This case clarifies the application of the Value-Added Tax (VAT) zero-rating on services performed in the Philippines and paid for in foreign currency. The Supreme Court affirmed that services performed by VAT-registered entities in the Philippines, when paid in acceptable foreign currency and accounted for under Bangko Sentral ng Pilipinas (BSP) regulations, qualify for zero-rated VAT, regardless of where the service is ultimately consumed. This ruling reinforces the principle that as long as the requirements are met, the location of consumption does not negate the availment of zero-rating.

Beyond Borders: Determining VAT on Services Paid in Foreign Currency

The case of Commissioner of Internal Revenue vs. Placer Dome Technical Services (Phils.), Inc. (G.R. No. 164365, June 08, 2007) arose from a claim for refund of input VAT payments by Placer Dome Technical Services (Philippines), Inc. (PDTSL). PDTSL, a domestic corporation, provided services related to the cleanup and rehabilitation of rivers affected by mine tailings. These services were contracted by Placer Dome, Inc. (PDI), the owner of 39.9% of Marcopper, through its subsidiary, PDTSL. The payment for these services was made in U.S. funds, remitted to the Philippines. PDTSL filed an administrative claim for the refund of its input VAT payments, arguing that the revenues derived from services rendered to PDTSL qualified as zero-rated sales under Section 102(b)(2) of the then Tax Code.

The Commissioner of Internal Revenue (CIR) denied the claim, leading PDTSL to file a Petition for Review with the Court of Tax Appeals (CTA). The CTA ruled in favor of PDTSL, stating that the sale of services constituted a zero-rated transaction under the Tax Code. The CIR then filed a Motion for Reconsideration, which was also denied by the CTA. The CIR elevated the rulings to the Court of Appeals, which affirmed the CTA’s decision, ultimately leading to the present petition before the Supreme Court.

At the heart of the controversy is Section 102(b) of the National Internal Revenue Code of 1986 (NIRC), as amended, which states:

Section 102. Value-Added Tax on Sale of Services and Use or Lease of Properties.

(b) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:

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

This provision clearly indicates that certain services performed in the Philippines by VAT-registered persons are subject to a zero percent VAT rate, provided the consideration is paid in foreign currency and accounted for per BSP regulations. However, the Bureau of Internal Revenue (BIR) issued Revenue Regulation No. 5-96, which was later interpreted by VAT Ruling No. 040-98, adding a layer of complexity.

The CIR argued that VAT Ruling No. 040-98 limited the application of zero-rated VAT to services “destined for consumption outside of the Philippines.” This interpretation was based on the “destination principle,” which generally taxes goods and services in the country where they are consumed. The CIR contended that since PDTSL’s services were consumed within the Philippines (i.e., the cleanup of the rivers), they should not qualify for zero-rating.

However, the Supreme Court, in this case, relied heavily on its earlier decision in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch) to resolve the issue. In American Express, the Court addressed a similar argument raised by the CIR regarding the interpretation of Section 102(b) of the NIRC and the validity of VAT Ruling No. 040-98.

The Supreme Court firmly rejected the CIR’s interpretation. The Court emphasized that Section 102(b) of the NIRC is clear and unambiguous, providing a broad scope for zero-rating on services performed in the Philippines by VAT-registered persons, provided they are paid in foreign currency and accounted for under BSP regulations. The Court explicitly stated that:

Under the last paragraph [of Section 102(b)], 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.

Building on this principle, the Court found VAT Ruling No. 040-98, which required services to be “destined for consumption outside of the Philippines,” to be ultra vires and invalid. The Court reasoned that the ruling contravened both the law and the regulations issued pursuant to it. Moreover, the Court clarified that while the VAT system generally adheres to the destination principle, Section 102(b) provides a clear exception for services performed in the Philippines that meet the specified conditions.

The Supreme Court referenced discussions during Senate interpellations, to illustrate legislative intent. The senators made it clear that imposing a condition of being “consumed abroad” for services performed in the Philippines by a VAT-registered person to be zero-rated, was not the intent of the legislators.

The Court noted three requirements for the availment of the zero-rate. First, the service must be performed in the Philippines. Second, the service must fall under any of the categories in Section 102(b) of the Tax Code. Third, it must be paid in acceptable foreign currency accounted for in accordance with BSP rules and regulations.

In light of these considerations, the Supreme Court denied the CIR’s petition. The Court held that PDTSL was entitled to a refund of its input VAT payments, as the services it provided met the requirements for zero-rating under Section 102(b) of the NIRC. The ruling affirmed that as long as the services are performed in the Philippines by a VAT-registered person, paid for in foreign currency, and accounted for under BSP regulations, they are eligible for zero-rating, irrespective of where the services are ultimately consumed.

FAQs

What was the key issue in this case?	The key issue was whether services performed in the Philippines by a VAT-registered entity, paid for in foreign currency, must be “destined for consumption outside of the Philippines” to qualify for zero-rated VAT.
What is VAT zero-rating?	VAT zero-rating means that a taxable transaction is subject to a VAT rate of 0%. The seller does not have to pay output tax but can claim input tax credits on purchases related to the zero-rated sale.
What is the destination principle in VAT?	The destination principle generally dictates that goods and services are taxed in the country where they are consumed. Exports are zero-rated, while imports are taxed.
What did VAT Ruling No. 040-98 stipulate?	VAT Ruling No. 040-98 interpreted Revenue Regulation No. 5-96 as requiring services to be “destined for consumption outside of the Philippines” to qualify for zero-rating. The Supreme Court declared this ruling ultra vires and invalid.
What are the requirements for zero-rating under Section 102(b) of the NIRC?	The requirements are that the service must be performed in the Philippines, fall under the categories in Section 102(b) of the Tax Code, and be paid in acceptable foreign currency accounted for under BSP regulations.
How did the Supreme Court rule on the destination principle in this case?	The Supreme Court clarified that while the VAT system generally adheres to the destination principle, Section 102(b) provides an exception for services performed in the Philippines that meet the specified conditions, irrespective of where they are consumed.
What was the basis for the Supreme Court’s decision?	The Supreme Court relied on the clear language of Section 102(b) of the NIRC and its previous ruling in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch).
What is the practical implication of this ruling?	VAT-registered entities performing services in the Philippines and receiving payment in foreign currency can avail of zero-rating, even if the services are consumed within the Philippines, provided they comply with BSP regulations.

In conclusion, the Supreme Court’s decision in Commissioner of Internal Revenue vs. Placer Dome Technical Services (Phils.), Inc. reinforces the importance of adhering to the clear language of the tax code and the BSP regulations when determining eligibility for VAT zero-rating. It provides clarity for businesses operating in the Philippines and receiving foreign currency payments for services rendered locally.

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. Placer Dome Technical Services (Phils.), Inc., G.R. No. 164365, June 08, 2007