Taxability of service fees received by non-resident foreign companies from online advertising in the Philippines

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. Internet or online advertising has helped increase the revenues of local companies and of media and advertising companies. This trend, of course, has caught the attention of the Bureau of Internal Revenue (BIR) for potential sources of government revenue.

While local revenue issuances provide for fairly detailed rules on the tax obligations of online media companies and of advertisers, it failed to consider that most online media companies are foreign corporations located abroad.

Generally, whenever a transaction involves foreign corporations, the situs of taxation of the income or transaction becomes an issue. For online advertising, the usual questions are: if all the services are performed, and all the facilities used for such services (ie, computers, servers, among others) are located outside the Philippines, are the service fees still taxable in the Philippines? Is it enough that online advertisements are viewable and accessible in the Philippines by the intended market/customer to make the service fees taxable here?

At present, no Philippine law categorically imposes tax on online media/advertising services rendered by non-resident 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 treat such transactions as either exempt from or subject 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 (February 16, 2001), the BIR ruled that if the editing, programming, designing and dissemination of advertisements 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 (August 2, 2005), services rendered abroad through the internet (ie, registration and maintenance of domain names), even if the same are for clients located in the Philippines (ie, domain name holders in the Philippines), are considered rendered outside the country. Further, in CIR v. American Express International, Inc. (G.R. No. 152609, June 29, 2005), the Supreme Court held that, for value-added tax (VAT) purposes, the service is distinct from the product/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 is ultimately used.

Possible bases to subject to Philippine taxes — The Supreme Court’s decision in CIR v. British Overseas Airways Corporation (G.R. No. 65773-74, April 30, 1987) may be used to argue that views/access in the Philippines may be considered as the activity that produces the income. Considering that media companies are paid for the promotion of products in the Philippine market, it is the visibility of the advertisement in the country that makes the transaction taxable here. 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 company will not be paid unless advertisements are viewable or accessible in the Philippines, then consumption, arguably, happens in the Philippines.

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 companies from online advertising in 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 percent final withholding income tax; b) 12 percent final withholding VAT; c) 30 percent income tax on the disallowed advertising expenses due to failure to withhold taxes; d) 20 percent annual interest for late payment; and e) 25 percent surcharge for non-filing of return and non-payment of taxes.
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