COMMISSIONER OF INTERNAL REVENUE v.
BURMEISTER AND ● Dec 1997: Respondent availed of the Voluntary Assessment
WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC.
Jan 22, 2007 | GR 153205 | Carpio, J.
FACTS:
● A foreign consortium composed of Burmeister and Wain
Scandinavian Contractor A/S (BWSC-Denmark), Mitsui
Engineering and Shipbuilding, and Mitsui and Co., Ltd. entered
into a contract with the National Power Corporation
(NAPOCOR) for the operation and maintenance of two of
NAPOCOR’s power barges. BWSC-Denmark was appointed
coordination manager of the Consortium.
○ BWSC-Denmark established herein respondent, which
subcontracted the actual operation and maintenance of
the power barges and performance of other acts which
have to be done in the Philippines.
● NAPOCOR paid capacity and energy fees to the Consortium
in Mark, Yen, and Peso.
○ Non-Peso component is deposited directly to the
Consortium’s bank accounts in Denmark and Japan,
while the Peso component is deposited in a separate
and special designated account in the Philippines.
○ Respondent is paid by the Consortium in foreign
currency inwardly remitted to the Philippines.
● Respondent sought a BIR ruling on the tax implications of the
above transactions. In said ruling, BIR declared that
respondent can choose to register as a VAT person, and the
consideration for its services is paid for in acceptable foreign
currency and accounted for in accordance with BSP rules, the
transactions shall be subject to VAT at zero-rate.
● Respondent registered as a VAT taxpayer, and seasonably
filed its quarterly VAT return for 1996, reflecting, among
others, a total zero-rated sales of P147,317,189.62 with VAT
input taxes of P3,361,174.14.
Program (VAP) of the BIR. It (respondent? BIR?) allegedly
misinterpreted RR No. 5-96o be applicable to its case.
○ In conformity with the RR, respondent subjected its
sale of services to the Consortium to 10% VAT in the
total amount of P103,558,338.11 (Apr to Dec 1996
sales) since said RR because effective only on April
1996
○ Sum of P43,893,951.07 (Jan to Mar 1996 sales) was
subjected to zero-rate.
● Respondent then filed its 1996 amended VAT return
consolidating the VAT output and input taxes for the four
calendar quarters of 1996, and paid P6,994,659.67 in output
tax liability for 1996 through PCIBank,
● Jan 1999: respondent secured VAT Ruling No. 003-99
reconfirming the earlier BIR Ruling insofar as it held that
services rendered by respondent is subject to VAT at zero
percent.
● Respondent then filed a claim for issuance of a tax credit
certificate (TCC) on the belief that it erroneously paid the
output VAT for 1996 due to its availment of the VAP.
● Dec 29, 1997: respondent filed a petition for review with the
CTA to toll the running of the 2-year prescription period.
● CTA: ordered CIR to issue a TCC for P6,994,659.67 in favor of
respondent; that respondent’s sale of services to the
Consortium was paid for in acceptable foreign currency
inwardly remitted to the Philippines and accounted for
accordingly, and is therefore subject to 0% VAT; zero-rating of
respondent’ sale of services to the Consortium was even
confirmed by petitioner in the BIR Ruling and the VAT Ruling;
since payment of services rendered by respondent were
subject to zero-rating, respondent mistakenly availed of the
VAP by paying output tax.
● CA: CIR’s petition for review dismissed for lack of merit; CTA
decision affirmed.
 ○ CIR: respondent’s services aren’t destined for
consumption abroad unlike those mentioned in the
code, so they don’t enjoy zero-rating
○ CA: Two kinds of transactions/services subject to zero
percent VAT (VAT Ruling 040-98): (a) services other
than repacking goods for other persons doing business
outside the Philippines which goods are subsequently
exported; and (b) services by a resident to a non-
resident foreign client, such as project studies,
information services, engineering and architectural
designs and other similar services, consideration for
which is paid for in acceptable foreign currency and
accounted for in accordance with BSP rules and
regulations
○ Only the first classification requires consumption
abroad in order to be zero-rated; second classification
need not be consumed abroad; second classification is
void, being an amendment to the Tax Code
○ Under Sec. 108(b)(2) of the Tax Code, for services
performed in the Philippines to enjoy zero-rating, these
must comply only with two requisites: (1) payment in
acceptable foreign currency, and (2) accounted for in
accordance with BSP rules. No provision requiring
services to be “destined for consumption abroad” in
order to be VAT zero-rated.
○ If indeed the ‘destination principle’ underlies and is the
basis of the VAT laws, then petitioner’s proper remedy
would be to recommend an amendment of the law to
Congress; otherwise, the terms of the basic law should
be applied.
ISSUE/RATIO:
Whether respondent is entitled to the refund of P6,994,659.67 as
erroneously paid output VAT for 1996 - NO
● Denial of the instant petition is not on the ground that
respondent’s services are subject to 0% VAT. Rather, it’s
based on the non-retroactivity of the prejudicial revocation of
BIR Ruling No. 023-95 and VAT Ruling No. 003-99, which
held that respondent’s services are subject to 0% VAT and
which respondent invoked in applying for refund of the output
VAT.
● Section 102(b) of the Tax Code, the applicable provision in
1996 when respondent rendered the services and paid the
● (2)VAT in question, enumerates which services are zero-rated,
thus:
●
● (b) Transactions subject to zero-rate. ― The following services
performed in the Philippines by VAT-registered persons shall
be subject to 0%:
● (1) Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which goods
are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
● (2) Services other than those mentioned in the preceding sub-
paragraph, 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);
● (3) Services rendered to persons or entities whose exemption
under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of
such services to zero rate;
● (4) Services rendered to vessels engaged exclusively in
international shipping; and
● (5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an
enterprise whose export sales exceed seventy percent (70%)
of total annual production. (Emphasis supplied)
● Respondent: that it complied with the requirements of the Tax
Code for zero rating under paragraph 2 of Sec. 102(b), and its
services should therefore be zero-rated; payment of its service
fees was in acceptable foreign currency, there was inward
remittance of the foreign currency to the Philippines, and
accounting was done in accordance with BSP rules; its
 services constituting the actual operation and management of
power barges in Mindanao are not even remotely similar to
project studies, etc. under Section 4. 102-2(b)(2) of RR No. 5-
96, and therefore need not be “destined to be consumed
abroad in order to be VAT zero-rated”
● SC: Disagreed
● Tax Code not only requires that services be other than
“processing, manufacturing or repacking of goods” and that
payment therefor be in acceptable foreign currency duly
accounted for, but also that the recipient of such services is
doing business outside the Philippines--the latter requirement
clearly provided for in the first paragraph of 102(b) where the
listed services must be “for other persons doing business
outside the Philippines”. That latter phrase refers to the
services enumerated in paragraph one and the general term
“services” appearing in paragraph 2 of 102(b). Ergo, services
other than processing, manufacturing, or repacking of goods
must likewise be performed for persons doing business
outside the Philippines.
● This is merely logical because if the provider and recipient of
the “other services” are both doing business in the Philippines,
payment of foreign currency is irrelevant; otherwise, those
subject to regular VAT under Section 102(a) can avoid paying
VAT by simply stipulating payment in foreign currency inwardly
remitted by the recipient of services.
○ To interpret 102(b)(2) to apply to a payer-recipient of
services doing business in the Philippines is to make
payment of the regular VAT under 102(a) dependent
on the generosity of the taxpayer. Service provider can
choose to pay regular VAT or avoid it by stipulating
payment in foreign currency inwardly remitted by the
payer-recipient. This cannot be as a tax is a mandatory
exaction, not a voluntary contribution.
○ Stipulation of payment in “acceptable foreign currency”
under BSP rules reflects the clear vision of the law that
the payer-recipient of services to be doing business
outside the Philippines because only those not doing
business in the Philippines can be required under BSP
rules to pay in acceptable foreign currency for their
purchase of goods/services in the Philippines. Such
requirement cannot be imposed by the BSP on
domestic transactions.
● Services covered by 102(b)(1) and (2) are in the nature of
export sales since the payer-recipient of services is doing
business outside of the Philippines. Under BSP rules,
proceeds of export sales must be reported to the BSP. There
is reason, then, to require the service provider under 102(b)(1)
and (2) to account for the foreign currency proceeds to the
BSP.
○ This rationale cannot apply if the service provider and
the recipient are both doing business in the Philippines
since their transaction cannot be considered an export
sale, even if payment is made in foreign currency.
○ More importantly, when both provider and recipient are
doing business in the Philippines, their transaction falls
squarely under 102(a) governing domestic
sale/exchange of services.
● When 102(b)(2) speaks of “services other than those
mentioned in the preceding subparagraph”, the legislative
intent is that only the services are different between
subparagraphs 1 and 2. The requirements for zero-rating,
including the essential condition that the recipient of services
is doing business outside the Philippines, remain the same
under both subparagraphs.
● The amended 108(b) [previously 102(b)] of the present Tax
Code clarifies this legislative intent. Expressly included among
the transactions subject to 0% VAT are services other than
those mentioned in the first paragraph of 108(b) 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 in acceptable foreign currency
and accounted for in accordance with BSP rules.
● In this case, the payer-recipient of respondent’s services is the is VAT-registered person that facilitates collection and
Consortium, which is a joint venture doing business in the payment of receivables belonging to its nonresident foreign
Philippines, despite its principal members being nonresident client, AmEx Hong Kong, for which it gets paid in acceptable
foreign corporations. foreign currency inwardly remitted and accounted for blah.
● Considering the 15-year term of the agreement, the ● In contrast, the present case involves a recipient (the
Consortium’s operation and maintenance of NAPOCOR’s Consortium) doing business in the Philippines. AmEx’s
power barges cannot be considered a single/isolated services were correctly subject to 0% VAT, while herein
transaction, and the Consortium itself cannot be considered a respondent’s services should be subject to 10% VAT.
person doing business outside the Philippines. Said services, ● As to the refund of its excess output tax, respondent relied on
therefore, cannot legally qualify for 0% VAT. VAT Ruling No. 003-99, which reconfirmed BIR Ruling No.
● Respondent, as subcontractor of the Consortium, operates 023-95, insofar as it held that services being rendered by
and maintains NAPOCOR’s power barges in the Philippines. respondent are subject to VAT at 0%. Respondent’s reliance
NAPOCOR pays the Consortium through its nonresident on these rulings binds petitioner.
partners, partly in foreign currency outwardly remitted. The ● Petitioner effectively revoked the rulings upon filing of his
Consortium then pays the respondent, also in foreign Answer before the CTA, challenging respondent’s claim for
currency, inwardly remitted and accounted for in accordance refund. However, such revocation cannot be given retroactive
with BSP rules. This payment schemed disqualifies effect as it will prejudice respondent by depriving the latter of a
requirement from 0% VAT. Essential to entitlement to 0% VAT refund of a substantial amount representing excess output tax.
is that the recipient is a person doing business outside the The refund is therefore upheld.
Philippines.
● General rule: the VAT system follows the “destination DISPOSITIVE:
principle” (exports are zero-rated; imports are taxed).
○ Exception (as stated in American Express): 0% WHEREFORE, the Court DENIES the petition.
VAT on services enumerated in Section 102 and
performed in the Philippines. For services covered SO ORDERED.
by 102(b)(1) and (2), the recipient of the services
must be a person doing business outside the
Philippines. To be exempt from the destination
principle under 102(b)(1) and (2), the services must
be (a) performed in the Philippines; (b) for a person
doing business outside the Philippines; and (c)
paid in acceptable foreign currency accounted for
in accordance with BSP rules
● Court said that American Express does not apply to
respondent. That case involved a recipient of services (AmEx
Int’l., Hong Kong branch) doing business outside the
Philippines. Therein respondent AmEx Int’l., Philippine branch