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CIR v. BURMEISTER

FACTS:

Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent) is a domestic corporation that entered into a contract with the National Power Corporation (NAPOCOR) for the operation and maintenance of NAPOCOR's two power barges. Respondent subcontracted the actual operation and maintenance of the power barges as well as other duties and acts to be done in the Philippines. NAPOCOR paid capacity and energy fees to respondent in a mixture of currencies, with the non-Peso component deposited directly to the consortium's bank accounts in Denmark and Japan, and the Peso-denominated component deposited in a separate bank account in the Philippines. Respondent sought a ruling from the BIR regarding the tax implications of these transactions, and the BIR ruled that if respondent chooses to register as a VAT person and the consideration for its services is paid for in acceptable foreign currency, the services are subject to VAT at a zero-rate. Respondent registered as a VAT taxpayer and filed its quarterly VAT returns. However, it later misinterpreted Revenue Regulations No. 5-96 to be applicable to its case and subjected its sale of services to the 10% VAT. After securing a VAT ruling reconfirming that its services are subject to zero-percent VAT, respondent filed a claim for a tax credit certificate with the BIR.

The respondent in this case, a construction company, entered into a consortium agreement to provide engineering, procurement, and construction services for an infrastructure project. The respondent invoiced the consortium in Danish Kroner (DKK) and US dollars (US$) and received remittances in these currencies from a Danish bank. The remittances were certified by the branch manager of the Bank of the Philippine Islands (BPI) to represent payments for sub-contract fees. The respondent believed that their sale of services to the consortium is subject to a zero percent value-added tax (VAT) pursuant to Section 108(B)(2) of the Tax Code. The Bureau of Internal Revenue (BIR) initially confirmed the zero-rating of the respondent's services in two rulings. However, the BIR later claimed that the respondent should have been subject to the regular 10% VAT. The respondent argued that it mistakenly availed of the Voluntary Assessment Program and should be entitled to a tax credit certificate. The Court of Tax Appeals (CTA) ruled in favor of the respondent, and upon appeal, the Court of Appeals affirmed the CTA decision. The Court of Appeals held that the services provided by the respondent, as a resident to a non-resident foreign client and paid for in acceptable foreign currency, are subject to zero percent VAT. The Court of Appeals also found that the BIR's interpretation of the revenue regulations and its requirement of consumption abroad for zero-rating was incorrect. The BIR's petition for review was dismissed for lack of merit, leading to this further appeal.

ISSUES:

  1. The lone issue for resolution is whether the respondent is entitled to the refund of P6,994,659.67 as erroneously paid output VAT for the year 1996.

  2. Whether or not payment in foreign currency is allowed for domestic sale or exchange of services in the Philippines.

  3. Whether or not the services rendered by the respondent qualify for 0% Value Added Tax (VAT) under Section 102(b)(1) and (2).

  4. Whether the services rendered by respondent should be subject to 0% VAT or 10% VAT.

  5. Whether respondent can rely on VAT Ruling No. 003-99 and BIR Ruling No. 023-95 to claim a refund of excess output tax.

  6. Whether the revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95 can be given retroactive effect.

RULING:

  1. The petition is denied. The denial of the petition is not based on the ground that the respondent's services are subject to 0% VAT. Rather, it is based on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-95 and VAT Ruling No. 003-99. The court held that the respondent's services are subject to 0% VAT and relied on these rulings to apply for a refund of the output VAT. However, these rulings are not retroactive.

  2. No, payment in foreign currency is not allowed for domestic sale or exchange of services in the Philippines. The law only allows payment in acceptable foreign currency for transactions between parties doing business outside the Philippines. In a domestic transaction where both the service provider and recipient are doing business in the Philippines, the Bangko Sentral ng Pilipinas (BSP) cannot require payment in foreign currency.

  3. No, the services rendered by the respondent do not qualify for 0% VAT under Section 102(b)(1) and (2). The recipient of the services must be a person doing business outside the Philippines. In this case, the recipient of the services is the Consortium, which is doing business within the Philippines. Therefore, the services rendered by the respondent do not legally qualify for 0% VAT.

  4. The services rendered by respondent should be subject to 10% VAT because the recipient of the services, the Consortium, is doing business in the Philippines. Unlike the American Express case that involved a recipient of services doing business outside the Philippines, the present case falls under the regular 10% VAT rate.

  5. Respondent can rely on VAT Ruling No. 003-99 and BIR Ruling No. 023-95 because these rulings bind petitioner. However, the filing of petitioner's Answer before the CTA challenging respondent's claim for refund effectively revokes VAT Ruling No. 003-99 and BIR Ruling No. 023-95.

  6. The revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95 cannot be given retroactive effect because it would prejudice respondent. Section 246 of the Tax Code prohibits retroactive application of revocations if it will prejudice the taxpayer and no exceptions to this rule were shown.

PRINCIPLES:

  • The applicable provision in 1996 when the respondent rendered the services and paid the VAT is Section 102(b) of the Tax Code.

  • Section 102(b) enumerates which services are zero-rated.

  • Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such services is doing business outside the Philippines.

  • The phrase "for other persons doing business outside the Philippines" not only refers to the services enumerated in the first paragraph of Section 102(b) but also pertains to the general term "services" appearing in the second paragraph of Section 102(b).

  • Services other than processing, manufacturing, or repacking of goods must be performed for persons doing business outside the Philippines to qualify for zero-rating.

  • A tax is a mandatory exaction, not a voluntary contribution.

  • Payment in acceptable foreign currency is only allowed for transactions between parties doing business outside the Philippines.

  • Services covered by Section 102(b)(1) and (2) must have a recipient who is doing business outside the Philippines to qualify for 0% VAT.

  • Services must meet certain criteria to be exempt from the destination principle under the Tax Code.

  • Rulings issued by the Commissioner of Internal Revenue bind the government but can be revoked if done so prospectively and not retroactively.