“Is this sale of service subject to zero-percent VAT?”
This is the usual question of vendors who render services to Philippine Economic Zone Authority (PEZA)-registered entities. With the recent decision of the Court of Tax Appeals (CTA) in ZMG Ward Howell, Inc. vs Commissioner of Internal Revenue (CTA Case No. 9004 dated September 18, 2017), we are given clarity regarding this matter.
In the said decision, the position of the Bureau of Internal Revenue (BIR) is that in order for the sale of services to qualify for zero-rating, the services should be rendered within the economic zone (ecozone). The BIR contended that the sale of services of the taxpayer, which is an executive search firm engaged to look for senior and mid-level executives in various industries, does not qualify as VAT zero-rated sale since the said services were rendered outside the ecozone and were not connected directly to the activity of the PEZA-registered enterprise.
The BIR pointed out that the taxpayer conducted its applicants’ testing and interviews in its office premises and/or some private hotels and restaurants within Metro Manila and not within any ecozone, and that the sale of services mainly consists of placing and sending candidates to the clients, who will then choose from among them the most qualified for the job.
Moreover, according to the BIR, the sending of pre-qualified applicants is a service activity that is not directly involved in the manufacture, assembly, or production of final goods or services being provided by its PEZA client, and the services being provided by the taxpayer do not directly vary with the changes in the revenue or some other measure of the registered activity of the PEZA-registered enterprise.
However, according to the CTA, regardless of the site where the services are rendered, provided they are rendered to a PEZA-registered enterprise operating within an ecozone, these shall qualify as zero-rated sales. The CTA opined that to qualify as zero-rated sale, the requisites provided in Section 108(B)(3) of the Tax Code must be satisfied by the sale of services. The said provision states that the sale of service must be performed in the Philippines by a VAT-registered person, and must be rendered to persons or entities exempted by special laws or international agreements to which the Philippines is a signatory.
The CTA also cited Section 4.108-5 of Revenue Regulations No. 16-05, which provides that effectively zero-rated sale of services shall be performed in the Philippines. Moreover, Section 4.108-6 of the same regulation defines “effectively zero-rated sales of services” as local sale of services rendered by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or international agreements.”
In relation to the foregoing, the Supreme Court ruled in Commissioner of Internal Revenue vs Toshiba Information Equipment (Phils.), Inc. that PEZA-registered enterprises located within an ecozone are considered VAT-exempt entities. Accordingly, sales made from a customs territory, which is a national territory of the Philippines outside the ecozones, to a purchaser located within an ecozone, will be considered exportations since ecozones are considered foreign territories.
In light of the said provisions, the CTA held that the sale of services by a VAT-registered person performed within the Philippines to a PEZA-registered enterprise operating within an ecozone shall be subject to 0 percent VAT.
The CTA noted that it is important that the service be performed within the Philippines in order for the latter to acquire jurisdiction to subject the sale transaction to VAT. However, this does not mean that the place where the service is rendered will determine the imposition of VAT on the sale of service either at 0 percent or at 12 percent. In other words, it is for the purpose of acquiring jurisdiction to impose VAT that the Tax Code requires the performance of service by VAT-registered persons be done in the Philippines before such transaction may qualify for VAT zero-rating.
In addition to the above contention of the BIR, the bureau pointed out that the sale of service should be directly connected to the registered activity of the PEZA-registered enterprise to qualify as zero-rated sales. However, the CTA held that the VAT exemption of PEZA-registered enterprises flows from the legal fiction establishing ecozones as foreign territories and not by virtue of the special tax incentives granted to them. As such, there is no need to prove that the sale of services to a PEZA-registered enterprise is directly connected to its registered activities. The important factor is that the PEZA-registered enterprise availing of the services is located and operating within the ecozone.
The CTA further emphasized that the effective zero-rating of goods and services is intended to benefit the purchaser who, not being directly and legally liable for the payment of VAT, will ultimately bear the burden of the tax shifted by the buyers. Accordingly, for as long as the PEZA-registered purchaser is located and operating within the ecozone, sellers from the customs territory cannot pass on any output VAT to it for any sale of goods or services destined for consumption within the ecozone. This is consistent with previous rulings and issuances from the BIR, the CTA and the Supreme Court.
This CTA decision may be used by vendors as reference based on prevailing tax regulations when transacting with PEZA-registered entities. Does this decision now clarify various uncertainties regarding the issue of zero-rated sales to PEZA-registered entities? I believe it does.
The author is an assistant manager with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.