Tax Alert No. 18 [Revenue Memorandum Circular (RMC) No. 38-2024 dated 15 March 2024]

Clarifying the Issues Raised on Revenue Memorandum Circular No. 5-2024

Please be informed that the BIR issued Revenue Memorandum Circular (“RMC”) No. 38-2024 on 15 March 2024 clarifying the concerns raised on RMC No. 5-2024 regarding the proper treatment of cross-border services in light of the Supreme Court decision in the Aces Philippines case.

The BIR clarified that the list of international or cross-border services in Q&A no. 2 of RMC No. 5-2024 is only to highlight that – like Aces Philippines – these services are performed, rendered, delivered, or supplied by a non-resident foreign corporation (“NRFC”) to a domestic/resident entity, and not to automatically subject these services to Final Withholding Tax (“FWT”) and Withholding VAT (“WVAT”).

The determination of the source of income involves an examination of all the components of the cross-border service agreements involving two taxing jurisdictions, taking into account the services to be performed in its entirety, and not singled out or compartmentalized on a particular activity as the income producing activity.

Crucial factors to such determination are on whether:

• The cross-border services are dependent on the successful use, consumption or utilization by the Philippine purchaser of the service for income to be accrued; or
• The performance of the service depends on the facilities located in the Philippines; or
• The particular stages of the service that occurred in the Philippines are so integral to the overall transaction that the business activity would not have been accomplished without it.

The RMC further mentioned that while Section 42(A)(3) and (C)(3) of the Tax Code, as amended, considers the labor or personal services as income sourced in the Philippines if the same are performed in the Philippines, the Supreme Court held in the Aces case that the subject may only be regarded as an income source if the particular property, activity or service causes an increase in economic benefits. Thus, the BIR concluded that the situs of the source of income for labor or personal services is not just the location where it is performed, but also the location of the service that produces the income or where the inflow of wealth originates.

Once the source of income is established to be within the Philippines following the above-mentioned conditions, the affected taxpayer may invoke the application of the tax treaty.

If the source of income of the cross border services is in the Philippines; the 12% WVAT will also apply.

In the case of reimbursable or allocable expenses for cross-border services between related parties, the same is subject to FWT and WVAT if the above-mentioned conditions are satisfied.

You may access the full version of the RMC through the BIR website.

For any inquiry or request for assistance, please feel free to contact anyone from our Tax Services group. You may also reach us through this link.