Senator Sherwin Gatchalian has called on the Senate to look into the Bureau of Internal Revenue’s imposition of a 25 percent withholding tax and 12 percent value added tax (VAT) on all cross-border services rendered by non-resident foreign corporations (NRFC).
Gatchalian, chairman of the Senate Committee on Ways and Means, said BIR’s release of Revenue Memorandum Circular (RMC) 5-2024, could drive away foreign entities from doing business in the country.
“This could hike the cost of doing business in the Philippines, which will further erode the country’s competitiveness in attracting foreign investors,” said Gatchalian.
The memorandum circular provides that services to a Philippine entity that are performed by a foreign entity are now taxable.
“We need to carefully review the issuances of the BIR which implements laws and Supreme Court decisions. We must ensure that these issuances do not go beyond the law and SC decision,” Gatchalian said in filing Senate Resolution No. 955.
The senator also noted that the RMC cites as a basis a Supreme Court (SC) decision on Aces Philippines Cellular Satellite Corp. vs. Commissioner of Bureau of Internal Revenue.
In that decision, the high court ruled that the satellite airtime free payments by Aces Philippines, a domestic corporation, to Aces Bermuda, a NRFC, is subject to final withholding tax.
In the SC ruling, the airtime free payments are being given as a consideration for the use of satellite communication services.
But various business groups argued that the factors present in the Aces case cannot be applied to all cross-border services.
Business groups also claim that foreign entities providing cross-border services may end up passing on their withholding and VAT payments to their local clients, a disadvantage to the local taxpayers.
Based on the circular, the taxable cross-border services include consulting services, IT outsourcing, financial services, telecommunications, engineering and construction, education and training, tourism and hospitality, and other similar services.