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.

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.

* * * * *

LOGO Philippines_QuisumbingTorres_Manila

Please contact QTInfoDesk@quisumbingtorres.com for inquiries.

VISIT QUISUMBING TORRES SITE


Copyright © 2024 Baker & McKenzie. All rights reserved. Ownership: This documentation and content (Content) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms). The Content is protected under international copyright conventions. Use of this Content does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All Content is for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulations and practice are subject to change. The Content is not offered as legal or professional advice for any specific matter. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any Content. Baker McKenzie and the editors and the contributing authors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The Content may contain links to external websites and external websites may link to the Content. Baker McKenzie is not responsible for the content or operation of any such external sites and disclaims all liability, howsoever occurring, in respect of the content or operation of any such external websites. Attorney Advertising: This Content may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Content may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. Reproduction: Reproduction of reasonable portions of the Content is permitted provided that (i) such reproductions are made available free of charge and for non-commercial purposes, (ii) such reproductions are properly attributed to Baker McKenzie, (iii) the portion of the Content being reproduced is not altered or made available in a manner that modifies the Content or presents the Content being reproduced in a false light and (iv) notice is made to the disclaimers included on the Content. The permission to re-copy does not allow for incorporation of any substantial portion of the Content in any work or publication, whether in hard copy, electronic or any other form or for commercial purposes.