This case clarifies that even non-profit organizations can be subject to Value Added Tax (VAT) on services they provide. The Supreme Court ruled that Commonwealth Management and Services Corporation (COMASERCO) was liable for VAT on services rendered to its affiliates, regardless of its non-profit status. This decision emphasizes that the key factor for VAT liability is engaging in the regular conduct of a commercial or economic activity, not whether the entity aims to generate profit. This ruling has significant implications for various organizations, as it broadens the scope of VAT liability beyond traditional for-profit businesses, affecting how services are priced and taxed.

Services Rendered: Is it VAT-able Even Without Profit?

The case revolves around the Commissioner of Internal Revenue’s assessment of deficiency value-added tax (VAT) against Commonwealth Management and Services Corporation (COMASERCO) for the taxable year 1988. COMASERCO, an affiliate of Philippine American Life Insurance Co. (Philamlife), provided collection, consultative, and technical services, including internal auditing, to Philamlife and its affiliates. The central question is whether COMASERCO’s services were subject to VAT, considering that COMASERCO claimed to operate on a “no-profit, reimbursement-of-cost-only” basis and even reported a net loss for the taxable year in question.

The Commissioner of Internal Revenue argued that COMASERCO’s services were subject to VAT because the company was engaged in the sale of services for a fee or consideration. According to the Commissioner, the generation of profit from rendering the service is immaterial for VAT liability; the VAT is a tax on the value added by the performance of the service. COMASERCO, however, contended that the term “in the course of trade or business” necessitates that the business is carried on with a view to profit or livelihood, thus, its activities must be profit-oriented. Since it operated without profit motive, COMASERCO argued that it should not be liable for VAT.

The Court of Tax Appeals (CTA) initially sided with the Commissioner of Internal Revenue, assessing COMASERCO with deficiency VAT. However, the Court of Appeals (CA) reversed the CTA’s decision, citing a previous case involving the same parties where it was held that COMASERCO was not liable for fixed and contractor’s tax because it was not engaged in the business of providing services to Philamlife and its affiliates. The Supreme Court then took up the case to resolve the conflicting decisions and clarify the VAT liability of entities providing services without profit motive.

The Supreme Court (SC) emphasized the provisions of the National Internal Revenue Code (NIRC) of 1986, as amended, particularly Section 99, which states that any person who, in the course of trade or business, sells, barters, or exchanges goods, renders services, or engages in similar transactions, is subject to VAT. Further, the SC referred to Republic Act No. 7716, the Expanded VAT Law (EVAT), and Republic Act 8424, the National Internal Revenue Code of 1997, which clarified that the phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person, regardless of whether or not the person engaged therein is a non-stock, nonprofit organization or government entity. The Court emphasized that VAT is a tax on transactions, imposed at every stage of the distribution process, even in the absence of profit.

The Supreme Court underscored that the intention to generate profit is immaterial in determining VAT liability, as long as the entity regularly conducts a commercial or economic activity. Even non-stock, non-profit organizations or government entities are liable to pay VAT on the sale of goods or services. This is because VAT is an indirect tax that can be passed on to the buyer, transferee, or lessee of the goods, properties, or services. The definition of the term “sale of services” includes the performance of all kinds of services for others for a fee, remuneration, or consideration, including technical advice, assistance, or services rendered in connection with technical management or administration of any scientific, industrial, or commercial undertaking or project.

The Court cited BIR Ruling No. 010-98, which emphasized that a domestic corporation providing technical, research, management, and technical assistance to its affiliated companies and receiving payments on a reimbursement-of-cost basis is subject to VAT on services rendered, regardless of the intention to realize profit. The Supreme Court applied the principle that tax exemptions are construed strictly against the grantee and liberally in favor of the government. COMASERCO’s services did not fall within the exemptions enumerated in Section 109 of Republic Act 8424. Thus, COMASERCO was subject to VAT.

The Supreme Court also gave weight to the opinion of the Commissioner of Internal Revenue and the conclusions of the Court of Tax Appeals, recognizing their expertise in tax matters. The Commissioner’s interpretation of the law, as the government agency charged with its enforcement, is entitled to great weight unless it is plainly wrong. The Court also clarified that the Court of Appeals’ decision in CA-G. R. No. 34042, which declared COMASERCO as not engaged in business and not liable for the payment of fixed and percentage taxes, does not bind the petitioner in this case. The issue in CA-G. R. No. 34042 was different from the present case, which involves COMASERCO’s liability for VAT. Every person who sells, barters, or exchanges goods and services, in the course of trade or business, as defined by law, is subject to VAT.

FAQs

What was the key issue in this case?	The key issue was whether COMASERCO was liable for VAT on services provided to its affiliates, despite operating on a “no-profit, reimbursement-of-cost-only” basis.
What did the Supreme Court rule?	The Supreme Court ruled that COMASERCO was liable for VAT because the company was engaged in the sale of services for a fee, regardless of its profit motive. The key factor was engaging in a commercial or economic activity.
What does “in the course of trade or business” mean?	“In the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including incidental transactions, regardless of whether the entity is profit-oriented.
Does the VAT law apply to non-profit organizations?	Yes, the VAT law applies to non-stock, non-profit organizations or government entities if they are engaged in the sale of goods or services in the course of trade or business.
What constitutes the “sale of services”?	The “sale of services” includes the performance of all kinds of services for others for a fee, remuneration, or consideration, including technical advice and assistance.
What is the effect of BIR Ruling No. 010-98?	BIR Ruling No. 010-98 clarifies that a domestic corporation providing technical assistance to its affiliates and receiving payments on a reimbursement-of-cost basis is subject to VAT, regardless of its profit motive.
How are tax exemptions interpreted?	Tax exemptions are construed strictly against the grantee and liberally in favor of the government. Any exemption must be clearly stated in the law.
Was the previous CA decision binding in this case?	No, the previous CA decision was not binding because the issue in that case (fixed and percentage taxes) was different from the issue in this case (VAT liability).

This ruling emphasizes that providing services for a fee, regardless of profit motive, subjects an entity to VAT, ensuring consistent application of tax laws. As such, entities need to accurately assess their tax obligations, and seek professional legal advice to avoid penalties.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Commissioner of Internal Revenue vs. Court of Appeals and Commonwealth Management and Services Corporation, G.R. No. 125355, March 30, 2000