BIR Clarifies Issues Raised on the Taxability of Cross-border Services Rendered by Non-Resident Foreign Corporations

The BIR issued the Revenue Memorandum Circular (RMC) No. 38-2024, a follow-up to RMC No. 5-2024, which was released to address the taxability of services provided by foreign entities to Philippine entities.

RMC No. 5-2024, which states that cross-border services provided by a foreign entity to a Philippine entity are now taxable, is based on a landmark Supreme Court (SC) decision in Aces Philippines Cellular Satellite Corp. vs. Commissioner of Bureau of Internal Revenue.

In the SC case, the Court of Tax Appeals (CTA) ruled that the satellite airtime free payments by Aces Philippines, a domestic corporation, to Aces Bermuda, a Non-Resident Foreign Corporation (NRFC), are subject to final withholding tax since they are given as consideration for using satellite communication services.

However, various business groups argued that the factors in the SC case cannot be applied to all cross-border services. They also claim that the RMC may negatively impact foreign investments and local taxpayers.

To address the questions and confusion of the public, the BIR released RMC 38-2024. The BIR clarified that the SC case cited in RMC 5-2024 only highlights that services similar to the services provided in the SC case are performed, rendered, delivered, or supplied by NRFC to a domestic/resident entity and not to subject these services automatically to final withholding tax and withholding VAT.

To determine the source of income, it is necessary to carefully examine all the components of the cross-border service agreements between two different taxing jurisdictions while considering the entirety of the services to be performed. It is important not to isolate or categorize a particular activity as the sole income-producing activity.

Crucial factors to such determination are 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
• The performance of the service depends on the facilities located in the Philippines; or
• The particular stages of the service that occurred in the Philippines are so integral to the overall transaction that the business activity would not have been accomplished without it.

Once the income source is established to be in the Philippines, under the conditions above, the affected taxpayer may invoke the tax treaty.

If the source of income of the cross-border services is in the Philippines, the 12% withholding VAT will also apply.

In the case of reimbursable or allocable expenses for cross-border services between related parties, the same is subject to final withholding tax and withholding VAT if the conditions mentioned above are met.

The full version of the RMC is available through the BIR website.

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If this affects your business, seek further information and assistance from experts to know how to accurately comply with these changes for your tax obligations.