Chambers urge BIR to revoke cross-border service tax rule

TEN business associations declared their opposition to a Bureau of Internal Revenue (BIR) cross-border taxation policy on services, citing its potential to increase the cost of doing business in the Philippines.

The Philippine Chamber of Commerce and Industry (PCCI) and Management Association of the Philippines (MAP) said on behalf of their co-signatories that foreign entities enter deals with Philippine clients on the understanding that the tax costs are manageable and that investments will be profitable.

“Once the tax costs do not justify doing business with Philippine clients … then foreign entities will more than likely look for other jurisdictions where the tax costs are lower,” they said in a joint statement on Thursday.

“In this light, it is respectfully submitted that subjecting the income of NRFCs (non-resident foreign corporation) on 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,” they added.

On Jan. 10, the BIR issued Revenue Memorandum Circular (RMC) 5-2024, which the business groups said will render taxable services to a Philippine entity that are performed by a foreign entity.

“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 business group said.

The services covered under the RMC are consulting, information technology outsourcing, financial, telecommunications, engineering and construction, education and training, tourism and hospitality, and other similar services.

In the RMC, the BIR said that the circular clarifies the proper tax treatment of cross-border services in light of the Supreme Court’s (SC) decision on Aces Philippines Cellular Satellite Corp. vs. Commissioner of Bureau of Internal Revenue, dated Aug. 30, 2022.

The SC had ruled that the satellite airtime fee payments by Aces Philippines to Aces Bermuda, an NRFC, is subject to final withholding tax.

The business groups identified the application of the SC ruling in the case of Aces Philippines as an “undue expansion” of the Aces case as it did not account for several crucial factual elements which qualified the income-generating activity as a complete and integral process.

“In the case of Aces, the satellite transmission services are considered Philippine-sourced income because the incomegenerating activity is directly associated with gateways located within the Philippine territory, and the provision of satellite communication services in the

Philippines is a governmentregulated industry,” the business groups said.

The groups argued that the two factors are not present in other cross-border services, citing consulting services, which can be rendered or performed remotely.

The business groups also said that the RMC counters the situs provisions of the Tax Code which state that an NRFC can only be taxed on income sources within the country.

“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,” the groups said.

The groups also said that the circular may violate income tax treaties of the Philippines with other 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.”

The 10 business groups also said that the RMC 5-2024 “misapplied and misconstrued” the benefits theory of taxation as it provides that service fees paid to foreign companies are identified as an inflow of economic benefits in favor of the foreign company.

“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,” they said.

“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 or suspended in the meantime that it is being reconsidered in light of the foregoing discussion,” they added.

Aside from the PCCI and MAP, the statement was also signed by the Philippine Exporters Confederation, Inc., Tax Management Association of the Philippines, Philippine Institute of Certified Public Accountants, Financial Executives of the Philippines, Association of Certified Public Accountants in Commerce and Industry, Association of Certified Public Accountants in Public Practice, Joint Foreign Chambers of the Philippines, and IT and Business Process Association of the Philippines.

The 10 groups submitted a joint position paper to the BIR Commissioner Romeo D. Lumagui, Jr. on Feb. 13. —