By Eric T. Dykimching and Christianne Grace F. Salonga
The Bureau of Internal Revenue (BIR) issued on January 10, 2024, Revenue Memorandum Circular (RMC) No. 5-2024 (RMC 5-2024), establishing the guidelines for assessing the final withholding tax (FWT) and final withholding Value-Added Tax (VAT) of the business activities of non-resident foreign corporations (NRFCs) within Philippine jurisdiction. RMC 5-2024 aims to clarify the appropriate tax treatment of cross-border services, particularly in light of the Supreme Court’s en banc Decision in “Aces Philippines Cellular Satellite Corp. vs. Commissioner of Internal Revenue”, G.R. No. 226680, dated August 30, 2022 (Aces Philippines vs. CIR or the Decision).
In the Decision, the Supreme Court held that payments for satellite airtime fees made by Aces Philippines (as payor or withholding agent) to Aces Bermuda (as payee or income earner) constituted income payments to a non-resident foreign corporation (NRFC) and were therefore subject to FWT. The Supreme Court’s analysis centered on the identification of the source of income and its situs. It underscored that the income-generating activity in the said case is the completion or delivery of the satellite service upon receipt of the routed call by the gateway located in the Philippines, rather than the mere act of satellite transmission, which takes place outside the Philippines. Thus, the situs of the said income source is the Philippines because the income generation is dependent on the operations of the gateway facilities situated in the Philippines.
BIR RMC 5-2024 enumerates the following cross-border services similar to that of Aces Philippines vs. CIR:
- “Consulting Services – A consulting firm based in one country provides advisory or consulting services to clients located in different countries. The firm may offer expertise in various areas such as management, finance, technology, or marketing. The consulting is carried abroad, but the results or outputs are used locally. The payment to the foreign consulting firm is considered an inflow of economic benefits to the foreign company. The income is sourced within the Philippines.
- IT Outsourcing – A technology company in one country offers IT outsourcing services to businesses located in different countries. This can involve services like software development, system maintenance, network management, or customer support.
- Financial Services – Banks, investment firms, or insurance companies operating internationally provide financial services to clients across borders. This can include services like asset management, wealth advisory, international banking, or insurance coverage.
- Telecommunications – telecommunication companies offer services such as international calling, data connectivity, or internet services to customers located in different countries. These services enable global communication and connectivity.
- Engineering and Construction – Engineering and constructions firms undertake projects in different countries, providing services like architectural design, project management, infrastructure development, or construction services.
- Education and Training – Educational institutions or training providers offer international programs, courses, or professional training to students or professionals from various countries. This can involve language courses, academic programs, vocational training, or skill development courses.
- Tourism and Hospitality – Travel agencies, hotels, online booking application, or tour operators cater to tourists, providing services like, planning, accommodation, transportation, tour packages, or entertainment activities.
- Other Similar Services – refer to services that are not specifically mentioned above but still follow the same concept of being provided, processed, or performed overseas and then utilized, applied, excluded, or consumed within the Philippines.”
Based on the foregoing, various existing cross-border services, such as consulting services, IT outsourcing, financial services, telecommunications, engineering and construction, education and training, tourism and hospitality, and other similar services, entail income allocation to countries where services are rendered. This allocation considers factors such as time spent, resources utilized, and value created in each jurisdiction. The crucial determinant for taxation situs is the location of the business activity rather than the receipt or disbursement of funds. This is pursuant to the “source-based taxation principle”, which ensures that income derived from economic activities occurring within a jurisdiction is subject to taxation in that jurisdiction, regardless of payment location.
Furthermore, concerning VAT, Section 108(A) in conjunction with Section 114 of the National Internal Revenue Code of 1997, as amended, imposes a 12% VAT only on services performed within the Philippines, including those performed for the benefit of another party within the country. Consequently, income from service fees paid to foreign entities is subject to VAT if the source of such income is within the Philippines, irrespective of the service provider’s location. Thus, the Supreme Court, in Aces Philippines vs. CIR, held that VAT applies to satellite airtime fees made by Aces Philippines to Aces Bermuda, as these are income payments for services utilized, applied, executed, or consumed within the Philippines.
In RMC 38-2024, the BIR clarified that “the affected taxpayer can invoke the application of a particular tax treaty to assert that the income derived or sourced within the Philippines (e.g., business profits, dividends, royalties or interests) is exempt from income tax for lack of permanent establishment or subject to preferential rate, as the case may be.”