Taxation of cross-border services clarified
By: Atty. Euney Marie J. Mata-Perez on April 9, 2026
THE Bureau of Internal Revenue (BIR) has clarified that not all income from cross-border transactions should be considered Philippine-sourced income. On March 30, 2026, the BIR issued Revenue Memorandum Circular (RMC) 24-2026 to clarify the proper application of RMCs 5-2024 and 38-2024, ensure alignment with statutory and jurisprudential standards and provide certainty to both revenue officers and taxpayers.
RMC 5-2024 was issued to apply the Supreme Court ruling on the taxation of cross-border services in Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue, G.R. No. 226680, dated August 30, 2022. Subsequently, the BIR issued RMC 38-2024 to address and clarify issues arising from the implementation of RMC 5-2024.
Under RMC 5-2024, the BIR took the position that various existing cross-border services rendered by non-resident service providers were akin to the services rendered by the foreign satellite company subject of the Aces case, and thus payments to such providers should be subject to a 25-percent withholding tax plus 12-percent VAT.
The cross-border services referred to in RMC 5-2024 include consulting services, IT outsourcing, financial services, telecommunications, engineering and construction, education and training, and tourism and hospitality.
RMC 24-2026 acknowledges the general rule regarding the taxation situs of income from services, as set out in Section 42 of the National Internal Revenue Code, that the income is taxed where the service is performed. However, it acknowledges that the Aces case “expands” the situs rule for taxation of services by including the place where the benefit is received or where the service is completed in determining taxability in the Philippines.
Thus, RMC 24-2026 provides that a revenue officer invoking the rule under the Aces case as a basis for assessment must clearly explain the existence of the following essential elements:
– the parties involved are a payor who is a Philippine resident individual or domestic corporation doing business and a payee who is a non-resident service provider;
– the specific activity or service is integral to the completion or delivery of the non-resident service provider’s service and resulted in actual payment or accrual, constituting economic benefit to the non-resident service provider;
– the situs of the income-producing activity is within the Philippines; and
– there is no applicable income tax exemption under tax treaties or domestic law.
Thus, like in Aces case, determining the source of income requires an examination of the cross-border service agreement as a whole. The evaluation must consider the entirety of the services performed and must not isolate or compartmentalize a single activity as the sole income-producing act. RMC 24-2026 maintains that this approach is consistent with Article 1233 of the New Civil Code, which provides that an obligation is deemed performed when the service constituting the obligation has been completely delivered or rendered.
It also specified documents that the taxpayer must submit and confirmed that seeking a ruling from the BIR is not a mandatory requirement. It also prescribed a checklist, which shall be accomplished and shall form part of the audit docket case.
RMC 24-2026 clarified that the circular does not apply to passive income, income from sale of goods and pass-through payment in favor of another non-resident for services rendered outside the Philippines.
RMC 24-2026 is good in the sense that it provided guidelines to revenue examiners, with the hope that it shall prevent the indiscriminate application of the doctrine in the Aces case. However, we still believe that there is a risk that the Aces case doctrine may not be properly applied, for the following reasons:
– Peculiarity of the Aces case. Here, it is only when the call is actually routed to a gateway that the local subscriber is able to connect to the intended recipient of the call. Thus, the gateway’s receipt of the call — the activity occurring in the Philippines — signifies completion/delivery of satellite service. The payment or accrual of satellite air time fees is contingent upon the delivery of satellite air time to the Philippines.
– The Aces case cannot expand the law. The Supreme Court interprets the law and cannot expand the application of a law. In fact, the Supreme Court applied the place of performance test in the Aces case when it concluded that the service, which was the call, having been delivered in the Philippines through the satellite, was rendered in the Philippines.
– Lack of basis of benefits received theory. The “benefits received” theory has no basis in the income tax provisions in our Tax Code.
The services rendered by a non-resident service provider will necessarily benefit the Philippine party; otherwise, the Philippine party will not engage the services. Also, necessarily, the payment for the service fees will originate from the Philippines and indubitably, the non-resident service provider will gain economic wealth in receiving such fees.
If these criteria will be used, it may still result in the improper application of the doctrine enunciated in the Aces case.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal and is the Chair of the Tax Committee of the Management Association of the Philippines. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com.
The article was published at the More to Follow Column at The Manila Times on April 9, 2026. Please see this link.