IN their position paper dated Feb. 13, 2024, representatives of certain private sector groups requested Bureau of Internal Revenue (BIR) Commissioner Romeo Lumagui to review, revisit and reconsider the provisions of Revenue Memorandum Circular (RMC) 5-2024 dated Jan. 10, 2024, and to suspend the effectivity of said RMC while its provisions are under reconsideration.
The said RMC applied the Supreme Court ruling on the taxation of cross-border services in Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue, GR 226680, dated Aug. 30, 2022 (Aces case). The controversy surrounding such RMC was the subject of our article published on Jan. 25, 2024.
Under the RMC, the BIR took the position that various existing cross-border services are akin to the services rendered by the foreign satellite company subject of the Aces case, and thus, payments to non-resident foreign corporations (NRFCs) rendering cross-border services should be subject to a 25 percent withholding tax plus 12 percent VAT on payments. In short, the BIR is saying that payments to foreign firms conducting cross-border services are all Philippine-sourced income, which should be subject to Philippine income tax and VAT.
The cross-border services referred to in the RMC include: (i) consulting services carried abroad, but the results or outputs are used locally, (ii) IT outsourcing where a technology company offers IT outsourcing to businesses located in different countries, (iii) financial services, (iv) telecommunication services, such as international calling, data connectivity or internet services to customers located in different countries, (v) engineering and construction firms providing services like architectural design, project management, etc., (vi) education and training providing international programs to students and professionals from various countries, (vii) tourism and hospitality, like travel agencies hotels, online books, etc., and (viii) other similar services.
In the position paper, the private sector representatives maintain as follows:
1. RMC 5-2024 unduly expanded the application of the Aces case. The services rendered by the foreign satellite company in said case had to be completed using ground facilities located in the Philippines, and the provision of satellite communication services is regulated in the Philippines. These factors are not present in the provision of the other cross-border services stated in RMC 5-2024.
2. RMC 5-2024 contradicts Section 42(C)(3) of the National Internal Revenue Code (Tax Code), which provides that compensation for labor or personal services rendered outside the Philippines shall be treated as income from sources outside the Philippines (and, thus, should not be taxed if rendered by NRFCs).
3. 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.
4. 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.
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 private sector groups also questioned the BIR's position on reimbursables in RMC 5-2024. RMC 5-2024 provides that reimbursable or allocable expenses charged by a foreign corporation to its Philippine counterparts are considered "income because it represents a financial gain or savings" to the foreign corporation being reimbursed. The RMC states that the reimbursement will result in the foreign corporation's receipt of additional funds, which can be used for other purposes or retained as profit and should be viewed as a form of income to the foreign corporation. The private sector group, however, stated that the Aces case did not involve the tax treatment of reimbursable and allocation of expenses among multinational enterprises.
The private sector groups also highlighted that the imposition of the additional 37 percent would lead to an increased cost of doing business in the Philippines.
The private sector signatories calling for the BIR's reconsideration and review of RMC 5-2024 include the Philippine Chamber of Commerce and Industry, the Management Association of the Philippines, the Joint Foreign Chambers of the Philippines, the Tax Management Association of the Philippines, the Philippines Institute of Certified Public Accountants, the Financial Executives Institute of the Philippines, the Association of Certified Public Accountants in Commerce and Industry, the Association of Certified Public Accountants in Public Practice, the Philippine Exporters Confederation Inc., and the IT and Business Process Association of the Philippines.
Given the preceding move and all arguments put forward by the various private sector groups, it is hoped that the BIR Commissioner will reconsider the provisions of RMC 5-2024.
Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A, and tax lawyer and has been ranked as one of the top 100 lawyers in the Philippines by Asia Business Law Journal. She is the incoming chair of the Tax Committee of the Management Association of the Philippines. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any questions or comments regarding this article, you may email the author at info@mtfcounsel.com or visit the MTF website at www.mtfcounsel.com.
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