Local business groups have appealed to the Bureau of Internal Revenue (BIR) to suspend the implementation of the policy that mandates high tax fees on cross-border services, stating it is detrimental effect to attracting foreign and local businesses in the country. 

In a joint statement on Feb. 15, the groups expressed their concern regarding Revenue Memorandum Circular (RMC) No. 5-2024, which was issued on Jan. 10, which subjects services performed by non-resident foreign corporations (NFRCs) for a Philippine entity to 25 percent withholding tax and 12 percent final withholding value-added tax (VAT).

As per the policy, "the jurisdiction providing the essential service for income generation is entitled to tax the income for cross-border services."

These services include consulting, outsourcing, financial, telecommunications, engineering and construction, education and training, tourism and hospitality, and others.

Overall, the groups said that RMC No. 5-2024 will "result in increased cost of doing business in the Philippines," contrary to the national government's goal of enticing more investors to the country.

The groups explained that foreign investors often evaluate the tax regime of a country prior to entering deals or partnerships for investments, with companies opting for "justified tax costs" along with "profitable and manageable transactions."

Tax rates that are prohibitive may likely disincentivize foreign entities to do business in the Philippines as they seek places offering lower taxes.

According to the businessmen, subjecting the income payments to NRFC to final withholding tax (FWT) will result in either of two scenarios.

First, 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.

Second, 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. 

They added that "an administrative issuance must not override, supplant, or modify the law, but must remain consistent with the law they intend to carry out."

It cited the circular's conflicting provision with the Tax Code, specifically on the source of income, where NRFCs, which often operate in varying countries and their income allocated to whichever country their services are rendered, are "only taxable on income from sources within the Philippines."

The group also mentioned how the circular may violate existing tax treaties with other countries, where business profits of treaty residents will not be taxed if the foreign companies don't have permanent establishments in the Philippines.

Lastly it stated that if the policy is applied to all cross-border services, "all NFRCs or foreign individuals will be taxed in the Philippines for services rendered (even if such services are performed abroad)."

Due to these issues, businessmen would like the BIR to halt the implementation amid discussions with affected businesses.

Among the signatories to the appeal were the Philippine Chamber of Commerce and Industry (PCCI), Management Association of the Philippines (MAP), Tax Management Association of the Philippines (TMAP), Philippine Institute of Certified Public Accountants (PICPA), Financial Executives Institute of the Philippines (FINEX), Association of Certified Public Accountants in Commerce and Industry, Association of Certified Public Accountants in Public Practice, Philippine Exporters Confederation, Inc. (Philexport), Joint Foreign Chambers of the Philippines (JFCP), and IT and Business Process Association of the Philippines (IT-BPAP).