Proof required to confirm that foreign corporations are not engaged in trade or business in the Philippines
By Austin Claude S. Alcantara
July 21, 2023
Section 108(B)(2) of the National Internal Revenue Code of the Philippines (Tax Code) establishes parameters for the performance of services inside and outside of the Philippines. Services rendered to a non-resident person who is not engaged in business and is outside the Philippines when the services are performed are subject to value added tax (VAT) at zero rate when consideration is paid for in acceptable foreign currency and accounted for pursuant to the rules of the Philippine Central Bank. In Amadeus Marketing Philippines, Inc v Commissioner of Internal Revenue,(1) the Court of Tax Appeals (CTA) en banc ruled that while the presentation of both the Foreign Articles or Certificate of Incorporation and the Securities and Exchange Commission Certificate of Non-Registration will ordinarily prove that an entity is a foreign corporation not doing business in the Philippines (ie, a non-resident person not engaged in business in the Philippines), these documents are insufficient when there is clear and convincing evidence that proves otherwise.
Facts
Amadeus Marketing Philippines, Inc (Amadeus Philippines), the taxpayer, filed a claim for refund of its excess input VAT with the Bureau of Internal Revenue (BIR) attributable to its zero-rated sales. Amadeus Philippines derived these sales from rendering marketing services for its client, Amadeus IT Group SA (AGSA), a foreign corporation. Specifically, Amadeus Philippines was engaged in Amadeus Global Travel Distribution's marketing, a computerised reservation system for:
- airlines seats;
- package tours;
- car rentals; and
- hotel services.
The BIR denied the claim for input VAT refund, as it found that Amadeus Philippines's services were not zero-rated because AGSA was a foreign corporation doing business in the Philippines. Amadeus Philippines challenged the denial of its claim for refund before the CTA. During trial before the CTA in Division, Amadeus Philippines submitted AGSA's Articles of Incorporation and a Certificate of Non-Registration from the Philippine Securities and Exchange Commission to prove that AGSA was a foreign corporation not doing business in the Philippines. The CTA in Division affirmed the BIR's denial of the claim for refund, prompting Amadeus Philippines to appeal the case with the CTA en banc.
Decision
The CTA en banc denied the appeal and ruled that to qualify for VAT zero-rating under section 108(B)(2) of the Tax Code, a taxpayer must show that the recipient of the services must be a foreign corporation doing business outside the Philippines. Thus, the corporation must be not only a foreign corporation, but it must also not be doing business in the Philippines.
In this case, in determining whether AGSA was doing business in the Philippines, the CTA en banc relied on MR Holdings, Ltd v Sheriff Carlos P. Bajar(2) and CIR v British Airways Corporation,(3) where the Supreme Court ruled that the test to determine if a foreign corporation is engaged in trade or business in the Philippines is whether the foreign corporation is performing acts in the Philippines that imply a continuity of its commercial dealings. In turn, continuity is shown by the exercise of functions that are incidental to or in progressive prosecution of the purpose and object of the foreign corporation's business. Moreover, under the provisions of the Foreign Investment Act of 1991, doing business includes the appointment of representatives or distributors domiciled in the Philippines. The continuity of commercial dealings, according to the CTA en banc, is exemplified by the appointment of a local agent in the Philippines.
Here, the CTA en banc found that Amadeus Philippines and AGSA entered into a Travel Agency Management Agreement Systems distribution agreement (Distribution Agreement), where AGSA appointed Amadeus Philippines, a Philippine resident, to be the sole distributor of its products in the Philippines and granted Amadeus Philippines the authority to grant non-exclusive licenses to subscribers for the use of its products. As shown in the distribution agreement, AGSA appointed Amadeus Philippines as its agent for the continued pursuit of AGSA's business in the Philippines. Thus, AGSA was doing business in the Philippines through Amadeus Philippines.
Continue reading here.
Originally published by the International Law Office on Lexology.
Social Networks



