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CIR vs. DKS - Case Digest

The CIR appealed the CTA's decision partially granting Deutsche Knowledge Services a tax refund. The CTA found DKS established the non-resident foreign corporation status of some affiliates, entitling DKS to a refund of excess input VAT from services to those affiliates. The SC upheld this, finding DKS proved affiliate foreign status and timely filed claims. However, DKS must also prove affiliates conducted no local business to fully qualify for a zero-rated VAT refund.

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582 views4 pages

CIR vs. DKS - Case Digest

The CIR appealed the CTA's decision partially granting Deutsche Knowledge Services a tax refund. The CTA found DKS established the non-resident foreign corporation status of some affiliates, entitling DKS to a refund of excess input VAT from services to those affiliates. The SC upheld this, finding DKS proved affiliate foreign status and timely filed claims. However, DKS must also prove affiliates conducted no local business to fully qualify for a zero-rated VAT refund.

Uploaded by

Jenova Jireh
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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COMMISSIONER OF INTERNAL REVENUE (CIR)

vs.
DEUTSCHE KNOWLEDGE SERVICES PTE. LTD.
G.R. No. 234445, July 15, 2020

FACTS:
 CIR filed a Petition for Review on Certiorari assailing the Decision of the CTA En
Banc which affirmed the Decision of the CTA Second Division partially granting
the application of DKS for Tax Refund/Credit.
 Deutsche Knowledge Services Pte. Ltd. (DKS) is the Philippine branch of a
multinational company organized and existing under and by virtue of the laws of
Singapore.
 DKS is a VAT-registered enterprise and is licensed to operate as a regional
operating headquarters (ROHQ) in the Philippines.
 DKS provides the following ‘qualifying services’ to its foreign affiliates-clients:
 General administration and planning
 Business planning and coordination
 Sourcing/ Procurement of raw materials and components
 Training and personal management
 Logistic Services
 Product development, etc.
 By virtue of several service agreements, DKS rendered qualifying services to its
foreign affiliates-clients from which it generated service revenues.
 DKS filed with the BIR an Application for Tax Refund/Credit and a Letter Claim
for Refund supported by relevant documents on October 21, 2011.
 DKS declared that its sales of services to 34 foreign affiliates-clients are
zero-rated sales for VAT purposes.
 Sought for a refund amounting to Php 33,868,101.19 representing the
unutilized input VAT attributable to zero-rated sales incurred during the
first quarter of 2010.
 BIR had NOT acted upon DKS’ Administrative Claim hence, DKS filed a Petition
for Review before the CTA Second Division (Judicial Claim).
 CTA Second Division ruled in favor of DKS; Both parties filed a Petition for
Review with CTA En Banc.
 Decision of CTA Second Division:
◦ Partially granted DKS’ Claim  Reduced from Php 33,868,101.19 to Php
14,882,227.02
 REASONS:
1. DKS did not properly support its input VAT claims in
accordance with prevailing VAT invoicing and substantiation
requirements  Resulted in disallowance of input VAT
reducing the amount of valid excess input VAT subject to
refund.
2. Based on evidence, DKS only established the NRFC status
of only 15 foreign affiliates-clients from initial 34.

Note: To be considered as NRFC, each entity must be supported (at the


very least) by both:
1. SEC Certificate of Non-registration of
Corporation/Partnership (Establishes that the recipient of
the service has no registered business in the Philippines);
and
2. Certificate/ Articles of Foreign Incorporation/Association
(Establishes that the recipient is indeed foreign)

 CTA En Banc affirmed CTA Second Division in favor of DKS; CIR filed this
present Petition for Review on Certiorari with SC.

 Decision of CTA En Banc:


 Found that DKS only established the NRFC status of 11 foreign affiliates-
clients as opposed to CTA Second Division findings of 15 entities.
 REASON:
 The court excluded the four entities because these entities’ NRFC
status was established by mere printouts from DKS’ own database
(AMInet Database).  Self-serving (Reason: DKS may easily
manipulate the database in their favor).
 RESULT:
 Reduced DKS’ claim from Php 14,882,227.02 to Php
14,527,282.57.

ISSUE/s:
 WON DKS’ administrative and judicial claim are timely filed.
 WON DKS can claim credit or refund of excess input VAT attributable to zero-
rated sales.

HELD:
1. WON DKS’ administrative and judicial claim are timely filed. – YES.

The SC ruled that the CIR cannot fault DKS for proceeding to court for
appropriate remedial action on the claim they ignored to resolve in the
administrative level. Thus, DKS’ administrative and judicial claims were timely
filed.

The CIR has no authority to unilaterally determine the completeness of these


documents and dictate the running of 120-day period to resolve the
administrative claim. To allow this would be giving the tax authorities “unbridled
power to indefinitely delay the administrative claim” and in turn “prevent the filing
of a judicial claim with the CTA.”

2. WON DKS can claim credit or refund of excess input VAT attributable to zero-
rated sales. – YES.

The SC upholds the findings of both the CTA Second Division and CTA En Banc
which gave credence to the following documents submitted by DKS as sufficient
proof of NRFC status, namely: (a) SEC Certification of Non-registration of
Company; and (b) Authenticated Articles of Association and/or Certificates of
Registration/ Good Standing/ Incorporation. Since DKS was able to show proof,
then DKS can claim credit or refund of excess input VAT attributable to zero-
rated sales.

For purposes of zero-rating under Section 108 (B)(2) of the NIRC, the claimant
must establish the two components of a client’s NRFC status:
1. That their client was established under the laws of a country not the
Philippines or, simply, is not a domestic corporation; and
2. That it is not engaged in trade or business in the Philippines.

There must be sufficient proof of both of these components: showing not only
that the clients are foreign corporations, but also are not doing business in the
Philippines.

The Court ruled that documents (e.g. SEC Certifications and client service
agreements) of this nature only establish the first component (i.e. that the affiliate
is foreign).

The absence of any other competent evidence (e.g. articles of association/


certificates of incorporation) proving the second component (i.e. that the affiliate
is not doing business here in the Philippines) shall be fatal to a claim for credit or
refund of excess input VAT attributable to zero-rated sales.

Petition is DENIED.

Prepared by: Angeles, Arce, Arsua

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