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CIR v. VS.PLACER DOME TECHNICAL SERVICES

FACTS:

In 1996, Marcopper Mining Corporation (Marcopper) experienced leakage of mine tailings from the Taipan Pit, causing potential environmental damage to rivers and the immediate area. To contain the damage, Placer Dome, Inc. (PDI), the owner of Marcopper, engaged Placer Dome Technical Services Limited (PDTSL), a non-resident foreign corporation, to perform the clean-up and rehabilitation project in the Philippines. PDTSL, in turn, engaged Placer Dome Technical Services (Philippines), Inc. (respondent), a domestic corporation and registered Value-Added Tax (VAT) entity, to implement the project.

An Implementation Agreement was signed by PDTSL and respondent, which stipulated that respondent would immediately implement the project and that PDTSL would pay respondent an amount of money, in U.S. funds, equal to the costs incurred for the implementation services.

Respondent filed amended VAT returns and subsequently claimed a refund for its reported excess input VAT payments, arguing that the revenues derived from its services qualified as zero-rated sales under the Tax Code, as they were paid in foreign currency inwardly remitted to the Philippines. When the Commissioner of Internal Revenue (CIR) did not act on this claim, respondent filed a Petition for Review with the Court of Tax Appeals (CTA).

The CTA ruled in favor of respondent, finding that its sale of services to PDTSL qualified as zero-rated transactions under the Tax Code. However, the CTA also found that only a portion of the reported total input VAT payments of respondent could be refunded. The CIR filed a Motion for Reconsideration, which was denied by the CTA. The CIR then appealed to the Court of Appeals.

The case involves a dispute over the proper taxation of tour package services provided by the respondent to foreign tourists in the Philippines. The petitioner argues that the services should be subject to the regular VAT rate of 10% while the respondent contends that they should be subject to a zero-percent VAT rate. The Bureau of Internal Revenue, through a revenue regulation and a VAT ruling, interpreted the relevant provisions of the National Internal Revenue Code and concluded that the tour package services should be subject to the regular VAT rate. The petitioner appeals the rulings and argues that only two categories of services are subject to zero-percent VAT, which do not include the services rendered by the respondent. The Court had already rejected similar arguments in a previous case, Commissioner of Internal Revenue v. American Express.

The case of American Express involved transactions invoked as "zero-rated" by a VAT-registered person who collects and pays receivables for its non-resident foreign client. The Commissioner of Internal Revenue (CIR) relied on VAT Ruling No. 040-98, which stated that the service must be consumed outside the Philippines for it to be zero-rated. However, the court in American Express declared the opinion in the ruling as ultra vires and invalid. American Express thoroughly discussed the issues raised in the present case. The nature of VAT imposed on services was explained as a tax on consumption expressed as a percentage of the value added to goods or services purchased by the producer or taxpayer. It is an indirect tax on services conducted in the course of trade or business in the Philippines, which must be regularly conducted, pursued in a commercial or economic activity, for valuable consideration, and not exempt under the Tax Code, other special laws, or any international agreement. While services may be subject to VAT, certain services are entitled to the benefit of zero-rating the VAT due.

ISSUES:

  1. Whether the phrase "and other similar services" in Section 108(B)(3) of the 1997 National Internal Revenue Code (NIRC) is clear and unambiguous, thus excluding any services not specifically listed in the preceding phrases.

  2. Whether VAT Ruling No. 040-98, which states that services must be consumed abroad to qualify for zero-rating, is valid and consistent with the law and regulations.

  3. Whether the destination principle applies to the services rendered by the respondent and whether they should be subject to VAT.

  4. Whether services rendered in the Philippines by a VAT-registered person, which are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are subject to the zero-rated value-added tax (VAT)

  5. The issue in this case pertains to the denial of the petition, without any pronouncement as to costs.

RULING:

  1. The phrase "and other similar services" in Section 108(B)(3) of the NIRC is broad and does not exclude services not specifically listed in the preceding phrases. It encompasses services that are of the same kind or nature, regardless of whether they involve different mental faculties or produce varying outputs.

  2. VAT Ruling No. 040-98, which states that services must be consumed abroad to qualify for zero-rating, is invalid because it contradicts both the law and the regulations. Administrative issuances should remain consistent and in harmony with the law they seek to interpret.

  3. The services rendered by the respondent, although facilitated in the Philippines, are consumed abroad. The consumption of services does not necessitate their performance abroad. The destination principle, which applies to goods, does not apply in the same manner to services. The law provides an exception to the destination principle, allowing for the zero-rating of services performed in the Philippines, paid for in foreign currency, and accounted for in accordance with BSP rules and regulations.

  4. Services rendered in the Philippines by a VAT-registered person, which are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are subject to the zero-rated VAT. The law does not impose a qualification or condition of being "consumed abroad" in order for services performed in the Philippines to be zero-rated. The place where the service is rendered determines the jurisdiction to impose the VAT. Therefore, the service rendered by the respondent is subject to the zero-rated VAT.

  5. The petition was denied and there was no pronouncement as to costs.

PRINCIPLES:

  • The VAT is a tax on consumption expressed as a percentage of the value added to goods or services purchased by the producer or taxpayer.

  • Services subject to VAT must be 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.

  • Section 102(b) of the 1986 NIRC provides for zero-rating of services paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.

  • Section 102(b)(2) of the Tax Code is clear and does not require statutory construction or interpretation.

  • Section 4.102-2(b)(2) of Revenue Regulation No. 5-96 only provides illustrative examples of services entitled to zero-rating and is not restrictive.

  • The canon of statutory construction known as ejusdem generis does not apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96.

  • The scope of the phrase "and other similar services" in tax laws is broad and does not have to exclude services not specifically listed in the preceding phrases.

  • Administrative issuances should not override or contradict the law they seek to interpret, and they should remain consistent and in harmony with the law and regulations.

  • The consumption of services does not require their performance abroad. The destination principle, which applies to goods, does not apply to services in the same manner. Services performed in the Philippines can be zero-rated as an exception to the destination principle if they meet specific criteria.

  • The services performed by VAT-registered persons in the Philippines, if paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are subject to the zero-rated VAT.

  • The activity that creates the income must not be confused with the main business in the course of which that income is realized.

  • The place where the service is rendered determines the jurisdiction to impose the VAT. The place of payment and the place where the output of the service will be further or ultimately used are immaterial.

  • The condition of being "consumed abroad" is not a requisite for services performed in the Philippines to be subject to the zero-rated VAT.

  • The court has the discretion to deny a petition without any pronouncement as to costs.