RMC No. 5-2024 — Further clarifying the proper tax treatment of cross-border services in light of the Supreme Court En Banc Decision in Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue, GR. No. 22668, dated August 30, 2022

BUREAU OF INTERNAL REVENUE REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE BUREAU OF INTERNALREVENUE 107 JAN 10 2024 D TUND

Quezon City 3 D{VSION

Date_1 f HAN 202t

REVENUE MEMORANDUM CIRCULAR NO._ 5- 2 0 24

SUBJECT : Further Clarifying the Proper Tax Treatment of Cross-Border Services

in Light of the Supreme Court En Banc Decision in Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue, G.R. No. 226680, dated August 30, 2022

TO : All Internal Revenue Officers and Others Concerned

This Circular is being issued to further clarify the proper tax treatment of cross-border services in light of the Supreme Court's En Banc Decision in Aces Philippines Cellular

established legal interpretations. As such, the Court's Decision serves as a valuable reference point for the Bureau in evaluating and addressing tax considerations related to the services rendered by NRFCs, contributing to a clearer understanding of the tax obligations associated with such transactions. Satellite Corp. v. Commissioner of Internal Revenue, G.R. No. 226680, dated August 30, 2022. the Philippine jurisdiction, allowing the Bureau to make informed determinations based on The Circular offers a framework for assessing the final withholding tax and final withholding Value-Added Tax (VAT) of the activities of non-resident foreign corporation (NRFC) within

Q1: What are the salient features of the Supreme Court's En Banc Decision in Aces

Philippines?

A1: The following are the relevant salient features of the Decision of the Supreme Court

satellite airtime services it provided to Aces Philippines: concerning final withholding tax on income payments abroad. The satellite airtime fee payments in this case were income payments made by Aces Philippines (payor/withholding agent) to Aces Bermuda (payee/income earner), a NRFC, for the

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first, the source of the income and, second, the situs of that source. Bermuda is subject to FWT requires a two-tiered approach, where we identify, Resolving the issue of whether the satellite air time fee payments to Aces

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Identifying the source A

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We must inguire into the property, activity, or service that produced the income, "Income" refers to the flow of wealth. In ascertaining the income source,

or where the inflow of wealth originated. It is insufficient to identify iust any property, activity, or service. The subject may only be regarded as an income attributable to a capital contribution. (emphasis and underscoring supplied) source if the particular property, activity, or service causes an increase in economic benefits, which may be in the form of an inflow or enhancement of assets or a decrease in liabilities with a corresponding increase in equity other than that

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place not during the act of transmission but only upon the gateway's receipt of the call as routed by the satellite. The Court identifies the gateway's receipt of the call as the income source as it coincides with (1) the completion or delivery of the service, and (2) the_inflow of economic benefits in favor of Aces Bermuda. (underscoring supplied) The Court agrees with the CTA that the income-generating activity takes

(l1) The [Philippine] gateway's receipt of the routed call marks the completion or.deliver of the

Service.

as the income-producing activity, the Court echoes the CTA En Banc's keen components of the Aces System (emphasis and underscoring supplied); and observation that "there is a continuous and very real connection" within the In rejecting Aces Philippines' attempt to single out the act of transmission

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time is delivered to Aces Philippines (i.e., upon the gateway's receipt of the routed call) and is utilized by the Philippine subscriber for a voice or data call. The (underscoring supplied) accrual of fees payable to Aces Bermuda signifies the inflow of economic benefits. In other words, the satellite air time fees accrue only when the satellite air

Identifying the situs B.

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from satellite air time fee payments: (1) the income-generating activity is directly government. In consideration of such protection, the flow of wealth should share the burden of supporting the government, and thus, is subject to tax. is settled that where the inflow of wealth and/or economic benefits proceeds from, and occurs within Philippine territory, it enjoys protection of the Philippine The following establishes the Philippine situs of Aces Bermuda's income After having identified the source of income, We now inguire into its situs. It

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associated with the gateways located within the Philippine_territory; and (2) engaging in the business of providing satellite communication services in the Philippines is a government regulated industry. (underscoring supplied)

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supplied) payments and completion of the principal undertaking) coincides with the receipt contributes to the income's Philippine situs. Verily, the gateways are legally owned economic/beneficial interest in these Philippine properties, inasmuch as its Philippine operations are dependent on these local facilities. (underscoring of the routed call by gateways located within Philippine territory. That income generation is dependent on the operations of facilities situated in the Philippines byAcesPhilippines.Nonetheless, To stress, the income-generating activity (i.e., accrual of satellite airtime fee Aces Bermuda has sufficient

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that: (a) Aces Bermuda's income attaches to property operated and maintained in the Philippines, and (b) making Aces Services available to Philippine subscribers, determinative of the income source and the situs thereof. At this point, it is clear All told, that the main asset is situated in outer space cannot be

albeit through its local service provider, is an endeavor that requires the

for its share in compensating the government for the protection it accords to Aces Bermuda's arrangements, operations, and related transactions in the Philippines. this income be subjected to Philippine taxation; to hold Aces Bermuda accountable (underscoring supplied) intervention of the Philippine government. In the Court's view, it is only fair that

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are foreign-sourced. Aces Philippines failed to establish that the satellite air time fee payments

was from sources outside the Philippines and exempt from the application of our income tax law. The rule is that the taxpayer bears the burden of proving that the "income

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The statements merely narrated that the satellite is situated in outer space but did not contradict the finding that Aces Bermuda's service is completed and performed in the Philippines. (underscoring supplied)

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Q2: What are the existing cross-border services akin to that of Aces vs. CIR?

A2: International Service Provision (or cross-border services) - A service-based company operates in various countries, providing services to clients. The income earned is

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allocated to the countries where the services are performed, taking into accounts factors such as the time spent, resources utilized, or value created in each jurisdiction. The source of income is determined by the location of the business activity rather than the disbursement or receipt of funds.

International service provision includes the following or similar transactions:

1. 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.

like software development, system maintenance, network management, or customer support. 2. IT Outsourcing -- A technology company in one country offers IT outsourcing services to businesses Iocated in different countries. This can involve services

3. Financial Services - Banks, investment firms, or insurance companies

This can include services like asset management, wealth advisory, international banking, or insurance coverage. operating internationally provide financial services to clients across borders.

4. Telecommunications -- Telecommunication companies offer services such as

in different countries. These services enable global communication and international calling, data connectivity, or internet services to customers located connectivity.

design, project management, infrastructure development, or construction 5. Engineering and Construction - Engineering and construction firms undertake projects in different countries, providing services like architectural services.

6. 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.

7. 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.

8. Other Similar Services -- refers 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, executed, or consumed within the Philippines.

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Q3: Based on the above-discussion by the Court in Aces Philippines, how would you establish the situs of taxation for the aforesaid cross-border services?

A3: The revenue-generating activity occurs within the Philippines.

accorded by the Philippine government. activity or service that produces the income is in the Philippines. The flow of wealth proceeded from, and occurred within the Philippine territory, enjoying the protection It is settled that the source of income is in the Philippines if the property,

payment is disbursed or physically received, but rather by the location where the principle is crucial in cases where business transactions occur in multiple stages across different taxing jurisdictions. In such instances, it becomes imperative to ascertain overall transaction that the business activity would not have been accomplished underlying business activities that produced the income actually took place. This whether the particular stages occurring in the Philippines are so integral to the The source of income is not necessarily determined by the location where the

the Philippines for tax purposes, irrespective of where the payment is ultimately received. This principle aligns with the benefits-received theory in taxation, which submits that the jurisdiction providing the essential services or factors for income generation should be entitled to tax that income. without them. If the income-generating activities in the Philippines are deemed essential, the income derived from these activities would be considered as sourced from

company, including those made through the internet or other electronic means with the The payment or income generated from service fees paid to the foreign

use of IT, is considered an inflow of economic benefits in favor of the foreign company.

On the other hand, the utilization of these services indicates that they offer benefits to the local company and are considered necessary to its business operations. The decision to avail these services is made with the intent of their relevance and importance to the local company's operations, reflecting sound judgment at the initial stage before engaging in such services. The outcomes or results of these services are subsequently put into practical use, applied, or utilized within the local country.

Q4:What is the treatment of reimbursable or allocable expenses, especially for cross- border services between or among related parties?

A4: The reimbursable or allocable expenses charged by a foreign corporation in the Philippines should contribute to the value or benefit received by a Iocal company. It payment to other affiliates or third parties for common incurred expenses. includes charges to the local company, with the affiliates abroad facilitating the

The reduction of expenses for a foreign corporation can be considered as income the foreign corporation's net income or profit. This is because the company is spending because it represents a financial gain or savings for the company, it effectively increases

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less on its operations, resulting in additional funds that can be used for other purposes or retained as profit. Therefore, the reduction in expenses is viewed as a form of income for the foreign corporation.

Q5: What would be the effect if there are no benefits derived from the cross-border

transactions?

A5: If there are no benefits derived by the Philippine company, then the payment becomes

unnecessary for regular commercial activity and instead becomes a means of shifting profits to a foreign company. In other words, if the income is not generated through business activities conducted in the Philippines or does not provide any benefits to the Iocal company, then, it may be seen as an attempt to evade taxes or manipulate profits by .funneling them to a foreign entity.

The main point here is that the source of income should be determined by the location of the business activity that generates the income, rather than the location of the payout

should be taxed in the jurisdiction where the economic activity takes place and where or where it is physically received. This perspective aligns with the principle that income

the benefits of that activity are received.

Q6: the location of the business activity that generates the income, rather than the What do you mean by the phrase, "the source of income should be determined by

location of the payout or where it is physically received."?

A6: This principle is known as the source-based taxation principle. The jurisdiction where

the economic activity occurs should have the right to tax the income derived from that activity, regardless of where the payment is made or received. This ensures that income is taxed in the jurisdiction (Philippines) where the economic activity occurs and, thus. prevent tax avoidance.

jurisdiction. This principle also promotes fairness in taxation by avoiding situations tax base and ensure that they can coilect taxes on income generated within their By attributing income to the source of the business activity, countries can maintain their

where income is artificially shifted or allocated to jurisdictions with more favorable tax regimes. Q7: Are revenues generated from service fees paid to foreign companies or individuals. which are considered sources within the Philippines, also subject to VAT?

A7: As propounded above, the source of income is not determined by where the payout is

disbursed or physically received, but rather by where the business activity that generated the income took place. Even if the services are conducted or paid abroad, but there are activities to be performed in the Philippines so essential that the entire service

Philippines. The income generated by the foreign company providing the services. which are considered sources within the Philippines, shall be subject to income tax and, consequently to final withholding tax. transaction cannot be accomplished without them, then, the benefit-received theory applies. This means that the revenue-generating activity actually occurs within the

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Section 114 of the NIRC of 1997, as amended, plays a significant role in determining In relation to VAT, it is important to note that Section 108(A), in relation to

Philippines. the use or lease of properties. This provision generally states that a twelve percent the applicability of VAT on payments related to the sale or exchange of services and (12%) VAT is levied only if the services in question are performed within the

activities involving the provision of services in the Philippines to others in exchange for a fee, remuneration, or consideration. It includes any service performed within the The phrase "sale or exchange of services" encompasses a broad range of

country for the benefit of another party, whether it involves professional services, consulting, technical assistance, or any other form of service provision.

be subject to final withholding VAT. if the service is utilized, applied, executed or consumed for a recipient within the Philippines, the income payment for such service is considered sourced within the individuals which is subject to VAT if the source of that income is within the Philippines. This means that even if the service provider is located outside the country. country and, thus, the VAT is applicable. Consequently. payment for such service shall This includes income generated from service fees paid to foreign companies or

provision thereof. give this Circular the widest dissemination and publicity as possible and strictly implement the All internal revenue officers, employees and others concerned are hereby enjoined to

This Circular takes effect immediately.

0f Lssioner of Internal Revenue GUI,JR

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