Philippines clarifies tax treatment of cross-border services

Local contact

EY Global

23 Jan 2024
Subject Tax Alert
Jurisdictions Philippines
  • The new regulations clarify that outbound service payments are considered Philippine-sourced income of the foreign service provider.
  • The Philippine payor making outbound service payments to the foreign recipient will be required to subject those payments to 25% final withholding tax and 12% final withholding value-added tax.

Executive summary

The Philippine Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 5-2024 to clarify that outbound service payments are subject to final withholding tax and final withholding value-added tax (VAT). The regulations were issued on 10 January 2024 and take effect immediately.

Detailed discussion

Under the source-based taxation principle, the jurisdiction where an economic activity occurs should have the right to tax the income derived from that activity.

  • The source of income is deemed to be in the Philippines if the property, activity or service that produces the income is in the Philippines.
  • If the income-generating activities in the Philippines are deemed essential, the income derived from these activities would be considered as sourced from the Philippines for tax purposes, irrespective of where the payment is ultimately made or received.

For international service provision (or cross-border services), the source of income is determined by the location of the business activity rather than the disbursement or receipt of funds. If services are conducted or paid for abroad, but there are activities to be performed in the Philippines so essential that the entire service transaction cannot be accomplished without them, the benefit-received theory applies. This means that the revenue-generating activity actually occurs within the Philippines.

Income generated by a foreign company providing services that are considered sourced within the Philippines shall be subject to income tax and, consequently, to final withholding tax. Reimbursable or allocable expenses charged by a foreign corporation in the Philippines can also be considered as income of the foreign corporation. For example, payments for consultancy services that are carried out abroad but the results or outputs of which are used locally are considered income sourced within the Philippines.

VAT also applies if the service is utilized, applied, executed or consumed for a recipient within the Philippines, even if the service provider is located outside the country.


Outbound service payments are considered income from Philippine sources subject to 25% corporate income tax and 12% VAT. The Philippine payor shall therefore be required to subject payments to the foreign service provider to 25% final withholding tax and 12% final withholding VAT.

Recommended action plan

Affected taxpayers will want to review ongoing service arrangements with Philippine subsidiaries/affiliates and clients, and evaluate whether the new regulations will impact these transactions.

Further, taxpayers will want to assess if treaty relief is available and collate documentation in preparation for local treaty


Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Philippines (SGV & Co.), Manila
  • Fabian K. Delos Santos, Philippines Tax Leader
  • Jules E. Riego, Philippines and ASEAN Business Tax Services Leader
  • Fidela T. Isip-Reyes, Philippines ITS Core Leader
  • Margarita D. Mallari-Acaban, Philippines ITS FSO
Ernst & Young LLP (United States), Philippines Tax Desk, New York
  • Mira F. Ramirez-Uy
Ernst & Young LLP (United States), ASEAN Tax Desk, New York
  • Bee-Khun Yap
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
  • Gagan Malik
  • Dhara Sampat
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
  • Pongpat Kitsanayothin

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.