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Proving the nonresident status of service recipients for VAT zero-rating

By: Atty. Keanu P. Castañeda on April 27,2023

SERVICES rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines may be subject to zero percent value-added tax (VAT), provided that the consideration for the services is paid for in acceptable foreign currency in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP), pursuant to Section 108(B)(2) of the National Internal Revenue Code, as amended (the Tax Code).

To be eligible for the VAT zero-rating, the following elements must be present – (1) the recipient of the services is a foreign corporation, and the said corporation is doing business outside the Philippines; or is a nonresident person not engaged in business who is outside the Philippines when the services were performed; (2) the payment for such services were made in foreign currency accounted for in accordance with BSP rules; (3) the services fall under any of the categories under Section 108 (B) (2), or simply, the services rendered should be other than “processing, manufacturing or repacking goods;” and (4) the services must be performed in the Philippines by a VAT-registered person.

The claimant of VAT zero-rating must establish and prove its client’s status as a nonresident foreign corporation (NRFC) – (1) that its client was established under the laws of a country not the Philippines; and (2) that the client is not engaged in trade or business in the Philippines (Commissioner of Internal Revenue [CIR] v Deutsche Knowledge Services Pte. Ltd, GR 234445, July 15, 2020).

There is no specific criterion as to what constitutes “doing,” “engaging in” or “transacting” business. Each case must be judged in light of its peculiar environmental circumstance

(Commissioner of Internal Revenue v British Overseas Airways Corporation [GR 234445, July 15, 2020]).

In CIR v Manulife Data Services Inc. (CTA En Banc [EB] 2183, March 31, 2023), the Court of Tax Appeals (CTA) held that, to be considered a NRFC doing business outside the Philippines, the entity must be supported, at the very least, by both – (1) Certificate of Non-registration of Corporation or Partnership issued by the Securities and Exchange Commission (SEC); and (2) duly authenticated Certificate or Articles of Foreign Incorporation. However, the CTA emphasized that notwithstanding the presentation of the said documents, there must be no indication that the recipient of the services is doing business in the Philippines.

The CTA ruled that the SEC Certifications of Non-Registration show that the customers/clients are foreign corporations. On the other hand, the articles of association or certificates of incorporation stating that these foreign corporations are registered to operate in their respective home countries, outside the Philippines, are prima facie evidence that their clients are not engaged in business in the Philippines.

Thus, in AIG Shared Services Corp. (Philippines) v CIR (CTA Case 9879, Oct. 26, 2021), the CTA found that the SEC Certification of Non-Registration of Company and Authenticated Articles and/or Certificates of Incorporation sufficiently established the NRFC status of the taxpayer’s clients. In this case, to prove that it rendered services to NRFCs, petitioner also presented the screenshots of foreign government websites indicating said clients’ registration therein.

Likewise, in Vestas Services Philippines Inc. v CIR (CTA Case 9672, Dec. 17, 2019), the petitioner was able to establish that its sale of services was made to a nonresident foreign corporation by presenting a Certification of Non-registration issued by the SEC and the Articles of Incorporation to prove that the taxpayer’s client is not doing business in the Philippines.

The failure to submit the abovementioned documents is fatal. Thus, in Sitel Philippines Corp. v CIR (GR 201326, Feb. 8, 2017), the Supreme Court held that the taxpayer insufficiently proved the NRFC status of its clients when it presented only the SEC Certifications of Non-Registration and its Agreements with its foreign clients. The Supreme Court held that, in order to come within the purview of Section 108(B)(2), it is not enough that the recipient of the service be proven to be a foreign corporation; it must also be specifically proven to be a NRFC.

Similarly, in the case of Accenture Inc. v CIR (CTA. EB Case 473, Feb. 2, 2010), the CTA held that the taxpayer insufficiently proved the NRFC status of its clients despite its submission of various documents, e.g., intercompany payment request, official receipts, billing statements, memo invoices-receivable, memo invoices-payable, bank statement and affidavit of its country controller.

It should be noted that the taxpayer should also prove that it rendered the service within the Philippines. In some recent decisions, the courts have also denied taxpayers’ claims for refund for having failed to prove this fact. Avaloq Philippines Operating Headquarters v CIR, (CTA Case 10119 [Jan. 9, 2023]). These cases will be discussed in our next articles.

Taxpayers should keep in mind that actions for tax refund or credit are in the nature of a claim for exemption, which are strictly construed against the taxpayer who have the burden of proving strict compliance with the conditions for the grant of the tax refund or credit.

Keanu P. Castañeda is an Associate of Mata-Perez, Tamayo & Francisco (MTF Counsel).

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