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Zero-percent VAT on sale of services

Zero-percent VAT on sale of services


Are you a provider of services to non-resident foreign clients? Are your service fees paid for in acceptable foreign currency? If so, then your service fees are entitled to the benefits of VAT zero-rating.

As provided in the Tax Code, there are two types of services which are eligible for zero rating if the service fee is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.

These are the (1) processing, manufacturing or repacking of goods for persons doing business outside the Philippines which goods are subsequently exported, and (2) services other than those previously mentioned.

The second type of services had been a contentious issue between the BIR and taxpayers. Relying on Revenue Regulations No. 7-95, as amended by RR No. 5-96, the BIR had taken the position that the services which are entitled to zero percent VAT are limited to the sales which are destined for consumption outside the Philippines. Hence, the zero-rating is limited to project studies, information services, engineering and architectural designs and other similar services, as so provided in the implementing rules and regulations. This position of the BIR had resulted in the denial of many tclaims for zero-rating with various cases ending in litigation.

The new expanded value-added tax law (Republic Act No. 9337) has modified the specific provision of the Tax Code by qualifying that the service has to be “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.” This has not, however, resolved the issue. It had only clarified as to whom the services are rendered, but not the type or nature of services rendered, i.e., whether such services should be destined for consumption abroad.

This issue has been clarified by a recent Supreme Court decision. The Court held that, as a general rule, the VAT system shall apply the destination principle wherein goods and services are taxed only in the country where they are consumed. The Court, however, emphasized that the law itself provides for an exception. Thus, the supply of services are zero-rated when the following requirements are met: the service is performed in the country, the service is other than processing, manufacturing or repacking of goods for persons doing business abroad and payment is in foreign currency and accounted for pursuant to central bank rules and regulations. The Court also noted that the interpretations that alter or revoke these requirements are ultra vires and invalid.

This is not the only the case where the Court ruled against the Bureau of Internal Revenue’s interpretation of laws. The erroneous interpretations of laws by tax authorities had resulted in the law’s misapplication. In some instances, taxpayers had been deprived of the benefits and exemptions due them.

What is the benefit to the taxpayer for the zero-rating of its services? Aside from the nonpayment of any output VAT on the sales, the taxpayer is also entitled to claim for refund or issuance of tax credit certificate for the input taxes related or attributable to the zero-rated sales. In this specific case, the provision of the Tax Code speaks in clear terms and leaves no room for interpretation.

Services rendered by VAT-registered persons, when paid in acceptable foreign currency, are zero-rated. Clearly, any regulation which restricts these conditions is void.

Due to BIR’s restrictive interpretation of the law and on its own implementing regulations, taxpayers were unduly denied their claims for refund or tax credit certificates. Worse, other taxpayers chose to pay VAT on the supposedly zero-rated services to avoid disputes with the tax authority.

With the decision of the Supreme Court invalidating the restrictive interpretation by the implementing agency, taxpayers may simply comply with the requirements unde r the law and avail of the benefits of VAT zero-rated sale of services.

(The author is a senior tax manager at Punongbayan & Araullo, member firm of Grant Thornton International. For comments and inquiries, please e-mail the author at or call 886-5511.)