Revisiting cross-border taxation: A call for clarity and reform

As the first quarter of 2026 draws to a close, taxpayers once again find themselves hopeful for long-awaited improvements in the tax system. The Bureau of Internal Revenue (BIR) has introduced organizational structure and rolled out recent regulations emphasizing a stricter system of checks and balances. Many taxpayers are cautiously optimistic that BIR audits will become less of an uphill battle with their concerns acknowledged and their rights respected.

With corruption highlighted in the recent months, numerous taxpayers have voiced their concerns regarding what they view as inequitable interpretations of certain revenue issuances. Many companies felt compelled to pay the deficiency assessments simply to close their cases, despite believing the transactions are not taxable. One of these controversial interpretations is the taxation of cross-border transactions.

In an expanding economy that actively seeks to attract foreign investors, cross-border transactions continue to pose complex challenges, particularly for multinational corporations. Recognizing the rapid pace of global developments, the BIR sought to keep pace by issuing new circulars and regulations to provide clearer guidelines on transactions in a globalized market. Unfortunately, not all regulations are met by the taxpayers with enthusiasm.

REVISITING RMC 5-2024 AND RMC 38-2024
Following the issuance of Revenue Memorandum Circular (RMC) No. 052024 — and the subsequent clarifications provided under RMC No. 382024 — many taxpayers reported encountering increasing challenges during their tax audits.

Revenue Memorandum Circular (RMC) No. 052024, later supplemented by RMC No. 382024, was issued to clarify the tax implications of the Supreme Court’s ruling in Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue (G.R. No. 226680). These issuances emphasized the application of the “benefit received theory” to determine the proper situs of taxation for both income tax (IT) and value-added tax (VAT). Under this principle, the source of income is identified based on the location of the property, activity, or service that generates the economic benefit. Thus, if such property, activity, or service that produces income is situated within Philippine territory — and is protected by the Philippine government — then the resulting income is treated as Philippine-sourced and becomes subject to IT and VAT.

The intention of these circulars was to provide clarity for similar service transactions, particularly in cases where the performance of such services by non-resident entities relies heavily on facilities located in the Philippines. In the Aces Philippines case, the taxpayer operated within the telecommunications sector and purchased satellite airtime services that made use of facilities present within the country. Applying the benefit received theory, the Court held that these services were effectively rendered in the Philippines, thereby subjecting them to Philippine income tax and VAT. Consequently, Aces Philippines was required to withhold and remit the corresponding Final Withholding Tax (FWT) and Final Withholding VAT (FWVAT).

Taxpayers may address these issues through a Request for Confirmation or a Tax Treaty Relief Application invoking applicable tax treaties. However, the broader concern lies in how the benefit received theory was applied to other multinational companies—many of which operate in entirely different industries, having different business models and unique cross-border transactions. As a result, several multinationals have found themselves assessed for FWT and FWVAT solely on the basis of having transactions with non-resident service providers.

In many instances, the audit findings simply cited RMC No. 05‑2024 without explaining how the taxpayer’s facts aligned with those in the Aces Philippines ruling. This lack of specificity triggered strong reactions from various professional associations and business groups and eventually raised concerns with the BIR. Their primary appeal is that the implementation of the RMC be revisited or amended, especially given that the circular enumerates a wide array of services — such as consulting, IT outsourcing, financial services, telecommunications, engineering and construction, and education and training, among others — as falling within the same tax treatment.

Stakeholders contend that this broad interpretation has resulted in inflated tax assessments, often leaving taxpayers with limited ability to dispute the findings despite providing supporting documents. Many in the private sector fear that tax administration uncertainties may discourage foreign investment, especially when more predictable and cost-efficient jurisdictions are available.

THE BUREAU’S RESPONSE
In the past months, various private sector groups have engaged in extensive discussions with the BIR to raise their concerns regarding the implementation of the circular. In response, the BIR, with Department of Finance (DoF) support, has committed to reevaluating the RMC’s application, ongoing audits and future Letters of Authority (LoAs).

At a Feb. 10 Senate Blue Ribbon hearing, the new BIR Commissioner announced that another circular will be issued to clarify RMC 052024 and RMC 382024. He underscored that any application of RMC 052024 in audit findings must be properly justified, with a clear explanation of how the taxpayer’s factual scenario aligns with the circumstances of the Aces Philippines case. This indicates that cross‑border transactions will no longer be automatically subjected to FWT or FWVAT. More importantly, tax treatment will continue to follow established rules applied to each taxpayer’s specific factual circumstances.

The BIR Commissioner’s commitment marks a welcome shift — one that aligns with the Bureau’s broader efforts to support government initiatives aimed at fostering transparency and reducing corruption within the tax system. Still, as stakeholders await further developments, several critical questions persist. How detailed and precise will the forthcoming clarificatory issuances be? When will the clarification be issued? How will ongoing audits that involve similar issues be affected? And perhaps most importantly, how will the BIR ensure that these guidelines will be applied accurately and consistently across its examining offices? Taken together, these questions reveal a broader desire for a tax environment where rules are applied with precision, fairness, and transparency — values essential to rebuilding trust in the system.

In the midst of the continuing fight against corruption, the public has become more aware of issues that were once kept out of sight. People have, inevitably, grown more conscious of how their taxes are collected and where these funds ultimately go. This heightened vigilance underscores the importance of transparency in public administration. It highlights the commendable steps taken by the BIR in recognizing gaps within its own system and committing to reforms that protect taxpayers’ rights.

As management scholar Peter Drucker famously said, “What gets measured gets managed.” And as Nobel Peace Prize laureate Kofi Annan once observed, “If corruption is a disease, transparency is a central part of its treatment.” These principles resonate strongly today. In the long and arduous battle against corruption, every meaningful reform matters. There is no reason not to support the first steps taken, especially when they pave the way for a more accountable and trustworthy tax system.

John Alexis S.b. Sumulong is a manager from the Tax Advisory & Compliance Practice Area at P&A Grant Thornton.

pagrantthornton@ph.gt.com

www.grantthornton.com.ph