Traversing the taxation of cross border services

LET'S TALK TAX JOHN PAULO D. GARCIA

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Over a year since the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circulars (RMC) Nos. 05-2024 and 38-2024, taxpayers continue to navigate the complexities that these twin issuances introduced in the taxation of cross-border services.

In particular, payments to foreign service providers have become a common focus during BIR audits, often resulting in assessments for final withholding tax (FWT) and final withholding value-added tax (FWVAT). In order to manage potential tax exposure and ensure compliance with tax obligations in relation to these cross-border services, taxpayers should undertake deliberate measures such as conducting a thorough review of cross-border service arrangements and strengthening documentation, among others.

RMC Nos. 05-2024 and 38-2024 were issued by the BIR to clarify the tax treatment of cross-border services in light of the Supreme Court's En Banc Decision in Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue, G.R. No. 226680. These circulars adopt the “benefit-received theory” in determining the situs or location of taxation for purposes of income tax and value-added tax (VAT). Under this approach, the source of income is deemed to be in the Philippines if the property, activity, or service generating the income is situated within Philippine territory. Consequently, where the flow of wealth originates from or occurs within the Philippines — benefiting from the protection provided by the Philippine government — the income is subject to Philippine income tax and VAT and consequently, to FWT and FWVAT.