Zeroing in on zero percent VAT rate

Prior to the effectivity of Republic Act No. (RA) 9337, known as the VAT Reform Law, services performed in the Philippines by VAT-registered persons which are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) were considered subject to zero percent VAT.

The Supreme Court, in the case of Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch) (G.R. No. 152609, June 29, 2005), definitively ruled that services performed by value-added tax (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.

The Supreme Court explained that while our VAT system uses the destination principle (under which the onus of taxation is in that country where the goods, property, or services are destined, used, or consumed), the destination principle does not apply to the aforementioned services. It reasoned that the law (then Section 108[B] of the Tax Code) plainly provides for a zero percent VAT rate for services enumerated therein that are performed in the Philippines. Unlike goods, services cannot be physically used in or bound for a specific place when their destination is determined. As such, services take place upon rendition and consumed in the place where it is rendered. The law makes it clear that regardless of the fact that the services are performed, consumed, or destined in the Philippines, the same are, subject to zero percent VAT.

The Supreme Court, however, subsequently qualified its decision in the American Express case.

In Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (G.R. No. 153205, January 22, 2007), it held that the recipient of the services must be a person doing business outside the Philippines to qualify for zero rate. It painstakingly explained that the fact the law stipulates payment in “acceptable foreign currency under BSP rules” means that the legislature clearly envisions export sales. Under BSP rules, the proceeds of export sales must be reported to the BSP. If the provider and the recipient of the services are both doing business in the Philippines, the transaction is not considered an export sale even if payment is denominated in foreign currency. In such a case, reporting to the BSP is an unnecessary act.

The Supreme Court further rationalized that it does not make sense for allowing zero-rated VAT for services where the recipient is doing business in the Philippines. If it were so, those subject to the regular VAT can avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services.

With the passage of RA 9337, however, the jurisprudential requisite that services (other than processing, manufacturing or repacking of goods) must be rendered to other persons doing business outside the Philippines was incorporated in the law itself. Hence, law and jurisprudence are now one in saying that the supply of services will be accorded VAT zero-rating when the following requirements are met: (1) the service is performed in the Philippines; (2) the service falls under any of the categories provided in Section 108(B) of the Tax Code; (3) the recipient is a person or entity doing business outside the Philippines; and (3) it is paid for in acceptable foreign currency that is accounted for in accordance with the regulations of the BSP.

In view of this development, taxpayers enjoying zero percent VAT are well advised to re-examine the legal basis of their zero-rating.

(Herminigildo G. Murakami is a Principal in the Tax & Corporate Services Division of Manabat Sanagustin & Co., CPAs, a member firm of KPMG International, a Swiss Cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email to:  [email protected] or [email protected]).