The BIR’s updated approach to cross-border services

Since the Supreme Court issued its landmark Aces Philippines Cellular Satellite Corp. v. CIR ruling, the taxation of cross-border services has been the subject of extensive debate. The subsequent issuance of Revenue Memorandum Circular (RMC) No. 5-2024, as later supplemented by RMC No. 38-2024, sought to clarify the ruling but only raised further concerns among taxpayers due to its expansive interpretation and the aggressive audit assessments that followed.

On March 30, the Bureau of Internal Revenue (BIR) seems to have taken a step back with the issuance of RMC No. 24-2026, which appears to have tempered the reach of RMC No. 52024. While framed as a clarification, the new Circular refines its application by underscoring the need for careful factual determination and closer adherence to governing law and jurisprudence.

THE ISSUE OF AUTOMATIC TAXABILITY
One of the most significant takeaways from RMC No. 24-2026 is its clear statement that cross-border services are not automatically subject to Philippine income tax simply because they are categorized as such. This clarification addresses a key concern about RMC No. 5-2024, which listed various services (e.g., consulting, IT outsourcing, and management services) in a way that appeared to presume taxability whenever the services benefitted a Philippine entity.

RMC No. 24-2026 corrects this impression by underscoring the basic principle of tax law that the classification of a service does not determine its taxability.

RMC No. 24-2026 brings the focus back to the general rule for the taxation of situs of services, i.e., that the income is taxed where the service is performed. In considering the application of the Aces Philippines case, which expands the situs rule for taxation of services to include the place where the benefit is received or where the service is completed, Revenue Officers are directed to factually establish the source of income within the Philippines, and not merely rely on the classification of the service. For businesses engaging foreign service providers, this clarification offers much needed assurance that cross-border arrangements will not be taxed by default.

HOW THE BIR MUST ESTABLISH TAXABILITY
As a more disciplined application of the Aces Philippines case, the new Circular emphasized that cross-border service agreements are to be examined as a whole, the evaluation of which must consider the entirety of the services performed, and not just isolate a single activity as the sole income producing act. Assessments must clearly show the existence of the following essential elements:

• The payor is a Philippine resident or domestic entity, and the payee is a non-resident service provider;

• The service or activity: (a) is integral to the completion or delivery of the service, and (b) results in actual payment or accrual, creating economic benefit to the nonresident;

• The income-producing activity is situated in the Philippines; and

• There is no applicable exemption in tax treaties or domestic law.

Passive income, income from the sale of goods, and pass-through payments made to another nonresident for services performed outside the Philippines are excluded from this coverage. This explicit exclusion appears to be an attempt to address the confusion around reimbursable expenses, cost allocations, and shared services. The clarification reduces the risk that simple reimbursements will automatically be treated as taxable income. That said, the Circular provides limited detail on how to distinguish true passthrough payments from taxable service fees, leaving room for interpretation in more complex arrangements.

DOCUMENTS TAXPAYERS MAY PRESENT DURING AUDIT
RMC No. 24-2026 reiterates the principle in the Aces Philippines case that the burden of proof rests on the taxpayer to show that payments to nonresident service providers are from sources outside the Philippines, and therefore not subject to Philippine income tax. Thus, the new Circular provided guidance as to the supporting documents that the taxpayer may present, including, but not limited to sworn statements describing the transaction and services rendered; service contracts, master service agreements, statements of work, invoices, billing statements, or relevant correspondence; Tax Residency Certificate of the non-resident service provider; SEC Certificate of Non-Registration of the nonresident foreign corporation; proof of foreign organization or registration; proof of outward remittance; relevant BIR rulings, if any;  and, Certificate of Entitlement to Treaty Benefits, if applicable. A prior BIR ruling is not required, and the lack of one will not prejudice a taxpayer if the position can be properly supported during audit.

AREAS FOR FURTHER CLARIFICATION
While RMC No. 24-2026 provides meaningful clarification and introduces a more disciplined framework, there remain areas where additional guidance would be welcome and beneficial to taxpayers.

One area where further clarification may be helpful is the inclusion of practical examples. Illustrative scenarios covering common cross-border arrangements, such as consulting services, IT outsourcing, management fees, and fixed-fee engagements could assist taxpayers and revenue examiners alike in applying the sourcing principles consistently and with greater certainty.

Additional guidance may also be useful in relation to fixed-fee and outcome-independent services. While the Circular emphasizes the concepts of “completion” or “delivery” of services, it remains unclear how these tests apply where payment is not contingent on the successful use or measurable results of the service.

There is likewise room for further clarification on cost allocations and shared service arrangements. Although RMC No. 24-2026 excludes passthrough payments from its scope, the lack of clear criteria for evaluating cost charges, particularly in related party arrangements, may still pose challenges for both taxpayers and revenue examiners.

Finally, taxpayers may benefit from guidance on the treatment of pending ruling requests or tax treaty applications during audit. Clarifying whether and how such pending applications may be considered in evaluating taxability would help address procedural concerns for taxpayers who have proactively sought confirmation and are awaiting BIR action.

CONCLUSION
RMC No. 24-2026 reins in the earlier expansive interpretations of RMC Nos. 5-2024 and 38-2024, placing greater emphasis on the facts of each transaction and ensuring that tax assessments are grounded in established legal principles. However, the Circular is best viewed as a course correction rather than a final settlement. Until further guidance is issued, taxpayers should continue to approach cross-border service arrangements with careful documentation, clear contracts, and a well-reasoned sourcing analysis.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Ivy Clarize A. Bernardez is an associate from the Tax Advisory & Compliance practice area of P&A Grant Thornton the Philippine member firm of Grant Thornton International Ltd.