Commissioner of Internal Revenue vs. BW Shipping Philippines, Inc.

A foreign corporation is not “doing business” in the Philippines for purposes of the zero-rating of a service under Section 108(B)(2) of the NIRC merely because it outsources crew recruitment to a local manning agency under a principal-agent arrangement that conforms to POEA rules, unless the Commissioner shows that the foreign principal exercises full control over the local agent’s business or that the outsourced activity is itself the profit-making pursuit of the foreign corporation.

BW Shipping Philippines, Inc. is a domestic corporation engaged in shipping, manning, and crewing of vessels. It is a VAT-registered taxpayer. In the ordinary course of business, it recruited and placed Filipino seafarers on board vessels owned by foreign shipping companies that were part of or affiliated with the BW Group. Respondent provided these manning services pursuant to Consularized Manning Agreements and Purchasing & Infrastructure Support Agreements. For the services, respondent received manning fees paid in foreign currency and duly accounted for under Bangko Sentral rules. In its VAT returns for the four quarters of taxable year 2014, respondent treated these receipts as zero-rated sales and accumulated input VAT from its domestic purchases and importations. No output tax was due against which the input VAT could be credited.

• Respondent’s Business and VAT Registration: Respondent BW Shipping Philippines, Inc. is a Philippine corporation engaged in shipping, manning, and crewing of vessels. It is a registered VAT taxpayer. During the four quarters of taxable year 2014, respondent rendered manning services — principally the recruitment and placement of Filipino seafarers — to several foreign shipping companies. The services were performed in the Philippines, were paid for in acceptable foreign currency inwardly remitted, and were duly accounted for under BSP regulations.

• Administrative Claim and Denial: On March 30, 2016, respondent filed an administrative claim for refund or issuance of a Tax Credit Certificate for its total unutilized input VAT of PHP 7,346,268.45 for all four quarters of TY 2014. Respondent asserted that its sales for the year were purely zero-rated because the services fell under Section 108(B)(2) of the NIRC. The BIR denied the claim in a letter dated August 16, 2016. Respondent received the denial on August 22, 2016.

• Evidence before the CTA: Before the CTA First Division, respondent presented, among others:

  • BIR Certificate of Registration showing its VAT-registered status.
  • Certificates of Non-Registration issued by the Securities and Exchange Commission, attesting that the recipient shipping companies were not registered as corporations or partnerships in the Philippines.
  • Consularized Certificates/Articles of Foreign Incorporation indicating that the companies were organized under the laws of foreign jurisdictions and were registered to operate outside the Philippines.
  • Official screenshots from foreign regulatory websites confirming the companies’ foreign registration.
  • Consularized Manning Agreements and Purchasing & Infrastructure Support Agreements between respondent and each foreign principal.
  • Official receipts, sales invoices, bank credit memos, a Certificate of Inward Remittances, and a list of zero-rated sales to prove payment in foreign currency and BSP accounting.

  • Quarterly VAT Returns for TY 2014 and succeeding periods, showing that the claimed input VAT had not been applied against any output tax liability and remained unutilized until claimed as a refund in the first quarter of 2016.

  • CTA Division’s Factual Findings: The CTA First Division found that respondent had satisfied all requisites for a VAT refund on zero-rated sales, except that certain zero-rated sales and input VAT amounts were not properly substantiated. The Division thus reduced the valid zero-rated sales to PHP 115,630,375.65 and the allowable input VAT to PHP 5,841,616.63, and further limited the refundable amount to the input VAT strictly attributable to the valid zero-rated sales: PHP 5,503,628.95. The Division gave credence to the documentary evidence as prima facie proof that the foreign shipping companies were not doing business in the Philippines.

  • CIR’s Challenge on the “Doing Business” Issue: The CIR did not dispute the foreign incorporation of the shipping companies. Instead, the CIR insisted that the Manning Agreements and Purchasing & Infrastructure Support Agreements — which styled the foreign companies as “Principal” and respondent as “Agent” — demonstrated an intention to establish a continuous business in the Philippines. The CIR argued that respondent performed not only crew screening but also supervisory and human resource management functions, acts that were incidental to and in progressive prosecution of the commercial gain of the shipping companies. The CIR also pointed out that BW Group, the foreign corporate group to which many of the principals belonged, appeared to have an office at the same address as respondent.

• Failure to Satisfy the “Service-Recipient Doing Business Outside the Philippines” Requisite: Petitioner CIR maintained that the Consularized Manning Agreements and Purchasing & Infrastructure Support Agreements showed that the foreign shipping companies, as principals, had designated respondent as their local agent, manifesting an intention to carry on a continuity of commercial dealings in the Philippines. The CIR argued that the manning and crewing functions performed by respondent — screening, hiring, and managing seafarers — were acts normally incident to the shipping companies’ business and were undertaken in progressive prosecution of commercial gain; without those services, the vessels could not operate.

• Overcoming the Prima Facie Evidence: Petitioner contended that the agency relationship and the exercise of control over crew selection and dismissal through the agreements were sufficient to treat the foreign principals as “doing business” in the Philippines, thereby defeating the zero-rating of respondent’s sales under Section 108(B)(2) of the NIRC.

• Prima Facie Proof of Non-Doing Business: Respondent countered that it had submitted SEC Certifications of Non-Registration and consularized foreign incorporation documents, which constitute prima facie evidence that the foreign shipping companies were organized abroad and were not engaged in trade or business in the Philippines.

• Manning Services as Outsourced Support: Respondent argued that its recruitment and placement services were merely auxiliary support functions that the shipping companies chose to outsource; they were not the profit-making commercial activities of the shipping companies themselves, which consisted of transporting goods. The designation of “Principal” and “Agent” in the Manning Agreements merely followed the terminology mandated by the POEA rules and the Omnibus Rules implementing the Migrant Workers Act and did not signify that the foreign companies were doing business in the Philippines.

• VAT Zero-Rating under Section 108(B)(2): Whether the CIR successfully rebutted the prima facie evidence that the foreign shipping companies were not “doing business” in the Philippines, such that respondent’s manning services failed to qualify as zero-rated sales under Section 108(B)(2) of the 1997 NIRC, as amended.

• VAT Zero-Rating under Section 108(B)(2): The Petition was denied. The CTA En Banc correctly affirmed the grant of the refund. Undisputed were the first, second, and fourth requisites for zero-rating: the services were other than processing, manufacturing, or repacking goods; they were performed in the Philippines; and they were paid for in acceptable foreign currency duly accounted for under BSP rules. The only contested element — the third — required respondent to prove that the service-recipients were persons engaged in business conducted outside the Philippines, which entails showing both that the clients are foreign corporations and that they are not doing business in the Philippines. Respondent satisfied this burden: the SEC Certifications of Non-Registration and consularized foreign incorporation documents constituted prima facie evidence that the shipping companies were not engaged in trade or business in the Philippines.

Petitioner’s attempt to overcome that prima facie evidence fell short. There was no showing that the foreign principals exercised full control over respondent’s business; the recruitment instructions and the approval of crew transfers were merely necessary consequences of an outsourcing arrangement and did not convert the foreign companies into entities doing business locally. The designation of the shipping companies as “Principal” and respondent as “Agent” in the Manning Agreements was specifically dictated by the POEA Rules and the Omnibus Rules implementing the Migrant Workers Act — definitions that do not imply control or the conduct of business in the Philippines. Moreover, the hiring of crew through a manning agency is not the revenue-generating activity of the shipping companies, whose business is the transport of goods. Cases that casually described foreign shipping companies as “doing business through its agent” were confined to money-claim disputes and never squarely resolved the issue; they could not supply a definitive precedent. The factual findings of the CTA, which is the specialized court for tax matters, are entitled to the highest respect and were not shown to be tainted by abuse of discretion.

Consequently, the third requisite was satisfied, respondent’s sales were properly zero-rated, and the refund of PHP 5,503,628.95 in unutilized input VAT was in order.

• Requisites for VAT Zero-Rating of Services under Section 108(B)(2), NIRC — To qualify for zero percent VAT on services other than processing, manufacturing, or repacking of goods, the following must concur: (1) the services are performed in the Philippines; (2) the services are other than “processing, manufacturing or repacking of goods”; (3) the service-recipient is a person engaged in business conducted outside the Philippines or a nonresident person not engaged in business who is outside the Philippines when the services are performed; and (4) the consideration is paid for in acceptable foreign currency and accounted for in conformity with BSP rules and regulations. (See Chevron Holdings, Inc. v. Commissioner of Internal Revenue, G.R. No. 215159, July 5, 2022.)

• Proof that a Foreign Corporation Is Not Doing Business in the Philippines — Under Commissioner of Internal Revenue v. Deutsche Knowledge Services Pte. Ltd. (G.R. No. 234445, July 15, 2020), a claimant for zero-rating must prove both that the client is a foreign corporation and that it is not engaged in trade or business in the Philippines. SEC Certifications of Non-Registration together with foreign incorporation documents constitute prima facie evidence that the clients are not doing business in the Philippines.

• Definition of “Doing Business” in the Philippines — As articulated in Sitel Philippines Corp. v. Commissioner of Internal Revenue (805 Phil. 464, 2017), there is no precise criterion; each case must be judged on its circumstances. The term implies continuity of commercial dealings and arrangements and contemplates the performance of acts or works normally incident to, and in progressive prosecution of, commercial gain or the purpose of the business organization. “In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character.” The related definition under Rule I, Section 1(j) of the Implementing Rules of the Foreign Investment Act (RA 11647, amending RA 7042) enumerates acts that constitute doing business (e.g., soliciting orders, opening offices, appointing representatives under full control, participating in management of a domestic business) and excludes isolated or auxiliary acts. To be “doing business,” the activity in the Philippines must be, by and large, for profit-making (Agilent Technologies Singapore v. Integrated Silicon Technology Phil. Corp., 471 Phil. 582, 2004).

• Respect for CTA Factual Findings — The factual findings of the Court of Tax Appeals, which has developed expertise on tax matters, are accorded the highest respect and will not be disturbed absent a showing of abuse of discretion.

• “In order for sales to a non-resident foreign corporation to qualify for zero-rating under Section 108(B)(2) of the NIRC, the claimant must be able to prove ‘(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. To be sure, 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.’” — This passage from Deutsche Knowledge Services states the dual proof requirement and was central to the Court’s analysis.

• “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. … ‘In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character.’” — The Court quotes Sitel to underscore the fact-intensive nature of the inquiry.

• “Unless there is showing of abuse in the exercise of its authority, the Court accords the highest respect to the factual findings of the CTA considering the expertise that it has developed on the subject.” — This dictum captures the standard of review applied to the CTA’s appreciation of evidence.

• Commissioner of Internal Revenue v. Deutsche Knowledge Services Pte. Ltd., G.R. No. 234445, July 15, 2020 — Followed as controlling precedent for the rule that SEC Certifications of Non-Registration and foreign incorporation documents are prima facie evidence that clients are not doing business in the Philippines.

• Sitel Philippines Corp. v. Commissioner of Internal Revenue, 805 Phil. 464 (2017) — Relied upon for the definition of “doing business,” requiring continuity of commercial dealings and an intention to establish a continuous business.

• Agilent Technologies Singapore v. Integrated Silicon Technology Phil. Corp., 471 Phil. 582 (2004) — Cited for the principle that to constitute “doing business,” the activity in the Philippines must be largely for profit-making.

• Chevron Holdings, Inc. v. Commissioner of Internal Revenue, G.R. No. 215159, July 5, 2022 — Referenced for the enumeration of the requisites for VAT zero-rating under Section 108(B)(2) of the NIRC.

• Gau Sheng Phils., Inc. v. Joaquin, 481 Phil. 222 (2004) and Tagud v. BSM Crew Service Centre Phils., Inc., 822 Phil. 380 (2017) — Discussed but distinguished; these labor cases casually referred to foreign shipping companies as “doing business through its agent,” but the issue was never raised or resolved, and thus they could not serve as authority on the tax question.

• Section 108(B)(2), National Internal Revenue Code of 1997, as amended by Republic Act No. 9337 — Enumerates “services other than processing, manufacturing or repacking of goods, rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP” as zero-rated transactions. The provision was applied to determine the precise requisites that respondent had to satisfy.

• Section 112(A), NIRC, as amended by RA 9337 — Governs the refund or issuance of a tax credit certificate for input tax attributable to zero-rated sales; requires that the input tax has not been applied against output tax and that the foreign currency exchange proceeds have been duly accounted for.

• Rule II, Section 1(oo) of the Omnibus Rules and Regulations Implementing the Migrant Workers and Overseas Filipinos Act of 1995, as Amended by RA 10022; and Part I, Rule II (39) of the 2016 Revised POEA Rules and Regulations Governing the Recruitment and Employment of Seafarers — Define “Principal” as the employer or foreign placement agency hiring Filipino workers through a licensed manning agency. The Court used these definitions to explain why the designation “Principal” in the Manning Agreements did not equate to doing business in the Philippines.

• Rule I, Section 1(j) of the Implementing Rules and Regulations of Republic Act No. 11647 (Foreign Investment Act, amending RA 7042) — Enumerates acts that constitute “doing business” and those that are excluded. The Court examined this list to conclude that the outsourced crew recruitment fell within the category of permissible support services that do not, without more, establish doing business.

Associate Justice Amy C. Lazaro-Javier (Acting Chairperson), Associate Justice Mario V. Lopez, and Associate Justice Japar B. Dimaampao (J. Lopez) concurred. Senior Associate Justice Marvic M.V.F. Leonen was on leave but left his vote in accordance with Section 4, Rule 12 of the Supreme Court Internal Rules.

N/A — The decision was unanimous among the participating justices.