1 CIR v.

CA and COMMONWEALTH MANAGEMENT

1. Commonwealth Management (Comaserco) was organized
by Philamlife to perform collection, consultation, technical
services and act as internal auditor of Philamlife and its
affiliates.
2. BIR assessed Comaserco for deficiency VAT (P350k) for
1988.
3. Comaserco protested with the BIR.
4. CIR sent a collection letter to it demanding payment.
5. Comaserco filed with the CTA a PetRev.
a. The services it rendered to PhilamLife and its
affiliates were on a no profit, reimbursement-ofcost-only basis.
b. It was not engaged in the business of providing
services.
c. It was established to ensure operational orderliness
and administrative efficiency of PhilamLife and
affiliates.
d. Its annual corporate ITR for 1988 indicated a net
loss in its operations (P6k).
e. Not profit motivated = not engaged in business =
not liable for VAT.
6. CTA: In favor of CIR
7. CA: Reversed.
a. Basis: another tax case involving the same parties.
b. Held: Comaserco was not liable to pay fixed and
contractors tax for services rendered to Philamlife
and affiliated. Comaserco was not engaged in
business of providing services to Philamlife.
c. Same way, not liable to pay VAT because it was not
engaged in the business of selling services.
8. CIR, PetRev with the SC.
a. Avers that to engage in business and to engage
in the sale of services are different.
b. The services it rendered to PhilAm for a fee are
subject to VAT.
c. VAT is a tax on the value added by the performance
of the service.
d. It is immaterial whether profit is derived therefrom.
ISSUE: Whether Comaserco is liable to pay VAT. YES.

SEC. 105. Persons Liable. Any person who, in the course of

trade or business, sells, barters, exchanges, leases goods
or properties, renders services, and any person who
imports goods shall be subject to the value-added tax
(VAT) imposed in Sections 106 and 108 of this Code.
Comaserco contends that the term in the course of trade
or business requires that the business is carried on
with a view to profit or livelihood. It avers that the
activities of the entity must be profit-oriented.
SC: The phrase in the course of trade or business means
the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental
thereto, by any person regardless of whether or not the
person engaged therein is a nonstock, nonprofit
organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members
of their guests), or government entity.
Even a non-stock, non-profit, organization or government
entity, is liable to pay VAT on the sale of goods or
services.
VAT is a tax on transactions, imposed at every
stage, of the distribution process on the sale,
barter, exchange of goods or property, and on the
performance of services, even in the absence of
profit attributable thereto.
The term in the course of trade or business
requires the regular conduct or pursuit of a
commercial or an economic activity, regardless of
whether or not the entity is profit- oriented.
Sec. 108: Sale of services as the performance of all
kinds of services for others for a fee, remuneration or
consideration. It includes the supply of technical advice,
assistance or services rendered in connection with
technical management or administration of any scientific,
industrial or commercial undertaking or project.
BIR Ruling: A domestic corporation that provided
technical,
research,
management
and
technical
assistance to its affiliated companies and received
payments on a reimbursement-of-cost basis, without any
intention of realizing profit, was subject to VAT on services

rendered. In fact, even if such corporation was organized

without any intention of realizing profit, any income or
profit generated by the entity in the conduct of its
activities was subject to income tax.
As long as the entity provides service for a fee,
remuneration or consideration, then the service rendered
is subject to VAT.
Sec. 109 clearly enumerated the transactions exempted
from VAT. Services rendered by Comaserco do not fall
within the exemptions.
Opinion of the Commissioner of Internal Revenue entitled
to great weight in the absence of any showing that it is
plainly wrong.

2 CIR v. BURMEISTER
CONTRACTOR

and

WAIN

SCANDINAVIAN

1. BWSC-Denmark, Mitsui Engineering, and Mitsui and Co.

(Consortium) entered into a contract with NAPOCOR for
the operation and maintenance of the latters 2 power
barges.
2. The
Consortium
appointed
BWSC-Denmark
as
coordination manager.
3. BWSC-D established BSWC Mindanao Inc. which
subcontracted the actual operation of the barges as well
as other duties necessary to be done in the Philippines.
4. NAPOCOR paid the capacity and energy fees in a mix of
Mark, Yen, and Peso.
5. The freely convertible non-Peso component is deposited
to the Consortiums account in Denmark and Japan. While
the Peso-denominated component is deposited in a
separate and special designated bank account in the Phil.
6. The Consortium pays BWSC-Mindanao in foreign currency
inwardly remitted to the Philippines through banking.
7. BWSCM sought a ruling from the BIR to ascertain the tax
implications of the above transactions.
8. BIR Ruling: If BWSCM chooses to register as a VAT person
and the consideration for its services is paid in acceptable
foreign currency and accounted for with the rules and
regs of BSP, the services shall be subject to VAT at zerorate.
9. BWSCM chose to register as a VAT Taxpayer. A certificate
was issued.
10.It filed its Quarterly VAT Returns. Total zero-rated sales:
P147M; VAT input taxes: P3M.
11.BWSCM availed of the Voluntary Assessment Program of
BIR. It claimed that it misinterpreted a Revenue
Regulation to be applicable to its case.
a. Pursuant to the regulation, BWSCM subjected its
sale of services to the Consortium to the 10% VAT
representing Apr-Dec 1996 sales (P103M) since the
Regulation became effective only on Apr. 1996.
b. The Jan-Mar 1996 sales were subjected to zero-rate.
c. BWSCM amended its return.
d. Paid P6M as its output tax liability.

12.VAT Ruling: Confirmed BIR Ruling insofar as it held that

the services rendered by BWSCM is subject to VAT at 0%.
13.BWSCM filed a claim for the issuance of a tax credit
certificate believing that it erroneously paid the output
VAT due to its availment of the Voluntary Assessment
Program.
14.PetRev with CTA in order to toll the running of the 2-year
prescriptive period.
15.CTA: CIR directed to issue tax credit certificate for P6M.
a. The sale of services to the Consortium was paid for
in acceptable foreign currency inwardly remitted to
Phil. and accounted for with the rules of BSP.
b. Established by BPI Credit memos showing
remittances in Danish Kroner and US$.
c. Subject to VAT at 0% under Sec. 108(B)(2), BIR
Ruling, VAT Ruling.
16.CIR, PetRev with CA. Dismissed.
a. Two kinds of transactions/services subject to 0%
VAT under the VAT Ruling. (a) services other than
repacking goods for other persons doing business
outside the Phil which goods are subsequently
exported and (b) services by a resident to a nonresident foreign client, the consideration for which
is paid for in acceptable foreign currency and in
accordance with BSP rules.
b. Ony the 1st classification is required to be
consumed abroad in order to be taxed at 0%. Since
no stipulation for the 2nd classification, it need not
be consumed abroad.
c. Tax code did not provide that the services must be
destined for consumption abroad in order to be zero
rated.
d. If indeed the destination principle (exports
exempt, imports taxable) is the basis of the VAT
laws, proper remedy of CIR is to recommend an
amendment of Sec. 108(b)(2) in Congress. Until
then, basic law applies.
ISSUE: Whether BWSCM is entitled to the refund. YES.
RE: Non-retroactivity; entitlement to refund
BWSCMs reliance on Bureau of Internal Revenue (BIR)

rulings binds the Commissioner of Internal Revenue.

The BIR Commissioners filing of his Answer before the
Court of Tax Appeals challenging a taxpayers claim for
refund effectively serves as a revocation of the VAT and
BIR Rulings, but such revocation cannot be given
retroactive effect since it will prejudice the taxpayer.
Section 246 of the Tax Code provides that any revocation
of a ruling by the Commissioner of Internal Revenue shall
not be given retroactive application if the revocation will
prejudice the taxpayer.

RE: Zero-rating conditions; interpretation

The Tax Code not only requires that the services be other
than processing, manufacturing or repacking of goods
and that payment for such services be in acceptable
foreign currency accounted for in accordance with BSP
rules.
Another essential condition for qualification to zero-rating
under Section 102(b)(2) is that the recipient of such
services is doing business outside the Philippines.
The place of payment is immaterial, much less is the
place where the output of the service is ultimately used.
An essential condition for entitlement to 0% VAT under
Section 102(b)(1) and (2) is that the recipient of the
services is a person doing business outside the
Philippines.
In this case, the recipient of the services is the
Consortium, which is doing business not outside,
but within the Philippines because it has a 15-year
contract to operate and maintain NAPOCOR's two
100-megawatt power barges in Mindanao.
When
Section
102(b)(2)
stipulates
payment
in
acceptable foreign currency under BSP rules, the law
clearly envisions the payer-recipient of services to be
doing business outside the Philippines.
Only those not doing business in the Philippines can be
required under BSP rules to pay in acceptable foreign
currency for their purchase of goods or services from the
Philippines.
The Court recognizes the rule that the VAT system
generally follows the destination principle (exports are

zero-rated whereas imports are taxed). Exception: 0% VAT

on services enumerated in Section 102 and performed in
the Philippines. For services covered by Section 102(b)(1)
and (2), the recipient of the services must be a person
doing business outside the Philippines.

3 CIR v. PLACER DOME TECHNICAL SERVICES (PHIL)

1. Placer Dome Inc. (39.9% owner of Marcopper) engaged
Placer Dome Technical Services Limited (PDTSL), nonresident foreign corp in Canada, to carry out the clean-up
and rehabilitation of the Makulapnit and Boac Rivers.
a. At the San Antonio Mines owned by Marcopper,
mine tailings from Taipan Pit started to escape
through the Makulapnit Tunnel and Boac Rivers.
b. The mining operations ceased and causing
potential environmental damage to rivers and
immediate area.
2. PDTSL engaged the services of PDTS-Philippines, a
domestic corp. registered VAT entity, to implement the
project in the Philippines.
3. Due to the urgency, PDTS-Phil agreed to immediately
implement the project.
4. The Agreement stipulated that all implementation
services rendered by PDTS-P even prior to the signing
shall be deemed to have been provided pursuant to the
Agreement.
5. Agreement also said that PDTSL was to pay PDST-Phil an
amount in US funds, equal to all costs incurred for the
implementation Services performed and a fee of 1% of
such costs.
6. PDTS-Phil amended its QVAT Returns declaring an input
VAT payment of P43M and P42M as its total excess input
VAT.
7. PDTS-Phil filed an admin claim for refund of its total input
VAT payment saying that pursuant to the Agreement, the
services it rendered qualified as zero-rated sales under
Sec. 102(b)(2) of the then Tax Code, since it was paid in
foreign currency inwardly remitted to the Philippines.
8. No action from CIR.
9. PDST-Phil filed a PetRev with CTA praying for the refund.
10.CIR invoked presumption that taxes are collected in
accordance with the law and refunds are construed
against claimant.
11.CTA: In favor of PDST but only to the extent of P17M as
this was the only claim proven by receipts and attributed
to its zero-rated sales.
12.CA: Affirmed CTA.

Section 102. Value-Added Tax on Sale of Services and Use

or Lease of Properties.
(b) Transactions Subject to Zero Percent (0%) Rate. The
following services performed in the Philippines by VATregistered persons shall be subject to zero percent (0%)
rate:
(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].
The law is very clear. Under the last paragraph [of
Section 102(b)], services performed by VATregistered persons in the Philippines (other than
the 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 BSP, are zero-rated.

RE: Destination Principle

CIR presently invokes the destination principle, citing
that PDTSPs services, while rendered to a nonresident
foreign corporation, are not destined to be consumed
abroad. Hence, the onus of taxation of the revenue arising
therefrom, for VAT purposes, is also within the Philippines.
Yet the Court in American Express debunked this
argument when it rebutted the theoretical underpinnings
of VAT Ruling No. 040-98, particularly its reliance on the
destination principle in taxation.
GENERAL RULE: The VAT system uses the destination
principle as a basis for the jurisdictional reach of the tax.
Citing the American Express Case: Confusion in zero
rating arises because CIR equates the performance of a
particular type of service with the consumption of its
output abroad.

The facilitation of the collection of receivables is

different from the utilization or consumption of the
outcome of such service.
o The consumption contemplated by law, contrary to
CIRs administrative interpretation, does not imply that
the service be done abroad in order to be zero-rated.
o Consumption is the use of a thing in a way that
thereby exhausts it. Applied to services, the term
means the performance or successful completion of a
contractual duty, usually resulting in the performers
release from any past or future liability
EXCEPTION: A zero percent VAT rate for services that are
performed in the Philippines, paid for in acceptable
foreign currency and accounted for in accordance with the
rules and regulations of the BSP.
Performed in the Philippines, such service is necessarily
subject to its jurisdiction, for the State necessarily has to
have a substantial connection to it, in order to enforce a
zero rate. The place of payment is immaterial; much less
is the place where the output of the service will be further
or ultimately used.
o

ISSUE: Whether PDTS is entitled to the refund of the input

VAT.

NOTE:
The VAT is a tax on consumption expressed as a
percentage of the value added to goods or services
purchased by the producer or taxpayer.
As an indirect tax on services, its main object is the
transaction itself or, more concretely, the performance of
all kinds of services conducted in the course of trade or
business in the Philippines.
These services must be regularly conducted in this
country; undertaken in pursuit of a commercial or
an economic activity; for a valuable consideration;
and not exempt under the Tax Code, other special
laws, or any international agreement.

Section 102. Value-Added Tax on Sale of Services and Use or

Lease of Properties.
(b) Transactions Subject to Zero Percent (0%) Rate. The
following services performed in the Philippines by VATregistered persons shall be subject to zero percent (0%) rate:
(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].
As explicitly provided in the law, a zero-rated VAT
transaction includes services by VAT-registered persons
other than processing, manufacturing or repacking
goods for other persons doing business outside the
Philippines, which goods are subsequently exported, the
consideration for which is paid in foreign currency and
accounted for in accordance with the rules and
regulations of the BSP.
This provision was interpreted by BIR through Revenue
Regulation No. 5-96, Section 4.102-2(b)(2) of which states:
Services other than processing, manufacturing or repacking for
other persons doing business outside the Philippines for goods
which are subsequently exported, as well as services by a
resident to a non-resident foreign client such as project studies,
information services, engineering and architectural designs and
other similar services, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP.
CIR argues that following Section 4.102-2(b)(2) of Revenue
Regulation No. 5-96, there are only two categories of services
that are subject to zero percent VAT, namely:
o services other than processing, manufacturing or
repacking for other persons doing business outside the
Philippines for goods which are subsequently exported;
and
o services by a resident to a non-resident foreign client,
such
as
project
studies,
information
services,
engineering and architectural designs and other similar
services.
American Express case involved transactions invoked as zerorated by a VAT-registered person that facilitates the collection
and payment of receivables belonging to its non- resident
foreign client, for which it gets paid in acceptable foreign
currency inwardly remitted and accounted for in conformity with
BSP rules and regulations.

The CIR in that case relied extensively on the same VAT Ruling
No. 040-98 now cited before us. However, the Court would
conclude in American Express that the opinion therein that
the service must be destined for consumption outside of
the Philippines was clearly ultra vires and invalid.
The VAT is a tax on consumption expressed as a percentage of
the value added to goods or services purchased by the
producer or taxpayer.
As an indirect tax on services, its main object is the transaction
itself or, more concretely, the performance of all kinds of
services conducted in the course of trade or business in the
Philippines.
These services must be regularly conducted in this
country; undertaken in pursuit of a commercial or an
economic activity; for a valuable consideration; and not
exempt under the Tax Code, other special laws, or any
international agreement.
Yet even as services may be subject to VAT, our tax laws extend
the benefit of zero-rating the VAT due on certain services. The
aforementioned Section 102(b) of the 1986 NIRC activates such
zero-rating on two categories of transactions: (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 BSP; and (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.
The law is very clear. Under the last paragraph [of
Section 102(b)], services performed by VAT-registered
persons in the Philippines (other than the 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 BSP,
are zero-rated.
The Court in American Express found support from the
legislative record that revealed that consumption abroad is not
a pertinent factor to imbue the zero-rating on services by VATregistered persons performed in the Philippines.
It is indubitable that CIRs arguments cannot withstand
the Courts ruling in American Express, a precedent
warranting stare decisis application and one which, in

any event, the Court is disinclined to revisit at this

juncture.

Petition denied.