(New) Withholding Tax treatment of cross-border services by non-resident foreign corporations

     

The RMC introduced a new framework for assessing the Final Withholding Taxes and Final Withholding VAT on services provided by non-resident foreign corporations (NRFC). 

      

In particular, the RMC states that cross-border reimbursements and allocated expenses are now taxable due to potential tax savings or benefits received from the transaction. The circular explained that these charges by a foreign company add value or benefit to the local company. 

     

The reduction of expenses by the foreign company increases the foreign company’s net income or profit because the foreign company spends less on its operations, resulting in additional funds that can be used for other purposes or retained as profit. 

     

Therefore, the reduction in expenses is viewed as a form of income of the foreign company, and this increases the tax base that is subjected to Final Withholding Taxes (FWT) as well as the Final Withholding VAT. 

      

Prior to the release of RMC 5-2024, reimbursements and allocation of expenses from foreign companies have generally not been subject to any taxes, because the nature of the transaction does not constitute any income that is subjected to Income Tax and, consequently, to Final Withholding Tax. 

    

RMC 5-2024 provides also a list of other cross-border services which may be taxable in the future such as consulting services, IT outsourcing, financial services, telecommunications, engineering and construction, education and training, tourism and hospitality and other similar services, based on the theory where the benefits are received, which may be in the Philippines, if the income-generating activities in the Philippines are deemed essential. 

      

The potential shift in the taxation policy and its impact have caused a level of uncertainty and significant discussion which is presently ongoing and needs to be monitored for all companies providing (inter-company) cross-border services to the Philippines, even if entirely performed overseas.