Summary
RMC No. 5-2024 further clarifies the tax treatment of cross-border services in light of the Supreme Court En Banc Decision in Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue, dated August 30, 2022.
Key points
- Two-tiered test in the Decision. The Supreme Court identified the source of the income first and then its situs. It held that the gateway’s receipt of the routed call was the income source and that the income had a Philippine situs, so the satellite airtime fees paid to Aces Bermuda, a Non-Resident Foreign Corporation, were subject to Final Withholding Tax (FWT).
- Burden on the taxpayer. The taxpayer must prove that income came from sources outside the Philippines. A satellite located in outer space did not decide the source.
- Source-based principle. Income is sourced where the business activity that generates it takes place, not where payment is made or received. If activities in the Philippines are so essential that the service cannot be accomplished without them, the income is Philippine-source and subject to income tax and FWT.
- Cross-border services covered. Examples include consulting, IT outsourcing, financial services, telecommunications, engineering and construction, education and training, and tourism and hospitality. Other similar services provided or performed overseas but used, applied or consumed in the Philippines are also covered.
- VAT treatment. Under Section 108(A) in relation to Section 114, twelve percent (12%) VAT applies to services performed in the Philippines or utilized or consumed by a Philippine recipient. Payment for such services is subject to Final Withholding VAT.
Who is affected
- Philippine payors of service fees to foreign companies
- Non-Resident Foreign Corporations providing cross-border services
Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.
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