Elusive proof for ‘doing business outside the Philippines’

The Philippines is becoming a center for outsourced services. Many companies in the Philippines, even those which are not registered with Philippine Economic Zone Authority, are able to offer their services to non-resident foreign corporations.

The supply of services to such non-resident foreign corporations is subject to zero rate of value-added tax (VAT). In zero rating, the sale is a taxable transaction but the sale does not result in an output tax. In addition, the input tax on the purchases of a VAT-registered person with a zero-rated sale may be allowed as a tax credit or refund. Hence, in the export of services, the input VAT paid by such service exporters can be applied for credit or refund if these are unutilized.

Section 108 (B)(2) of the National Internal Revenue Code prescribes the following conditions for some exports of services to be VAT zero rated:

1. The services by a VAT-registered person must be other than processing, manufacturing or repacking of goods;

2. The payment for such services must be in acceptable foreign currency accounted for in accordance with the Bangko Sentral ng Pilipinas rules and regulations; and

3. The recipient of such services is doing business outside the Philippines

Of the three requisites, in many cases, the service exporter claiming a refund failed to prove the third requisite.

Certainly, crucial now is the taxpayer’s burden of proof to establish that it provided services to clients “doing business outside the Philippines” in order to substantiate its claim for VAT input refund or credit on zero rated supply of services. For then, as in the cases below, the said service provider may be denied its claim no matter how many documents, devoid of any evidence that the clients were doing business outside of the Philippines, have been attached and presented in court.

In some of the cases decided in 2015, the Court of Tax Appeals (CTA) made a specific pronouncement as to the documentary requirements that should be presented to prove that the recipient of the service is doing business outside the Philippines.

These 2015 decisions were based on a 2014 case which is now a pending petition for review before the CTA En Banc. In the said cases, the CTA ruled that to be considered as a non-resident foreign corporation doing business outside the Philippines, each entity must be supported by both Securities and Exchange Commission (SEC) Certificate of Non Registration of corporation/partnership and the certificate/articles of foreign incorporation/association/registration.

The CTA, in the said cases, held that SEC Certificates of Non Registration indicate that the named entities are not registered corporations/partnerships in the Philippines but they do not prove that such entities are non-resident foreign corporations doing business outside the Philippines. On the other hand, the Certificate of Association and Certificates of Registration/ Incorporation of Foreign Company only establish that the named entities were incorporated/organized abroad but do not indicate that such entities are not doing business in the Philippines.

Hence, neither of these documents alone is sufficient proof.

Instead, both these documents should be presented to prove that the client is doing business outside the Philippines.

In a 2012 case, the Supreme Court (SC) had the opportunity to rule on this issue. However, the SC only concluded that service exporter claiming a refund failed to discharge its burden. The SC made no specific mention as to what documentary requirements should have been submitted by the petitioner. Instead, the Court went on to say that the evidence presented by petitioner may have established that its clients are foreign but that fact does not automatically mean that its clients were doing business outside the Philippines.

The Court instead emphasized, as in another case it cited, that there is no specific criterion as to what constitutes “doing” or “engaging in” or “transacting” business in the Philippines and that each case must be judged in the light of its peculiar environmental circumstances.

It’s indeed exciting to see what the decision of the SC will be if the CTA cases are elevated to it ultimately.

But with these decisions, the Courts are reminding us once again that tax refunds, like tax exemptions, are construed strictly against the taxpayer. Consequently, a taxpayer claiming a tax credit or refund has always the burden of proof to establish the factual basis of that claim.

Jennifer M. Rosete is an associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld