Private sector groups today urged the Bureau of Internal Revenue (BIR) to revoke the implementation of Revenue Memorandum Circular (RMC) 5-2024, which subjects cross-border services to 25% withholding tax and 12% final withholding value-added tax (VAT).

On January 10, 2024 the BIR issued Revenue Memorandum Circular (RMC) 5-2024, which provides that services to a Philippine entity that are performed by a foreign entity are now taxable, citing the Supreme Court’s decision on Aces Philippines Cellular Satellite Corp. vs. Commissioner of Bureau of Internal Revenue. In the said case, the High Court ruled that the satellite air time fee payments by Aces Philippines, a domestic corporation, to Aces Bermuda, a non-resident foreign corporation (NRFC), is subject to final witholding tax, following a two-tiered test that (a) identified the source of the income, and (b) the situs of that source.

RMC 05-2024 maintains that for cross-border services, the jurisdiction providing the essential service for income generation is entitled to tax the income.

The RMC identifies the services covered as:

(i) consulting services,

(ii) IT outsourcing,

(iii) financial services,

(iv) telecommunications,

(v) engineering and construction,

(vi) education and training,

(vii) tourism and hospitality, and

(viii) other similar services.

In a joint statement, business groups asserted that RMC 05-2024 —

1. Unduly expanded the application of Aces. It did not account for several crucial factual elements in said case which qualified the income-generating activity as one complete and integral process. In the case of Aces, the satellite transmission services are considered Philippine-sourced income because (1) the income-generating activity is directly associated with gateways located within the Philippine territory, and (2) the provision of satellite communication services in the Philippines is a government-regulated industry. These factors are not necessarily present in other cross-border services. Consulting services for example, can actually be rendered or performed remotely, and not dependent on facilities located in the Philippines. Other cross-border services do not also require government regulation.

2. RMC 5-2024 run counter to the provisions of the Tax Code on the situs of the source of income. Under the Tax Code, an NRFC is only taxable on income from sources within the Philippines. However, applying RMC 5-2024, where a service-based company operates in various countries, providing services to clients, and their income earned is allocated to the countries where the services are performed, the source of income may still be considered to be derived within the Philippines for so long as the services performed in the Philippines are deemed essential.

3. RMC 5-2024 may violate existing income tax treaties entered into by the Philippines with various countries, which generally provide that business profits of a treaty resident shall not be taxed in the Philippines if the foreign treaty resident does not have a permanent establishment in the Philippines.

4. RMC 5-2024 misapplied and misconstrued the benefits theory of taxation. The RMC provides that service fees paid to foreign companies, including those facilitated through internet and electronic means with the use of IT, are regarded as an inflow of economic benefits in favor of the foreign company, which should be subject to tax under the benefits-received theory.

5. If the RMC is applied to all cross-border services based on the criteria and standards stated therein, then all NRFCs or foreign individuals will be taxed in the Philippines for services rendered (even if such services are performed abroad).

The business groups, composed of the Philippine Chamber of Commerce and Industry (PCCI), Philippine Exporters Confederation (Philexport), Management Association of the Philippines (MAP), Tax Management Association of the Philippines (TMAP), Philippine Institute of Certified Public Accountants (PICPA), Financial Executives of the Philippines (FINEX), Association of Certified Public Accountants in Commerce and Industry, Association of Certified Public Accountants in Public Practice, Joint Foreign Chambers of the Philippines (JFsC), IT and Business Process Association of the Philippines, appealed to BIR to reconsider the implementation of such policy and consider its negative implications to foreign or local businesses.

They maintained that implementing RMC No 5-2024 will result in increased cost of doing business in the Philippines.

“When a foreign entity deals with Philippine clients, it does so with the understanding that the tax costs of the transaction are manageable from a whole entity perspective and that the transaction will still generate a profit for the foreign entity. Once the tax costs do not justify doing business with Philippine clients, e.g., the tax rates are prohibitive, then foreign entities will more than likely look for other jurisdictions where the tax costs are lower. In this light, it is respectfully submitted that subjecting the income of NRFCs from services rendered abroad will lead to an increase in the tax cost of doing business, which, may drive away foreign entities from conducting business in the Philippines,” the group said.

“Subjecting the income payments to NRFC to FWT will result in either of two scenarios: (1) the NRFC receives a lesser amount for services rendered due to the FWT without any certainty that the taxes withheld in the Philippines may be used as a tax credit in its home country; or (2) the local client who was constituted as the withholding agent may be constrained to gross up the income payments to the NRFC to keep the NRFC whole and will ultimately be left to shoulder the tax burden of the income tax on the NRFC. More often than not, the resultant scenario will be the second,” the group added.

Finally, “An administrative issuance must not override, supplant, or modify the law, but must remain consistent with the law they intend to carry out… We also request that the immediate effectivity of the RMC be revoked and/or suspended in the meantime that it is being reconsidered in light of the foregoing discussion,” the group said.