Philippines’ Aggressive New Tax Burns BPOs

Foreign BPO entities in the Philippines are facing renewed fiscal pressure as the imposition of taxes by local government agencies is projected to escalate operating expenditures by 15–20%.

The Information Technology and Business Process Association of the Philippines (IBPAP), the industry’s main lobby group, warns that the tax confusion could slow the sector’s growth by up to 5% and potentially lead to the loss of around 80,000 jobs.

Several foreign BPO firms have taken local authorities to court, while a few others are paying the tax under protest.

Paying under protest preserves the right to claim a refund if the court eventually rules in their favor. It also helps companies avoid the 25% surcharge and 12–20% annual interest that local governments can impose for non-payment.

At the same time, IBPAP is lobbying national politicians and lawmakers to find a legislative solution to the dispute.

Uncertainty over tax and incentives has long troubled foreign BPO companies operating in the Philippines.

Five years ago, at the height of the COVID-19 pandemic, BPO firms operating in special economic zones such as Philippine Economic Zone Authority (PEZA) faced a similar threat. Authorities warned they could lose tax incentives if employees worked from home.

The national government temporarily relaxed the rule due to the health crisis. But as the pandemic eased, pressure to tax work-from-home arrangements returned.

Companies were later told they could avoid taxes if they registered as business service enterprises, although many policymakers acknowledged that amendments to the PEZA Act would ultimately be needed to resolve the issue.

Ignoring the CREATE MORE Act

In 2024, the Philippines passed the CREATE MORE Act to strengthen investment incentives and attract more BPO companies.

Under the law, BPO firms are fully exempt from local business taxes on their earnings for seven to seventeen years. They are also exempt from property taxes and from duties on machines and software imported for operational use.

The main goal of the law was to give BPO investors long-term tax certainty and keep the Philippines competitive with outsourcing hubs such as India and Vietnam.

However, several municipal governments are now interpreting the law differently.

These municipalities argue that the tax exemption applies only to core BPO earnings. They say they can still collect fees on ancillary activities such as canteen operations, parking facilities, and sub-leasing arrangements.

Many cities rely heavily on business taxes, which account for up to 60% of their revenue. With infrastructure costs rising, local officials are reluctant to give up this income stream—even for the BPO sector.

Analysts say the dispute may ultimately require a new national law that explicitly bars local governments from taxing BPO operations. A ruling by the Supreme Court of the Philippines could also settle the issue, but that process may take two to three years, say analysts.

“We are currently working with Sen. Bam Aquino, who has committed to champion the IT-BPM industry in the Philippines,” said Genny Inocencio-Marcial, Consultant for Policy at IBPAP.

Bam Aquino, according to Genny, has already begun discussions with fellow lawmakers in Congress, hoping to eventually pass legislation that prevents local authorities from imposing such taxes.

The refusal of some local governments to recognize the CREATE MORE incentives partly stems from a circular issued two years ago by the Bureau of Internal Revenue.

On January 10, 2024, the BIR released Revenue Memorandum Circular No. 5-2024 to clarify the tax treatment of cross-border services following a ruling by the Supreme Court of the Philippines in the Aces Philippines Cellular Satellite case.

Under this interpretation, Philippine companies receiving services from overseas providers must withhold taxes before making payments abroad. These may include a 25% final withholding income tax and 12% value-added tax (VAT).

The rule affects BPO companies because they frequently rely on foreign software platforms, consulting services, and technical support from global affiliates.

Municipalities that have already imposed taxes—or are considering doing so—include Quezon City, Makati, Pasig, Cebu City, Mandaue, Taguig and Parañaque.