COMMISSIONER OF INTERNAL REVENUE, PETITIONER, AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), RESPONDENT.

American Express International versus Commissioner of Internal Revenue

The Case

This is a petition for review filed by the Commissioner of Internal Revenue against American Express International, Incorporated, Philippine Branch, questioning the decision of the Court of Appeals which affirmed the Court of Tax Appeals in ordering the refund of excess input value-added tax paid by the respondent for the year 1997. The case matters because it settles the proper interpretation of the zero-rating provision for services under the Tax Code, clarifies that the destination principle does not require that a service be consumed abroad in order to be zero-rated, and holds that revenue regulations which alter or revoke the statutory requirements for zero-rating are ultra vires and invalid.

Procedural History

The respondent filed a petition for review with the Court of Tax Appeals after the Commissioner failed to act on its letter-request for refund. The Court of Tax Appeals rendered a decision in favor of the respondent, ordering the Commissioner to refund the amount of 3,352,406.59 pesos representing excess input value-added tax paid for the year 1997. The Commissioner elevated the matter to the Court of Appeals, which dismissed the petition for lack of merit and affirmed the decision of the Court of Tax Appeals in its entirety. The Commissioner then filed the present petition for review on certiorari under Rule 45 of the Rules of Court before the Supreme Court.

Facts

American Express International, Incorporated, Philippine Branch, is a Philippine branch of a corporation organized under the laws of the State of Delaware, United States of America. It operates as a servicing unit of American Express International, Incorporated, Hong Kong Branch, and is engaged primarily in facilitating the collection of receivables of the Hong Kong branch from card members situated in the Philippines and the payment to service establishments in the Philippines. It registered with the Bureau of Internal Revenue as a value-added tax taxpayer effective March 1988.

For the period from January 1, 1997 to December 31, 1997, the respondent filed its quarterly value-added tax returns. On March 23, 1999, it amended these returns and declared taxable sales, output value-added tax, zero-rated sales, domestic purchases, and input value-added tax. On April 13, 1999, it filed a letter-request with the Bureau of Internal Revenue for the refund of its 1997 excess input taxes in the amount of 3,751,067.04 pesos, citing Section 110(B) of the 1997 Tax Code. It arrived at this amount after deducting from its total input value-added tax paid of 3,763,060.43 pesos its applied output value-added tax liabilities for the third and fourth quarters of 1997.

Because the Commissioner took no immediate action on the request, the respondent filed a petition for review with the Court of Tax Appeals on April 15, 1999. The Commissioner, in his answer, claimed that the claim for refund is subject to investigation, that taxes paid and collected are presumed to have been made in accordance with law, and that claims for tax refund are construed strictly against the claimant. The Court of Tax Appeals ruled in favor of the respondent, and the Court of Appeals affirmed. Hence, this petition.

Issues

• Whether or not the Court of Appeals committed reversible error in holding that the respondent is entitled to the refund of the amount of 3,352,406.59 pesos representing excess input value-added tax for the year 1997.

Applicable Provisions

Section 102 of the Tax Code provides:

Sec. 102. Value-added tax on sale of services and use or lease of properties. -- (a) Rate and base of tax. -- There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services x x x. The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by x x x persons engaged in milling, processing, manufacturing or repacking goods for others; x x x services of banks, non-bank financial intermediaries and finance companies; x x x and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include: x x x (3) The supply of x x x commercial knowledge or information; (4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of x x x any such knowledge or information as is mentioned in subparagraph (3); x x x (6) The supply of technical advice, assistance or services rendered in connection with technical management or administration of any x x x commercial undertaking, venture, project or scheme; x x x. The term 'gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax. (b) Transactions subject to zero percent (0%) rate. -- The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding subparagraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP; x x x.

This provision is the basis for determining whether the respondent's services are zero-rated, as it enumerates the categories of services subject to the zero percent rate when paid in acceptable foreign currency and accounted for in accordance with Bangko Sentral ng Pilipinas regulations.

Ruling

The Court denied the petition for lack of merit. On the sole issue of entitlement to tax refund, the Court held that the respondent's services are zero-rated under Section 102(b)(2) of the Tax Code. The law is clear: services performed by value-added tax-registered persons in the Philippines, other than processing, manufacturing, or repacking of goods for persons doing business outside the Philippines, when paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, are zero-rated. The respondent, a value-added tax-registered person, facilitates the collection and payment of receivables belonging to its non-resident foreign client, for which it is paid in acceptable foreign currency inwardly remitted and accounted for in conformity with Bangko Sentral ng Pilipinas rules and regulations. Its service is not in the same category as processing, manufacturing, or repacking of goods and should therefore be zero-rated.

The Court rejected the Commissioner's argument that the service must be consumed abroad to be zero-rated. The Court explained that the destination principle does not require that the service be performed abroad. The facilitation of the collection of receivables is different from the utilization or consumption of the outcome of such service. While the facilitation is done in the Philippines, the consumption is not. The respondent renders assistance to its foreign clients by receiving the bills of service establishments located in the country and forwarding them to the regional operating centers abroad. The consumption contemplated by law does not imply that the service be done abroad in order to be zero-rated. Consumption means the use of a thing in a way that thereby exhausts it, and applied to services, it means the performance or successful completion of a contractual duty. The services rendered by the respondent are performed or successfully completed upon its sending to its foreign client the drafts and bills it has gathered from service establishments here. Its services, having been performed in the Philippines, are therefore also consumed in the Philippines.

The Court also held that the Commissioner's reliance on VAT Ruling No. 040-98 was unwarranted. By requiring that the respondent's services be consumed abroad in order to be zero-rated, the Commissioner went beyond the sphere of interpretation and into that of legislation. Even granting that it is valid, the ruling cannot be given retroactive effect, for it will be harsh and oppressive to the respondent, which has already relied upon VAT Ruling No. 080-89 for zero rating. The Court further noted that the respondent can sell its services to another branch of the same parent company, as the business concept of a transfer price allows goods and services to be sold between and among intra-company units at cost or above cost. The service partakes of the nature of export sales as applied to goods, especially when rendered in the Philippines by a value-added tax-registered person that gets paid in acceptable foreign currency accounted for in accordance with Bangko Sentral ng Pilipinas rules and regulations.

Doctrine

The value-added tax system generally uses the destination principle, under which goods and services are taxed only in the country where they are consumed. However, the Tax Code itself provides a clear exception: the supply of service shall be zero-rated when the following requirements are met: first, the service is performed in the Philippines; second, the service falls under any of the categories provided in Section 102(b) of the Tax Code; and third, it is paid for in acceptable foreign currency that is accounted for in accordance with the regulations of the Bangko Sentral ng Pilipinas. The consumption contemplated by law does not imply that the service be done abroad in order to be zero-rated. Revenue regulations that alter or revoke these statutory requirements are ultra vires and invalid.

Disposition

The petition was denied for lack of merit, and the decision of the Court of Appeals affirming the Court of Tax Appeals was affirmed. The respondent won, and the Commissioner was ordered to refund the amount of 3,352,406.59 pesos representing excess input value-added tax for the year 1997.

Remember This

The single line worth memorizing is that the supply of service is zero-rated when it is performed in the Philippines, falls under Section 102(b) of the Tax Code, and is paid for in acceptable foreign currency accounted for in accordance with Bangko Sentral ng Pilipinas regulations, and that revenue regulations altering these requirements are ultra vires and invalid. Examiners like to use this case in questions on value-added tax zero-rating, the destination principle, and the validity of administrative issuances that go beyond the law.