Tuesday, June 24, 2008 Tax notes: Withholding tax on BPO services
THE Bureau of Internal Revenue (BIR) issued BIR Ruling DA-219-2008—dated April 8, 2008—to clarify the applicable withholding tax rate on various services offered by business process outsourcing (BPO) companies.
Generally, for this ruling to apply, the BPO must be characterized by the following corporate background:
1. It performs activities that are not directly related to the business of its clients;
2. Its assigned staff are selected, hired and dismissed by the BPO company and not by their clients;
3. Salaries and other benefits are also drawn directly from the BPO company and not from its clients; and
4. The BPO company carries on an independent business and undertakes the performance of its contract according to its own manner and method, free from the control and supervision of its clients.
The outsourcing activities covered by the said ruling are bookkeeping, internal audit, payroll processing, human resources (HR) benefit administration, data processing and staff outsourcing.
The BIR ruled that bookkeeping services are subject to the 10 percent or 15 percent creditable withholding tax on professionals. The tax is 15 percent if the gross income for the current year exceeds P720,000 and 10 percent if otherwise.
On their internal audit services, BPO companies provide advice or guidance to clients to ensure that their processes comply with established procedures relating to accounting-related transactions. For such services, a BPO company’s internal audit service may be considered as management and technical consultancy services, which are likewise subject to the 10 percent or 15 percent creditable withholding tax.
On the other hand, there is a different tax treatment for payroll processing, HR benefit administration, data processing, and staff outsourcing services.
They qualify under the category of contractual services. Hence, a BPO company that provides these kinds of services may be classified under the category of a service contractor, and income payments for such services are subject to the two percent creditable withholding tax. (Source: Punongbayan & Araullo)
