Franchising in the Philippines: Who Bears the Tax on Franchise Fees?

The fee for buying a franchise may be clear, but the total amount you will pay may not be. Phrases such as “excluding tax”, or a promise that the brand owner will receive the full amount, can increase your costs. When considering a franchise in the Philippines, it is important to examine not just the fees but also the tax responsibilities before paying or signing.

1. Separate the price, the tax and the actual amount payable

Ask for a written breakdown of every fee: the initial franchise fee, ongoing royalties, training, use of systems and any other services charged by the franchisor. For each item, ask whether the applicable tax is included or will be added.

Do not simply group everything together as a single “total investment”. Payments for brand rights, equipment purchases and services from independent providers may receive different tax treatment. Your tax adviser needs to understand the underlying transaction and identify the recipient.

Ask for answers to the following:

• What price is stated in the offer and the contract?
• Which taxes are said to be included or added, and why?
• Must any amount be withheld and paid to the tax authorities?
• How much will the franchisor receive, and what will your total outlay be?

Withholding tax is not automatically an additional charge. It may be part of the agreed fee that is paid directly to the tax authorities rather than to the recipient. This distinction matters when the other party insists on receiving the full amount without deductions.

2. Understand the tax rules for licensing agreements

The Philippines has no single comprehensive franchise law. The general contract provisions of the Civil Code apply, alongside relevant tax and intellectual property laws. Executive Order No. 169 also provides additional protections for agreements within its scope involving micro, small and medium-sized enterprises, including fee disclosure requirements.

Republic Act No. 8293, or the Intellectual Property Code, is particularly relevant. Franchise agreements involving the transfer of systematic knowledge for operating a business fall within the rules governing technology transfer arrangements.

Under Section 88.4, Philippine taxes on all payments relating to such an arrangement must be borne by the licensor. You should therefore not simply accept a blanket clause shifting all taxes on licensing payments to the franchise buyer.

This does not mean that you have no tax obligations of your own as the outlet operator. Taxes on your own operations are separate from the allocation of tax responsibility for payments under the agreement. Likewise, who bears the cost is a different question from who must withhold and remit the tax.

Section 91 provides a mechanism for requesting an exemption. If the franchisor says the contract has an approved exemption, ask for the documentation and have its scope reviewed. An explanation that “everyone does it this way” is not enough.

3. Watch for promises that the recipient will receive the full amount

Read the clauses covering withholding, deductions, reimbursement and any additional payments needed to ensure that the franchisor receives the full amount. Even if they do not explicitly say “you bear the tax”, that may be their practical effect.

For example, if a fee has been agreed but you must increase it so that the other party receives that amount without deductions, your actual cost will rise. Looking only at the royalty percentage is not enough; you also need to examine the payment terms.

Ask the franchisor’s finance manager for a worked example. Have your own adviser review it, particularly if the recipient is based overseas. Tax treatment may vary depending on the type of payment, the recipient’s status and any applicable tax treaty between the countries concerned.

4. Get the documentation right before signing

Ask your solicitor or lawyer and tax adviser to review the contract, fee schedule, worked examples and proposed billing documents. These should all be consistent in how they describe the price and taxes.

Clarify who will issue the proper documentation, who will withhold tax where required, and when proof of remittance will be provided. If the applicable tax changes, specify how payments will be adjusted without breaching the law.

Use the reviewed total outlay when comparing brands and preparing your budget. Practical takeaway: before signing, make sure the price, responsibility for tax and remittance arrangements are clear—not just the figure in the offer.