A policy shift that could shape the Philippines’ investment future

By Keshav Mundra

The issuance of Revenue Memorandum Circular (RMC) 5-2024, which provides for the tax treatment of cross-border services, has become one of the most controversial developments in Philippine taxation. While intended to clarify the treatment of cross-border service income, the circular has raised concerns among taxpayers, investors and multinational corporations about its potential impact on compliance, investment flows and the country’s competitiveness.

RMC 5-2024 builds on the Supreme Court’s 2022 ruling in Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue (G.R. No. 226680), which applies the rule that services performed within the Philippines are subject to Philippine taxation. This enunciates the rule under Section 42(A)(3) of the National Internal Revenue Code, which states that service income is taxable in the Philippines if the services are performed within the country.

However, the memorandum applied and interpreted the “benefits-received theory” to assert that “the jurisdiction providing the essential services or factors for income generation should be entitled to tax that income,” i.e if the income-generating activities in the Philippines are deemed essential to the performance of the service, the income should be considered Philippine-sourced, even if the services were performed abroad and payments were received offshore. During tax audits, this is interpreted to mean that the use or consumption of the services is an income-generating activity that is part of the performance of the services. This tax position effectively shifts the focus from the place of performance to the place of consumption or use of the service.

This shift has sparked debate because it appears to depart from the statutory situs rule. Traditionally, the situs of service income is determined by where the service is performed. RMC 5-2024, however, treats the use or consumption of the service as an income-generating activity, thereby expanding the scope of taxable income.

For multinational enterprises, this creates uncertainty. Services performed outside the Philippines but consumed locally may now be subject to final withholding tax (FWT) and value-added tax (VAT). Businesses are left questioning whether their existing structures and contracts expose them to unexpected liabilities.

Broader economic implications

The broader economic impact of RMC 5-2024 and its interpretation cannot be ignored. Its application in audits is already affecting investor sentiment and influencing business decisions:

• Discouraging investments. The uncertainty surrounding FWVAT and FWT obligations makes the Philippines less attractive compared to jurisdictions with clearer tax regimes. Investors are increasingly choosing alternative markets where tax rules are more predictable.
• Encouraging offshoring. This interpretation prompts investors to offshore contracts and revenue streams to mitigate exposure. This reduces local economic activity which results in the reduction of income that is taxable in the Philippines.
• Shrinking the tax base. Ironically, the Bureau of Internal Revenue’s (BIR) aggressive stance could reduce collections in the long run as businesses may shift operations abroad.

In short, while the circular aims to protect the Philippine tax base, its unintended consequence may be to erode it.

Tax policy is a critical determinant of investor confidence. Multinationals consider not only tax rates but also the stability and predictability of tax rules when deciding where to invest. By introducing ambiguity, RMC 5-2024 risks undermining the Philippines’ competitiveness in Southeast Asia.

The challenge for policymakers now is to strike a balance between safeguarding revenue and fostering an environment conducive to investment. Clearer guidance — whether through legislative amendments, further Supreme Court clarification, or additional BIR issuances — may be necessary to resolve the tension between statutory rules and administrative interpretations.

The debate over RMC 5-2024 reflects broader challenges in international taxation. As cross-border services become increasingly central to global commerce, jurisdictions must grapple with how to fairly allocate taxing rights. The Philippines’ approach, if left unchecked, could set a precedent that complicates compliance for multinationals and deters investment.

For now, taxpayers must remain vigilant. Careful documentation of where services are performed, coupled with proactive engagement with auditors, will be essential to defend positions in light of RMC 5-2024. At the same time, policymakers should weigh the long-term economic trade-offs of aggressive interpretations that may drive investment away.

RMC 5-2024 represents a turning point in Philippine tax administration. While rooted in the benefits-received theory, its departure from the statutory situs rule raises serious concerns for investors and taxpayers. Unless clarified, the circular risks discouraging investment, reducing economic activity, and, ultimately, shrinking the very tax base it seeks to protect.

For the Philippines to remain competitive, tax policy must prioritize clarity, predictability, and alignment with established legal principles. We expect the BIR to issue further clarification on the application of RMC 5-2025, which will hopefully clarify the discussions above.

Keshav Mundra is a tax and legal director at Deloitte Philippines, a member firm of the Deloitte network.