Tax Articles

Applying The Tax On Cross-Border Services To Fintech

By: Atty. Jomel N. Manaig

Atty. Jomel N. Manaig Partner   +632 8403-2001 loc. 140 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

Final Withholding Tax and Final Withholding VAT imposed on cross-border services are still creeping in assessments against several taxpayers. Even with the issuance of RMC No. 24-2026, we have observed some inconsistent application of the tax – mainly on the characterization of the covered cross-border services.

In my previous article (“BIR’s Clarification on the Tax on Cross-Border Services”), I discussed the basic premise in the imposition of the tax on cross-border services and analyzed the general impact of the supposed clarifications in RMC No. 24-2026. However, not all industries and sectors are affected equally by the tax on cross-border services. Some industries, like the Fintech industry, face unique challenges which require innovative approaches.

One of the failings of the imposition of the tax on cross-border services under RMC No. 5-2024, in my opinion, is the arbitrary and wholesale categorization of various cross-border services supposedly subject to the tax. Because of this arbitrary and wholesale categorization, the factual circumstances which lead to the establishment of the right of the government to impose tax on cross-border services disappear in the background. In effect, as long as a particular cross-border service falls within any of the broad categories listed in RMC No. 5-2024, the revenue officers automatically impose tax on it.

It should be noted that RMC No. 5-2024 is supposedly rooted from the doctrines laid down in the Aces Philippines case. A careful reading of the said case would reveal that the Supreme Court imposed tax on a specific cross-border service (“satellite air time services”) after evaluating the unique factual circumstances surrounding the transaction. The doctrine, for all intents and purposes, is heavily reliant on the specific and unique facts of the case.

Unfortunately, RMC No. 5-2024 and its subsequent implementation erroneously used this doctrine and applied it across-the-board to virtually all cross-border services – regardless of whether or not the factual circumstances in the Aces Philippines case are actually present.

If one would not pour enough attention and understanding to the actual doctrine in the Aces Philippines case, one may mistakenly put satellite air time services in the same basket as Fintech-related services. After all, both heavily rely on the use of technology to render the service and technology easily transcends geographical borders. The complex technology which enables Fintech to do what it is designed to do may actually make it harder to defend itself against arbitrary and erroneous tax impositions.

In order to avoid this, Fintech entities must be ready to dispel the notion that the mere presence of cross-border services would give rise to the imposition of tax. But how?

The answer to this lie in the Aces Philippines case itself. In that case, the Supreme Court held that the satellite air time services are taxable in the Philippines because the activity that produced the income actually occurred in the country. In other words, the service should have some activity occurring in the Philippines for the tax on cross-border services to be applicable. Absent such Philippine-based income-producing activity, no tax may be imposed by our tax authorities.

Following such factual requirement, Fintech entities should analyze and review their cross-border services and document the lack of income-producing activity in the Philippines. Although a basic requirement, it may not necessarily be easy to prove.

Another issue I have observed is the failure to disassociate the fact of utilization of the service in the Philippines to the right to tax the transaction. The implementation of RMC No. 5-2024 brought about the flawed idea that Final Withholding Tax may be imposed on all cross-border services that were utilized or consumed in the Philippines. However, utilization or consumption was never an actual criterion for taxation in the Aces Philippines case. But because of how RMC No. 5-2024 was implemented, such flawed criterion has become the decisive factor in assessments.

For Fintech-related services, its nature inherently gives rise to utilization or consumption in the Philippines. As such, Fintech entities must be ready to dismiss this flawed criterion for being baseless and a departure from the case which it supposedly seeks to represent.

As a final word, the imposition of the tax on cross-border services is an inevitable event brought about by the ever-converging and continuously intertwining commercial relations that go beyond traditional boundaries. While it is inevitable, we should still ensure that it would be properly and fairly imposed.