Summary
RMC No. 38-2024 clarifies issues raised on RMC No. 5-2024 about the tax treatment of cross-border services after the Supreme Court decision in Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue.
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Key points
- Aces ruling not automatic. The Aces Philippines finding that income under the Satellite Air Time Purchase Agreement is Philippine-source and subject to final withholding tax does not automatically apply to the listed cross-border services. Question No. 2 of RMC No. 5-2024 listed them only to show they are rendered by a Non-Resident Foreign Corporation (NRFC) to a Philippine entity.
- How source is determined. Question No. 3 applies the long-standing rule that income is Philippine-source if the property, activity or service producing it is in the Philippines. The whole cross-border agreement is examined, not one activity singled out.
- Crucial factors. These include whether the income depends on successful use or consumption by the Philippine purchaser, whether performance depends on facilities in the Philippines, and whether stages in the Philippines are so integral that the business activity could not be accomplished without them.
- Tax treaties. The rules in RMC No. 5-2024 are not inconsistent with tax treaties. Once the source is within the Philippines, the taxpayer may invoke a treaty, for example for exemption for lack of permanent establishment or a preferential rate. The Philippines has forty-four (44) existing tax treaties.
- VAT and rates. Services performed in the Philippines by non-resident foreign persons are subject to VAT under Sections 105 and 108, collected by withholding under Section 114(C) and Section 4.114-2 of RR No. 16-2005, as amended. The Final Withholding rates stated are 25% on gross income under Sections 25(B) and 28(B), and 12% Final Withholding VAT.
- Related-party services. Intra-group services between related parties follow the same source rule. The Circular states that basic rules on reimbursable or allocable expenses between related parties are also laid down.
Who is affected
- Non-Resident Foreign Corporations providing cross-border services to Philippine entities
- Philippine payors of cross-border service fees
- Related parties with intra-group service charges
Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.
Copies of BIR issuances are hosted here for reference. For the official version, check bir.gov.ph. Summaries by Tax Resources PH are not a substitute for the full text or professional advice.