established for a successful invocation of the most favored nation clause, as follows: (1) similarity in subject matter, or the definition and treatment of royalties which must be consistent between the US and the third country-in this case, the UAE; and (2) similarity in circumstances in the payment of tax, or the similarity of the mechanisms employed by the US and the Third (3^rd) State in mitigating the effects of double taxation. Here, the grant to Summit of the exclusive right and license to use Hearst trademark and domain name constitutes royalties, in compliance with the first (1^st) requirement for invoking the MFN clause. However, the second (2^nd) condition pertaining to the mechanism of relief from double taxation was not met. Specifically, the UAE uses the full credit method, allowing the full amount of tax paid in the Philippines to be credited in the UAE, whereas the US applies the ordinary credit method, which limits the credit based on U.S. tax rules. On the basis of the differences in the methods of granting relief from double taxation, the MFN clause cannot be invoked. Consequently, the royalties paid to Hearst for the rights granted shall be subject to the 25% tax rate under Article 13(2)(b)(i) of the PH-US Tax Treaty. [BIR ITAD RULING NO. 22-25, APRIL 14, 2025]

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GENERALLY, MFN CLAUSE IN A TREATY PROVISION ALLOWS FOR A LOWER TAX RATE IF A THIRD COUNTRY RECEIVES A BETTER RATE UNDER SIMILAR CONDITIONS SUBJECT TO THE CONDITIONS IMPOSED UNDER THE TREATY

Bistro Americano Corp. (BAC) is seeking confirmation that the royalties paid to DFO LLC, a U.S. resident, should be subject to a preferential rate of 10% under the Most-Favored-Nation (MFN) clause under Article 13(2)(b)(iii) of the Philippine-United States (PH-US) Tax Treaty. Under an International Multiple Unit Franchise Agreement, DFO granted BAC the rights to develop and operate Denny’s restaurants in the Philippines using Denny’s brand and system. In reply, under Section 28(B)(1) of the Tax Code of 1997, as amended, royalties paid to non-resident foreign corporations are generally taxed at 30%. However, Section 32(B)(5) provides an exemption where a tax treaty is applicable. The MFN clause in Article 13(2)(b)(iii) of the PH-US Treaty allows for a lower tax rate if a third country (e.g., UAE) receives a better rate under similar conditions. While the grant to operate Denny’s restaurants and use its trademarks qualifies as royalties in both the PH-US and PH-UAE Tax Treaties, satisfying the first condition, the second condition was not met. The two treaties provide differing mechanisms for addressing double taxation, thereby precluding the application of the MFN clause. Therefore, BAC’s royalties remain subject to the 25% tax rate under Article 13(2)(b)(i) of the PH-US Tax Treaty. [BIR ITAD RULING NO. 020-25, APRIL 14, 2025]

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[THE PREFERENTIAL TAX RATE OF 10% UNDER THE PHILIPPINE-KOREA TAX TREATY APPLIES ONLY TO QUALIFYING DIVIDEND PAYMENTS; DIVIDENDS PAID TO INDIVIDUALS OR NON-QUALIFIED ENTITIES ARE SUBJECT TO THE HIGHER OF 25% TAX RATE] [THE 10% PREFERENTIAL TAX RATE ON DIVIDENDS UNDER THE PHILIPPINE-KOREA TAX TREATY APPLIES ONLY TO CORPORATE SHAREHOLDERS FULFILLING OWNERSHIP REQUIREMENTS & THE LOCAL ENTITY IS EITHER BOI-REGISTERED OR BELONGING TO PIONEER AREAS OF INVESTMENT]

Y Co., a company incorporated under Philippine laws, is seeking confirmation that dividend payments paid to a resident of Korea are subject to a preferential tax rate of 10% under the PH-Korea Tax Treaty. As represented, the Board of Directors of Y Co. declared cash dividends, which entitles the Korean National to receive the entire dividends, who, according to the Secretary Certificate dated August 1, 2024, owns 100% of Y Co.’s outstanding common shares. In reply, Section 25(B) of the Tax Code of 1997, as amended, provides that income derived by a nonresident alien not engaged in trade or business within the Philippines is subject to income tax at 25%. However, under Section 32(B)(5) of the same code, such income is exempt insofar as any treaty obligation binds the Philippine government. In this connection, Article 10 of the PH-Korea Tax Treaty provides that the lower rate of 10% applies only in two instances: (i) where the beneficial owner of the dividends is a company that directly holds at least 25% of the capital of the company paying the dividends; or (ii) where the company paying the dividends is a resident of the Philippines, registered with the Board of Investments (BOI), and engaged in preferred pioneer areas of investment under the Philippine investment incentives laws. Given that neither condition is present, the beneficial owner being an individual, and the company paying the dividends not being BOI-registered nor engaged in preferred pioneer areas-a higher rate of 25% shall apply to the dividends paid.  [BIR ITAD RULING NO. 013-25, APRIL 14, 2025]

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III. BIR FURTHER CLARIFIES PROVISIONS IN RELATION TO THE IMPLEMENTATION OF VALUE-ADDED TAX ON DIGITAL SERVICES

Revenue Memorandum Circular (RMC) No. 47-2025, issued on May 8, 2025, clarifies certain issues on the imposition of VAT on digital services under Revenue Regulations (RR) No. 3-2025 pursuant to Republic Act (RA) No. 12023, otherwise known as “VAT on Digital Services.”

Highlights of the clarifications include the following:

1. All Non-Resident Digital Service Providers (NRDSPs) must register or update their registration, regardless of the nature of their transactions.
2. NRDSPs with purely Business-to-Business (B2B) transactions are still required to file tax returns to enable proper tracking of digital economy activity in the country.
3. NRDSPs shall register through the VAT on Digital Services (VDS) Portal upon availability. Prior to its roll-out, the Online Registration and Update System (ORUS) on the BIR official website must be used.
4. NRDSPs shall register within 120 days from the effectivity of RR No. 3-2025, or on or before June 1, 2025.
5. Required information during registration includes:

5.1 Business name (including trade name)

5.2 Authorized representative’s name, and local representative’s TIN

5.3 Registered foreign address; and

5.4 Contact information of the NRDSP

 

6. Any official registration document issued from the NRDSP’s home country shall suffice for the registration.
7. NRDSPs are not required to appoint a local representative but may appoint a resident third-party service provider for administrative and tax compliance support.
8. NRDSPs with a local representative may manually register with BIR Revenue District Office (RDO) No. 39-South Quezon City.
9. The appointment of a resident third-party service provider shall not classify the NRDSP as a resident foreign corporation doing business in the Philippines.
10. Upon registration, the BIR will issue a Certificate of Registration (COR)/BIR Form 2303, which includes the TIN and details necessary for VAT returns filing.
11. NRDSPs will be subject to 12% VAT on their gross sales from digital services consumed in the Philippines.
12. Failure to register may result in penalties (under Section 13 of RR No. 3-2025) and potential suspension of operations (Section 12).
13. For cross-border B2B transactions, the Philippine business customer must withhold and remit the 12% VAT via the reverse charge mechanism.
14. In Business-to-Consumer (B2C) transactions, the NRDSP is responsible for filing VAT returns and paying VAT using the simplified pay-only regime in the VDS Portal.
15. If a DSP acts as an online marketplace and is involved in setting terms or facilitating transactions:

15.1 For B2B transactions, the Philippine consumer/buyer shall remit the 12% withholding tax.

15.2 For non-resident DSP with B2C transactions, the non-resident DSP is responsible for VAT payment.

15.3 For resident DSP with either B2B or B2C transactions, the resident e-marketplace DSP shall be liable for filing the VAT return and payment of the VAT due.

16. There is no invoice format required. However, invoices must include:

16.1 Transaction date

16.2 Reference Number

16.3 Buyer’s identity and TIN

16.4 Description of the transaction; and

16.5 The total amount, indicating VAT inclusion

If VAT is not itemized on a B2B invoice, an annotation should state that the Philippine buyer is responsible for VAT.

17. The NRDSP shall be subject to VAT after 120 days from the effectivity of the RR No. 3-2025, or starting June 2, 2025.
18. The NRDSP shall use BIR Form 2550-DS in filing the VAT returns and/or payment/remittance of the VAT for B2C transactions, which shall be available and generated in the VDS Portal.

In B2B transactions, the business consumer/buyer shall use BIR Form 1600-VT in filing and remittance of the VAT withheld.

19. NRDSPs cannot claim input VAT credits under Section 7(B) of RR No. 3-2025.
20. If VAT was paid by both NRDSP and Philippine buyer in error, no refund can be claimed by the NRDSP. Instead, overpayments can be carried over in subsequent filings by amending BIR Form 2550-DS.
21. When an NRDSP makes sales via an e-marketplace but receives payments directly from buyers, the e-marketplace is not liable for the VAT on those sales. However, any service fee charged by the e-marketplace to the Philippine buyer is subject to VAT.
22. If digital services are used to facilitate the purchase of physical goods through an online marketplace, and the marketplace charges a separate service fee, only the service fee-classified as a digital service-is subject to VAT. The sale or delivery of physical goods is not covered by RR No. 3-2025.
23. VAT applies only to digital services as specifically defined under RA No. 12023.
24. Teleconsultation platforms-where users can book appointments and hold virtual consultations between doctors and patients through websites, apps, or marketplaces-are considered digital services under the category of “online consultation through a digital platform.”
25. For online subscription services sold to educational institutions, no Certificate of Tax Exemption is required to claim VAT exemption. Institutions simply need to present accreditation or recognition from DepEd, CHED, or TESDA to avail of the exemption.
26. Digital services provided by NRDSPs that are directly attributable to a registered business activity/project of an IPA-registered entity (such as a registered export enterprise, high-value domestic market enterprise or domestic market enterprise), or are used in the export activity of an export-oriented enterprise (EOE), qualify for VAT exemption.
27. NRDSPs can verify if a customer is a business by:

27.1 Collecting the Taxpayer Identification Number (TIN)

27.2 Including a questionnaire or tick box on their platform where the customer indicates they are engaged in business in the Philippines

27.3 Optionally requesting supporting business documents like a Certificate of Registration (COR), if the system allows uploads

28. VAT-registered businesses in the Philippines may claim input VAT on purchases from NRDSPs by using the filed BIR Form 1600-VT (withholding VAT return) as proof.
29. VAT obligations for NRDSPs begin on June 2, 2025. All digital services provided on or after this date are subject to 12% VAT. If a Philippine customer paid in advance for a full-year contract without VAT, the NRDSP is still liable to pay VAT on the portion of services delivered from June 2, 2025 onwards.
30. RA No. 12023 mandates a 12% VAT on digital services consumed in the Philippines, regardless of whether the service provider is resident or non-resident. The provider’s physical presence is not a factor-only the location of consumption matters. If the service is billed to an entity abroad but ultimately used by a Philippine subsidiary, the transaction is subject to VAT, and the subsidiary must withhold and remit the VAT as a B2B transaction.

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