Refining Taxation of Cross-Border Services: Key Insights from RMC No. 24-2026

 As featured on PhilStar:  Refining taxation of cross-border services

The Bureau of Internal Revenue (BIR) has issued Revenue Memorandum Circular (RMC) No. 24-2026 to clarify the application of RMC Nos. 5-2024 and 38-2024 on the tax treatment of cross-border services. At the center of the discussion is the proper characterization and taxation of these services rendered across jurisdictions and the corresponding documentary requirements.

The need for clarification

RMC No. 5-2024 provided guidance on the tax treatment of cross-border services following a Supreme Court ruling involving a Philippine-based telecommunications company. It introduced a framework for determining when payments to non-resident service providers are subject to Philippine income tax.

However, implementation raised concerns, as some assessments appeared to go beyond the ruling, treating certain cross-border transactions as taxable solely due to their nature. This created uncertainty, particularly for industries that regularly engage foreign service providers. While RMC No. 38-2024 attempted to clarify these issues, questions remained on how the framework should be applied in practice, especially in identifying income sources and the required documentation.

RMC No. 24-2026 is thus a response to these lingering ambiguities. It aims to ensure that both tax authorities and taxpayers are aligned with statutory rules and jurisprudence, while avoiding inconsistent or overly expansive interpretations.

No automatic taxability for cross-border services

A key clarification under RMC No. 24-2026 is that not all cross-border services are automatically subject to Philippine income tax. The mere classification of a transaction as a cross-border service does not, by itself, trigger tax liability.

The general rule remains: income from services is taxed where the services are performed. However, the ruling introduced a broader perspective by considering where the service is completed or where the benefit is received.

Importantly, the circular emphasizes that this expanded interpretation must be applied carefully. Revenue Officers cannot rely solely on the existence of a cross-border arrangement. Instead, they must establish that the income is sourced within the Philippines, inquiring into the property, activity, or service that produced the income, or where the inflow of wealth originated.

Determining the source of income

RMC No. 24-2026 underscores that establishing the taxability of a cross-border service requires a factual, holistic examination of the service agreement. Following the Supreme Court’s guidance

in the ruling, Revenue Officers must consider the entirety of the services rendered, rather than isolating a single activity as the sole income-producing act.

Accordingly, the BIR requires that the following elements be established: (1) Parties involved: A Philippine payor and a payee who is a non-resident service provider; (2) Specific activity or service: The activity or service must be integral to the completion of the non-resident provider’s obligations and must result in actual payment or accrual, reflecting an economic benefit to the non-resident; (3) Situs of the income-producing activity is within the Philippines; and (4) There is no applicable income tax exemption under tax treaties or domestic law.

The circular also clarifies that this framework does not include passive income, income from the sale of goods, and pass-through payments to other non-resident service providers for services performed outside the Philippines.

Documentary requirements for taxpayers

Another significant aspect of the circular is its guidance on documentation. The burden is on the taxpayer to show that income paid to a non-resident is sourced outside the Philippines and not subject to local tax. To meet this burden, taxpayers may present a range of documents, including service contracts, invoices, proof of payment, and certifications of the non-resident’s tax residency and non-registration in the Philippines.

Sworn statements and other supporting records may also be required to substantiate the nature and location of the services performed.

The circular also recognizes practical considerations by allowing certified photocopies of documents, subject to verification by the BIR. This clarification is particularly relevant for cross-border transactions where original documents may be located overseas.

No prior ruling required

RMC No. 24-2026 also clarifies that a prior BIR ruling is not required to determine taxability, and taxpayers need not secure a confirmatory ruling before applying the correct tax treatment. Nevertheless, the option to request a ruling remains available for those seeking certainty.

Ongoing legal challenge

It is also worth noting that the implementation of RMC Nos. 5-2024 and 38-2024, which RMC No. 24-2026 seeks to clarify, is under legal challenge before the Court of Tax Appeals.

In a 31 March 2026 Resolution in a case involving a global banking group, the Court granted a writ of preliminary injunction enjoining the BIR from implementing the RMCs while the case is pending, until further orders.

While the injunction is provisional and does not resolve the merits of the dispute, it underscores the continuing uncertainty surrounding the interpretation and application of the earlier circulars and highlights the broader significance of the clarifications introduced under RMC No. 24-2026.

Toward greater certainty

Ultimately, the effectiveness of these clarifications will depend on how they are implemented in practice. The taxation of cross-border services remains inherently complex, particularly in a global environment shaped by digitalization and increasingly integrated business operations. As taxpayers and the BIR continue to navigate the evolving landscape of cross-border services, ongoing dialogue and further guidance may still be necessary.