BIR scraps workers’ tax perk

The Bureau of Internal Revenue has implemented Malacanang’s marching order to remove the special tax rate that has for a long time benefitted a subsector of the business process outsourcing (BPO) industry, a move that would possibly make the cost of doing business much higher.

In a tax advisory dated Jan. 31, Internal Revenue 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 reversed previous rules that allowed these employees to pay only 15 percent of their gross income, ending the uncertainty over the tax rate to the dismay of the ROHQ/RHQ industry.

Since December last year, there was uncertainty over the fate of the 5,000 workers who —prior to this advisory—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 Duterte vetoed this particular tax perk. However, the industry and tax experts pointed to inefficiencies in the veto that led to confusing interpretations. The Philippine Association of Multinational Regional Headquarters Inc. (Pamuri) insisted that the status quo, as provided in the TRAIN Law, should be retained instead.

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

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 2-17 percent personal income tax, and Singapore, which has a personal income tax ranging from zero 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, was whether or not the first provision—the one which granted the special rate—still applied.

“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 Jan. 1, 2018, shall continue to be entitled to the PTR,” Pamuri argued in its previous statement.