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CIR v. AMERICAN EXPRESS

FACTS:

The petitioner is challenging the decision of the Court of Appeals (CA) which affirmed the decision of the Court of Tax Appeals (CTA) dismissing the petitioner's petition. The petitioner, a Philippine branch of American Express International, Inc., registered as a value-added tax (VAT) taxpayer and filed its quarterly VAT returns for the period January 1, 1997, to December 31, 1997. The petitioner later declared zero-rated sales and filed a letter-request for the refund of its excess input taxes. Since there was no immediate action, the petitioner filed a petition with the CTA arguing that export sales paid for in foreign currency and accounted for in accordance with regulations are subject to VAT at zero percent. The respondent in this case is a non-stock, non-profit organization engaged in the promotion and development of the Philippine export industry. The respondent filed a claim for refund of its unutilized input VAT for the year 1997, arguing that its services are subject to zero-rating. The petitioner opposed the claim, but the CTA ruled in favor of the respondent and ordered the petitioner to refund the unutilized input VAT. The Court of Appeals affirmed the decision. In another case, the petitioner denied the claim for refund of respondent, Procter & Gamble Philippines (P&G), representing excess input VAT for the year 1997. P&G engaged the services of cargo forwarders and a customs brokerage firm for the exportation of its goods and claimed these services to be zero-rated. However, the petitioner argued that the services were consumed in the Philippines and VAT should be imposed. The Court of Appeals granted P&G's petition and ordered the petitioner to refund the input VAT.

ISSUES:

  1. Whether the services rendered by the respondent, a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client, should be zero-rated.

  2. Whether the ancillary business of facilitating the collection under the credit card system can be considered as separate billable services.

  3. Whether the service rendered by the respondent qualifies as export sales and is therefore subject to zero-rated VAT.

  4. Whether the transactions entered into by the respondent with its Hong Kong-based client meet the requirements for being subject to VAT.

  5. Whether the facilitation service rendered by the respondent is subject to zero-rated value-added tax (VAT).

  6. Whether the cost of respondent's service should be tacked in as part of the cost of goods exported.

  7. Whether the place where the service is rendered determines the jurisdiction to impose the VAT.

  8. Whether the respondent's facilitation service falls under the category of "services other than processing, manufacturing or repacking for other persons doing business outside the Philippines" provided for in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96.

  9. Whether the ejusdem generis principle applies to Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96.

  10. Whether VAT Ruling No. 040-98, which requires that services performed in the Philippines by a VAT-registered person must be "consumed abroad" in order to be zero-rated, is valid and enforceable.

  11. Whether VAT Ruling No. 080-89 recognizing the zero rating of the respondent's services should be revoked.

  12. Whether the revocation, if any, of VAT Ruling No. 080-89 should be given retroactive effect.

  13. Whether or not the tax refund for zero-rated transactions of the respondent is in order.

RULING:

  1. Yes, the services rendered by the respondent should be zero-rated. Under the Tax Code, services performed by VAT-registered persons in the Philippines, when paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP), are zero-rated. Respondent facilitates the collection and payment of receivables in the Philippines for its foreign client, getting paid in acceptable foreign currency. Therefore, the service falls under the category of zero rating.

  2. Yes, the ancillary business of facilitating the collection under the credit card system can be considered as separate billable services. The credit card system involves the issuance of credit cards by banks or non-bank credit card companies. The system allows the cardholders to obtain goods and services on credit and pay for them at a later time. The components of this system, including the facilitation of collection, can function as separate billable services.

  3. The service rendered by the respondent does qualify as export sales and is subject to zero-rated VAT. The facilitation of the collection and payment of receivables belonging to a foreign company constitutes a service regularly rendered in the Philippines, undertaken in pursuit of a commercial or economic activity, for a valuable consideration, and not exempt under any law or international agreement. Furthermore, the service is provided by a VAT-registered person and payment is made in an acceptable foreign currency accounted for in accordance with BSP rules and regulations.

  4. The transactions entered into by the respondent with its Hong Kong-based client do meet the requirements for being subject to VAT. The service is regularly rendered in the Philippines, commercial in nature, on a significant scale, with a reasonable degree of frequency, and not at random, fortuitous, or attenuated. The respondent receives consideration in foreign currency that is accounted for in conformity with the law, and it is not exempt under any law or international agreement.

  5. The facilitation service rendered by the respondent is subject to zero-rated VAT. The law provides for an exception to the destination principle, granting 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 Bangko Sentral ng Pilipinas (BSP). The respondent's service meets all three requirements and therefore qualifies for zero-rating.

  6. The cost of respondent's service does not need to be tacked in as part of the cost of goods exported. The law does not impose such a requirement or associate services with exported goods. The focus is on the services performed by VAT-registered persons in the Philippines. The service rendered by respondent is distinct from the product that arises from the rendition of such service.

  7. The place where the service is rendered determines the jurisdiction to impose the VAT. The law does not make any qualification or add a condition in determining the tax situs of a zero-rated service. If the service is performed in the Philippines, it is subject to Philippine jurisdiction. The place of payment and the place where the output of the service will be used are immaterial.

  8. Yes, the respondent's facilitation service falls under the category of "services other than processing, manufacturing or repacking for other persons doing business outside the Philippines" provided for in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96.

  9. No, the ejusdem generis principle does not apply to Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96.

  10. VAT Ruling No. 040-98 is ultra vires and invalid. An administrative issuance that overrides the law it seeks to interpret is not countenanced by the Court.

  11. VAT Ruling No. 080-89 should not be revoked. The respondent has relied on this ruling, and changing its status will deprive the respondent of a refund of excess input taxes to which it is entitled.

  12. The revocation of VAT Ruling No. 080-89, assuming arguendo that it was revoked by VAT Ruling No. 040-98, cannot be given retroactive effect if it would be prejudicial to the taxpayers.

  13. The Court upholds the entitlement of the respondent to the tax refund, as determined by the appellate court. There is no conflict between the decisions of the CTA and CA, and the Court respects the findings and conclusions of the specialized court. Under a zero-rating scheme, the seller is entitled to recover the VAT by way of a refund or input tax credit, and the tax paid or withheld is not deducted from the tax base. Since the refund was applied for within the reglementary period, it is deemed in order.

PRINCIPLES:

  • Services performed by VAT-registered persons in the Philippines, when paid in acceptable foreign currency and accounted for in accordance with BSP rules and regulations, are zero-rated.

  • The credit card system involves the issuance of credit cards and the facilitation of collection, which can be considered as separate billable services.

  • The VAT system is a tax on consumption and applies to the performance of all kinds of services conducted in the course of trade or business in the Philippines.

  • The transactions must meet certain requirements to be subject to VAT, including being regularly conducted in the Philippines, undertaken in pursuit of a commercial or economic activity, for a valuable consideration, and not exempt under the Tax Code, other special laws, or any international agreement.

  • Export sales are subject to zero-rated VAT, while imports are taxed.

  • The destination principle is used to determine the jurisdictional reach of the VAT system. Goods and services are taxed only in the country where they are consumed.

  • Consumption refers to the use of a thing in a way that exhausts it. In the context of services, consumption means the performance or successful completion of a contractual duty. Services rendered in the Philippines are also consumed in the Philippines.

  • Services cannot be physically used or bound for a specific place when determining their location for legal purposes. The destination principle is used to determine the service location based on the predetermined end of a course.

  • To qualify for zero-rated VAT, the service must be performed in the Philippines, fall under the categories specified in the Tax Code, and be paid for in acceptable foreign currency accounted for in accordance with BSP rules and regulations.

  • The law must be applied as it is written and clear and categorical language leaves no room for interpretation. The Court should see to it that its mandate is obeyed.

  • RR 5-87 provides for the zero-rating of certain services without qualifications, when paid for in acceptable foreign currency and accounted for in accordance with BSP regulations.

  • The term "other service establishments" in Section 4.102-2(b)(2) of RR 7-95 is broad enough to cover respondent's facilitation service.

  • The term "as well as" in RR 5-96 means "in addition to, besides, also or too" and is not restrictive.

  • The ejusdem generis principle does not apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96 because the specific services listed in the provision do not constitute a readily discernible class of the same kind and the general phrase "and other similar services" is intended to have a broader meaning.

  • The interpretation placed upon a statute by executive officers is entitled to respect, but it can be ignored if found to be erroneous, absurd, or improper.

  • The revocation of administrative rulings should not be given retroactive application if it will be prejudicial to the taxpayers, unless explicitly stated.

  • The BIR Commissioner may render a different construction to a statute if it is congruent with the law, otherwise, no amount of interpretation can revoke, repeal, or modify what the law says.

  • The condition of being "consumed abroad" is not required by the legislature for services performed in the Philippines by a VAT-registered person to be zero-rated.

  • Legislative approval by reenactment: The reenactment of a statute substantially unchanged is considered a persuasive indication of the adoption by Congress of a prior executive construction. The legislature is presumed to have approved or confirmed the contents of revenue regulations then in force regarding the VAT.

  • Specialized court expertise: The Court respects the findings and conclusions of a specialized court like the CTA, which has developed expertise on tax cases.

  • Zero-rating scheme: Under a zero-rating scheme, the sale or exchange of a particular service is completely exempt from VAT, and the seller is entitled to recover the tax included in the cost of purchases attributable to the sale or exchange.