7/27/2019 179. Tax on Software ICN 01.20.11
1/3
BDB Laws Tax Law For Businessappears in the opinion section
ofBusiness MirroreveryThursday.
Tax on software
Intellectual property, no matter how intangible, is also taxed
by the government. Thus, ifyou sell an idea and you earn one peso
from it, the government would most likely wantits share.
An idea is most often embodied in a software. The Bureau of
Internal Revenue (BIR)had issued Revenue Memorandum Circular (RMC)
44-2005 to clarify tax on softwareand create a guideline on the
different classifications thereof.
The RMC classifies software payments either as business income,
royalties, rentalincome or capital gains.
A transfer of software is classified as a transfer of copyrights
if, as a result of thetransaction, the transferee acquires any one
or more of the following rights:
a. The right to make copies of the software for purposes of
distribution to the public bysale or other transfer of ownership,
or by rental, lease or lending.
b. The right to prepare derivative computer programs based upon
the copyrightedsoftware.
c. The right to make a public performance of the software.
d. The right to publicly display the computer program.
e. Any other rights of the copyright owner, the exercise of
which by another without hisauthority shall constitute infringement
of such copyright.
7/27/2019 179. Tax on Software ICN 01.20.11
2/3
When only copyrights are transferred, payments made in
consideration therefor aretaxable as royalties. On the other hand,
when copyright ownership is transferred,payment made in
consideration therefor is considered business income of the
transferor.
Another classification under RMC 44-2005 is transfer of
copyrighted articles. Acopyrighted article incorporating software
includes a copy of software from which the
work can be perceived, reproduced, or otherwise communicated,
either directly or withthe aid of a machine or device. The copy of
the software may be fixed in a CD-ROM, orin the main memory or hard
drive of a computer, or in any other medium. In case oftransfer of
copyrighted articles, if the transferee acquires a copy of a
software but doesnot acquire any of the rights described above (or
only acquires a de minimis grant ofsuch rights), and the
transaction does not involve the provision of services or of
know-how, the transfer of the copy of the software is classified
solely as a transfer of acopyrighted article and payments therefor
constitute business income.
Contracts for the use of software may also be accompanied with
the provision ofservices (e.g., installation, maintenance and
customization of the software) by personnelof the relevant foreign
licensor/owner. These are called after-sale services. Payments
as consideration for after-sales service in a mixed contract are
not royalties alone, butare deemed to include income from
services.
RMC 04-2005 also refers to site license or enterprise license or
network licensearrangements, which refer to arrangements in which
the transferee obtains rights tomake multiple copies of the program
for operation only within its own business. Althoughthese
arrangements permit the making of multiple copies of the program,
such rights aregenerally limited to those necessary for the purpose
of enabling the operation of theprogram on the licensees computers
or network, and reproduction for any other purposeis not permitted
under the license. Payments under such arrangements are
generallydealt with as business income.
Another type of transaction involving the transfer of computer
software is the moreunusual case where a software house or a
computer programmer agrees to supplyinformation about the ideas and
principles underlying the program, such as logic,algorithms or
programming languages or techniques. In these cases, the payments
arecharacterized as royalties to the extent that they represent
consideration for the use of,or right to use, secret formulas or
for information concerning industrial, commercial orscientific
experience which cannot be separately copyrighted.
Thus, software payments may be considered either as royalties or
business income, or acombination of both. In general, it is the
rights acquired by a company over a software,whether these were
saved in CDs or installers or downloaded through the Internet froma
web site is determinative of whether the income derived therefrom
are royalties or
business income.
Whether or not a software and the use thereof is classified as
business income, royalty,rental income or capital gain is often a
bone of contention between taxpayers andrevenue collectors. Tax
treatment depends on how payment for the software isclassified.
Thus, a careful classification of every type of intellectual
property that is
contained in software must always be obtained so that tax
payments are properly made.
