Taxation of foreign

individuals, entities
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.