What key clarifications does Revenue Memorandum Circular 38-2024 provide on cross-border services?

The Bureau of Internal Revenue (BIR) clarified through Revenue Memorandum Circular (RMC) 38-2024 that international service provisions or cross-border services in Question No. 2 of RMC 5-2024 are not automatically subject to Final Withholding Tax (FWT) and Final Withholding VAT (FVAT). Instead, the issuance provides guidelines for determining the source of income when these services are performed, rendered, delivered, or supplied by a Non-Resident Foreign Corporation (NRFC) to a domestic or resident entity in the Philippines.

Determining the source of income requires examining all components of the cross-border service agreement between two tax jurisdictions. This assessment must consider the entirety of the services performed rather than isolating or compartmentalizing a specific activity as the sole income-producing factor. The crucial factors to consider are shown below.

Do the rules set forth in RMC 5-2024 conflict with the provisions of tax treaties?

RMC 38-2024 clarifies that RMC 5-2024 does not conflict with tax treaties. Instead, it provides guidelines for determining the source of taxation for cross-border services. If income is established as sourced within the Philippines, the taxpayer may apply the relevant tax treaty to seek either an exemption from income tax or a preferential tax rate, depending on the presence of a permanent establishment.

Both circulars uphold the benefits-received theory, which states that if economic benefits flow into the Philippines and enjoy the protection of the Philippine government, they should be subject to Philippine taxes.

How are reimbursable or allocable expenses for cross-border services treated?

The regulation clarifies that reimbursable or allocable expenses among related parties, such as management, financial, or technical services, must be at arm’s length and contribute value to the Philippine entity or local companies. If they meet certain criteria, they may be subject to withholding taxes and VAT.

The BIR follows the Aces Philippines ruling, stating that the source of income is determined by where the business activity occurs, not where the income is paid or received; the aforementioned RMCs were issued to ensure a consistent tax treatment for cross-border services. – Rappler.com

The content provided in this article above is for general purposes only. If you want to know more about VAT Withholding and Tax Treatment for Cross-Border Services, CONSULT ACG or email us at consult@acg.ph

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