The Bureau of Internal Revenue (BIR) has removed the special tax rate that has for a long time benefitted a subsector of the business process outsourcing (BPO) industry, possibly making the cost of doing business much higher.

In a tax advisory dated January 31, BIR Commissioner Ceasar Dulay said that the workers employed by regional operating headquarters and regional headquarters (ROHQs/RHQs) “are now subject to regular income tax rates.”

This reverses previous rules that allowed these employees to pay only 15 percent of their gross income, ending the uncertainty over the tax rate at the dismay of the ROHQ/RHQ industry.

Since late December last year, there was uncertainty over the fate of the 5,000 workers who — prior to this advisory — have enjoyed the preferential tax rate (PTR).

The TRAIN law, which was passed in December, allowed the industry to keep the PTR as long as these ROHQs and RHQs have already been established before 2018. New companies that would invest here starting this year would not be able to avail themselves of the perk, according to the law.

Days after the law was passed, President Rodrigo Duterte vetoed this tax perk. However, the industry and tax experts pointed to inefficiencies in the veto that led to confusing interpretations. PAMURI insisted that status quo, as said in the TRAIN law, should be retained instead.

Multinational companies (MNCs) established these ROHQs and RHQs to cater to affiliates, subsidiaries, or branches in the global market. The Philippines is just one of many countries trying to attract the investments of these MNCs.

Philippine Association of Multinational Companies Regional Headquarters Inc. (Pamuri) had previously said that MNCs “relied heavily on the PTR in making their business decision.”

Under the 15-percent tax rate, the Philippines is just on par with that of Hong Kong, which offers a range of two percent to 17 percent personal income tax, and Singapore, which has a personal income tax ranging from 0 percent to 22 percent.

There are two citations in the TRAIN law that allowed the PTR. One allowed the special tax rate, while the other provided this would apply only to ROHQs and RHQs already existing before 2018.

The problem, according to Pamuri, was President Duterte vetoed only a part of the latter provision. The question, therefore, is whether or not the first provision — the one which granted the special rate — still applies.

“In order to give effect to [the provision] that still remains in the law as well as the veto message, the correct interpretation should be that ROHQ/RHQs registered before January 1, 2018 shall continue to be entitled to the PTR,” Pamuri said in its previous statement.

Source: http://business.inquirer.net/245393/bir-removes-special-tax-rate-bpo-subsector