Are you paying royalties? You may want to know what are the taxes involved but make sure you correctly identify an income payment as royalty.
Royalties are payment for the use or supply of scientific, technical, industrial, commercial knowledge or information or “know-how”. According to a commentary by the ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD), in a know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which can remain unrevealed to the public.
Furthermore, the tax authority opines that this differs from contracts for the provisions of services where one just uses customary skills to execute work such as after-sales service, services under a guarantee, pure technical assistance, or for an opinion given by an engineer, an advocate or an accountant. These services do not constitute royalties. To determine whether it is compensation for service or royalty payment, one must inquire on whether the payee has proprietary interest in the property giving rise to the income. Hence, if the payee has proprietary interest, it is payment of royalty. Otherwise, it is compensation for personal services.
Royalties may be classified as active business income subject to 30% normal corporate income tax and 12% value-added tax or passive income subject to final withholding tax. If royalty is earned within the Philippines, it is generally subject to 20% final withholding tax except those from books, literary works and musical compositions which are subject to 10% tax. On the other hand, royalty income of non-resident alien not engaged in trade or business in the Philippines is subject to 25% tax. Moreover, royalty income of non-resident foreign corporation is subject to 30% income tax but may be lowered to a preferential rate under the tax treaty.
If you need advice or assistance in reviewing your tax matters, contact Triple i Consulting.