The business-process outsourcing (BPO) industry is regarded as one of the fastest-growing industries in the Philippines. The demand for outsourcing services is reaching new heights, with the call-center services, finance and accounting, human resource and even legal outsourcing taking up the biggest portions of the pie.

There has also been an emerging shift from cost-effectiveness (call centers) to skills quality and competence (finance and accounting, etc.), which strengthens the Philippines’ position as a global leader in the BPO industry.

The recent growth in the BPO industry has been characterized not by traditional call centers but by more skilled and technical outsourcing. Although call centers still form the largest part of the BPO sector, the Philippines has begun boosting its technically skilled talent pool, including lawyers and its professionals in accounting and finance. To achieve and sustain this rapid growth, the Philippine government has taken concrete steps in ensuring that the industry is protected by airtight tax rules.

On April 8, 2008, the Bureau of Internal Revenue (BIR) issued BIR Ruling DA-219-2008 to clarify the applicable withholding-tax rate on various services offered by BPOs. Generally, for this ruling to apply, the BPO must be characterized by the following corporate background:

a. It performs activities which are not directly related to the business of its clients;

b. Its assigned staff are selected, hired and terminated by the BPO and not by their clients;

c. Salaries and other benefits are also drawn directly from the BPO and not from its clients; and

d. The BPO 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 ruling are: (a) bookkeeping; (b) internal audit; (c) payroll processing; (d) HR benefit administration; (e) data processing; and (f) staff outsourcing.

The BIR ruled that bookkeeping services are expressly subject to 10- percent or 15-percent corporate withholding tax (CWT) on professionals.

On its internal audit services, BPOs 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’s internal audit service may be considered as management and technical consultancy services which are likewise subject to a 10-percent or 15-percent CWT on professionals; 15 percent if the gross income for the current year exceeds P720,000 and 10 percent if otherwise.

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. Thus, a BPO that provides these kinds of services may be classified under the category of a service contractor. Income payments for such services are subject to the 2-percent CWT.

With the accelerating growth of the global offshore outsourcing market, the foregoing BIR ruling on BPOs is timely and instructive. Investors will no longer be in a quandary as to how they should be classified for tax purposes. This would then bring better business outlooks and prevent unnecessary tax assessments in the future.

With this, the government and the investors may just focus on toiling the rich potential of the Philippine BPO industry.