BIR Clarifies Tax Treatment On Cross-Border Services | CloudCFO PH
BIR Clarifies Tax Treatment On Cross-Border Services

BIR Clarifies Tax Treatment On Cross-Border Services

Posted on February 7, 2024

The Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular (RMC) No. 5-2024, clarifying cross-border services’ tax treatment. This circular stems from the Supreme Court’s decisive ruling in the case of Aces Philippines Cellular Satellite Corp. vs. Commissioner of Internal Revenue (G.R. No. 226680, 30 August 2022). Effective immediately upon issuance, RMC No. 5-2024 introduces a source-based taxation principle, shaking up established norms and raising pertinent questions for taxpayers.

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Source-Based Taxation and Its Implications

In the wake of the Aces Philippines case, the BIR’s RMC heralds a paradigm shift by introducing the source-based taxation principle for cross-border services. The crux of this principle lies in attributing taxation rights to the jurisdiction where the economic activity generating income occurs. This marks a departure from the conventional approach, emphasizing the location of payment disbursement or receipt.

RMC No. 5-2024 asserts that if the results or outputs of cross-border services spanning consulting, IT outsourcing, financial services, telecommunications, engineering and construction, education and training, tourism, hospitality, and other similar services find utilization in the country, the income from these services will be considered sourced within the Philippines. Even expenses charged to local companies by foreign corporations that are related parties are deemed income, as they represent financial gains or savings for the foreign entity.

However, this bold move by the BIR has left taxpayers with a myriad of questions. Does the source-based principle apply to all cross-border services, or is it limited to specific scenarios such as satellite airtime fee payments? Does it override existing tax code sections and provisions? Can foreign corporations still avail of tax treaty relief? These questions underscore the need for a nuanced understanding of the circular’s implications.

Salient Features of Aces Philippines Case

The Aces Philippines case, the bedrock upon which RMC No. 5-2024 stands, offers a two-tiered approach to determine the taxability of satellite airtime fee payments. Identifying the source of income and the situs of income, the Supreme Court intricately examined the completion or delivery of service and the inflow of economic benefits.

Completion or delivery of service was pinpointed not during transmission but upon the gateway’s receipt of the call as routed by the satellite. This continuous connection between the satellite, control center in Indonesia, and terminals and gateways in the Philippines solidified the income source in the country.

The situs of income, crucial in determining taxation jurisdiction, was established based on the integral connection between income-generating activities and gateways in the Philippine territory. A government-regulated industry and the failure to prove foreign-sourced income contributed to the income’s Philippine situs.

Taxation of Cross-Border Services According to RMC 5-2024

RMC 5-2024 goes beyond satellite airtime fees, encompassing various cross-border services, and introduces the source-based principle for taxation. This means that regardless of payment location, the jurisdiction where the economic activity occurs has the right to tax the income. The circular defines cross-border services as those conducted abroad but utilized in the Philippines, covering consulting, IT outsourcing, financial services, telecommunications, engineering and construction, education and training, tourism and hospitality, and other similar services.

Under the sourced-based principle, the jurisdiction providing essential services for income generation is entitled to tax that income. This ensures income is taxed where economic activity occurs, preventing tax avoidance.

Additionally, the circular stipulates that income generated from service fees paid to foreign entities is subject to VAT if the source of income is within the Philippines. Even if the services are conducted abroad, if essential activities occur in the Philippines, VAT applies.

Repercussions and Guidance for Taxpayers

The issuance of RMC No. 5-2024 undoubtedly leaves room for interpretation and raises questions during tax investigations and audits. If you need guidance on Philippine taxation, CloudCFO provides expert and tech-empowered accountants to give added value insights to your taxation needs. Inquire today and don’t let the complex landscape of Philippine taxation stop you from scaling your business. 

DISCLAIMER: This article is strictly for general information purposes only. Nothing in this article constitutes or intends to constitute financial, accounting, regulatory or legal advice and must not be used as a substitute for professional advice. It is still necessary to consult your relevant professional adviser regarding any specific matter referenced above.

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