Unpacking the Requirements for VAT Refund Claims in the Philippines: Completeness of Documents and Zero-Rated Sales

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. DEUTSCHE KNOWLEDGE SERVICES, PTE. LTD., RESPONDENT. G.R. NOS. 226548 & 227691, February 15, 2023

Imagine a business diligently tracking its Value-Added Tax (VAT) payments, expecting a refund on zero-rated sales, only to face a bureaucratic maze. This scenario is all too real for many businesses in the Philippines. The Supreme Court case of Commissioner of Internal Revenue vs. Deutsche Knowledge Services sheds light on the crucial aspects of VAT refund claims, specifically the submission of complete documents and the substantiation of zero-rated sales.

This case clarifies when the 120-day period for the BIR to act on a VAT refund claim commences and highlights the importance of proving that services were indeed rendered to non-resident foreign corporations doing business outside the Philippines. The decision offers practical guidance for businesses navigating the complexities of VAT refunds.

Understanding VAT Refunds and Zero-Rated Sales

At the heart of this case lies the concept of Value-Added Tax (VAT) and the possibility of claiming refunds on input VAT, especially for businesses engaged in zero-rated sales. VAT is an indirect tax imposed on the value added in each stage of the production and distribution process. Businesses registered for VAT collect output VAT on their sales and pay input VAT on their purchases. When output VAT exceeds input VAT, the difference is remitted to the government. However, when input VAT exceeds output VAT, a business can apply for a refund or a tax credit certificate (TCC).

Zero-rated sales, as defined under Section 108(B)(2) of the National Internal Revenue Code (Tax Code), refer to services performed in the Philippines by VAT-registered persons for a person engaged in business conducted outside the Philippines. These services are taxed at a rate of zero percent, which means no output VAT is charged. However, the business can still claim a refund on the input VAT attributable to these zero-rated sales.

Here’s the exact text of Section 108(B)(2):

(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:

(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); xxx.

For example, imagine a software development company in Makati providing coding services to a tech firm based in Singapore. If the Singaporean company doesn’t have a business presence in the Philippines and pays for the services in US dollars, the Philippine company’s services are considered zero-rated.

The Deutsche Knowledge Services Case: A Detailed Look

Deutsche Knowledge Services, Pte. Ltd. (DKS), the Philippine branch of a Singaporean multinational company, filed a claim for a refund of unutilized input VAT attributable to zero-rated sales for the fourth quarter of 2009. The Bureau of Internal Revenue (BIR) did not fully grant the refund, leading DKS to seek judicial recourse with the Court of Tax Appeals (CTA).

The case unfolded as follows:

• DKS filed an administrative claim for a VAT refund with the BIR.
• The BIR did not fully grant the refund, prompting DKS to file a judicial claim with the CTA.
• The CTA Division partly granted DKS’s claim, reducing the refundable amount.
• Both the CIR and DKS appealed to the CTA En Banc, which affirmed the CTA Division’s decision.
• The CIR and DKS then filed separate petitions for review with the Supreme Court.

A key issue was whether the CTA had jurisdiction to hear the case, given the CIR’s argument that DKS had not submitted complete documents with its administrative claim. The Supreme Court, however, sided with DKS, clarifying the requirements for initiating the 120-day period for the BIR to act on the claim.

The Supreme Court emphasized the taxpayer’s role in determining when complete documents have been submitted. As the Court stated, “it is the taxpayer who ultimately determines when complete documents have been submitted for the purpose of commencing and continuing the running of the 120-day period.“

Another crucial aspect was the substantiation of zero-rated sales. The CTA disallowed certain sales due to DKS’s failure to present official receipts or prove that the service recipients were non-resident foreign corporations doing business outside the Philippines. The Supreme Court upheld this disallowance.

As stated in the decision, “To be zero-rated, the service recipient must be proven to be a foreign entity and not engaged in trade or business in the Philippines when the sales are rendered.“

Practical Implications for Businesses

This case underscores the importance of meticulously documenting VAT refund claims and adhering to the requirements for zero-rated sales. Here are some practical takeaways for businesses in the Philippines:

• Complete Documentation: Even if you file an initial claim with minimal documents, track when you deem the submission “complete.” This marks the start of the 120-day period for the BIR to act.
• Substantiation is Key: For zero-rated sales, gather and preserve all necessary documents, including official receipts, SEC Certificates of Non-Registration (to prove foreign entity status), and documents proving the client’s non-engagement in business within the Philippines.
• Timely Filing: Be aware of the deadlines for filing both administrative and judicial claims. The Supreme Court reiterated the 120+30-day rule.

Key Lessons

• Taxpayers determine when their submission of documents is complete for VAT refund claims.
• Properly document zero-rated sales by proving that the service recipient is a foreign entity not engaged in business in the Philippines.
• Strictly comply with the timelines for filing administrative and judicial claims for VAT refunds.

For example, if a BPO company in Cebu provides call center services to a company in Australia, the BPO must secure documents to prove that the Australian company is not operating a business in the Philippines to qualify for zero-rating.

Frequently Asked Questions

Here are some common questions related to VAT refunds and zero-rated sales in the Philippines:

Q: What documents are considered “complete” for a VAT refund claim?

A: The taxpayer determines what constitutes complete documents. However, it’s advisable to include all relevant documents such as VAT invoices, official receipts, proof of zero-rated sales, and any other documents that support your claim.

Q: How do I prove that a service recipient is not engaged in business in the Philippines?

A: You can provide documents such as SEC Certificates of Non-Registration, Articles of Association, Certificates of Registration, Company Profile Fact Sheets, and other relevant corporate documents.

Q: What happens if the BIR doesn’t act on my VAT refund claim within 120 days?

A: You have 30 days from the lapse of the 120-day period to file a judicial claim with the CTA.

Q: Can I claim a VAT refund if I didn’t issue a VAT invoice or official receipt?

A: No. A VAT invoice or official receipt is a primary requirement for claiming input VAT.

Q: What is the difference between zero-rated sales and VAT-exempt sales?

A: Zero-rated sales are taxable at 0%, allowing the business to claim input VAT refunds. VAT-exempt sales are not subject to VAT, and the business cannot claim input VAT refunds.

ASG Law specializes in taxation and VAT refund claims. Contact us or email hello@asglawpartners.com to schedule a consultation.