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Getting a refund for something you paid for is always great. In the world of taxation, there are only a few cases when taxpayers are entitled to a refund of taxes. But before we apply for claims, how can we identify that we are eligible for a tax refund?

Section 112(A) of the Tax Code, as amended, provides that a VAT-registered taxpayer whose sales are zero-rated or effectively zero-rated may apply for tax refund of input tax within two (2) years after the close of the taxable quarter when the sale was made. Moreover, for a sale to qualify for zero-rating, the following basic requirements in Section 108(B)(2) should be satisfied:

1.    The services must be other than processing, manufacturing or repacking of goods;

2.    The recipient of such services is doing business outside the Philippines or a non-resident person not engaged in business who is outside the Philippines when the services are performed; and

3.    The payment for such services must be in acceptable foreign currency in accordance with the Bangko Sentral ng Pilipinas (BSP) rules and regulations.

In general, the Foreign Investments Act (FIA) provides that the term “doing business” includes soliciting orders, service contracts, opening offices; appointing representatives or distributors residing in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business; and any other act that imply a continuity of commercial dealings or arrangements in progressive prosecution for commercial gain or of the purpose and object of the business organization. Conversely, the following conditions do not constitute “doing business” in the Philippines:

1.    mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor;

2.    having a nominate director or officer to address its inclinations in such enterprise; or

3.    naming a representative or distributor domiciled in the Philippines which executes business in its own name and for its own record its own account.

In the recent Court of Tax Appeals (CTA) Case No. 9664 (Amadeus Philippines, Inc. v. Commissioner of Internal Revenue) dated 22 February 2021, the CTA reiterated an important technicality in the definition of “doing business.”

The Case starts on 31 March 2017 when Amadeus Philippines, Inc. (“Amadeus PH” or the “Company”) filed with the Revenue District Office (RDO) No. 50 an Application for Tax Refunds/Credits for its unutilized input VAT incurred during 1st to 4th quarters of TY 2015. It is worth recalling that before the effectivity of the Tax Reform for Acceleration and Inclusion (“TRAIN”) Law on 01 January 2018, the BIR had 120 days to process a VAT refund claim. Hence, on 25 August 2017, 147 days after Amadeus PH had filed its claim for refund, Amadeus PH also filed on time a Petition for Review with the CTA due to the alleged inaction of the RDO. Prior to TRAIN, the taxpayer should file within 30 days from the lapse of the 120 day processing period.

On 03 November 2017, the RDO raised its defenses as follows:

(a)  Petitioner failed to demonstrate that the VAT was erroneously or illegally collected;

(b)  That the VAT was presumed paid and collected in accordance to laws and regulation;

(c)   That it is incumbent upon the Petitioner to show that it has complied with Section 204(C) of the Tax Code;

(d)  That the tax refund is not fully substantiated with proper documents; and

(e)  That the tax refund should be construed strictly against the taxpayer and in favor of the government.

After numerous preliminary proceedings, the Case was submitted for the Court’s decision on 24 January 2020 based on the following argument made by the Petitioner:

Amadeus PH asserts that it was entitled to the refund of its unutilized excess input VAT on purchase of goods and services attributable zero-rated sales of services.

The Company clarifies that it is VAT-registered and mostly provides services to Amadeus SA, a non-resident foreign corporation not doing business in the Philippines. Further, the transactions were paid in acceptable foreign currency duly accounted in accordance with the BSP rules and regulations, and do not pertain to the manufacturing and repacking of goods.

Amadeus PH further emphasizes that Amadeus SA is a foreign corporation not doing business in the Philippines. To support this, Amadeus PH submitted Amadeus SA’s Certificate of Non-Registration with the SEC and other documents indicating that the latter is a foreign corporation not doing business in the Philippines, and the Amadeus Commercial Organization (ACO) Agreement detailing the relationship between Amadeus PH. and Amadeus SA. They highlight that they only function as the latter’s sole distributor of its products in the Philippines and manages business in its own name which exempts them from the term “doing business” under the Section 3(d) of the FIA.

However, upon review of the ACO Agreement, the CTA observed that the relationship between the two parties was highly restrictive: essentially Amadeus PH is obligated to market, distribute and provide access to Amadeus System to subscribers on an exclusive basis and is prohibited from distributing products and services that compete with Amadeus SA’s without its prior consent. Second, it provides numerous cases where Amadeus SA is participating in the marketing and distribution in the Philippines, such as a.) Amadeus SA is permitted to directly contract with multinational subscribers whether based within or outside the Philippines through corporate or online products, b.) May terminate the agreement entered between any Philippine subscriber in the event of misuse or abuse of the system, and c.) Amadeus Philippines, Inc. is duty-bound to honor any obligation undertaken by Amadeus SA with third-party licensors relative to their products. With this, the CTA argued that the nature of the relationship between Amadeus PH and Amadeus SA reduces the former to a mere extension of the foreign corporation through which it conducts its business in the Philippines. It is to be noted that in making this observation, the CTA applied a similar finding of the Supreme Court in GR No. 102223 (Communications Materials and Design, Inc. et. al. v. Court of Appeals, et. al).

Considering the foregoing circumstances, the Court ruled that the sales of services were not entitled to VAT zero-rating and, consequently, to a refund of the excess input VAT. Thus, the Petition for Review was denied for lack of merit.

It is necessary to comply with each requisite down to its last details. One absence of proof can turn the tables against you. “Taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto” - Arthur Vanderbilt.

Francheska Samantha L. Angeles is an Analyst from the Tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.