Tax Articles

Compliance Obligations of Foreign Corporations

By: Atty. Mabel L. Buted

Mabel L. Buted Partner   +632 8403-2001 loc.160 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

Foreign companies are taxable in the Philippines on their income derived from sources within the country, regardless of their classification. Also, regardless of classification, their income earned from sources outside the Philippines are not subject to Philippine taxes. However, in so far as compliance with tax obligations is concerned, classification matters.

Foreign corporations engaged in trade or business within the Philippines are referred to as resident foreign corporations. As a rule, they should secure licenses and register with the concerned government agencies to be able to do business in the country. They are also subject to the taxes (income tax, VAT, withholding taxes and other applicable taxes) similar to those imposed on domestic companies organized and established under Philippine laws, except that only income earned from sources within the Philippines are taxable in the country. As registered and resident entities, they need to comply with their tax obligations in the same manner as domestic or locally registered corporations.

On the other hand, foreign corporations not engaged in trade or business in the Philippines are considered for tax purposes as nonresident foreign corporations. Similar to resident foreign corporations, they are taxable only on Philippine-sourced income. However, unlike the residents, they are not required to file tax returns. The taxes due on their transactions with Philippine customers are paid and remitted through the final withholding tax system. Income of nonresident foreign corporations are subject to withholding taxes (income tax and VAT) based on the gross amount, without any deductions.

Under the withholding tax mechanism, the Philippine customers or payors of income are obliged to withhold the applicable taxes and directly remit the same to the tax authority. This is so because non-resident foreign corporations are located outside the Philippine taxing jurisdiction and are not registered - and so the Philippine tax authorities cannot impose upon them the obligation to pay taxes.

That is the general rule. In some instances though, nonresident foreign corporations, even if not doing business in the Philippines, may be required to register with the tax authority. For instance, those transacting business with government agencies and instrumentalities are required to obtain one-time Taxpayer Identification Number (TIN). The one-time TIN is indicated in the forms, permits, licenses, clearances, official papers and documents that are filed with the government.

Also, a nonresident foreign company is required to register and secure TIN from the tax authority, in case it is applying for tax treaty relief - to allow it to avail of any tax exemption or preferential tax rate due on its Philippine sourced income in accordance with the terms of the tax treaty which the Philippines has with its country of residence. Under the rules, a non-resident can file for tax treaty relief availment, and at the same time, claim for a refund if the income is already subjected to the regular income tax.

Non-resident foreign companies providing digital services to Philippine customers are also required to register. To recall, starting June 2, 2025, all nonresident digital service providers (DSPs) became subject to VAT on the sale of digital services consumed in the Philippines. Hence, the nonresident DSPs are now mandated to impose VAT on these transactions and issue invoices, subjecting the same to VAT.

Based on the implementing rules, in a Business-to-Consumer (B2C) transaction, the nonresident DSP pays and remits directly the VAT. On the other hand, in a Business-to-Business (B2B) transaction, the Philippine customers are obligated to pay and remit the tax due by withholding the VAT. But regardless of the nature of the transaction (i.e., B2C or B2B) where the nonresidents are engaged in and regardless of the manner by which the VAT is paid, the rules require all nonresident DSPs to register and file VAT returns. The VAT returns are filed on a quarterly basis.

It is important for foreign corporations – doing business in the country or simply transacting business with Philippine customers – to be aware of their compliance obligations and comply with them to be able to proceed with ease on their operations or transactions. But it is also incumbent upon our regulators to impose only the obligations that are essential for regulation and administration and avoid burdens that unnecessarily disrupt transactions and business operations.