The selective rhodium-catalyzed functionalization of arenes is greatly facilitated by oxidizing directing groups that, act both as directing groups and internal oxidants. We report density functional theory (B3LYP and M06) investigations on the mechanism of rhodium(III)-catalyzed redox coupling reaction of N-phenoxyacetamides with alkynes. The results elucidated the role of the internal oxidizing directing group, and the role of Rh-III/Rh-I and Rh-III/Rh-V catalysis of C-H functionalizations. A novel Rh-III/Rh-V-Rh-III cycle successfully rationalizes recent experimental observations by Liu and Lu et al. (Liu, G. Angew. Chem. Int. Ed. 2013, 52, 6033) on the reactions of N-phenoxyacetamides with alkynes in different solvents. Natural Bond Orbital (NBO) analysis confirms the identity of Rhy intermediate in the catalytic cycle.