Does a Philippine company need to withhold VAT when paying a foreign royalty?

Yes, if the nonresident recipient has no Philippine VAT registration. NIRC Section 114(C) treats the Philippine payor as the withholding agent for the 12% VAT due on the royalty, since a nonresident with no local registration has no way to file and remit its own VAT return on Philippine-sourced income.

Is withholding VAT on a royalty the same as withholding income tax on it?

No — they are two separate taxes with two separate withholding obligations on the same royalty payment. Final withholding income tax under NIRC Section 28(B)(1) (for a nonresident foreign corporation licensor) applies to the income tax due on the royalty, while the 12% withholding VAT under Section 114(C) is a consumption tax on the transaction itself. Both can apply to the same payment.

What rate of final withholding income tax applies to a royalty paid to a nonresident foreign corporation?

25%, under NIRC Section 28(B)(1) as it stands following the CREATE Act, which lowered the rate from the pre-CREATE 30%. This is separate from, and in addition to, the 12% final withholding VAT due under Section 114(C) on the same payment.

Can the Philippine payor claim the VAT it withholds on a foreign royalty as a credit?

Generally yes, for a VAT-registered payor — the VAT withheld and remitted on behalf of the nonresident licensor is treated as the payor's own input tax, creditable against its output VAT, subject to the normal substantiation rules for input tax.

Does a tax treaty change either withholding obligation?

A tax treaty between the Philippines and the licensor's home country can reduce the final withholding income tax rate on the royalty below the statutory 25%, subject to the treaty's royalty article and the BIR's treaty-relief application process. VAT withholding under Section 114(C) is a domestic consumption tax and is generally not covered by income tax treaties, so it is not reduced the same way.

Withholding VAT on Royalty Payments to a Nonresident Foreign Licensor: The 12% Final Withholding VAT Rule

A Philippine company that pays a royalty to a nonresident foreign licensor — for the use of a trademark, patent, software license, or similar property right — must withhold 12% final withholding VAT on that payment, in addition to a separate final withholding income tax on the same royalty. Because the nonresident licensor typically has no Philippine VAT registration and cannot file its own VAT return on Philippine-sourced income, NIRC Section 114(C) shifts the VAT withholding and remittance obligation onto the local payor instead.

This is a different mechanism from the ordinary creditable withholding tax most BIR Form 2307 guides on this site cover — it is a VAT withholding on a cross-border payment, not an EWT certificate issued to a local resident payee. For the parallel domestic royalty question, see Is a Franchise Fee a Royalty or Ordinary Income?.

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Why does the local payor withhold VAT on a foreign royalty? #

VAT is normally remitted by the seller of the goods or services, but a nonresident foreign licensor with no branch, office, or VAT registration in the Philippines has no practical way to file a Philippine VAT return — so the law makes the resident payor the withholding agent for that VAT instead. NIRC Section 108(A), as amended by RA No. 9337, subjects the sale or lease of services performed in the Philippines to VAT:

“There shall be levied, assessed and collected, a value-added tax equivalent to twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties.”
— Section 108(A), National Internal Revenue Code, as amended by RA No. 9337

The licensing of a trademark, patent, or other property right for use in the Philippines — the “use… of properties” the provision names directly — falls within that scope. Section 114(C) then addresses how that VAT actually reaches the BIR when the seller is a nonresident:

Payments for the lease or use of property or property rights (which includes royalty-type licensing arrangements) made to nonresident owners, and payments for services made to nonresident suppliers not registered under NIRC Section 236, are generally treated as subject to withholding of the VAT due at the time of payment, with the Philippine payor responsible for withholding and remitting that amount on the nonresident’s behalf — a structure one secondary tax-compliance summary (LookupTax) that tracks this provision describes as a 12% withholding applying to exactly this category of cross-border payment. Because the specific restated text of Section 114(C) following its most recent amendment was not independently confirmed against the primary statute for this guide, treat the 12% figure and the registration trigger as the operative rule to verify against the current NIRC text or a recent BIR issuance before relying on it for a large transaction.

How does VAT withholding interact with income tax withholding on the same royalty? #

A single royalty payment to a nonresident foreign corporation can carry two completely separate withholding obligations, and missing either one leaves exposure on that tax specifically — paying one does not substitute for the other.

Tax	Legal basis	Rate	What it taxes
Final withholding income tax	NIRC Section 28(B)(1), as amended by the CREATE Act	25% (reduced from the pre-CREATE 30%)	Philippine-sourced income tax due on the royalty itself
Final withholding VAT	NIRC Section 114(C)	12%	VAT due on the royalty as a sale of a service/property right

Both withholdings are computed on the same gross royalty amount but serve entirely different tax bases — income tax versus consumption tax — and both are the Philippine payor’s responsibility to withhold, remit, and report, since the nonresident recipient is not expected to file either return itself.

Worked example: a Philippine franchisee licensing a foreign trademark #

Visayas QSR Group, Inc., a Philippine fast-food franchisee, pays a quarterly trademark and system royalty of ₱2,000,000 to its nonresident foreign franchisor, which has no branch or VAT registration in the Philippines.

Item	Amount
Gross royalty payment	₱2,000,000.00
Final withholding income tax (25% under Sec. 28(B)(1), no treaty relief assumed)	₱500,000.00
Final withholding VAT (12% under Sec. 114(C))	₱240,000.00
Net amount remitted to the foreign franchisor	₱1,500,000.00 (gross less income tax withheld; VAT withheld is a separate remittance to the BIR, not a further deduction from the franchisor’s net)

Visayas QSR Group remits both the ₱500,000 income tax and the ₱240,000 VAT to the BIR on the franchisor’s behalf, using the applicable final withholding tax and VAT withholding return filings, and — being VAT-registered itself — can generally claim the ₱240,000 withheld VAT as its own creditable input tax, subject to ordinary input tax substantiation. If the franchisor’s home country has an applicable tax treaty with the Philippines, the income tax portion may be reduced through a treaty-relief application, but the VAT withholding is calculated independently of that treaty position.

Summary #

Royalty payments to a nonresident foreign licensor trigger two separate Philippine withholding obligations on the payor: final withholding income tax under NIRC Section 28(B)(1) at 25%, and final withholding VAT under NIRC Section 114(C) at 12%, because the nonresident recipient has no local registration to file either return itself. Confirm both obligations — and check for treaty relief on the income tax side specifically — before remitting a cross-border royalty, since missing the VAT withholding is a distinct exposure from missing the income tax withholding, even though both apply to the same payment.