The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 38-2024 last March 15, 2024, aimed at clarifying taxpayers’ concerns relative to RMC No. 5-2024 on the proper tax treatment of cross-border services in light of the Supreme Court En Banc Decision in Aces Philippines Cellular Satellite Corp. v. CIR, GR No. 226680, dated August 30, 2022.

The BIR clarified that the list of cross-border services in RMC No. 5-2024 does not automatically make their Philippine-sourced income subject to income tax. The intent of the list was merely to highlight that these cross-border services are also performed, rendered, delivered, or supplied by a non-resident foreign corporation (NRFC) to a domestic or resident entity in the Philippines, rather than automatically subjecting them to final withholding tax (FWT) and final withholding value-added tax (FVAT).

The said circular highlights that determining the source of income involves an examination of all the components of the cross-border service agreement involving two tax jurisdictions, namely the residence of the NRFC and the Philippines. In cases where the service agreement occurs in multiple stages across different taxing jurisdictions, it is important to examine all the components of the cross-border service agreement, looking at the services to be performed in its entirety, rather than isolating or compartmentalizing one particular activity as the income producing activity.

Further, the BIR emphasized the crucial factors to determine the taxability of such transaction: (i) 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; (ii) whether the performance of the service depends on the facilities located in the Philippines; or (iii) 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 it.

The BIR also clarified that once the source of income has been established for cross-border services within the Philippines, the transaction will also be subject to 12% FVAT. Sections 105 and 108 of the Tax Code provide that services rendered or performed in the Philippines by non-resident foreign persons are subject to VAT.

Additionally, the BIR clarified that the rules enunciated in RMC No. 5-2024 are not inconsistent with the provisions of tax treaties. If the source of income is established to be within the Philippines using the above-mentioned guidelines, the affected taxpayer can invoke the application of a particular tax treaty to assert that the income derived or sourced within the Philippines and is exempt from income tax or subject to preferential rate.

Finally, the BIR clarified the inclusion of reimbursable or allocable expenses for cross-border services between or among related parties in RMC No. 5-2024. The BIR emphasized that the determination of the source of income for the charges made by the parent entity or affiliates to a related local company for the services made by the former to the latter is still the time-honored rule, as reiterated by the Supreme Court in Aces Philippines, that, “in ascertaining the income source, we must inquire into the property, activity, or service that produced the income, or where the inflow of wealth originated, ” putting emphasis that, “the subject may only be regarded as an income source if the particular property, activity or service causes an increase in economic benefits, which may be in the form of an inflow or enhancement of assets or a decrease in liabilities with a corresponding increase in equity other than that attributable to a capital contribution. ”

Please be guided accordingly.



P&A Grant Thornton

Certified Public Accountants

P&A Grant Thornton is the Philippine member firm of Grant Thornton International Ltd


As published in SunStar Cebu, dated 01 April 2024