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Taxability of service fees received

by non-resident foreign online

advertising companies from the
Aila May S.

18 1 Google +0 0

The use of the Internet for the promotion of goods and services,
particularly social media (Facebook, Twitter, and Instagram to
name a few), has grown in the recent years. Companies in the
Philippines have resorted to this medium of advertising, as it is
accessible to more Filipinos.
Internet or online advertising has helped increase the revenues of
local companies, be it seller of goods or seller of services, and of
advertising companies. This trend, of course, has caught the
attention of the Bureau of Internal Revenue (BIR) for potential sources of
government revenue.
In 2013, the BIR issued Revenue Memorandum Circular No. 55-2013 (RMC 55-13) which provides for
the definition of, and the tax obligations of persons involved in,
various online business transactions. As regards Internet or online
advertising, the BIR defined the same as a form of promotion
that uses the Internet to deliver marketing messages to attract
customers. Among others, RMC 55-13 provides for the obligation
Amicus Curiae -- Rodulfo Jose R.
of: 1) the advertising company to issue official receipt; and 2) the Martinez: "Ride-sharing services
advertiser to withhold and remit to the BIR 2% tax. However,
here to stay"
while RMC 55-13 gave fairly detailed rules on the obligations of
online advertising companies and advertisers, it failed to consider
Amicus Curiae -- Kiarra Nastazsa
that most online advertising companies are foreign corporations
Adrienne A. Cabile:"Examining
located abroad.
the proposed extended maternity
Generally, whenever a transaction involves foreign corporations,
the situs of taxation of the income or transaction becomes an
issue. As in the case of Internet or online advertising, the usual
questions are: if all the services of the foreign advertising
companies are performed, and all the facilities used for such
services (i.e., computers, servers, among others) are located,
outside the Philippines, are the service fees taxable in the
Philippines? Does the fact that the online advertisements are
viewable and accessible in the Philippines by the intended
market/customer make the service taxable in the country?


Amicus Curiae -- Rodulfo Jose R.

Martinez: "Election surveys as
election propaganda"
Amicus Curiae -- Genie Celini D.
Nuevo: "Of breaking political
dynasties and empowering youth

Amicus Curiae -- Maureen Z.

Macaraeg: "The ASEAN Economic
Community and prospects of
Japan, for example, imposed consumption tax to recipients located cross-border practice of law"
in Japan of cross-border digital services performed by offshore
providers (i.e., reverse charge mechanism). India, likewise,
intends to impose six percent (6%) equalization levy to non-resident online advertising companies
Recently, other countries have taken steps in taxing online
advertising transactions.

which do not have permanent establishments in the country.

At present, no Philippine law categorically imposes tax on online advertising services rendered by nonresident foreign corporations. Admittedly, however, the provisions of the National Internal Revenue
Code (Tax Code), a number of BIR rulings and the existing jurisprudence may provide for bases to
either exempt or subject such transactions to Philippine taxes.
Possible bases to exempt from Philippine taxes -- Under Section 42 (C)(3) of the Tax Code, payments
for services performed outside the country are considered income from sources outside the
Philippines. In ITAD Ruling No. 014-01 (16 February 2001), the BIR ruled that if the editing,
programming, designing and dissemination of the advertisement are done using the facilities located
abroad, the situs of the income is abroad.
It may be argued that views or access within the Philippines do not make advertising service taxable
in the country. In BIR Ruling No. 009-05 (2 August 2005), services rendered abroad through the
Internet (i.e., registration and maintenance of domain names), even if the same are for clients located
in the Philippines (i.e., domain name holders in the Philippines), are considered rendered outside the
country. The BIR used the Supreme Courts decision in CIR v. British Overseas Airways Corporation
(G.R. No. 65773-74, 30 April 1987) where it was held that the situs should be where the activity
which produced the income happened -- in case of service, where the services are performed. Further,
in CIR v. American Express International, Inc. (G.R. No. 152609, 29 June 2005), the Supreme Court
held that, for value-added tax (VAT) purposes, the service is different from the product or output that
arises from the performance of the service. What determines jurisdiction is the place where the
service is rendered, not the place where the output of the service will be ultimately used.
Possible bases to subject to Philippine taxes -- The Supreme Courts decision in CIR v. British Overseas
Airways Corporation, may likewise be used to argue that the display and/or viewing of the
advertisements in the Philippines may be considered as the activity which produces the income.
Considering that advertising companies are paid for the promotion of products in the Philippine
market, it is the visibility of the advertisement in the country which makes the transaction taxable in
the Philippines. Moreover, consumption, in the context of a service, means the performance or
completion of a contractual duty, releasing the performer from future liability. If the advertising
company will not be paid unless advertisements are viewable or accessible in the Philippines, then
consumption, arguably, happens in the Philippines.
In addition, the local companies have to consider whether or not the advertising companies are
residents of countries with existing tax treaties with the Philippines; if not, whether they, for other
reasons, may be considered as doing business in the Philippines. These considerations are important,
at least, for income tax purposes.
Unless a new law is passed or a Supreme Court decision covering the above issues is promulgated, the
taxability of the service fees received by non-resident foreign online advertising companies from the
Philippines will remain unsettled. As such, local companies availing of these services are constantly
exposed to the risk of being pursued by the BIR. In case the BIR will take the strict position, the
exposure may include the assessment of: a) deficiency 30% final withholding income tax; b) 12% final
withholding VAT; c) 30% income tax on the disallowed advertising expenses due to failure to withhold
taxes; d) 20% per annum interest for late payment; and e) 25% surcharge for non-filing of return and
non-payment of taxes.
The views and opinions expressed in this article are those of the author. This article is for general
informational and educational purposes only and not offered as and does not constitute legal advice or
legal opinion.
Aila May S. Alvarez is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices