Accenture, Inc. vs. Commissioner of Internal Revenue

For a transaction to qualify for zero-rating under Section 108(B)(2) of the 1997 Tax Code (and its predecessor Section 102(b)(2) of the 1977 Tax Code), the recipient of the services must be proven to be doing business outside the Philippines; mere proof that the recipient is a foreign corporation or has no branch office in the Philippines is insufficient, and the claimant bears the strict burden of establishing this jurisdictional fact.

Accenture, Inc. is a domestic corporation engaged in management consulting, business strategies development, and software licensing, duly registered as a Value Added Tax (VAT) taxpayer. It rendered services to various foreign clients and received payment in foreign currency. For the taxable periods covering July to November 2002, it generated excess input VAT credits which it sought to claim as a refund or tax credit certificate, asserting that the sales were zero-rated under Section 108(B)(2) of the 1997 Tax Code.

• Accenture is a VAT-registered corporation engaged in management consulting, business strategies development, and software licensing.
• For the periods 1 July 2002 to 31 August 2002 (1st period) and 1 September 2002 to 30 November 2002 (2nd period), Accenture filed Monthly and Quarterly VAT Returns showing zero-rated sales to foreign clients and excess unutilized input VAT credits totaling P37,038,269.18.
• Of this amount, P35,178,844.21 represented allocated input VAT on domestic purchases of taxable goods not directly attributable to zero-rated sales.
• On 1 July 2004, Accenture filed an administrative claim for refund or Tax Credit Certificate (TCC) with the Department of Finance, which was not acted upon.
• On 31 August 2004, Accenture filed a judicial claim with the CTA First Division.
• Accenture presented evidence including Official Receipts, Intercompany Payment Requests, Billing Statements, Memo Invoices, Bank Statements, and SEC certifications showing its clients had no branch offices in the Philippines.
• A Court-commissioned Independent CPA confirmed that zero-rated sales were supported by documents and paid in foreign currency in accordance with BSP rules.
• The evidence showed Accenture billed Accenture Participations B.V., a foreign corporation with no presence in the Philippines.
• However, Accenture did not present specific evidence proving that its foreign clients were "doing business outside the Philippines" or were "nonresident foreign corporations" under Section 22(I) of the Tax Code.

• Section 108(B)(2) of the 1997 Tax Code (prior to amendment by RA 9337) does not explicitly require that the recipient of services be doing business outside the Philippines to qualify for zero-rating; it only requires payment in acceptable foreign currency accounted for in accordance with BSP rules.
• The requirement imposed in Burmeister (interpreting Section 102(b)(2) of the 1977 Tax Code) should not apply because the petition was filed before Burmeister was promulgated on 22 January 2007, and applying it would violate the rule against retroactive application.
• American Express supports the position that the place of consumption is immaterial and there is no requirement that services be "consumed abroad."
• The evidence (SEC records showing no branch offices, billing to foreign entities, foreign currency payments per BSP rules) sufficiently establishes that clients are foreign corporations doing business outside the Philippines.
• BSP rules requiring foreign currency payment imply the recipient is not doing business in the Philippines.

• Sales are not zero-rated because Accenture failed to prove that the recipients of its services were doing business outside the Philippines, a requirement under Section 108(B)(2) as interpreted in Burmeister.
• Claims for refund are construed strictly against the claimant, and Accenture failed to substantiate its claim with sufficient documentation.
• Burmeister correctly interpreted Section 102(b)(2) of the 1977 Tax Code, and since Section 108(B)(2) of the 1997 Tax Code is a mere reenactment, the interpretation applies.
• Judicial interpretation in Burmeister is not retroactive legislation but merely clarifies the law as it always existed; thus, it applies to pending cases.
• Mere proof of foreign incorporation or absence of a local branch is insufficient to prove the recipient is doing business outside the Philippines; specific evidence of nonresident foreign corporation status is required.

• Procedural Issues:
  • Whether the interpretation in Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc. can be applied retroactively to a case filed prior to its promulgation.
• Substantive Issues:
  • Whether Section 108(B)(2) of the 1997 Tax Code requires the recipient of services to be doing business outside the Philippines for the transaction to qualify for zero-rating.
  • Whether Accenture successfully proved that its clients were entities doing business outside the Philippines.
  • Whether Accenture is entitled to the refund of unutilized input VAT.

• Procedural:
  • The application of Burmeister does not violate the rule against retroactivity. Judicial interpretation of a statute constitutes part of the law from the date of its enactment because the Court merely establishes the contemporaneous legislative intent. Thus, the interpretation in Burmeister of Section 102(b)(2) applies to Section 108(B)(2) of the 1997 Tax Code and binds parties even in pending cases.
• Substantive:
  • Section 108(B)(2) of the 1997 Tax Code, being a reenactment of Section 102(b)(2) of the 1977 Tax Code, must be interpreted consistently with Burmeister to require that the recipient of services be doing business outside the Philippines. This is derived by harmonizing Section 108(B)(2) with Section 108(B)(1), which explicitly requires the recipient to be doing business outside the Philippines.
  • American Express does not conflict with Burmeister; the former addressed the place of consumption (immaterial), while the latter addressed the status of the recipient. In fact, American Express involved a nonresident foreign client, thus satisfying the Burmeister requirement.
  • Accenture failed to prove that its clients were doing business outside the Philippines. Evidence merely showed they were foreign corporations or had no branch offices in the Philippines, which is insufficient to establish they were "nonresident foreign corporations" (not engaged in trade or business in the Philippines) under Section 22(I) of the Tax Code.
  • The burden of proof lies with the claimant in a tax refund case, and tax refunds are construed strictly against the taxpayer. Accenture failed to discharge this burden.
  • The petition for review is denied.

• Strict Construction of Tax Refunds and Exemptions — Tax refunds, like tax exemptions, are construed strictly against the taxpayer. The claimant bears the burden of proof to establish the factual basis of the claim by competent evidence.
• Judicial Interpretation as Part of the Law — The interpretation of a law by the Supreme Court constitutes part of that law from the date it was originally passed, as the Court's construction merely establishes the contemporaneous legislative intent. Consequently, judicial interpretations have retroactive application to pending cases.
• Harmonious Construction of Statutory Provisions — Section 108(B)(2) must be read in conjunction with Section 108(B)(1). The essential condition that the recipient of services must be doing business outside the Philippines applies to both provisions to prevent tax avoidance and maintain the integrity of the VAT system.
• Definition of "Doing Business" by Foreign Corporations — "Doing business" implies continuity of commercial dealings and arrangements, and contemplates the performance of acts or works or the exercise of functions normally incident to, and in progressive prosecution of, commercial gain. Each case must be judged in light of its peculiar environmental circumstances.

• "A tax is a mandatory exaction, not a voluntary contribution."
• "When this Court decides a case, it does not pass a new law, but merely interprets a preexisting one."
• "The interpretation of a law by this Court constitutes part of that law from the date it was originally passed, since this Court's construction merely establishes the contemporaneous legislative intent that the interpreted law carried into effect."
• "There is no specific criterion as to what constitutes 'doing' or 'engaging in' or 'transacting' business. Each case must be judged in the light of its peculiar environmental circumstances."

• Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc. — Controlling precedent interpreting Section 102(b)(2) of the 1977 Tax Code to require that the recipient of services must be doing business outside the Philippines for zero-rating to apply. Applied to Section 108(B)(2) of the 1997 Tax Code as a reenactment.
• Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch) — Distinguished; held that the place of performance/consumption of services is immaterial for zero-rating, but did not address the requirement regarding the recipient's business location, as the recipient therein was a nonresident foreign client.
• Commissioner of Internal Revenue v. British Overseas Airways Corporation — Cited for the test to determine what constitutes "doing business" by a foreign corporation.
• National Amnesty Commission v. Commission on Audit — Cited by the CTA En Banc regarding the non-retroactivity of rulings, but the Supreme Court clarified that judicial interpretation is part of the law from enactment.
• Columbia Pictures, Inc. v. Court of Appeals — Cited for the principle that judicial interpretation is part of the law.
• Senarillos v. Hermosisima — Cited for the same principle regarding judicial interpretation.
• Paseo Realty & Development Corporation v. Court of Tax Appeals — Cited for the principle that tax refunds are construed strictly against the taxpayer.

• Section 108(B)(2) of the National Internal Revenue Code of 1997 — Provision on zero-rated sales of services other than processing/manufacturing; interpreted to require the recipient to be doing business outside the Philippines.
• Section 102(b)(2) of the National Internal Revenue Code of 1977 — Predecessor provision to Section 108(B)(2).
• Section 112(A) of the National Internal Revenue Code of 1997 — Provision allowing refund of unutilized input VAT from zero-rated sales.
• Section 22(H) and (I) of the National Internal Revenue Code of 1997 — Definitions of "resident foreign corporation" and "nonresident foreign corporation."
• Republic Act No. 9337 — Amendment to Section 108(B)(2) explicitly adding the requirement that services be rendered to a person engaged in business conducted outside the Philippines, cited to confirm legislative intent.
• Rule 45 of the 1997 Rules of Civil Procedure — Basis for the Petition for Review before the Supreme Court.