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Proving that services were rendered in the Philippines for VAT zero-rating purposes

By Gladys Jane Dela Cruz on May 4,2023

IN last week’s article, we discussed that to qualify for value-added tax (VAT) zero-rating under Section 108(B)(2) of the National Internal Revenue Code, the following elements must be present: (1) the recipient of the services is a foreign corporation 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 acceptable foreign currency accounted for in accordance with the Bangko Sentral ng Pilipinas 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.

In recent court decisions, claims for refund for VAT zero-rating under said section have been denied for failure to prove the last element — that the services must be performed in the Philippines by a VAT-registered person. Since in most instances, the taxpayer claiming for refund is doing business in the Philippines, this element can sometimes be taken for granted.

It should be noted that the objective of VAT as an indirect tax on services is the performance of all kinds of services conducted in the course of trade or business within the Philippines.

In the case of Commissioner of Internal Revenue (CIR) v American Express International Inc. (GR 152609, June 29, 2005), the Supreme Court explained that the place where the service is rendered determines the jurisdiction to impose the VAT. If the service is performed in the Philippines, such service is necessarily subject to its jurisdiction for the State has to have a “substantial connection” to it, in order to enforce a zero VAT rate. The place of payment and the place where the output of the services will be ultimately used are both immaterial.

In the American Express case, the taxpayer was a Philippine branch engaged primarily in facilitating: (i) collections of receivables of its Hong Kong unit from credit card members situated in the Philippines and; (ii) payments to service establishments in the Philippines. In ruling that the taxpayer is qualified for VAT zero-rating, the Supreme Court distinguished the facilitation of the collection of receivables from the utilization or consumption of the outcome of such service, or the use of the credit cards which may take place abroad. The Supreme Court recognized that the taxpayer’s assistance to its foreign clients of receiving the bills of service establishments located here in the Philippines and forwarding them abroad is deemed service performed in the Philippines.

In any case, whether or not the taxpayer actually rendered services in the Philippines is a question of fact, which should be proven by evidence. Failure to prove such a fact in court may be fatal to a claim for VAT refund.

The Court of Tax Appeals (CTA), in one case, held that the taxpayer failed to establish that its services were performed in the Philippines because the taxpayer failed to present the service agreement with its purported clients abroad (Ammex I-Support Corp. v CIR [CTA Case 9773, July 14, 2022]).

In another case, the CTA en banc ruled that the fact that the taxpayer’s registered address is located in the Philippines and the taxpayer made purchases or incurred expenses in the Philippines do not necessarily establish that the services it rendered to its foreign clients were performed in the Philippines. In this case, no proof of any service agreement or contract was adduced by the taxpayer (Ibex Philippines Inc. v CIR, CTA EB Case 2533, Nov. 10, 2022).

Interestingly, in the case of Avaloq Philippines Operating Headquarters v CIR (CTA Case 10119, Jan. 9, 2023), the CTA found that the service agreement which was entered into by a taxpayer (domestic corporation) with its foreign client and duly presented in court was also insufficient to satisfy the requisite. In this case, the court especially noted that there is no provision in the said agreement which explicitly stated where the services were to be performed by the taxpayer. Moreover, the CTA found insufficient the testimony of the independent certified public accountant (CPA) and even considered such CPA as an incompetent witness for not being connected to the taxpayer or privy as to where the taxpayer renders its services.

Meanwhile, in another case, the CTA considered as acceptable proof the testimony adduced by the taxpayer’s vice president of finance with regard to the fact of the taxpayer’s rendition of services in the Philippines plus the presentation of service agreements entered into by the taxpayer with its foreign clients which expressly indicated the specific service activity to be rendered in the Philippines (MSCI Hong Kong Ltd. v CIR, CTA Case 10131, Nov. 2, 2022).

Indeed, the determination of whether the services are being rendered in the Philippines depends on the peculiar circumstances surrounding each case. It is incumbent upon the taxpayer to discharge its burden of proof of establishing that the services it is rendering qualifies for VAT zero-rating.

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