COMMISSIONER OF INTERNAL REVENUE v.

BURMEISTER AND ● Dec 1997: Respondent availed of the Voluntary Assessment

WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC. Program (VAP) of the BIR. It (respondent? BIR?) allegedly
Jan 22, 2007 | GR 153205 | Carpio, J. misinterpreted RR No. 5-96o be applicable to its case.
○ In conformity with the RR, respondent subjected its
FACTS: sale of services to the Consortium to 10% VAT in the
total amount of P103,558,338.11 (Apr to Dec 1996
● A foreign consortium composed of Burmeister and Wain sales) since said RR because effective only on April
Scandinavian Contractor A/S (BWSC-Denmark), Mitsui 1996
Engineering and Shipbuilding, and Mitsui and Co., Ltd. entered ○ Sum of P43,893,951.07 (Jan to Mar 1996 sales) was
into a contract with the National Power Corporation subjected to zero-rate.
(NAPOCOR) for the operation and maintenance of two of ● Respondent then filed its 1996 amended VAT return
NAPOCOR’s power barges. BWSC-Denmark was appointed consolidating the VAT output and input taxes for the four
coordination manager of the Consortium. calendar quarters of 1996, and paid P6,994,659.67 in output
○ BWSC-Denmark established herein respondent, which tax liability for 1996 through PCIBank,
subcontracted the actual operation and maintenance of ● Jan 1999: respondent secured VAT Ruling No. 003-99
the power barges and performance of other acts which reconfirming the earlier BIR Ruling insofar as it held that
have to be done in the Philippines. services rendered by respondent is subject to VAT at zero
● NAPOCOR paid capacity and energy fees to the Consortium percent.
in Mark, Yen, and Peso. ● Respondent then filed a claim for issuance of a tax credit
○ Non-Peso component is deposited directly to the certificate (TCC) on the belief that it erroneously paid the
Consortium’s bank accounts in Denmark and Japan, output VAT for 1996 due to its availment of the VAP.
while the Peso component is deposited in a separate ● Dec 29, 1997: respondent filed a petition for review with the
and special designated account in the Philippines. CTA to toll the running of the 2-year prescription period.
○ Respondent is paid by the Consortium in foreign ● CTA: ordered CIR to issue a TCC for P6,994,659.67 in favor of
currency inwardly remitted to the Philippines. respondent; that respondent’s sale of services to the
● Respondent sought a BIR ruling on the tax implications of the Consortium was paid for in acceptable foreign currency
above transactions. In said ruling, BIR declared that inwardly remitted to the Philippines and accounted for
respondent can choose to register as a VAT person, and the accordingly, and is therefore subject to 0% VAT; zero-rating of
consideration for its services is paid for in acceptable foreign respondent’ sale of services to the Consortium was even
currency and accounted for in accordance with BSP rules, the confirmed by petitioner in the BIR Ruling and the VAT Ruling;
transactions shall be subject to VAT at zero-rate. since payment of services rendered by respondent were
● Respondent registered as a VAT taxpayer, and seasonably subject to zero-rating, respondent mistakenly availed of the
filed its quarterly VAT return for 1996, reflecting, among VAP by paying output tax.
others, a total zero-rated sales of P147,317,189.62 with VAT ● CA: CIR’s petition for review dismissed for lack of merit; CTA
input taxes of P3,361,174.14. decision affirmed.
 ○ CIR: respondent’s services aren’t destined for held that respondent’s services are subject to 0% VAT and
consumption abroad unlike those mentioned in the which respondent invoked in applying for refund of the output
code, so they don’t enjoy zero-rating VAT.
○ CA: Two kinds of transactions/services subject to zero ● Section 102(b) of the Tax Code, the applicable provision in
percent VAT (VAT Ruling 040-98): (a) services other 1996 when respondent rendered the services and paid the
than repacking goods for other persons doing business ● (2)VAT in question, enumerates which services are zero-rated,
outside the Philippines which goods are subsequently thus:
exported; and (b) services by a resident to a non- ●
resident foreign client, such as project studies, ● (b) Transactions subject to zero-rate. ― The following services
information services, engineering and architectural performed in the Philippines by VAT-registered persons shall
designs and other similar services, consideration for be subject to 0%:
which is paid for in acceptable foreign currency and ● (1) Processing, manufacturing or repacking goods for other
accounted for in accordance with BSP rules and persons doing business outside the Philippines which goods
regulations are subsequently exported, where the services are paid for in
○ Only the first classification requires consumption acceptable foreign currency and accounted for in accordance
abroad in order to be zero-rated; second classification with the rules and regulations of the Bangko Sentral ng
need not be consumed abroad; second classification is Pilipinas (BSP);
void, being an amendment to the Tax Code ● (2) Services other than those mentioned in the preceding sub-
○ Under Sec. 108(b)(2) of the Tax Code, for services paragraph, the consideration for which is paid for in acceptable
performed in the Philippines to enjoy zero-rating, these foreign currency and accounted for in accordance with the
must comply only with two requisites: (1) payment in rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
acceptable foreign currency, and (2) accounted for in ● (3) Services rendered to persons or entities whose exemption
accordance with BSP rules. No provision requiring under special laws or international agreements to which the
services to be “destined for consumption abroad” in Philippines is a signatory effectively subjects the supply of
order to be VAT zero-rated. such services to zero rate;
○ If indeed the ‘destination principle’ underlies and is the ● (4) Services rendered to vessels engaged exclusively in
basis of the VAT laws, then petitioner’s proper remedy international shipping; and
would be to recommend an amendment of the law to ● (5) Services performed by subcontractors and/or contractors in
Congress; otherwise, the terms of the basic law should processing, converting, or manufacturing goods for an
be applied. enterprise whose export sales exceed seventy percent (70%)
ISSUE/RATIO: of total annual production. (Emphasis supplied)
Whether respondent is entitled to the refund of P6,994,659.67 as ● Respondent: that it complied with the requirements of the Tax
erroneously paid output VAT for 1996 - NO Code for zero rating under paragraph 2 of Sec. 102(b), and its
● Denial of the instant petition is not on the ground that services should therefore be zero-rated; payment of its service
respondent’s services are subject to 0% VAT. Rather, it’s fees was in acceptable foreign currency, there was inward
based on the non-retroactivity of the prejudicial revocation of remittance of the foreign currency to the Philippines, and
BIR Ruling No. 023-95 and VAT Ruling No. 003-99, which accounting was done in accordance with BSP rules; its
 services constituting the actual operation and management of business in the Philippines can be required under BSP
power barges in Mindanao are not even remotely similar to rules to pay in acceptable foreign currency for their
project studies, etc. under Section 4. 102-2(b)(2) of RR No. 5- purchase of goods/services in the Philippines. Such
96, and therefore need not be “destined to be consumed requirement cannot be imposed by the BSP on
abroad in order to be VAT zero-rated” domestic transactions.
● SC: Disagreed ● Services covered by 102(b)(1) and (2) are in the nature of
● Tax Code not only requires that services be other than export sales since the payer-recipient of services is doing
“processing, manufacturing or repacking of goods” and that business outside of the Philippines. Under BSP rules,
payment therefor be in acceptable foreign currency duly proceeds of export sales must be reported to the BSP. There
accounted for, but also that the recipient of such services is is reason, then, to require the service provider under 102(b)(1)
doing business outside the Philippines--the latter requirement and (2) to account for the foreign currency proceeds to the
clearly provided for in the first paragraph of 102(b) where the BSP.
listed services must be “for other persons doing business ○ This rationale cannot apply if the service provider and
outside the Philippines”. That latter phrase refers to the the recipient are both doing business in the Philippines
services enumerated in paragraph one and the general term since their transaction cannot be considered an export
“services” appearing in paragraph 2 of 102(b). Ergo, services sale, even if payment is made in foreign currency.
other than processing, manufacturing, or repacking of goods ○ More importantly, when both provider and recipient are
must likewise be performed for persons doing business doing business in the Philippines, their transaction falls
outside the Philippines. squarely under 102(a) governing domestic
● This is merely logical because if the provider and recipient of sale/exchange of services.
the “other services” are both doing business in the Philippines, ● When 102(b)(2) speaks of “services other than those
payment of foreign currency is irrelevant; otherwise, those mentioned in the preceding subparagraph”, the legislative
subject to regular VAT under Section 102(a) can avoid paying intent is that only the services are different between
VAT by simply stipulating payment in foreign currency inwardly subparagraphs 1 and 2. The requirements for zero-rating,
remitted by the recipient of services. including the essential condition that the recipient of services
○ To interpret 102(b)(2) to apply to a payer-recipient of is doing business outside the Philippines, remain the same
services doing business in the Philippines is to make under both subparagraphs.
payment of the regular VAT under 102(a) dependent ● The amended 108(b) [previously 102(b)] of the present Tax
on the generosity of the taxpayer. Service provider can Code clarifies this legislative intent. Expressly included among
choose to pay regular VAT or avoid it by stipulating the transactions subject to 0% VAT are services other than
payment in foreign currency inwardly remitted by the those mentioned in the first paragraph of 108(b) rendered to a
payer-recipient. This cannot be as a tax is a mandatory person engaged in business conducted outside the Philippines
exaction, not a voluntary contribution. or to a nonresident person not engaged in business who is
○ Stipulation of payment in “acceptable foreign currency” outside the Philippines when the services are performed, the
under BSP rules reflects the clear vision of the law that consideration for which is paid in acceptable foreign currency
the payer-recipient of services to be doing business and accounted for in accordance with BSP rules.
outside the Philippines because only those not doing
● In this case, the payer-recipient of respondent’s services is the is VAT-registered person that facilitates collection and
Consortium, which is a joint venture doing business in the payment of receivables belonging to its nonresident foreign
Philippines, despite its principal members being nonresident client, AmEx Hong Kong, for which it gets paid in acceptable
foreign corporations. foreign currency inwardly remitted and accounted for blah.
● Considering the 15-year term of the agreement, the ● In contrast, the present case involves a recipient (the
Consortium’s operation and maintenance of NAPOCOR’s Consortium) doing business in the Philippines. AmEx’s
power barges cannot be considered a single/isolated services were correctly subject to 0% VAT, while herein
transaction, and the Consortium itself cannot be considered a respondent’s services should be subject to 10% VAT.
person doing business outside the Philippines. Said services, ● As to the refund of its excess output tax, respondent relied on
therefore, cannot legally qualify for 0% VAT. VAT Ruling No. 003-99, which reconfirmed BIR Ruling No.
● Respondent, as subcontractor of the Consortium, operates 023-95, insofar as it held that services being rendered by
and maintains NAPOCOR’s power barges in the Philippines. respondent are subject to VAT at 0%. Respondent’s reliance
NAPOCOR pays the Consortium through its nonresident on these rulings binds petitioner.
partners, partly in foreign currency outwardly remitted. The ● Petitioner effectively revoked the rulings upon filing of his
Consortium then pays the respondent, also in foreign Answer before the CTA, challenging respondent’s claim for
currency, inwardly remitted and accounted for in accordance refund. However, such revocation cannot be given retroactive
with BSP rules. This payment schemed disqualifies effect as it will prejudice respondent by depriving the latter of a
requirement from 0% VAT. Essential to entitlement to 0% VAT refund of a substantial amount representing excess output tax.
is that the recipient is a person doing business outside the The refund is therefore upheld.
Philippines.
● General rule: the VAT system follows the “destination DISPOSITIVE:
principle” (exports are zero-rated; imports are taxed).
○ Exception (as stated in American Express): 0% WHEREFORE, the Court DENIES the petition.
VAT on services enumerated in Section 102 and
performed in the Philippines. For services covered SO ORDERED.
by 102(b)(1) and (2), the recipient of the services
must be a person doing business outside the
Philippines. To be exempt from the destination
principle under 102(b)(1) and (2), the services must
be (a) performed in the Philippines; (b) for a person
doing business outside the Philippines; and (c)
paid in acceptable foreign currency accounted for
in accordance with BSP rules
● Court said that American Express does not apply to
respondent. That case involved a recipient of services (AmEx
Int’l., Hong Kong branch) doing business outside the
Philippines. Therein respondent AmEx Int’l., Philippine branch