The Court of Tax Appeals (CTA) has denied the P3.88 million claim for refund filed by Avaloq Philippines Operating Headquarters against the Bureau of Internal Revenue (BIR) for excess or unutilized input value-added taxes (VAT) paid in 2018.

Avaloq Philippines is the regional operating headquarters (ROHQ) of Avaloq Group AG of Switzerland.  It is engaged in general administration and planning, business planning and coordination, sourcing/procurement of raw materials and components, and corporate finance advisory services, among other businesses.

On July 12, 2020, it filed an administrative claim for VAT refund before the BIR. It said that it incurred excess or unutilized input VAT arising from its zero-rated sales during the 1st and 2nd quarters of 2018 in the amount of P3,880,796.01.

The BIR denied the refund in a letter sent on Sept. 16, 2020.  Avaloq Philippines filed a petition for review before the CTA on Nov. 9, 2021.

The firm told the CTA that its claim for refund is supported under Section 108(B)(2) in relation to Sections 110(B) and 112(A) of the National Internal Revenue Code (NIRC).

The provisions on the NIRC state that in order to be entitled to a refund of excess or unutilized input VAT attributable to zero-rated or effectively zero-rated sales, the taxpayer should be VAT-registered and the taxpayer is engaged in zero-rated or effectively zero-rated sales.

The law also mandates that the sales should be paid for in acceptable foreign currency exchange through intercompany offsetting agreements, and the proceeds have been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

In denying the claim for refund, the CA said that “petitioner (Avaloq Philippines) failed to prove that it is engaged in zero-rated or effectively zero-rated sales."

The tax court said that for a sale or service to qualify for VAT zero-rating, it must be proven that the services rendered were other than processing, manufacturing, or repacking of goods, and the services were rendered to Non-Resident Foreign Corporations (NRFCs) doing business outside the Philippines.

Avaloq Philippines claimed that it initially obtains foreign currency funding from its head office depending on their financial needs. Upon receiving the foreign currency funding, it is then recorded and treated by the firm as a loan payable to Avaloq Group AG.

While Avaloq Group AG grants loans to Avaloq Philippines the foreign currency depending on the latter's needs, the CTA said "it remains that petitioner has failed to adduce evidence that such amount advanced by Avaloq Group AG can be the subject of set-off with respect to the receivables earned by petitioner from its sales of services to Avaloq Group AG's other affiliates.”

“Avaloq Group AG is an entity different from its affiliates. Hence, it cannot be presumed that such affiliates can use the amounts advanced by Avaloq Group AG to petitioner to pay-off petitioner's receivables which arose from the latter's sales of service to such affiliates,” the CTA said.

The CTA ruled: "For failing to prove that its sales of services to non-resident foreign corporations doing business outside the Philippines were paid for in acceptable foreign currency in accordance with BSP rules and regulations, the said sales of services do not qualify for VAT zero-rating under Section 108(B)(2) of the NIRC. Thus, petitioner's VAT refund claim cannot prosper.”

The decision promulgated on Dec. 7, 2023 was written by Associate Justice Maria Rowena Modesto-San Pedro with the concurrence of Associate Justices Ma. Belen M. Ringpis-Liban and Corazon G. Ferrer-Flores.