Philippines: Cross-border services may be subject to final withholding tax and final withholding value-added tax (VAT)

The Philippine tax authority clarifies the tax treatment and situs of cross-border services in respect of the assessment and collection of final withholding tax and final withholding VAT.
16 Jan 2024    1 minute read

In brief

On 10 January 2024, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 5-2024 to clarify whether cross-border services are subject to final withholding tax and final withholding VAT. RMC No. 5-2024 is based on the Supreme Court's decision in the case of Aces Philippines Cellular Satellite Corp. vs. Commissioner of Internal Revenue (G.R. No. 226680, 30 August 2022). It is effective immediately upon issuance.

Contents

The jurisdiction providing the essential services or factors for income generation is entitled to tax the income

RMC No. 5-2024 provides the following:

  • 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 income-producing activity took place.
  • Cross-border services include (i) consulting services, (ii) IT outsourcing, (iii) financial services, (iv) telecommunications, (v) engineering and construction, (vi) education and training, (vii) tourism and hospitality, and (viii) other similar services.

Application of the benefits-received theory

According to RMC No. 5-2024, it is imperative to ascertain whether the particular stages occurring in the Philippines are integral to the overall transaction such that the business activity would not have been accomplished without the Philippine activities. If the income-generating activities in the Philippines are deemed essential, the income derived from these activities is considered sourced from the Philippines for tax purposes.

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Kristine Anne Mercado-Tamayo
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Quisumbing Torres, Manila
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kristine.mercado-tamayo@quisumbingtorres.com
Roberto Romalio Reyes
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