On 10 January 2024, the Bureau of Internal Revenue (“BIR”) issued Revenue Memorandum Circular (“RMC”) No. 5-2024 which clarifies the tax treatment of cross-border services based on the case of Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue, G.R. No. 22668, 30 August 2022.
Aces Philippines Cellular Satellite Corporation (“Aces Philippines”) and Aces International Limited (“Aces Bermuda”) has an agreement whereby the former pays satellite airtime fees to the latter in exchange for satellite communication services. Following this arrangement, Aces Philippines took over the operation of the gateways situated in the Philippines. The BIR discovered that while Aces Philippines had paid satellite airtime fees to Aces Bermuda, it had failed to withhold the appropriate taxes. Aces Philippines argued that Aces Bermuda’s income from satellite airtime fees was not subject to tax because the activity that produces the income takes place outside the Philippines (i.e. control center in Indonesia and satellite in outer space).
The Court ruled that the source of the income is the gateways’ receipt of the call as routed by the satellite since the fulfillment of Aces Bermuda’s service is done when the satellite routes the call, and a gateway receives the routed call. Furthermore, the income or the inflow of economic benefits to Aces Bermuda accrue only when the gateway receives the routed call.
Also, the Court held that the situs of this source is directly associated with the gateways located within Philippine territory. The income-generating activity or the accrual of satellite airtime fees is dependent on the operations of these gateways in the Philippines.
Therefore, the satellite airtime fee payments to Aces Bermuda constitute as income from sources within the Philippines and should be withheld.
Based on the ruling above, the BIR set forth the following guidelines under RMC 5-2024:
- Cross-border services include the following:
- Consulting, IT, financial services, telecommunications, engineering and construction, education and training, tourism and hospitality, and other similar services that are provided, processed, or performed overseas and then utilized, applied, executed, or consumed within the Philippines.
- Situs of taxation for cross-border services
- The source of income is in the Philippines if the property, activity, or service that produces the income is in the Philippines.
- The source of income is not necessarily determined by the location where the payment is disbursed or physically received, but rather by the location where the underlying business activities that produced the income actually took place.
- It is imperative to ascertain whether the particular stages occurring in the Philippines are so integral to the overall transaction that the business activity would not have been accomplished without them.
- Treatment of reimbursable or allocable expenses for cross-border services between or among related parties
- Reimbursable or allocable expenses charged by a foreign corporation should contribute to the value or benefit received by a local company.
- Reduction of expenses for the foreign corporation can be considered income because it represents a financial gain or savings for the company.
- Effect if there are no benefits derived from the cross-border transactions by the Philippine company
- If income is not generated through business activities conducted in the Philippines, then, it may be seen as an attempt to evade taxes or manipulate profits by funneling them to a foreign entity.
On 15 March 2025, the BIR issued RMC 38-2024 to address concerns, questions, and issues raised in RMC No. 5-2024 through the following:
- The determination of the source of income involves an examination of all the components of the cross-border service agreement involving two tax jurisdictions, taking into account the services to be performed in its entirety, and not singled out or compartmentalized one particular activity as the income producing activity.
- Once the source of income is established to be within the Philippines using the aforesaid guidelines, then, the affected taxpayer can invoke the application of a particular tax treaty to assert that the income derived or sourced within the Philippines is exempt from income tax for lack of permanent establishment or subject to preferential rate, as the case may be.
As seen from the above pronouncements of the BIR, we can see that they are adopting a view that there must be an imposition of tax on transactions even though they may have been physically rendered outside the Philippines as long as the inflow of wealth and/or economic benefits proceeded from or occurred within the Philippines.
This guide provides a general overview of the above transactions at the time of writing only and is not intended to be a comprehensive legal advice. This should also not be taken as an opinion on the topic. For more details and information, you may coordinate with any GVES Law Partner regarding the matter.
Atty. Feleo C. Quijano is an Associate of GVES Law.