Gatchalian files resolution probing taxes on cross-border services

A Senate resolution was filed seeking to probe 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). 

Senator Win Gatchalian filed the Proposed Senate Resolution No. 955, urging the Senate Committee on Ways and Means to conduct an inquiry, in aid of legislation, on the taxability or income payments to non-resident foreign corporations for cross-border services rendered to residents.  

Gatchalian said the BIR’s move could drive away foreign entities from launching businesses 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,” he stressed. 

The BIR Revenue Memorandum Circular (RMC) 5-2024 provides that services to a Philippine entity being performed by a foreign entity are “now taxable.”

With this, Gatchalian said there’s a 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,” he noted. 

Gatchalian cited the RMC as the basis of the Supreme Court decision on the Aces Philippines Cellular Satellite Corp. vs. Commissioner of Bureau of Internal Revenue case. 

The high court ruled that the satellite airtime free payments by Aces Philippines, a domestic corporation, to Aces Bermuda, an NRFC, is subject to final withholding tax. 

In the SC ruling, airtime-free payments are being given as a consideration for the use of satellite communication services.  

Various business groups, however, have maintained that the factors present in the Aces case cannot be applied to all cross-border services. 

Gatchalian likewise cited that the business group claimed that foreign entities providing cross-border services may end up passing on their withholding and VAT payments to their local clients to the detriment of local taxpayers.

As per RMC 5-2024, 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.