c. Destination Principle and Cross-Border Doctrine

Destination Principle and Cross-border Doctrine

Destination Principle: VAT is imposed in the country in which the products or services are actually consumed or used (i.e., qualifying exports are zero-rated, while imports are generally subject to VAT).

Actual shipment of the goods from the Philippines to a foreign country is required for an ordinary export sale; specified transactions may also qualify as export sales under Section 106(A)(2)(a) of the Tax Code without actual shipment.

Origin Principle: Tax is imposed by the jurisdiction where goods are produced or services originate, regardless of where they are consumed (i.e., Exports taxable, imports exempt; Situs: country of production)

Cross-border Doctrine: No VAT shall be imposed to form part of the cost of goods sold destined for consumption outside of the territorial border of the taxing authority. (CIR v. AMEX, G.R. No. 152609)¹

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.

Exception: The supply of service shall be zero-rated when it satisfies the requirements of the applicable category under Section 108(B) of the Tax Code:

• For services rendered in the Philippines to a person engaged in business outside the Philippines, the service is performed in the Philippines;

Note: Under Section 108(B)(2) of the Tax Code, the recipient may be 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, subject to the other statutory requirements. (CIR v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G.R. No. 153205, 22 January 2007)²

• The service falls under any of the categories provided in Section 108(B) of the Tax Code³; and
• For the foregoing category, it is paid for in acceptable foreign currency that is accounted for in accordance with BSP rules.