Interpreting when service income from cross-border transactions is considered Philippine-sourced – and taxable – has become a hot topic of debate lately in the Philippines.
The controversy follows Bureau of Internal Revenue (BIR) application of the Supreme Court’s 2022 ruling in Aces Philippines Cellular Satellite Corp v Commissioner of Internal Revenue (the Aces case) on such transactions.
Taxation, being an inherent power of a sovereignty, can be exercised only if there is a nexus between the subject (person, property, income or business) and the state that exercises that power.
CPA lawyer and Managing Partner
Mata-Perez, Tamayo & Francisco (MTF Counsel)
Under the National Internal Revenue Code (tax code), resident citizen individuals and domestic corporations are taxed on their worldwide income, while foreign corporations – whether resident or not – are taxed only on their Philippine-sourced income.
Philippine-sourced income is subject to rules that are well embodied in the tax code, providing that compensation for labour or services is deemed Philippine-sourced only if the services are performed in the Philippines.
Once income of a non-resident is considered Philippine-sourced (absent any exemption under income tax treaty), it is subject to the regular income tax rate of 25%, and value-added tax of 12%, both of which are required to be withheld by the Philippine payors.
In the Aces case, the Supreme Court held that the airtime fees paid by a domestic telecoms carrier to a foreign satellite company were Philippine-sourced income.
The country’s highest court took note that the income generating activity took place upon the receipt of calls routed by the satellite through gateway facilities located in the Philippines, with satellite air time fees accruing only when calls are received by these facilities and utilised by Philippine subscribers.
The Supreme Court held that the foreign satellite owner has sufficient economic or beneficial interest in the facilities owned by a local company “inasmuch as its Philippine operations are dependent on these local facilities”.
The decision did not consider the view of other jurisdictions or even the Organisation for Economic Co-operation and Development (OECD) approach, holding that the “service” of a satellite located in outer space is not domestic-sourced.
But in any case, the ruling did persuade the BIR to issue Revenue Memorandum Circular (RMC) No.5-2024 and apply the Aces case doctrine to various cross-border transactions.
The BIR specified that it is now imperative to determine whether particular stages of a transaction occurring in the Philippines are so integral to the overall transaction that the business activity would not have been accomplished without them.
This view, however, can always be skewed in favour of the Philippine leg of any transaction. It has been very controversial and given rise to an uptick in assessments against local companies for final withholding tax on their payments to non-residents for services rendered by them.
The subsequent RMC No.5-2025 circular amending certain provisions also mentioned “benefits received” as a basis to conclude that the payments to non-residents are Philippine-sourced. However, because both the Philippine entity and the foreign corporation provider would unavoidably mutually benefit from a service transaction, this test would not be reliable or even have legal basis in the determination of source of income.
Although clarified in subsequent issuances, RMC No.5-2025 remains controversial and was recently enjoined by the Court of Tax Appeals pursuant to a case brought about by several banking institutions.
For tax counsel, analysis of every transaction should be based on the legal provisions, taking into consideration the peculiarity of each case. While there seems to be a change in interpretation of the rules affecting situs (legal site) and cross-border transactions, the law should still prevail and be the guide in determining situs of cross-border services.
Neither the courts nor the BIR can change the law. The question that has to be answered and proven is still where the service was performed, because it is the place of performance of such service that is determining legal location under the Philippines tax code.
If the service was performed outside the Philippines and the provider is a non-resident, no Philippine tax should be due on the fees paid for said service.
Euney Marie Mata Perez is a CPA lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel)?
MTF CounselUnit 1002, One Corporate Plaza,
845 A. Arnaiz Ave, Legaspi Village,
Makati City, Philippines 1229
Contact details:
T: +63 2 8831 1297
E: euney.mata-perez@mtfcounsel.com
