G.R. No. 246826 - Moldex Realty, Inc. vs. Spouses Yu

Case Summary (G.R. No. 246826)

Key Dates and Procedural Posture

Respondent filed quarterly VAT returns for 1997 and later amended them on March 23, 1999, declaring large zero‑rated sales and excess input VAT. On April 13, 1999 respondent sought a refund of excess input VAT for 1997 (P3,751,067.04). Administrative inaction led to a Petition for Review to the Court of Tax Appeals (CTA). The CTA ruled for respondent and ordered refund; the Court of Appeals (CA) affirmed; the Commissioner filed a petition for review to the Supreme Court which denied the petition and affirmed the refund.

Undisputed Factual Background

American Express (Philippine Branch) was VAT‑registered since 1988. For 1997 it amended returns to classify a substantial portion of receipts as zero‑rated and claimed excess input VAT. Respondent’s role was limited to collection facilitation and forwarding drafts/bills to the ROCs; billing and redemption were handled by the foreign parent/ROCs. Consideration for respondent’s services was paid in acceptable foreign currency inwardly remitted and accounted for under BSP regulations.

Issues Presented

Whether the Court of Appeals erred in holding respondent entitled to refund of excess input VAT (P3,352,406.59 as determined by CTA) on the ground that respondent’s Philippine‑performed services, paid in acceptable foreign currency and accounted for under BSP rules, are zero‑rated under the VAT law and implementing regulations.

Statutory and Regulatory Framework

Section 102 of the Tax Code (as applicable/renumbered in 1997 Tax Reform Act) imposes a 10% VAT on sale of services but provides that certain services performed in the Philippines by VAT‑registered persons shall be subject to a zero percent rate if paid in acceptable foreign currency and accounted for under BSP rules. RR No. 5‑87, RR No. 7‑95 and RR No. 5‑96 implement and clarify zero‑rating of services, identifying (a) processing/manufacturing/repacking for export and (b) other services paid in acceptable foreign currency inwardly remitted and accounted for in accordance with BSP regulations. Section 246 of the Tax Code (non‑retroactivity of rulings) limits retroactive revocation of BIR rulings where such revocation would prejudice taxpayers, except in limited cases (fraud, materially different facts, bad faith).

Contentions of the Parties

Respondent: Advocated that services performed in the Philippines paid in acceptable foreign currency inwardly remitted and properly accounted for are automatically zero‑rated under Section 102(b) and implementing rulings; relied on VAT Ruling No. 080‑89 that recognized automatic zero‑rating for its ROC income. Respondent sought refund of excess input VAT under the Tax Code and RR provisions.
Petitioner (BIR): Argued refund claims require investigation and strict proof; urged strict construction against tax exemptions; invoked Sections 204 and 229 (procedural requirements for refund claims) and relied upon VAT Ruling No. 040‑98 which purportedly required consumption/destination abroad for service zero‑rating.

Lower Courts’ Decisions

Court of Tax Appeals: Found respondent’s services to be zero‑rated under Section 108(b) (Tax Reform Act numbering) and RR 5‑96; ordered refund of excess input VAT.
Court of Appeals: Affirmed CTA, holding respondent’s services fit within RR 7‑95 §4.102‑2(b)(2) and RR 5‑96; rejected BIR’s interpretation in VAT Ruling No. 040‑98 as legislative in nature and refused to apply it retroactively because respondent had relied on VAT Ruling No. 080‑89.

Supreme Court’s Legal Analysis — Scope of Zero‑Rating for Services

Statutory Text and Plain Meaning: The Court emphasized that Section 102(b)(2) plainly provides that services performed in the Philippines by VAT‑registered persons (other than processing/manufacturing/repacking) whose consideration is paid in acceptable foreign currency and accounted for under BSP rules shall be zero‑rated. No additional statutory requirement that the service be “consumed” abroad appears in the text.
Destination Principle and Its Exception: While VAT ordinarily follows the destination principle (tax where consumed), the statute itself creates a clear exception for certain services performed in the Philippines but paid in foreign currency and accounted for per BSP rules; the statutory exception is to be applied as written.

Supreme Court’s Analysis — Application to Respondent’s Activities

Characterization of Service: The Court found respondent’s facilitation of collections to be a commercial service performed in the Philippines for a foreign principal, compensated in acceptable foreign currency inwardly remitted and accounted for under BSP rules — thereby falling squarely within Section 102(b)(2) and the implementing regulations. Distinction was made between the ancillary facilitation service performed in the Philippines and other components of the credit card system performed abroad (e.g., billing and redemption by ROCs). Tax situs and performance: The Court held that the place of performance (Philippines) determines jurisdiction and that the statute expressly grants zero rating despite performance in the Philippines.

Regulatory Interpretation and Administrative Rulings

RRs and Their Scope: The Court upheld RR 5‑87 and RR 7‑95 (as amended by RR 5‑96) as implementing provisions consistent with the statute; the enumerations of services in the regulations are illustrative, not exhaustive. The use of “as well as” and “and other similar services” was interpreted broadly, rejecting a restrictive ejusdem generis construction.
BIR Rulings: VAT Ruling No. 080‑89, which advised that respondent’s ROC income was automatically zero‑rated, was recognized as a legitimate administrative interpretation upon which respondent relied. VAT Ruling No. 040‑98, which the BIR advanced to require consumption abroad for zero‑rating, was foun

Case Syllabus (G.R. No. 246826)

Procedural History

Petition for Review under Rule 45 to the Supreme Court from the Court of Appeals decision in CA-G.R. SP No. 62727, assailing the CA’s February 28, 2002 decision affirming the Court of Tax Appeals (CTA) judgment.
CTA (Presiding Judge Ernesto D. Acosta) rendered judgment ordering petitioner Commissioner of Internal Revenue to refund respondent the amount of P3,352,406.59 as excess input VAT for 1997; CTA decision led to CA appeal.
Court of Appeals affirmed the CTA in toto; CA reasoned respondent’s services were zero-rated under applicable statutory/regulatory provisions and that reliance on VAT Ruling No. 040-98 by petitioner was unwarranted and could not be applied retroactively.
This Supreme Court case was submitted for decision (briefing and memoranda exchanged; memoranda received by Court in 2003); petition to the Supreme Court challenges CA holding that respondent is entitled to refund.

Parties and Standing

Petitioner: Commissioner of Internal Revenue (Bureau of Internal Revenue, BIR).
Respondent: American Express International, Inc. (Philippine Branch) (Amex Philippines), a servicing unit (branch) of American Express International, Inc. - Hongkong Branch (Amex-HK), organized under Delaware law but operating in the Philippines and registered as a VAT taxpayer with BIR Revenue District Office No. 47 (East Makati).

Relevant Facts (Undisputed)

Amex Philippines is a Philippine branch that facilitates collections of Amex-HK receivables from card members in the Philippines and effect payments to Philippine service establishments; it is a servicing unit of Amex-HK.
Amex Philippines registered as a VAT taxpayer effective March 1988 (VAT Registration Certificate No. 088445, VAT Reg. No. 32A-3-004868).
For 1997, Amex Philippines originally filed quarterly VAT returns for each quarter; on March 23, 1999 it amended those returns to declare significant zero-rated sales and associated input VAT on domestic purchases, showing total input VAT P3,763,060.43 and total output VAT P24,704.53 for the year, with zero-rated sales reflected.
On April 13, 1999 respondent filed a letter-request with the BIR seeking refund of excess input taxes for 1997 in the amount of P3,751,067.04 (after applied output VAT liabilities for certain quarters), invoking Section 110(B) of the 1997 Tax Code (regarding excess input tax refund/credit).
No immediate grant by BIR resulted; respondent filed a petition (to CTA) on April 15, 1999 seeking refund.
The CTA ordered refund of P3,352,406.59; the CA affirmed; petitioner brought the case to the Supreme Court.

Claim of Respondent (Primary Legal Contentions)

Services performed in the Philippines by a VAT-registered person, which are paid for in acceptable foreign currency inwardly remitted and accounted for under Bangko Sentral ng Pilipinas (BSP) regulations, are subject to 0% VAT under Section 102(b)(2) of the Tax Code (as amended).
Respondent relied on BIR VAT Ruling No. 080-89 (April 3, 1989), where BIR opined that as a VAT-registered entity whose service is paid for in acceptable foreign currency remitted inwardly and accounted for under Central Bank rules, its service income was automatically zero-rated effective January 1, 1988 — and thus no application for zero-rate was necessary.
Respondent asserted entitlement to refund or tax credit for input taxes attributable to zero-rated sales under Section 106 (now Section 112) of the Tax Code and implementing RR No. 5-87, Section 8(a).

Petitioner's Defenses and Administrative Position

Petitioner raised special and affirmative defenses: refund claims are subject to BIR investigation; taxes paid and collected are presumed lawful and not refundable absent clear statutory grant; claimant must justify exemption by clearest statutory grant; and taxpayer must comply with statutory governing rules on tax refund or recovery (Sections 204(c), 229 of the Tax Code).
Petitioner relied administratively on VAT Ruling No. 040-98 which, as applied by the petitioner, required that certain services must be consumed abroad (i.e., destined for consumption outside the Philippines) to qualify for zero-rating — an administrative interpretation narrower than respondent’s position.

Issues Presented to the Supreme Court

Whether the Court of Appeals committed reversible error in holding that respondent is entitled to refund of P3,352,406.59 representing excess input VAT for 1997 — essentially, whether respondent’s services are zero-rated and thus whether respondent is entitled to input tax refund/credit.

Statutory and Regulatory Framework Cited

Section 102 of the Tax Code (Value-added tax on sale of services and use or lease of properties) as relevantly amended (Tax Reform Act of 1997 / RA 8424 effective January 1, 1998): levies VAT at 10% on sale of services but provides enumerated services performed in the Philippines by VAT-registered persons that shall be subject to 0% (including paragraph (2) covering "services other than those mentioned" where consideration is paid in acceptable foreign currency and accounted for under BSP rules).
Section 110(B) (excess input or output tax provisions for refund/credit) and Section 106 (now 112) (refunds or tax credits of input tax for zero-rated or effectively zero-rated sales).
Revenue Regulations (RR): RR No. 5-87 (Section 8: Zero-rating general rule and zero-rated services), RR 7-95 (Consolidated VAT Regulations, Section 4.102-2 on Zero-Rating), and RR 5-96 (amending Section 4.102-2(b)(2) to add as examples “project studies, information services, engineering and architectural designs and other similar services” and the phrase “as well as services by a resident to a non-resident foreign client”).
BIR VAT Rulings: No. 080-89 (acknowledging automatic zero-rating for respondent’s ROC-related service income) and No. 040-98 (administrative ruling reading a “consumed abroad” requirement into zero-rating).
Section 246 of the Tax Code (non-retroactivity of rulings; revocations/modifications not applied retroactively if prejudicial to taxpayers, except limited exceptions including taxpayer misstatement, materially different facts discovered, or taxpayer bad faith).
Sections 204 and 229 of the Tax Code (administ