Withholding Tax on Fees Paid to a Foreign Supplier in the Philippines

When a Philippine business pays a non-resident foreign corporation for services, the payment is generally subject to Philippine withholding tax because the income is sourced from the Philippines. The Philippine payor acts as the withholding agent and must withhold the applicable tax before remitting the balance to the foreign supplier. If a tax treaty between the Philippines and the supplier's country provides a lower rate or an exemption, the supplier may invoke tax treaty relief — but the application must be filed with the Bureau of Internal Revenue before the transaction. This article explains the withholding rules, the tax treaty relief process, and the practical steps for compliance.

Why foreign service fees are subject to Philippine withholding tax

The Philippines taxes income derived from sources within the country. When a Philippine entity pays a non-resident foreign corporation for services, that payment is generally treated as Philippine-sourced income and is subject to withholding tax at source.

The withholding agent is the Philippine payor. The payor must withhold the tax, remit it to the Bureau of Internal Revenue, and issue the corresponding certificate to the foreign supplier. This obligation applies even if the foreign supplier has no office or presence in the Philippines.

Under Revenue Regulations No. 11-2018, which amended the withholding tax rules to implement the TRAIN Law, income payments to non-resident foreign corporations are covered by the final withholding tax system. The regulations renumbered and updated the relevant provisions of Revenue Regulations No. 2-98.

When services are considered rendered in the Philippines

The situs of the service matters. Under the Consolidated Value-Added Tax Regulations of 2005 (Revenue Regulations No. 16-2005), non-resident persons who perform services in the Philippines are deemed to be making sales in the course of trade or business, even if the performance of services is not regular.

The regulations also list specific services that fall within the scope of "sale or exchange of services," including the supply of technical advice, assistance, or services rendered in connection with technical management or administration of any scientific, industrial, or commercial undertaking. The supply of scientific, technical, industrial, or commercial knowledge or information is likewise covered.

For withholding tax purposes, the key question is whether the service is performed in the Philippines or whether the income is otherwise sourced from Philippine sources. If the service is rendered abroad and the income is not Philippine-sourced, the withholding obligation may not arise — but the facts must support that position.

The general withholding tax rules for non-resident payees

Revenue Regulations No. 11-2018 addresses income payments to non-resident foreign corporations under Section 2.57.1 of Revenue Regulations No. 2-98, as amended. The regulation covers final withholding tax on various forms of income, including income derived from all sources within the Philippines by non-resident foreign corporations.

For income payments to resident foreign corporations, the regulations also provide rules under the creditable withholding tax system in Section 2.57.2. Professional fees, talent fees, and similar payments for services rendered are subject to creditable withholding tax, with rates that vary depending on the payee's gross income and whether the payee is an individual or non-individual.

The distinction between final and creditable withholding tax matters. Final withholding tax is withheld in full and constitutes the entire tax due on that income. Creditable withholding tax is withheld on account of the payee's income tax liability and may be credited against the payee's total tax due.

How tax treaty relief can reduce the withholding rate

The Philippines has tax treaties with various countries that may provide for lower withholding tax rates or exemptions on certain types of income, including business profits and income from services. To avail of these preferential rates, the foreign supplier must file a Tax Treaty Relief Application (TTRA) with the Bureau of Internal Revenue.

Revenue Memorandum Order No. 72-2010 governs the processing of TTRAs. Under this order, the application must be filed with the International Tax Affairs Division (ITAD). If the forms or documents are submitted to any other BIR office, the application is considered improperly filed.

The TTRA must be filed before the transaction. For this purpose, the transaction means before the occurrence of the first taxable event — the first or only time when the income payor is required to withhold the income tax, or should have withheld taxes had the transaction been subjected to tax.

Failure to properly file the TTRA with ITAD within the prescribed period disqualifies the application.

Documentary requirements for a tax treaty relief application

Revenue Memorandum Order No. 72-2010 sets out general documentary requirements that must accompany all TTRAs. These include:

• Proof of residency — a consularized certification from the tax authority of the income earner's country confirming residency for purposes of the tax treaty being invoked.
• Articles of Incorporation — for corporate income earners, a photocopy with a consularized certification that the copy is a faithful reproduction.
• Special Power of Attorney — if the applicant is the withholding agent or a local representative, a consularized SPA or written authorization from the income earner.
• Certification of business presence — from the Securities and Exchange Commission for corporations or the Department of Trade and Industry for individuals.
• Certificate of no pending case — a sworn statement on whether the transaction is under investigation, audit, or other proceedings.

For income from services specifically, the applicant must submit BIR Form No. 0901-S when invoking the "Independent Personal Service" or "Dependent Personal Service" article of the applicable tax treaty. Additional requirements include a notarized service contract, certified copies of passports of concerned employees, and a notarized certification by the Philippine contractor as to the duration of services performed in the Philippines.

Processing timeline and remedies

Under Revenue Memorandum Order No. 72-2010, the BIR must issue its ruling within sixty (60) working days from receipt of the TTRA or from receipt of complete documentary requirements, whichever comes later. For matters without an issue on income characterization, the period is thirty (30) working days.

If the ruling is adverse to the non-resident income earner, the taxpayer may, within thirty (30) days from receipt, seek review by the Secretary of Finance. Requests for reconsideration of an adverse ruling are not entertained by the BIR.

Frequently asked questions

What is the withholding tax rate on service fees paid to a foreign corporation?

The rate depends on the nature of the income and the applicable tax treaty, if any. Revenue Regulations No. 11-2018 provides the rates for income payments to non-resident foreign corporations under the final withholding tax system. If a tax treaty applies and the supplier has obtained a TTRA ruling, the treaty rate may be lower.

Can a foreign supplier claim a tax treaty exemption without filing a TTRA?

No. Under Revenue Memorandum Order No. 72-2010, the TTRA must be filed with the International Tax Affairs Division before the transaction. Failure to file properly disqualifies the application, and the supplier cannot claim the preferential treaty rate.

What happens if the Philippine payor fails to withhold the tax?

The withholding agent bears the legal responsibility for withholding and remitting the tax. Failure to comply may result in assessment for the unwithheld amount, plus penalties and interest. The payor should withhold the correct amount at the time of payment.

Practical takeaways

• Philippine payors must withhold tax on service fees paid to non-resident foreign corporations when the income is Philippine-sourced.
• The withholding agent is the Philippine payor, who must remit the tax and issue the corresponding certificate.
• To claim a lower treaty rate, the foreign supplier must file a TTRA with the BIR's International Tax Affairs Division before the first taxable event.
• Documentary requirements under Revenue Memorandum Order No. 72-2010 include proof of residency, the service contract, and BIR Form No. 0901-S for income from services.
• An adverse TTRA ruling may be appealed to the Secretary of Finance within thirty (30) days from receipt.

Primary sources

The rules discussed above are drawn from the following issuances, embedded here in full for your reference.

RR No. 11-2018 — Amends certain provisions of RR No. 2-98, as amended, to implement further amendments introduced by RA No. 10963 (TRAIN Law) relative to withholding of Income Tax (Published in Manila Bulletin on March 19, 2018) Digest | Full Text | Annex A | Annex B-1 | Annex B-2 | Annex B-3 | Annex C | Annex D | Annex E | Annex FOpen in Law LibraryDownload PDF

RR No. 16-2005 — Prescribes the Consolidated Value-Added Tax Regulations of 2005 superseding RR No. 14-2005 (Published in Manila Times on Oct. 21, 2005) Digest | Full TextOpen in Law LibraryDownload PDF

RMO No. 72-2010 — Prescribes the guidelines on the processing of Tax Treaty Relief Applications pursuant to existing Philippine Tax Treaties Digest | Full Text | Annex A | Annex B | Annex C | Annex D | FormsOpen in Law LibraryDownload PDF

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.