VAT ZERO-RATING UNDER THE 2021 CREATE LAW APPLIES SOLELY TO EXPENDITURES THAT ARE STRICTLY NECESSARY FOR THE REGISTERED PROJECT OR ACTIVITY, EXCLUDING ANY COSTS THAT, WHILE BENEFICIAL, ARE NOT INDISPENSABLE TO ITS ONGOING OPERATION

C Construction Co. (C Co.) seeks confirmation that its sale of services to I Co., a PEZA-registered Ecozone Export Enterprise, is subject to Value-Added Tax (VAT) at a zero-percent rate. As represented, I Co. contracted C Co. to perform roof overlay and roof framing rehabilitation work at its factory at Cavite Export Processing Zone (CEPZ), Rosario, Cavite, on April 26, 2022. Eighty percent (80%) of the project cost covered the Production Area, while the remaining twenty percent (20%) pertained to the Administration Area. Prior to the start of the project, C Co. applied for VAT zero-rating with the BIR Large Taxpayers (LT) Service, but the application was denied on June 29, 2022, on the grounds that the roof works were not considered exclusively and directly attributable to I Co.’s registered activity. In reply, under Section 5, Rule 2 of the Implementing Rules and Regulations (IRR) of Republic Act (RA) No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Law), provides that Registered Export Enterprises (REEs) are granted VAT zero-rating incentive on their local purchases of goods and services that are directly and exclusively used in its registered project or activity. Only expenditures that are strictly indispensable to the project qualify; costs that may be helpful but not essential to its continuous operation are excluded. The BIR also stressed that determining whether a purchase is truly indispensable depends on the specific facts of each case, as evaluated by the BIR. Given that the Regular LT Audit Division III has already reviewed I Co.’s application and supporting documents in line with the CREATE Law, the BIR upholds its factual findings and its conclusion that the project’s total cost does not qualify for VAT zero-rating. [BIR RULING NO. 055-2025, APRIL 14, 2025]

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BEING NON-STOCK AND/OR NON-PROFIT CORPORATION DOES NOT, BY THIS REASON ALONE, COMPLETELY EXEMPT AN INSTITUTION FROM TAX

E Co. is applying for a Certificate of Tax Exemption (CTE) as a non-stock, non-profit educational institution under Section 30(H) of the Tax Code. In reply, the Bureau denied the request because it failed to meet the “non-profit” requirement. Although it claimed to be organized for educational purposes, its governing rules allowed the payment of per diems and possible compensation to trustees, which was considered a prohibited form of private inurement or distribution of income. As a result, it was determined not to be truly non-profit and therefore not entitled to tax exemption. Consequently, E Co. shall be treated as an ordinary corporation subject to the regular corporate income tax rate under Section 27(A) of the Tax Code. [BIR RULING NO. OT 049-2025, APRIL 4, 2025]

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A DOMESTIC MARKET ENTERPRISE ENGAGED IN LEASING MAY RETAIN ITS 5% SCIT ENTITLEMENT UNTIL THE EXPIRATION OF THE TRANSITORY PERIOD; THUS, THE TENANT NEED NOT WITHHOLD THE 5% EWT

B Co. seeks the renewal/revalidation of its BIR ruling dated July 26, 2001, which exempted its lessees from withholding the 5% creditable withholding tax (CWT) on rental payments. B Co. now faces concerns from its current lessees, who refuse to recognize the previous ruling and are requesting an updated one. As represented, B Co. is a Clark Freeport Zone (CFZ) registered domestic market enterprise engaged in industrial development. It constructs buildings and leases them to manufacturing, warehousing, and Business Process Outsourcing (BPO) locators. It enjoys a 5% preferential tax rate in lieu of all national and local taxes under Republic Act (RA) No. 7227, as amended by RA No. 9400. Its lessees, as CFZ locators, benefit from the same 5% tax rate. In reply, the BIR clarified that the 5% gross income tax applies only to Registered Export Enterprises (REEs) under Section 294(B) of the Tax Code, as amended by the CREATE Act. However, Domestic Market Enterprises (DMEs) that were already enjoying the 5% rate prior to the effectivity of the CREATE Act may continue doing so for up to ten (10) years. In view of this, B Co., as a CFZ-registered domestic market enterprise, may continue to avail itself of the 5% preferential tax rate in lieu of all national and local taxes within the 10-year transitory period. It is therefore exempt from regular income tax, and its lessees are not required to withhold the 5% CWT on rental payments for properties leased from B Co. [BIR RULING NO. 048-2025, APRIL 4, 2025]

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THE EXEMPTION FROM TAXES, FEES & CHARGES ENJOYED BY PAGCOR IS EXTENDED TO ITS CONTRACTEES/LICENSEES PURSUANT TO PD NO. 1869, AS AMENDED

P Co. seeks confirmation that the Philippine Amusement and Gaming Corporation’s (PAGCOR) tax exemptions for gaming operations also apply to them as a contractee and licensee. It claims that the income from its gaming operations should be exempt from Corporate Income Tax (CIT) and Value-Added Tax (VAT), and subject only to the 5% Franchise Tax under Section 13(2)(a) and (b) of Presidential Decree (PD) No. 1869, as amended. As represented, PAGCOR granted P Co. the authority to operate Electronic Games on October 24, 2023. In reply, the BIR cited the Supreme Court ruling in Bloomberry Resorts and Hotels, Inc. v. BIR, which held that PAGCOR’s tax privilege, paying only a 5% Franchise Tax on income from gaming operations in lieu of all other taxes, also extends to PAGCOR’s licensees. Moreover, the SC made clear that, like PAGCOR, its contractees and licensees are exempt from CIT and other taxes under Section 13(2) of PD 1869, as amended. In view of this, the BIR opined that P Co., as a PAGCOR contractee/licensee, likewise enjoys this exemption. Thus, income derived solely from its gaming operations is subject only to the 5% Franchise Tax, in lieu of all other taxes, for as long as its PAGCOR Certificate of Authority for the specific gaming site remains valid. However, any income P Co. earns from non-gaming or unrelated activities remains subject to CIT and VAT. [BIR RULING NO. 032-2025, JANUARY 21, 2025]

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EVEN THOUGH AN INVESTOR IS COMPRISED OF A FOREIGN GOVERNMENT, IT IS NOT AN INSTITUTION EXEMPT FROM PHILIPPINE-SOURCED TAX IN CONTEMPLATION OF LAW RATHER THEY ARE INVESTMENT COMPANIES

PIF is seeking confirmation that the income of its wholly owned subsidiaries, Saudi Second Investment Company (SSIC) and Saudi Fourth Investment Company (SFIC), from investments in Philippine stocks, bonds, and other domestic securities would be exempt from Philippine income tax. The SSIC and SFIC are Single-Person Limited Liability companies incorporated in the Kingdom of Saudi Arabia (KSA) for the purpose of investing in stocks, bonds, and other securities, while PIF is the sovereign wealth fund of the KSA government. In reply, SSIC and SFIC do not qualify as “financing institutions” contemplated under the exemption but are instead classified as investment companies under the Investment Company Act (RA No. 2629). Although ultimately owned and managed by PIF, the Companies are separate juridical entities engaged in investment (not financing) activities and are treated as ordinary private corporations for Philippine tax purposes. Consequently, any income they derive from Philippine securities or bank deposits is subject to Philippine income tax and the corresponding withholding taxes. [BIR RULING NO. OT 020-2025, JANUARY 7, 2025]

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[THE SOURCE OF INCOME IS THE PROPERTY, ACTIVITY OR SERVICE THAT PRODUCED THE INCOME, THE TEST OF TAXABILITY IS THE "SOURCE" & THE SOURCE OF INCOME IS THAT ACTIVITY WHICH PRODUCED THE INCOME] [INCOME GENERATION IS DEPENDENT ON THE OPERATIONS OF FACILITIES SITUATED IN THE PHILIPPINES CONTRIBUTES TO THE INCOME'S PHILIPPINE SITUS] [WHEN THE INFLOW OF WEALTH OR ECONOMIC BENEFITS ORIGINATES FROM & OCCURS WITHIN PHILIPPINE TERRITORY, IT ENJOYS THE PROTECTION OF THE PHILIPPINE GOVERNMENT & IN CONSIDERATION OF SUCH PROTECTION, IS SUBJECT TO TAXATION]

O Co. is requesting confirmation that its payments to A International Pte. Ltd.,(A Co.), a non-resident foreign corporation (NRFC) based in Singapore, for advertising and lead generation services are not subject to Philippine income tax, VAT, and withholding tax, on the ground that the services were allegedly performed abroad. In reply, a perusal of the Lead Generation Agreement shows that the income is considered sourced within the Philippines because the income-generating activity is tied to the results of advertisements that led Philippine users to avail of O Co’s services, with payment determined by statistical data reflecting Philippine-based customer actions. Consistent with the “source of income” and “place of performance” doctrines and the ruling in Aces Philippines Cellular Satellite Corporation v. CIR, the services are deemed performed within Philippine territory since the economic benefit and completion of the service occur in the Philippines. Consequently, payments to A Co. constitute Philippine-sourced income subject to Philippine income tax, VAT, and the corresponding withholding tax, absent any clear and specific statutory exemption. [BIR RULING NO. OT 009-2025, JANUARY 6, 2025]

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[A FOREIGN CORPORATION, WHETHER ENGAGED OR NOT IN TRADE OR BUSINESS IN THE PHILIPPINES, IS TAXABLE ONLY ON INCOME DERIVED FROM SOURCES WITHIN THE PHILIPPINES] [ELECTRONIC TRANSFER OF SOFTWARE FROM THE NON-RESIDENT SUPPLIER IS CONSIDERED IMPORTATION OF SOFTWARE & IS SUBJECT TO VAT] [WHEN ONLY COPYRIGHT RIGHTS ARE TRANSFERRED, THE PAYMENTS ARE TREATED AS ROYALTIES. HOWEVER, WHEN FULL COPYRIGHT OWNERSHIP IS TRANSFERRED, THE PAYMENTS ARE TREATED AS BUSINESS INCOME]

O Co. is requesting confirmation on whether its payments to F Co. a Non-Resident Foreign Corporation (NRFC) based in Belarus, are exempt from withholding tax. As represented, O Co. engaged F Co. under a Service Agreement for software development, enhancement, implementation, and the transfer of the Software Suite’s complete source code and related technical documentation, with all services performed entirely abroad and F Co. not being registered or doing business in the Philippines. Under Sections 23(F) and 42(A)(3) of the Tax Code of 1997, income from services is considered Philippine-sourced, and therefore taxable, only if the services are performed in the Philippines; accordingly, the service fees paid by O Co. are not subject to income tax, VAT under Section 108(A), or withholding tax. However, the transfer of exclusive intellectual property rights over the software constitutes a separate transaction that may be treated as a transfer of copyright ownership, making the corresponding payment business income subject to the 25% final tax on gross income under Section 28(B), which O Co. must withhold pursuant to Revenue Regulations (RR) No. 2-98. Furthermore, the downloadable software is considered an importation under Section 107 of the Tax Code of 1997, as amended, and Revenue Memorandum Circular (RMC) No. 07-2006, making O Co. liable for 12% import VAT, which must be withheld before remitting payment to F Co. [BIR RULING NO. OT 008-2025, JANUARY 6, 2025]

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