Commissioner of Internal Revenue vs. American Express International, Inc. (Philippine Branch);  G.R. No. 152609. June 29, 2005.

TOPIC:

VAT; Destination Principle And Cross Border Doctrine

Doctrines: 

  • As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed.
  • An exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, “paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP]

FACTS:

AMEX – PH is a Philippine branch of a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, U.S.A. It is engaged primarily to facilitate the collections of Amex-HK receivables from card members situated in the Philippines and payment to service establishments in the Philippines. AMEX-PH is a registered VAT taxpayer. 

It filed with BIR a letter-request for the refund of its 1997 excess input taxes and cites as basis therefor, Section 110 (B) and 102 of the 1997 Tax Code:

xxxx  Any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes x x x.

Section 102 of the Tax Code: 

xxxx Provided That the following services performed in the Philippines by VAT-registered persons shall be subject to 0%:

(1)x x x

(2)Services other than those mentioned in the preceding subparagraph, the consideration is paid for in acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the BSP. x x x.

In response, CIR provided that taxes paid and collected are presumed to have been made in accordance with laws and regulations, hence, not refundable. An exemption from the common burden [cannot] be permitted to exist upon vague implications.

However, the CTA ordered a refund to the respondent.

The CA affirmed the decision of CTA and held that (a) services were paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (b) by requiring that respondent’s services be consumed abroad in order to be zero-rated, petitioner went beyond the sphere of interpretation and into that of legislation. 

ISSUES: 

(1) Whether the respondent is entitled to the refund of the amount of P3,352,406.59 allegedly representing excess input VAT for the year 1997.

(2) Whether respondent is exempt from destination principle

HELD: 

(1) YES. Under Sec. 102 of the Tax Code, services performed by VAT-registered persons in the Philippines (other than the processing, manufacturing or repacking of goods for persons doing business outside the Philippines), when paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated. Respondent is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client, for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in conformity with BSP rules and regulations. Certainly, the service it renders in the Philippines is not in the same category as “processing, manufacturing or repacking of goods” and should, therefore, be zero-rated.

(2) YES, As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed. In the present case, the facilitation of the collection of receivables is different from the utilization or consumption of the outcome of such service. While the facilitation is done in the Philippines, the consumption is not. Respondent renders assistance to its foreign clients—the ROCs outside the country—by receiving the bills of service establishments located here in the country and forwarding them to the ROCs abroad. 

However, the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, “paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP].” Thus, for the supply of service to be zero-rated as an exception, the law merely requires that first, the service be performed in the Philippines; second, the service fall under any of the categories in Section 102(b) of the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in accordance with BSP rules and regulations. Indeed, these three requirements for exemption from the destination principle are met by respondent.

Notes: 

  • The VAT is a tax on consumption “expressed as a percentage of the value added to goods or services”4 purchased by the producer or taxpayer. 

As an indirect tax on services, its main object is the transaction46 itself or, more concretely, the performance of all kinds of services conducted in the course of trade or business in the Philippines.

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