In our previous article titled “Taxation of cross-border services,” we featured Revenue Memorandum Circular (RMC) No. 5-2024, where the Bureau of Internal Revenue (BIR) clarified the proper tax treatment of cross-border services in light of the SC En Banc Decision in Aces Philippines Cellular Satellite Corporation vs. The Commissioner of Internal Revenue (CIR) and provided a new framework for assessing the final withholding tax and the final withholding Value-Added Tax (VAT) on services provided by non-resident foreign corporations (NRFC) to Philippine businesses.

Let us briefly recall the salient provisions of RMC No. 05-2024 in our previous article.

List of cross-border transactions akin to that of Aces vs. CIR 

The RMC defined cross-border services as those provided by service-based companies operating in various jurisdictions where income earned is allocated to the countries where the services are performed, considering factors such as time spent, resources utilized, or value created in each jurisdiction.

Cross-border services include (i) Consulting services; (ii) IT Outsourcing; (iii) Financial services; (iv) Telecommunications; (v) Engineering and Construction; (vi) Education and Training; (vi) Tourism and Hospitality; (viii) and other similar services. These are services processed or performed overseas, but the result or output is used, utilized, executed, or consumed in the Philippines. 

Situs of taxation for cross-border services and their tax treatment

The RMC subscribed to the “Benefit-Received Theory” approach in identifying the situs or place of taxation for cross-border services that determines the income tax and VAT treatment. This theory states that the situs of taxation for cross-border services is where the source of income (i.e., property, activity, or service that produced the income) occurs. If the revenue-generating activity occurs within the Philippine territory or if the flow of wealth proceeds from the Philippines, the situs of taxation is in the Philippines.

The RMC further discussed that under the source-based principle of taxation, the jurisdiction where the economic activity occurs should have the right to tax that income, regardless of where the payment is made or received. As such, the source of income is not necessarily determined by the location where the payment is disbursed or physically received but rather by the location where the underlying business activities that produced the income actually took place. This principle ensures that income is taxed in the jurisdiction where economic activity occurs and thus prevents tax avoidance.

It is also added in the RMC that where business transactions occur in multiple stages across different taxing jurisdictions, it is imperative to ascertain whether the particular stages occurring in the Philippines are so integral to the overall transaction that the business activity would not have been accomplished without them. If the income-generating activities in the Philippines are deemed essential, the income derived from these activities shall be considered, for tax purposes, as sourced within the Philippines, irrespective of where the payment is ultimately received.

Similarly, the RMC applied the same theory of “Benefit-Received Theory” when determining the VAT treatment of such cross-border services. Accordingly, income generated from service fees paid to foreign companies or individuals is subject to VAT if the source of income is within the Philippines, regardless of where the payout is disbursed or physically received.  The source of income means that even if the services are conducted or paid for abroad and the activities to be performed in the Philippines are so essential that the entire service transaction cannot be accomplished without them, then the benefit-received theory applies. Hence, revenue-generating activity occurs within the Philippines. This means that if the service provider is located outside the country, if the service is utilized, applied, executed, or consumed for a recipient within the Philippines, the income payment for such a service is considered sourced within the country, and thus, the VAT is applicable. Consequently, payment for such services shall be subject to final withholding VAT.

Tax treatment of reimbursable or allocable expenses for cross-border services

The reimbursable or allocable expenses charged by a foreign corporation in the Philippines should contribute to the value or benefit received by a local company. Otherwise, it may be considered income (reduction in expenses) as it represents a financial gain or savings for the foreign company, thereby effectively increasing the latter’s net income or profit. If, however, the Philippine company derives no benefits therefrom or no income is generated through business activities conducted in the Philippines, reimbursement or the allocation of the expenses by the foreign company in the Philippines may be seen as an attempt to evade taxes or manipulate profits by funneling them to a foreign entity.

Issues raised in RMC No. 5-2024

The RMC attracted various inquiries and confusions to the taxpayers and other stakeholders since it appears that cross-border services, as well as reimbursable or allocable expenses, albeit entirely rendered outside the Philippines, are considered income sourced within the Philippines, hence subject to final withholding tax and VAT following the “Benefit-Received Theory”.

Clarifications on RMC No. 5-2024

The concerns came to the knowledge of the BIR. Hence, the BIR recently issued RMC No. 38-2024 to address and clarify the issues raised on RMC No. 05-2024. Let’s discuss the key clarifications in RMC No. 38-2024.

Tax treatment in Aces vs. CIR does not automatically apply to cross-border service

RMC No. 38 clarified that RMC No. 5 just listed the cross-border services and only to highlight that, like the Aces case, these services are likewise performed, rendered, delivered, or supplied by NRFC to a domestic/resident entity in the Philippines.

The determination of the source of income involves an examination of all the components of the cross-border service agreement involving two tax jurisdictions, taking into account the services to be performed in its entirety, and not singled out or compartmentalized one particular activity as the income-producing activity.

Proper determination of source of income 

The guidelines in determining the source of income for cross border services is if the property, activity, or service that produces the income is in the Philippines. Crucial factors to such determination among others are:

1. Whether the cross-border services are dependent on the successful use, consumption, or utilization by the Philippine purchaser of the service for income to be accrued; or
2. Whether the performance of the service depends on the facilities located in the Philippines; or
3. Whether the particular stages occurring in the Philippines are  integral to the over-all transaction that the business activity would not have been accomplished without it. 

Tax treaty relief can be availed 

The BIR clarified that once the source of income is established to be within the Philippines using the aforesaid guidelines, then, the affected taxpayer can invoke the application of a particular tax treaty to assert that the income derived or sourced within the Philippines is exempt from income tax for lack of permanent establishment or subject to preferential rate, as the case may be. In short, the application of the benefits of the tax treaty, such as tax exemption of business profits for lack of permanent establishment, presupposes that the situs of the source of income is in the Philippines.

If it is established that the source of income of cross-border services is within the Philippines, the income is subject to VAT (Withholding VAT). Section 105 and 108 of the Tax Code, as amended, provides that services rendered or performed in the Philippines by non-resident foreign corporations are subject to VAT (Withholding VAT). 

Clarification on reimbursable or allocable expenses

The BIR clarified in RMC No. 38 that cross-border services usually involve related parties, common of which are intra-group services, like management, financial and administrative services; technical and support services; purchasing, marketing, and distribution services; and other commercial services provided in connection with the nature of the group’s business. As these are intra-group services, issues such as whether their pricing of such services is arm’s length, may arise. As such, it is deemed necessary to also lay down the basic rules on reimbursable or allocable expenses for services between or among related parties to have a wholistic approach insofar as the determination of the proper tax treatment of cross-border services is concerned.

Like any other cross-border service agreement, the source of income of these reimbursable or allocable expenses is not determined by where income is disbursed or physically received, but rather where the business activity that produced such income is actually conducted.


The clarifications provided by RMC No. 38-2024 are a welcome development for taxpayers to understand and apply tax laws concerning cross-border services. However, the RMC was not able to address other crucial issues raised by the general taxpayers and other stakeholders, such as, among others, the application of Section 42 (C)(3) of the Tax Code which provides that compensation for labor or personal services performed without the Philippines shall be treated as gross income from sources without the Philippines, and that the imposition of VAT will only warrant if the service is performed in the Philippines. Hopefully, the BIR will shed further light on these matters.

Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.


As published in BusinessWorld, dated 26 March 2024