Management services agreements are agreements entered into between two

corporations, in which a party (usually a related party) will provide management,

consulting or other services for a fee (“management fees or service fees”). Usually,
management agreements between a domestic corporation and the parent or affiliate
NRFC involve human resource functions, marketing and sales, finance, and IT services,
among others.

The tax treatment of the management fees received by the NRFC is one of the
challenging facets of this business set-up. As with any cross-border transaction, the
examiner, during a tax audit, would normally assess the withholding tax and leave it to
the taxpayer to prove that the transaction is not subject to withholding tax.

When are payments for management services to an NRFC subject to final withholding
tax?

Under the tax code, an NRFC shall be subject to Philippine income tax only on its
income sourced within the Philippines. In the doctrinal case of CIR v. British Overseas
Airways Corp., the Supreme Court ruled that the source of income is the property,
activity, or service that produced the income; the test of taxability is the “source” and
the source of income is that activity which produced the income. The situs of the
income derived from services is determined solely by the place where service is
rendered. Thus, the taxability of fees received by the NRFC from the performance of
management services depends on where the services are performed. If performed
outside the Philippines, the income is not taxable here. However, should there be any
service performed in the Philippines, the same shall be subject to Philippine taxes.

Nevertheless, even if there are management services being performed within the
Philippines, management fees can still enjoy exemption under a tax treaty. An NRFC,
who is a resident of a contracting state in a tax treaty with the Philippines, may be
exempt from income tax on the business profits derived within the Philippines. As a
condition for the tax exemption, all Philippine tax treaties require that the NRFC must
not carry on transacting business in the Philippines through a permanent establishment.
In the case of management services, the most common risk of creating a permanent
establishment is the length of period that the service is performed in the host country.
Most Philippine tax treaties provide a 180-day threshold for the duration of the services.