Withholding tax obligation challenges of ASEAN member-states
By: Atty. Euney Marie J. Mata-Perez on March 19, 2026
ON March 11, 2026, I was invited as a resource speaker in a discussion on “Tax Compliance Challenges Faced by Businesses in the Asean Member-States (AMS)” during the 22nd Working Group on the Asean Forum on Taxation (WG-AFT) held at the New World Hotel, Makati.
The panel members were able to tackle critical tax compliance issues, explore regulatory and operational challenges, and open a discussion on the potential pathways for streamlining tax administration processes.
I was asked to share my view on why withholding taxes remains one of the most operationally challenging aspects of tax compliance among member-states of the Association of Southeast Asian Nations (Asean). Let me share my views in this article.
Taxes withheld are either: creditable withholding taxes (CWT), also known as expanded withholding taxes, or final taxes.
CWT is actually an advance collection of regular income taxes of the payees and shall be used to offset or reduce the actual income tax due calculated at the end of the tax year. The payees (the persons who receive income that is subject to the withholding tax) are still required to file their income tax returns, and report their income in such returns.
Final taxes, on the other hand, are the full and final payment of the taxes due on certain forms of income due to the payee and generally include passive income, such as dividends, interest from deposits or deposit substitutes, and royalties. Final taxes are also generally required to be withheld if the income recipient is a nonresident who is not registered as a tax filer in the country’s tax system.
Whether the tax withheld is a CWT or a final tax, it is the withholding agent who is obliged to remit the taxes withheld to the Bureau of Internal Revenue (BIR). It is also the withholding agent who may face deficiency assessments when taxes are not correctly withheld. Thus, compliance with existing regulations and withholding the correct taxes are key.
The issues I raised on this topic during the panel discussion are as follows:
1. The Philippines has a complex creditable withholding regime, which has several rates. I have yet to see a taxpayer not assessed of deficiency CWT. The multiple rates and multiple rules make compliance difficult.
2. Some CWT rates are very high vis-à-vis the effective income tax rates of taxpayers, resulting in excess withholding tax credits, which taxpayers cannot use and would have difficulty in seeking a refund. The regular income tax rate in the Philippines has been reduced from 30 percent to 25 percent, or 20 percent under certain conditions.
However, we have CWT rates as high as 15 percent, especially on corporate professional firms. Such a rate would already be equivalent to the effective tax rates of taxpayers availing of the 40 percent optional standard deduction, and thus, taxed at 60 percent of their gross income.
3. The broadening and changing interpretation of the situs of income, especially on the place of performance of services, is also causing issues. Our National Internal Revenue Code (Tax Code) is clear that fees from services will be considered Philippine-sourced only if the services are performed in the Philippines. With the pronouncement of the Supreme Court in the case entitled Aces Philippines Cellular Satellite Corp. vs. The Commissioner of Internal Revenue, the BIR issued Revenue Memorandum Circular 5-2024, which seemingly expanded the situs rules on cross-border services and adopted the so-called “benefits test,” a test not sanctioned by the Tax Code for income tax purposes.
There is also confusion in the implementation of rules. The 12 percent value-added tax (VAT) is now imposed on digital services consumed in the Philippines by virtue of the amendments to our Tax Code introduced by Republic Act (RA) 12023 signed on Oct. 2, 2024. The amendment changed the nexus of taxation on digital services for VAT purposes from place of performance to place of consumption.
In other words, if the service is consumed or used by the customer or client in the Philippines, it shall be considered rendered or performed in the Philippines, and thus, VAT will be due. However, this change in the rule applies only for VAT purposes, and not for income tax purposes.
Also, there is an issue in interpreting taxation on “digital services.” The VAT is imposed only on digital services consumed in the Philippines. For all other services, it is still the performance of the service in the Philippines that will give rise to the power of the government to impose VAT.
Under the new Section 108-A of the Tax Code, a “digital service” shall refer to any service that is supplied over the internet or other electronic network with the use of information technology and where the supply of the service is essentially automated.
As discussed in our articles published on Dec. 5, 2024, and March 20, 2025, digital services should not cover services performed abroad using human skills, profession, and expertise, the performance of which entails man-hours, such as those rendered by professionals. Even if the services rendered used some technology or the product or output of such services were transmitted electronically, they should not automatically be deemed a digital service.
In the end, it was concluded during the panel discussion that the key is to have simple and clear rules, which are consistently applied, to make compliance easy and not cumbersome for Asean member-states. We hope that the Philippines will be able to catch up in this area.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal and is the Chair of the Tax Committee of the Management Association of the Philippines. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com.
The article was published at the More to Follow Column at The Manila Times on March 19, 2026. Please see this link.