Tuesday, October 03, 2006 Tax notes: Royalty subject to regular income tax
THE royalty must be in the nature of passive income to be subject to the 20 percent final withholding tax under Section 27 (D) (1) of the Tax Code.
If the royalties received by a domestic corporation are derived from, or generated in, active pursuit of business, such income shall be considered in the nature of ordinary income.
As ordinary income, the royalty payments shall not be subject to the 20 percent final tax on royalty, but instead taxed together with other income at the regular corporate income tax rate. (Bureau of Internal Revenue Ruling DA-369-06 dated June 15, 2006 and DA-368-06 dated June 13, 2006)
If the services performed include management services, systems, techniques, technologies and networks for the expansion of the business enterprises, the income shall be subject to a 15 percent creditable withholding tax.
Royalty payments that have already been subjected to the 20 percent final tax shall be treated as passive income and excluded from the income subject to the regular corporate income tax.
Likewise, net operating losses incurred during the period when the payments were subjected to final income tax can be carried forward and deducted form gross income after the change in the royalty treatment. (Source: Punongbayan & Araullo)
