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CIR v. DEUTSCHE KNOWLEDGE SERVICES PTE. LTD.

FACTS:

Deutsche Knowledge Services Pte. Ltd. (DKS) is the Philippine branch of a multinational company organized under the laws of Singapore. It operates as a regional operating headquarters (ROHQ) in the Philippines and provides various services to its foreign affiliates/related parties. DKS is a value-added tax (VAT)-registered enterprise.

On October 21, 2011, DKS filed an application for tax refund or issuance of a tax credit certificate (TCC) with the Bureau of Internal Revenue (BIR), seeking to refund unutilized input VAT attributable to zero-rated sales incurred during the first quarter of 2010. DKS claimed that its sales of services to foreign affiliates-clients were zero-rated for VAT purposes. However, the Commissioner of Internal Revenue (CIR) did not act on DKS's administrative claim, leading DKS to file a petition for review with the Court of Tax Appeals (CTA).

During the proceedings before the CTA, DKS presented evidence to prove the non-resident foreign corporation (NRFC) status of its foreign affiliates-clients. The CTA Second Division partially granted DKS's claim for tax refund, reducing the amount to be refunded based on disallowed input VAT claims and the number of foreign affiliates-clients that were proven to be NRFCs.

Both the CIR and DKS filed motions for reconsideration with the CTA, but were denied. The CIR then filed a petition for review on certiorari before the CTA En Banc.

The sole issue in the present case is whether DKS is entitled to a tax refund or credit.

ISSUES:

  1. The sole issue for the Court's resolution is whether DKS is entitled to a tax refund/credit amounting to P14,527,282.57.

  2. Whether DKS is entitled to a tax refund or credit of excess input VAT attributable to zero-rated sales.

  3. Whether DKS's foreign affiliates-clients are non-resident foreign corporations (NRFCs) doing business outside the Philippines.

  4. Whether the absence of competent evidence proving that the affiliate is not doing business in the Philippines is fatal to a claim for credit or refund of excess input VAT attributable to zero-rated sales.

RULING:

  1. The petition is unmeritorious.

  2. The Court held that the claim of DKS for tax refund/credit is timely filed. The Court emphasized that the date of completion of the submission of complete documents triggers the running of the 120-day period for the Commissioner of Internal Revenue (CIR) to resolve the claim. The CIR cannot unilaterally determine the completeness of the documents and dictate the running of the 120-day period. The determination of completeness of documents is within the authority of the claimant while the substantive determination of completeness for the purpose of ascertaining entitlement to the tax refund or credit is for the CIR and the courts to determine. The CIR and the courts' subsequent evaluation of the documents is a substantive determination of completeness. In this case, the CIR failed to notify DKS of the alleged deficiencies in the documentary requirements and it was the CIR's belated response to the claim before the Court that raised the issue of documentary deficiencies, which the CIR could have addressed on the administrative level. Thus, the Court ruled that DKS's claim is timely filed and the CIR's argument that the claim was filed prematurely is without merit.

  3. DKS is entitled to a tax refund or credit of excess input VAT attributable to zero-rated sales. The claim for tax refund was filed within two years after the close of the taxable quarter when the sales were made, and the creditable input tax due or paid is attributable to such sales.

  4. DKS's foreign affiliates-clients are NRFCs doing business outside the Philippines. The SEC Certifications of Non-Registration, Authenticated Articles of Association, and Certificates of Registration/Good Standing/Incorporation sufficiently establish the NRFC status of DKS's affiliates-clients.

  5. The absence of competent evidence proving that the affiliate is not doing business in the Philippines is fatal to a claim for credit or refund of excess input VAT attributable to zero-rated sales.

PRINCIPLES:

  • The running of the 120-day period for the CIR to resolve a tax refund or credit claim is triggered by the date of completion of the submission of complete documents supporting the claim.

  • The claimant has the prerogative to determine the completeness of their submissions upon filing or within 30 days thereafter, for the purpose of ascertaining the date of completion.

  • The determination of whether the claimant's submissions are actually complete as required by law is for the CIR and the courts to determine. This is a substantive determination for the purpose of ascertaining entitlement to the tax refund or credit.

  • The CIR cannot unilaterally determine the completeness of the documents and dictate the running of the 120-day period. The tax authorities may request for additional documents to aid in verifying the claim, but the claimant must be duly notified and given the opportunity to comply.

  • If the tax authorities find deficiencies in the documentary requirements, they must notify the claimant and require them to make further submissions, as necessary. Failure to do so may result in the claimant proceeding to court for the appropriate remedial action.

  • To be entitled to a tax refund or credit of excess input VAT attributable to zero-rated sales, the taxpayer must be VAT-registered, engaged in sales which are zero-rated or effectively zero-rated, and file the claim within two years after the close of the taxable quarter when such sales were made. The creditable input tax due or paid must be attributable to such sales. (Section 4.112-1(a) of Revenue Regulations No. (RR) 16-05)

  • Sales of "other services" shall be zero-rated if the seller is VAT-registered, the services are rendered to a person engaged in business conducted outside the Philippines or a nonresident person not engaged in business who is outside the Philippines when the services are performed, and the services are paid for in acceptable foreign currency and accounted in accordance with BSP rules and regulations. (Section 108(B)(2) of the Tax Code)

  • The claimant must establish the NRFC status of the client, which involves proving that the client was established under the laws of a country other than the Philippines and is not engaged in trade or business in the Philippines. Sufficient proof of both components is required, such as SEC Certifications of Non-Registration and articles of association/certificates of incorporation stating that the affiliate is registered to operate in their respective home countries outside the Philippines. (Case law)

  • The absence of competent evidence proving that the affiliate is not doing business in the Philippines is fatal to a claim for credit or refund of excess input VAT attributable to zero-rated sales.