CIR V AMERICAN EXPRESS INTERNATIONAL, INC. (Phil.
Branch) (1) Processing, manufacturing or repacking goods for other persons doing business
GR 152609 | June 29, 2005 | J. Panganiban
Facts:
Respondent, a VAT taxpayer, is the Philippine Branch of AMEX USA and was tasked with
servicing a unit of AMEX-Hongkong Branch and facilitating the collections of AMEX-HK
receivables from card members situated in the Philippines and payment to service
establishments in the Philippines.
It filed with BIR a letter-request for the refund of its 1997 excess input taxes, citing as basis
Section 110B of the 1997 Tax Code, which held that “xxx Any input tax attributable to the
purchase of capital goods or to zero-rated sales by a VAT-registered person may at his
option be refunded or credited against other internal revenue taxes, subject to the
provisions of Section 112.”
In addition, respondent relied on VAT Ruling No. 080-89, which read, “In Reply, please be
informed that, as a VAT registered entity whose service is paid for in acceptable foreign
currency which is remitted inwardly to the Philippine and accounted for in accordance with
the rules and regulations of the Central Bank of the Philippines, your service income is
automatically zero rated xxx”
Petitioner claimed, among others, that the claim for refund should be construed strictly
against the claimant as they partake of the nature of tax exemption.
CTA rendered a decision in favor of respondent, holding that its services are subject to
zero-rate. CA affirmed this decision and further held that respondent’s services were
“services other than the processing, manufacturing or repackaging of goods for persons
doing business outside the Philippines” and paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of BSP.
Issue:
W/N AMEX Phils is entitled to refund
Held:
Yes. Section 102 of the Tax Code provides for the VAT on sale of services and use or
lease of properties. Section 102B particularly provides for the services or transactions
subject to 0% rate:
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 BSP;
(2) Services other than those mentioned in the preceding subparagraph, e.g. those
rendered by hotels and other service establishments, the consideration for which is paid for
in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP
Under subparagraph 2, services performed by VAT-registered persons in the Philippines
(other than the processing, manufacturing or repackaging of goods for persons doing
business outside the Philippines), when paid in acceptable foreign currency and accounted
for in accordance with the R&R of BSP, are zero-rated. Respondent renders service falling
under the category of zero rating.
As a general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax. Goods and services are taxed only in the country where they
are consumed. Thus, exports are zero-rated, while imports are taxed.
In the present case, the facilitation of the collection of receivables is different from the
utilization of consumption of the outcome of such service. While the facilitation is done in
the Philippines, the consumption is not. The services rendered by respondent are
performed upon its sending to its foreign client the drafts and bulls it has gathered from
service establishments here, and are therefore, services also consumed in the Philippines.
Under the destination principle, such service is subject to 10% VAT.
However, the law clearly provides for an exception to the destination principle; that is 0%
VAT rate for services that are performed in the Philippines, “paid for in acceptable foreign
currency and accounted for in accordance with the R&R of BSP.” The respondent meets
the following requirements for exemption, and thus should be zero-rated:
(1) Service be performed in the Philippines
(2) The service fall under any of the categories in Section 102B of the Tax Code
(3) It be paid in acceptable foreign currency accounted for in accordance with BSP R&R.
Commissioner of Internal Revenue vs. American Express International, Inc.
(Philippine Branch)
G.R. No. 152609 | June 29, 2005 | J. Panganiban | digest by MCAC Baldemor
Facts:
The respondent is a Philippine Branch of American Express International, a corporation
duly organized and existing under and by virtue of the laws of the State of Delaware,
U.S.A. It is a servicing unit of the American Express International – HK Branch and is
engaged primarily to facilitate the collections of AMEX-HK receivables from card members
situated in the Philippines and payment to service establishments in the Philippines. The
respondent corporation is a registered VAT taxpayer.
The controversy in this case arose when the respondent requested from the BIR a refund
of its 1997 excess input taxes, which was arrived at after deducting from its total input VAT
paid its applied output liabilities. There being no action on the part of the BIR, the
respondent filed a petition before the Court of Tax Appeals.
According to the respondent, Section 102 provides that export sales by a VAT registered
person, the consideration of which is paid for in acceptable foreign currency inwardly
remitted to the Philippines and accounted for in accordance with existing regulations of the
BSP, are subject to VAT at zero percent. Moreover, Section 106 provides that input taxes
on domestic purchases of taxable goods and services related to zero-related revenues are
available as tax refund. Being a VAT-registered entity, the respondent argued that it is
subject to the said VAT rate and that it can avail of the refunds or tax credits of input tax.
Ruling:
Yes, it can. The law is very clear in saying that VAT-registered person in the Philippines
(other than the processing, manufacturing or repacking of goods for persons doing
business outside the Philippines), when paid in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the BSP, are zero-rated. The
respondent in this case is a VAT registered person that facilitates the collection and
payment of receivables belonging to its resident foreign client, for which it gets paid in
acceptable foreign currency inwardly remitted and accounted for in conformity with BSP
rules and regulations. Certainly, the service it renders in the Philippines is not in the same
category as “processing, manufacturing or repacking of goods” and should, hence, be
zero-rated.
For facilitating in the Philippines the collection and payment of receivables belonging to its
Hong Kong-based foreign client, and getting paid for it in duly accounted acceptable
foreign currency, the respondent renders service falling under the category of zero-rating.
With this, the Court upholds the respondent’s entitlement to the refund.
It is also important to note that the law neither makes a qualification nor adds a condition in
determining the tax situs of the zero-rated service. Under this criterion, the place where
the service is rendered determines the jurisdiction to impose VAT. Performed in the
Philippines, such service is necessarily subject to its jurisdiction in order to enforce a zero
rate. The place of payment is immaterial, much less is the place where the output of
service will be further or ultimately used.

The Court of Tax Appeals granted the petition of the respondent to be given the refund of
its excess input taxes, and such ruling of the CTA was affirmed by the CA. According to
the CA, the CIR was mistaken in requiring that the respondent’s services be consumed
abroad in order to be zero-rated. By doing so, it went beyond the sphere of interpretation
and into that of legislation.

Issue: W/N the respondent company can avail of tax credits

 Beltran vs PAIC Finance
The Spouses Beltran purchased from SESCO a unit of Performance Analyzer. As such,
the spouses made initial payments to decrease the outstanding balance. It was agreed by
the parties that the balance of the spouses Beltran would be financed by PAIC Finance.
Under the agreement, the spouses will lease the unit from PAIC until the principal amount
is fully settled; that in such case, ownership over the unit shall be vested to the spouses
Beltran.
However, the unit malfunctioned despite the repairs earlier made by SESCO. The said
repairs were found to be unsatisfactory by the Beltrans who thereupon decided to return
the unit and discontinued the monthly rental payments to PAIC. Consequently, PAIC filed
an action for collection of sum of money against the spouses Beltran, demanding payment
for the arrears in rental.
The trial court ruled to dismiss the complaint, holding that since the contract is one of
lease, the lessor PAIC is obliged to deliver the object of the lease in such condition
as to render it fit for the use intended, as provided under the Civil Code. As such, the
Performance Analyzer proved to be unfit for the use intended soon after
delivery. Consequently, the lease must be deemed extinguished because the thing leased
was totally unfit for the purposes of the lease.
The basic purpose of a financial leasing transaction is to enable the prospective buyer of
equipment, who is unable to pay for such equipment in cash in one lump sum, to lease
such equipment in the meantime for his use, at a fixed rental sufficient to amortize at least
70% of the acquisition cost (including the expenses and a margin of profit for the financial
lessor) with the expectation that at the end of the lease period, the buyer/financial lessee
will be able to pay any remaining balance of the purchase price.
A financing lease may be seen to be a contract sui generis, possessing some but not
necessarily all of the elements of an ordinary or civil law lease. Thus, legal title to the
equipment leased is lodged in the financial lessor. The financial lessee is entitled to the
possession and use of the leased equipment. At the same time, the financial lessee is
obligated to make periodic payments denominated as lease rentals, which enable the
financial lessor to recover the purchase price of the equipment which had been paid to the
supplier thereof. The Beltrans are therefore bound to pay to PAIC all the rental payments
which accrued and are due and payable under that contract.

Upon appeal of PAIC with the CA, the appellate court affirmed the trail court decision, but
held that the contract under consideration is not one of lease but one of sale. It held that
the “contract of lease” is but a scheme to simulate the real agreement which is a
financing arrangement where the spouses Beltran would pay the unpaid balance to
PAIC who shouldered the purchase price of the Performance Analyzer.

PAIC sought recourse with the SC, arguing that the CA erred in applying the provisions
under the Civil Code in determining the character of the agreement; that the agreement is
one of a Financial Lease Agreement governed under R.A. 5980, entitled “An act regulating
the organization of Financial Companies.

WON the agreement in the present case is a Financial Lease.

(1.) YES. The contract in consideration is a Financial Lease. Financial leases, while they
are complex arrangements, cannot be casually dismissed as "simulated contracts." To the
contrary, they are genuine or legitimate contracts which have been accorded statutory
recognition under R.A. 5980, the Financing Company Act.