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Taxation of foreign individuals, entities

08:43 AM July 20, 2012

GENERALLY, a non-resident alien engaged in trade or business within the Philippines shall be subject to an withholding income tax rate of 20 percent on the total amount received thereof consistent with Section 25(A)(1) of the Tax Code.

A nonresident alien individual who shall come to the Philippines and stay  for an aggregate period of more than 180 days during any calendar year shall be deemed a ‘nonresident alien doing business in the Philippines.’

Furthermore, Section 28 (B) (1) states that foreign corporations not engaged in trade or business in the Philippines shall be subject to 30 percent withholding income tax only when the income is derived from sources within the Philippines.


The tax rates mentioned above, however, will differ if a different tax rate is provided for in a Tax Treaty entered into by the Philippines with the country where the foreign corporation is registered or a resident of.

Purchases from non-resident suppliers of services should not be subjected to 2 percent EWT provided that there was no permanent establishment established in the Philippines consistent with Section 42 (A) (3) of the Tax Code, as amended.

If the services rendered are performed outside the Philippines, the compensation for such services constitutes income from sources without the Philippines and not subject to Philippine income taxes (BIR ITAD Ruling No. DA-065-07 dated February 5, 2007).

Accordingly, VAT Ruling 027-04 dated October 20, 2004 states the following:

“Applying the aforecited provisions of the NIRC and for income tax and withholding tax purposes, only those income generated in the Philippines shall be subject to the taxes mentioned. In the case of non-resident alien who is doing business outside of the Philippines and whose services to be rendered to a Filipino clientele shall be performed abroad such as in this case, shall still be treated as services performed abroad by a non-resident alien not doing business in the Philippines.

Such services rendered shall not be subject to income tax and withholding tax pursuant to Section 28(B).”

Furthermore, the onus of taxation in the VAT System is in that country where goods, property or services are destined, used or consumed. Thus, goods, property or services destined to, used or consumed in the Philippines even if purchased abroad are subject to the 12 percent VAT.

Under Section 105 of the Tax Code, any person who in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the 12 percent VAT.


As to non-resident suppliers of services and the withholding obligation on the VAT, Section 4.114-2 of Revenue Regulations No. 16-2005, as amended, states that the 12 percent VAT shall be withheld on payments made thereto.

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