The Supreme Court, through its decision in Aces Philippines Cellular Satellite Corp. (Aces Philippines) vs. Commissioner of Internal Revenue (G.R. No. 226680, August 30, 2022), ruled that the airtime fees Aces Philippines paid to its related party, Aces Bermuda, under an airtime purchase agreement are considered sourced from the Philippines and are therefore subject to withholding tax. In the decided case, the Bureau of Internal Revenue (BIR) posited that satellite airtime fees are income payments to nonresident foreign corporations (NRFC) subject to final withholding tax (FWT) by the payor, Aces Philippines. The latter, however, claims that since it uses satellites located outside the Philippines, the services were sourced outside the Philippines and should not have been subject to withholding tax. Upon the decision of the Supreme Court, the satellite airtime fees are considered the full performance of the contractual services since there are gateway facilities situated in the Philippines that successfully transmit data signals to the end users of Aces Philippines, which would give rise to income payments subject to final withholding tax.

Considering the SC decision, BIR has recently issued Revenue Memorandum Circular (RMC) No. 5-2024 on the tax treatment of final withholding taxes on payments for purchase of services from companies abroad. Under the RMC, international service provision or cross-border services are defined as services rendered by companies located abroad (e.g., non-resident foreign corporations) throughout various countries outside its jurisdiction, or “borders.”

The location of the business activity, rather than the disbursement or receipt of funds, determines the source of income for taxation purposes under the new RMC. This is seen as a means of promoting fairness in taxation by preventing instances where the taxpayer’s income is artificially shifted or allocated to jurisdictions where tax regimes are more favorable to them. 

Under the source-based principle of taxation, the source of income for cross-border services does not necessarily mean the location where the payment is disbursed or physically received, but rather where the income-generating business activity took place.

 Further, under the benefits-received theory discussed in the RMC, if specific stages in the said business transaction occurring in the Philippines are so integral to producing the income and completing the overall transaction, such activities are deemed essential and therefore considered to be sourced from the Philippines and subject to Philippine tax regulations, regardless of where the payment is ultimately received. The RMC further thrusts on the benefits-received theory, which generally states that the jurisdiction providing the essential services or factors for income generation should be entitled to tax such income.

Moreover, payments and income generated from service fees paid to foreign companies, including those made through the internet and electronic means, are considered an inflow of economic benefits in favor of the foreign company. On the other hand, the use of such services suggests that these services are beneficial to the local company and are deemed essential to its operations. Therefore, payments made to NRFCs for cross-border services are subject to 25% (FWT) and 12% final withholding value-added tax (FVAT).

RMC No. 05-2024 also enumerated several cross-border services that are also subject to withholding tax, as follows:

  • Consulting services are the services provided by a consulting firm in one country to clients located in different countries.
  • IT Outsourcing is the outsourcing of a technology company to one country, providing such services to businesses located in different countries. This includes software development, system maintenance, network management, or customer support.
  • Financial Services of banks, investment firms, or insurance companies operating internationally including asset management, wealth advisory, international banking, or insurance coverage.
  • Engineering and Construction firms that undertake projects in different countries providing services like architectural design, project management, infrastructure development, or construction services.
  • Educational institutions or training providers that offer international programs, courses, or professional training to students or professionals from various countries. This can involve language courses, academic programs, vocational training, or skill development courses.
  • Tourism and Hospitality, where travel agencies, hotels, online booking applications, or tour operators cater to tourists, providing services like planning, accommodation, transportation, tour packages, or entertainment activities.
  • Other similar services that are not specifically mentioned yet follow the same concept of being provided, processed, or performed overseas and then utilized, applied, executed, or consumed within the Philippines.

In relation to VAT, Section 108(A), in relation to Section 114 of the NIRC of 1997, states that VAT is levied only if the sale or exchange of services is performed within the Philippines. The phrase sales or exchange of services may include services provided within the Philippines or income generated from service fees where the source of such income is from the Philippines. This means that even 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 of such a service is considered sourced within the country and therefore subject to VAT. Consequently, the payment for such services shall be subject to the 12% FVAT.

The RMC also emphasized that reimbursable or allocable expenses among related parties, especially for cross-border services between a foreign and a local company, will also be subject to the applicable withholding tax. Since there is a reduction in expenses for a foreign corporation through the allocation of expenses, it can be considered a financial gain or savings that increases the foreign corporation’s net income or profit as it is spending less on its operations.

Further, reimbursable expenses are financial gains or savings for the company where the affiliates abroad facilitate the payment to other affiliates or third parties for commonly incurred expenses. In either case, there is a consideration of benefits received by the Philippine company from their foreign related parties due to the reimbursement and/or allocation of expenses, and as a result, the same shall be subject to the applicable withholding taxes.

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 18 February 2024