MANILA -- At least 8 business groups in the Philippines have called on the Bureau of Internal Revenue (BIR) to scrap the 25 percent withholding tax and 12 percent final withholding value-added tax (VAT) on cross-border services.

In a statement, the groups said that imposing these will raise the costs of doing business in the Philippines and drive foreign investors away from the country.

They added that subjecting foreign companies' income payments to withholding tax may push local clients to shoulder the tax burden of the income tax of the foreign company.

The groups noted that the BIR is implementing Revenue Memorandum Circular (RMC) 5-2024, which provides that services to a Philippine entity that are performed by a foreign entity are now taxable.

The memo maintains that for cross-border services, the jurisdiction providing the essential service for income generation is entitled to tax the income.

It cites the Supreme Court’s decision on Aces Philippines Cellular Satellite Corp. vs. Commissioner of Bureau of Internal Revenue, where the High Court ruled that the satellite air time fee payments by Aces Philippines, a domestic corporation, to Aces Bermuda, a non-resident foreign corporation (NRFC), is subject to final withholding tax.

The groups stated that the factors present in the Aces case are not necessarily applicable in other cross-border services like consultancy firms.

They said the memo also runs counter to certain provisions of the Tax Code.

They noted that the law states that a non-resident foreign corporation is only taxable on income from sources within the Philippines

"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.," they explained.

They also noted that the memo may violate existing income tax treaties the the Philippines entered into with various countries.

The groups stated that the treaties 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.

They also stressed that the memo will hurt Philippine companies, because if it is applied to all cross-border services based on the criteria and standards stated therein, then all foreign companies or individuals will be taxed in the Philippines for services rendered, even if such services are performed abroad.

Among the signatories of the letter are the Philippine Chamber of Commerce and Industry (PCCI), Philippine Exporters Confederation (Philexport), Management Association of the Philippines (MAP), Tax Management Association of the Philippines (TMAP), Philippine Institute of Certified Public Accountants (PICPA), and the Financial Executives of the Philippines (FINEX).