Tuesday, November 04, 2008 Tax notes: Proof of doing business outside the Philippines
FOR services to qualify as zero-rated for purposes of claims for the issuance of tax credit certificate (TCC) or refund of unutilized input value-added tax (VAT), a taxpayer must satisfy the following requirements under Section 108 (B)(2) of the Tax Code of 1997:
1. The recipient of services must be doing business outside the Philippines;
2. The payment of its service fees must be in acceptable foreign currency; and
3. Accounting of such remittance must be in accordance with the rules and regulations of Bangko Sentral ng Pilipinas (BSP).
Although not expressly stated in the second paragraph of Section 108 (B) [then Section 102(b)] of the Tax Code, it is clear that subparagraph (2) mandates that the service must be rendered “for other persons doing business outside the Philippines” to qualify for VAT zero-rating.
It is thus not sufficient that the taxpayer’s clients are “foreign clients” to meet the requirement of the law. The phrase “foreign clients” is too general so that it cannot be assumed that the companies it refers to are engaged in doing business outside the Philippines.
A “foreign client” may also be doing business in the Philippines, which would make the transaction fall under Section 108 (A) of the Tax Code of 1997 governing domestic sale or exchange subject to 12% VAT. (Accenture Inc. vs. Commissioner of Internal Revenue, CTA Case Nos. 7158, 7285, and 7313, Aug. 7, 2008)
For failure to establish that the “foreign clients” are doing business outside the Philippines, the sale of service to “foreign clients” does not qualify for zero-percent VAT, which resulted in the denial of the taxpayer’s claim for refund or issuance of TCC on its unutilized input VAT on sale of services to its foreign clients. (Source: Punongbayan & Araullo)
