The Supreme Court affirmed that Deutsche Knowledge Services Pte. Ltd. (DKS), a Regional Operating Headquarters (ROHQ) in the Philippines, is entitled to a tax refund/credit of P14,527,282.57. This ruling clarifies the requirements for ROHQs to claim VAT refunds on services provided to foreign affiliates. It emphasizes the need for proper documentation to prove that clients are indeed foreign corporations doing business outside the Philippines, which is crucial for zero-rating of sales and subsequent VAT refund claims.
VAT Zero-Rating: How ROHQs Can Claim Tax Refunds for Foreign Services
This case revolves around DKS’s application for a refund of input Value-Added Tax (VAT) related to zero-rated sales from services provided to its foreign affiliates. DKS, as an ROHQ, sought to refund VAT, claiming its services to foreign clients were zero-rated, thus entitling it to a refund of input taxes. The Commissioner of Internal Revenue (CIR) contested this, arguing DKS didn’t sufficiently prove its clients were foreign corporations doing business outside the Philippines, a key requirement for zero-rating. This led to a legal battle over the adequacy of evidence needed to establish the status of foreign clients for VAT refund purposes.
At the heart of the matter lies Section 108(B)(2) of the Tax Code, which stipulates the conditions for zero-rating “other services.” These include that the service provider is VAT-registered, the services are rendered to a person engaged in business outside the Philippines or a nonresident person outside the Philippines, and payment is received in acceptable foreign currency and accounted for under Bangko Sentral ng Pilipinas (BSP) rules. The debate centered on whether DKS had adequately demonstrated that its clients met the requirement of being NRFCs doing business outside the Philippines.
The CIR challenged DKS’s claim on two primary grounds: the timeliness of the judicial claim and the sufficiency of evidence proving the foreign status of DKS’s clients. On the issue of timeliness, the CIR argued that DKS prematurely filed its judicial claim before the Court of Tax Appeals (CTA). However, the Court reiterated that taxpayers have the prerogative to determine the completeness of their submissions. The BIR cannot unilaterally dictate the running of the 120-day period to resolve the claim; such an action would grant undue power to delay administrative claims and prevent taxpayers from seeking judicial recourse.
Concerning the proof of NRFC status, the CIR contended that DKS failed to provide sufficient evidence. To qualify for zero-rating, the taxpayer must prove that the client is not a domestic corporation and does not engage in trade or business in the Philippines. The CTA determined that DKS had sufficiently established the NRFC status of 11 of its foreign clients through SEC Certifications of Non-Registration of Company and Authenticated Articles of Association and/or Certificates of Registration/Good Standing/Incorporation.
The Court upheld the CTA’s findings, emphasizing the respect accorded to the tax court’s expertise on tax matters. The SEC Certifications of Non-Registration proved that DKS’s affiliates were foreign corporations. Moreover, the articles of association/certificates of incorporation, showing that these affiliates were registered to operate in their respective home countries outside the Philippines, were considered prima facie evidence that these clients were not engaged in trade or business in the Philippines. This critical evidence distinguished the case from previous rulings such as Accenture, Inc. v. Commissioner of Internal Revenue and Sitel Philippines Corp. v. Commissioner of Internal Revenue, where claimants failed to provide similar proof of their clients not conducting business in the Philippines.
The ruling underscores the importance of maintaining thorough documentation to substantiate claims for VAT refunds. ROHQs must diligently gather and preserve records, including SEC certifications and articles of incorporation, to demonstrate the NRFC status of their foreign clients.
SECTION. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — x x x x
(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 x x x (2) Services other than those mentioned in the preceding paragraph, rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). x x x x
This documentation is crucial for securing VAT refunds on zero-rated sales. The implications of this case extend beyond ROHQs. All VAT-registered entities engaged in transactions with foreign entities must rigorously adhere to documentation requirements to qualify for zero-rating and subsequent tax benefits.
FAQs
| What was the key issue in this case? |
The primary issue was whether DKS, an ROHQ, sufficiently proved that its foreign clients were non-resident foreign corporations (NRFCs) doing business outside the Philippines to be entitled to a VAT refund. This determination is crucial for zero-rating of sales under the Tax Code. |
| What is a Regional Operating Headquarters (ROHQ)? |
An ROHQ is a foreign business entity licensed to derive income in the Philippines by providing qualifying services to its affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. ROHQs must secure a license from the Securities and Exchange Commission (SEC). |
| What documents are required to prove NRFC status? |
To establish NRFC status, a claimant must provide an SEC Certification of Non-Registration of Company and Authenticated Articles of Association or Certificates of Registration/Good Standing/Incorporation. These documents together prove that the client is a foreign corporation not doing business in the Philippines. |
| What is the significance of zero-rated sales? |
Zero-rated sales are subject to a VAT rate of 0%, meaning no output VAT is charged. However, businesses making zero-rated sales can claim refunds or credits for input VAT attributable to those sales. |
| What is the 120-day period in VAT refund claims? |
The Commissioner of Internal Revenue (CIR) has 120 days from the date of submission of complete documents to resolve an administrative claim for a VAT refund. If the claim remains unresolved after this period, the taxpayer can appeal to the Court of Tax Appeals (CTA). |
| How did the court address the issue of timeliness in filing the judicial claim? |
The Court held that the taxpayer has the right to determine when their documents are complete. The CIR cannot unilaterally determine completeness and dictate the start of the 120-day period. |
| What was the basis for the CTA’s decision in this case? |
The CTA relied on the SEC Certification of Non-Registration and Authenticated Articles of Association/Certificates of Registration to determine that DKS had sufficiently established the NRFC status of 11 of its foreign clients. |
| What can other companies learn from this case? |
This case highlights the importance of maintaining meticulous documentation to support VAT refund claims, particularly for ROHQs dealing with foreign clients. Proper records are crucial to demonstrating that clients are NRFCs doing business outside the Philippines. |
In summary, the Supreme Court’s decision emphasizes the necessity for ROHQs to diligently substantiate claims for VAT refunds. By providing concrete evidence of their clients’ NRFC status, businesses can ensure compliance with tax regulations and avail themselves of entitled tax benefits.
For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.
Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Commissioner of Internal Revenue v. Deutsche Knowledge Services Pte. Ltd., G.R. No. 234445, July 15, 2020
