When ‘clarity’ still leaves room for debate

By Carlo Navarro  and Darren Zamudio

As cross-border services continue to underpin modern business models — from shared services and IT support to regional management functions — tax certainty has become a critical concern for business leaders. The issuance of Revenue Memorandum Circular (RMC) 24-2026 forms part of the Bureau of Internal Revenue’s continuing effort to clarify the tax treatment of such arrangements following RMC 05-2024.

The earlier circular, issued in light of the Supreme Court’s ruling in Aces Philippines Cellular Satellite Corp. v. CIR (G.R. No. 226680), introduced uncertainty among taxpayers and investors. It brought confusion to the longstanding principle that service income will be deemed sourced within the Philippines and thus taxed in the Philippines if it is performed in the Philippines. In practice, it was interpreted to extend the Philippines’ right to tax service income to services that are consumed or used in the Philippines.

Against this backdrop, RMC 24-2026 is a step to clarify and refine the framework. While this circular moves the needle toward greater clarity, it does not fully eliminate interpretational challenges. For businesses operating across jurisdictions, improved guidance still requires careful application to specific operational facts.

One of the most significant clarifications under RMC 24-2026 is the reaffirmation that cross-border services are not automatically subject to final withholding tax merely by virtue of classification. This addresses prior audit approaches where tax treatment was often determined primarily on characterization, without a detailed evaluation of the underlying facts and circumstances of each transaction.

Equally important, the circular reiterates the longstanding principle that the situs of service income is determined by the place where the service is performed. This provides a more stable basis for assessing tax exposure and aligns with statutory rules under Section 42 of the Tax Code. For multinational groups, this supports existing operating models where services are rendered entirely outside the Philippines.

The circular also sets out more structured documentary requirements to substantiate that income payments to nonresident service providers are sourced outside the Philippines. This includes service agreements, proof of performance, tax residency certificates, and remittance records. Taken together, these requirements provide taxpayers with a clearer compliance and audit framework.

Despite these clarifications, RMC 24-2026 also reiterates the 2022 Aces Philippines decision, which it interprets as potentially broadening the situs analysis by considering where the benefit is received or where the service is completed in determining taxability in the Philippines.

However, a closer reading of the Aces Philippines ruling suggests that references to “economic benefit” were never intended to set a general sourcing rule based on benefits received.

In resolving the case, the court applied a two-step analysis: first identifying the source of income and then determining its situs. The concept of “economic benefit” was relevant in establishing the source of income. The situs of taxation, however, remained anchored on where the income-generating activity was performed, consistent with Section 42 of the Tax Code.

Read in this light, the court’s reference to “inflow of economic benefits” should be understood as part of its analysis in identifying income, rather than as a standalone test for sourcing or situs determination. The situs of taxation continues to depend on the location of the income-generating activity.

For business leaders, this distinction is more than academic. A broad application of a “benefits-received” approach could expose offshore services to Philippine taxation even when performed entirely abroad, creating uncertainty in structuring and pricing cross-border arrangements and potentially diverging from longstanding source-based taxation principles.

Ironically, an overly expansive interpretational approach may have unintended consequences, including influencing businesses’ structure or locating operations, which could affect the overall Philippine tax base over time.

RMC 24-2026 also clarifies that a prior confirmatory ruling is not required to apply a tax treatment. While this provides flexibility, it does not eliminate audit risk.

In practice, seeking a confirmatory ruling remains a prudent strategy in high-value or complex transactions. It provides upfront certainty, reducing the likelihood of disputes during audit. It also strengthens the taxpayer’s position by demonstrating that the tax treatment was adopted based on disclosed facts and applicable guidance. Lastly, it helps align internal stakeholders on consistent tax treatment of cross-border arrangements.

Given the potential exposure and operational disruption that may arise from adverse audit findings, the cost and effort of obtaining a ruling may, in many cases, be justified.

RMC 24-2026 represents a meaningful step toward clarifying the tax treatment of cross-border services, but it also reinforces the importance of disciplined compliance. Organizations should take this opportunity to reassess existing arrangements.

First, contracts and supporting documentation should clearly demonstrate where services are performed and how they are delivered. Second, internal processes should ensure that all required documents are consistently maintained and readily available in the event of an audit. Third, businesses should assess whether key transactions warrant a confirmatory ruling to reduce tax uncertainty.

Ultimately, while the circular moves the needle toward greater clarity, its practical impact will depend on how consistently it is applied in audits. For now, businesses that combine robust documentation with a proactive approach to tax risk management will be best positioned to navigate this evolving landscape.

Carlo Navarro is the tax and legal leader at Deloitte Philippines, a member firm of the Deloitte network. Darren Zamudio is a senior manager with the tax and legal practice of Deloitte Philippines.