Bar Q & A, Taxation

Bar Q & A and Recent Jurisprudence on VAT, Zero Rated Transactions and Tax Credit

2019 Bar

A.2.

For purposes of value-added tax, define explain or distinguish the following terms:

(a) Input tax and output tax (3%)

(b) Zero-rated and effectively zero-rated transactions (3%) 

(c) Destination principle (2%)

SUGGESTED ANSWERS:

(a) Input tax is the VAT

(b) Zero-rated transactions generally refer to the export sale of good and supply of services. The tax rate is set at zero. The seller of such transactions charges no output tax, but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to zero rate. The seller can also claim a refund of a tax credit certificate for the VAT previously charged to customers.

A zero-rated transaction benefits the seller, while an effectively zero-rated transactions benefits the purchaser.

(c) The destination principle provides that the destination of the goods determines taxation or exemption from tax. Export sales of goods are subject to 0% rate (or zero-rated), while importations of goods are subject to the 12% VAT. Exports are zero-rated because the consumption of such goods will be made outside the Philippines, while imports of goods are subject to 12% VAT because they are for consumption within the Philippines.

2018 Bar

X. Klause, Inc, a domestic VAT-registered corporation engaged in the land transportation business, owns a house and lot along Katipunan St., Quezon City. This property is being used by Klaus, Inc. president and single largest shareholder, Atty Krimson, as his residence. No business activity transpires there except for the company’s Christmas party which is held there every December. Atty. Krimson recently grew tired of the long commute from Katipunan to his office in Makati City and caused the company to sell the house and lot. This sale was recorded in the books of Klaus, Inc. as

investment in real property.

a. Is the sale of the said property subject to VAT?

No. In order that the sale may be subject to VAT, it must be made by a taxable person in the course of trade or furtherance of his profession. Applying this in the case at bar, the sale of

the subject lot was not made in the course of trade or business, or in the regular conduct or

pursuit of a transactions incidental thereto. The sale may be considered as an isolated

transaction which is not subject to VAT.

IX. 

Karlito, a Filipino businessman, is engaged in the business of metal fabrication and repair of LPG cylinder tanks. He conducts business under the name and style of “Karlito’s Enterprises’, a single proprietorship. Started only five (5) years a ago, the business has grown so enormously that Karlito decided to incorporate it by transferring all the assets of the business, particularly the inventory of goods on hand, machineries and equipment, supplies, parts, raw materials, office furniture and furnishings, delivery trucks and other vehicles, buildings, and tools to the new corporation, Karlito’s enterprises, Inc. in exchange for 100% of the capital stock of the new corporation, the stock subscription to which shall be deemed fully paid in the form of the assets transferred to the corporation by Karlito.

As a result, Karlito’s Enterprises, the sole proprietorship, ceased to do business and applied for cancellation of its BIT Certificate of Registration. The BIR, however, assessed Karlito VAT on account of the cessation of business based on the current market price of the assets transferred to Karlito’s Enterprises, Inc.

a. Is the transfer subject to VAT?

No. One of the requisites for a transaction to be VAT-taxable is that the sale, barter or exchange of goods is undertaken in the course of trade or business. In this case, the sale of the properties is an isolated transaction not done in the ordinary course of “karlito’s Enterprises” and is thus not subject to VAT. (CIR vs Magsaysay Lines 7/28/06)

2017 Bar

I.

SMZ, Inc. is a VAT-registered enterprise engaged in the general construction business. HP International contracts the services of SMZ Inc, to construct HP International’s factory building located in the Laguna TechnoPark, a special economic zone HP International is registered with the Philippine Economic Zone Authority (PEZA) as an ecozone export enterprise, and, as such, enjoys income tax holiday pursuant to the Special Economic Zone Act of 1995. 

SMZ, Inc., files an application with the Bureau of Internal Revenue (BIR) for the VAT zero-rating of its sale of services to HP International. However, the BIR denies SMZ, Inc.’s application on the ground that HP International already enjoys income tax holiday: Is the BIR correct in denying SMZ, Inc.’s application? Explain your answer: (6%) 

SUGGESTED ANSWER 

No. All sales of goods, properties, and services made by a VAT-registered supplier from the Customs Territory to an ecozone enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter’s type or class of PEZA registration (Coral Bay Nickel Corporation v. CIR, G.R. No. 190506, June 13, 2016, citing Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G.R. No. 150154, August 9, 2005). 

Moreover, under Section 108 (B)(3), of the 1997 NIRC as amended, services rendered to persons or entities whose exemption under special laws effectively subjects the supply of such services to zero percent (0%) rate are considered zero-rated. Considering the law doés not provide for any additional qualification or disqualification, the BIR cannot deny the application on the ground that HP International already enjoys income tax holiday. 

An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to the requirements provided by law. To do so constitutes lawmaking, which is generally reserved for Congress (Soriano v. Secretary of Finance, et al, G.R. Nos. 184450, 184508, 184538, 185234, January 24, 2017). 

ALTERNATIVE ANSWER 

The BIR is wrong. Under Sec 108(B)(3) of the NIRC, the sale is effectively zero-rated and there is no need to file an application for zero-rating with the BIR The BIR in pointing out that HP International enjoys income tax holiday is of no moment, because a sale of services to an ecozone enterprise by a supplier from the customs territory is considered as an effectively zero-rated sale of service in view of the exemption enjoyed by the Peza enterprise from indirect taxes.

V.

On March 30, 2016, XL Co. filed an administrative claim for refund of unutilized Input VAT for taxable year 2014, together with supporting documents, XL Co. claimed that its sale of generated power and delivery of electric capacity was VAT zero-rated. Due to the inaction of the Commissioner of Internal Revenue (CIR), XL Co. filed with the Court of Tax Appeals (CTA) the following judicial claims for refund. 

Period Covered Date Filed 

1st Quarter of 2014 March 31, 2016 

2nd Quarter of 2014 June 30, 2016 

3rd and 4th quarter of 2014 August 12, 2016 

Is XL Co.’s claim for VAT refund timely filed? Explain your answer. (5%)

SUGGESTED ANSWER:

As regards the claims for VAT refund which are administrative in nature, all have been timely filed. The law requires that the administrative claim should be filed within two years from the end of the quarter when the sale was made (Sec. 112(A), NIRC); hence, the filing of the administrative claim for refund on March 30, 2016 covering the four quarters of 2014, complies with the period prescribed by law. 

The same is not true, however, as to the judicial claims. Only the judicial claim filed on August 12, 2016 is timely filed. As provided by Section 112(C), 1997 NIRC, as amended, one of the conditions for a judicial claim of refund or credit under the VAT System is compliance with the 120+30 day mandatory and jurisdictional periods. Strict compliance with the 120+30 day periods is, thus, necessary for such claim to prosper (CIR V. San Roque Power Corporation, G.R. Nos. 187485, 196113 and 197156, October 8, 2013). 

The Commissioner has been granted by law 120 days within which to decide the taxpayer’s claim. Then, if the Commissioner does not act on the taxpayer’s claim within the 120-day period, the taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day. period. Applying this to the present case, the 120+ day from the filing of the administrative claim fell on July 28, 2016. XL Co. may ile the judicial claim from July 29, 2016 to August 27, 2016; thus, only the judicial claim filed on August 12, 2016 has been timely filed.

XII.

On September 17, 2015, Data Realty, Inc., a real-estate corporation duly organized and existing under Philippine law, sold to Jenny Vera a condominium unit at Freedom Residences in Malabon City with an area of 32.31 square meters for a contract price of P4,213,000. The condominium unit had a zonal value amounting to P2,877,000 and fair market value amounting to P550,000. 

(a) is the transaction subject to value-added tax and documentary stamp tax? Explain your answer. (3%) 

SUGGESTED ANSWER 

(a) Yes. As to the VAT liability, sale of real properties held primarily for sale to customer or held for lease in the ordinary course of trade or business is subject to VAT (Section 106 (A) 1)(a), 1997 NIRC, as amended); further, the contract price, which is the highest compared  to the zonal value and the fair market value, is beyond the transactional . threshold amount for residential dwellings thereby making the sale transaction VATable. As to the DST. liability, all deeds of sale and conveyances of real property are likewise subject to DST (Section 196, 1997 NIRC, as amended).

(b) Would your answer be the same if the property was sold by a bank in a foreclosure sale? Explain your answer. (3%) 

SUGGESTED ANSWER 

(b) No, the sale made by the bank is exempt from VAT. Banks are exempt from VAT because they are subject to percentage tax under Title V of the NIRC (Section 109 in relation to Section 121 of 1997 NIRC, as amended). The sale, however, will still be subject to DST because conveyances of real property are generally subject to DST (Section 196, NIRC). 

2016 Bar

IX

(A) Explain the procedure for claiming refunds or tax credits of input Value Added Tax (VAT) for zero-rated or effectively zero-rated sale. under Sec. 112 of the National Internal Revenue Code (NIRC) from the filing of an application with the CIR up to the CTA. (2.5%)

(B) Explain the procedure for claiming refunds of tax erroneously or illegally collected under Sec. 229 of the NIRC from the filing of the claim for refunds with the CIR up to the CTA. (2.5%)

SUGGESTED ANSWER

(A) In order to be entitled to a refund/tax credit of excess input VAT attributable to zero-rated or effectively zero-rated sales, the following requisites must be complied with:

The claim for refund must be filed with the Commissioner within 2 years counted from the last day of the quarter when the zero. rated sale was made (Sec. 112, NIRC);

The claim for refund must be accompanied by a statement under oath that all documents to support the claim has been submitted at the time of filing of the claim for refund (RMC 54-14);

The Commissioner must decide on the claim within 120 days from date of filing and the adverse decision is appealable to the CTA within 30 days from receipt (Sec. 112, NIRC; CIR v. Aichi Forging of Asia, Inc., G.R. No. 184823, October 6, 2010, 632 SCRA 422);

If no decision is made within the 120-day period, there is a deemed denial or adverse decision which is appealable to the CTA within 30 days from the lapse of the 120-day period (Sec. 112, NIRC; Sec. 7(a)(1) of RA 1125, as amended by RA 9282).

XIII

Pursuant to Sec. 11 of the “Host Agreement between the United Nations and the Philippine government, it was provided that the World Health Organization (WHO), “its assets, income and other properties shall be: a) exempt from all direct and indirect taxes.” Precision Construction Corporation (PCC) was hired to construct the WHO Medical Center in Manila. Upon completion of the building, the BIR assessed a 12% VAT on the gross receipts of PCC derived from the construction of the WHO building. The BIR contends that the 12% VAT is not a direct nor an indirect tax on the WHO but a tax that is primarily due from the contractor and is therefore not covered by the Host Agreement. The WHO argues that the VAT is deemed an indirect tax as PCC can shift the tax burden to it. Is the BIR correct? Explain. (5%)

SUGGESTED ANSWER

No. Since World Health Organization (WHO), the contractee, is exempt from direct and indirect taxes pursuant to an international agreement where the Philippines is a signatory, the exemption from indirect taxes should mean that the entity or person exempt is the contactor itself because the manifest intention of the agreement is to exempt the contractor so that no tax may be shifted to the contractee (CIR v. John Gotamco & Sons, Inc., G.R. No. L-31092, February 24, 1987, 148 SCRA 36). The immunity of WHO from indirect taxes extends to the contractor by treating the sale of service as effectively zero-rated when the law provided that, “services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such service to zero percent (0%) rate” (Section 108(B) 3, NIRC). Accordingly, the BIR is wrong in assessing the 12% VAT from the contractor, Precision Construction Corporation.

2015 Bar

VIII

In June 2013, DDD Corp., a domestic corporation engaged in the business of leasing real properties in the Philippines, entered into a lease agreement of a residential house and lot with EEE, Inc., a non-resident foreign corporation. The residential house and lot will be used by officials of EEE, Inc. during the visit to the Philippines. The lease agreement was signed by representatives from DDD Corp. and EEE, Inc. in Singapore. DDD Corp. did not subject the said lease to VAT believing that it was not a domestic service contract. Was DDD Corp. correct? Explain. (3%)

SUGGESTED ANSWER

DDD Corp. is not correct. Lease of properties shall be subject to VAT irrespective of the place where the contract of lease was executed if the property is leased or used in the Philippines (Sec. 108(A), NIRC)

IX

For calendar year 2011, FFF, Inc., a VAT-registered corporation, reported unutilized excess input VAT in the amount of P1,000,000.00 attributable to its zero-rated sales. Hoping to impress his boss, Mr. G, the accountant of FFF, Inc., filed with the Bureau of Internal Revenue (BIR) on January 31, 2013 a claim for tax refund/credit of the P1,000,000.00 unutilized excess input VAT of FFF, Inc. for 2011. Not having received any communication from the BIR, Mr. G. filed a Petition for Review with the CTA on March 15, 2013, praying for the tax refund/credit of the P1,000,000.00 unutilized excess input VAT of FFF, Inc. for 2011. –

XXI

MMM, Inc., a domestic telecommunications company, handles incoming telecommunications services for non-resident foreign companies by relaying international calls within the Philippines. To broaden the coverage of its telecommunications services throughout the country, MMM, Inc. entered into various interconnection agreements with local carriers. The non-resident foreign corporations pay MMM, Inc. in US dollars inwardly remitted through Philippine banks, in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. MMM, Inc. filed its Quarterly VAT Returns for 2000. Subsequently, MMM, Inc. timely filed with the BIR an administrative claim for the refund of the amount of P6,321,486.50, representing excess input VAT attributable to its effectively zero-rated sales in 2000. The BIR ruled to deny the claim for refund of MMM, Inc. because the VAT official receipts submitted by MMM, Inc. to substantiate said claim did not bear the words “zero-rated” as required under Section 4.108-1 of Revenue Regulations (RR) No. 7-95. On appeal, the CTA division and the CTA en banc affirmed the BIR ruling. MMM, Inc. appealed to the Supreme Court arguing that the NIRC itself did not provide for such a requirement. RR No. 7-95 should not prevail over a taxpayer’s substantive right to claim tax refund or credit.

(A) Rule on the appeal of MMM, Inc. (3%)

(B) Will your answer in (A) be any different if MMM, Inc. was claiming refund of excess input VAT attributable to its effectively zero-rated sales in 2012? (2%) ;

SUGGESTED ANSWER

(A) The appeal of MMM, Inc. must be denied. MMM, Inc.’s position that the requirements under RR No. 7-95 should not prevail over a taxpayer’s substantive right to claim tax refund or credit is unmeritorious. The Secretary of Finance has the authority to promulgate the necessary rules and regulations for the effective enforcement of the provisions of the National Internal Revenue Code (NIRC). Such rules and regulations are given weight and respect by the courts in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields. An applicant for a claim for tax refund or tax credit must not only prove entitlement to the claim, but also compliance with all the documentary and evidentiary requirements. Consequently, the Court of Tax Appeal (CTA), and the CTA en banc correctly ruled that the failure to indicate the words “zero-rated” on the invoices and receipts issued by a taxpayer, would result in the denial of the claim for refund or tax credit (Eastern Telecommunications Philippines, Inc. v. CIR, G.R. No. 183531, March 25, 2015).

(B) No, my answer will not be different if the claim for refund is for effectively zero-rated sales in 2012. The requirement to print the word “zero-rated” is no longer by mere regulations, but is now clearly provided by law as follows — “If the sale is subject to žero percent (0%) value-added tax, the term “zero-rated sale” shall be written or printed prominently on the invoice or receipt. Failure to comply with this invoicing requirement is fatal to a claim for refund of input taxes attributable to the zero-rated sale (Sec. 113(B)(2)(c), NIRC). Moreover, as recently ruled by the Supreme Court, the subsequent incorporation of Sec. 4.108-1 of RR 7-95 in Sec. 113 of the NIRC as introduced in R.A. No. 9337, actually confirmed the validity of the imprinting requirement on VAT invoices or official receipts-a case falling under the principle of legislative approval of administrative interpretation by reenactment (Northern Mindanao Power Corp. v. CIR, G.R. No. 185115, February 18, 2015).

2014 Bar

IV

Gangwain Corporation. (GC) filed its quarterly tax returns for the calendar year 2012 as follows:

First quarter – April 25, 2012

Second quarter – July 23, 2012

Third quarter – October 25, 2012

Fourth quarter – January 27, 2013

On December 22, 2013, GC filed with the Bureau of Internal Revenue (BIR) an administrative claim for refund of its unutilized input Value-Added Tax (VAT) for the calendar year 2012. After several months of inaction by the BIR on. its claim for refund, GC decided to elevate its claim directly to the Court of Tax Appeals (CTA) on April 22, 2014. In due time, the CTA denied the tax refund relative to the input VAT of GC for the first quarter of 2012, reasoning that the claim was filed beyond the two-year period prescribed under Section 112(A) of the National Internal Revenue Code (NIRC).

(A) Is the CTA correct? (3%)

(B] Assuming that GC filed its claim before the CTA on

February 22, 2014, would your answer be the same? (3%)

SUGGESTED ANSWER:

(A) No. CTA is not correct. The two-year period to file à claim for refund refers to the administrative claim : and does not refer to period within which to elevate the claim to the CTA. The filing of the administrative claim for refund was timely done because it is: made within two years from the end of the quarter, when the zero-rated transaction took place (Section 112(A); NIRC). When GC decided to elevate its claim to the CTA on April 22, 2014, it was after the lapse of 120 days from the filing of the claim for refund with the BIR, hence, the appeal is seasonably filed. The rule on VAT refunds is two years to file the claim with the BIR, plus 120 days for the Commissioner to act and inaction after 120 days is a deemed adverse decision on the claim, appealable to the CTA within 30 days from the lapse of the 120-day period (CIR 3:0. Aichi Forging Company of Asia, Inc., G.R. No: 1. 184823, October 6, 2010; CIR v. San Roque, G.R. No. 187485, February 12, 2013)

(B) Yes. The two-year prescriptive period to file a claim for refund refers to the administrative claim with: the BIR and not to the period to elevate the claim to the CTA. Hence, the CTA cannot deny the refund for reasons that the first quarter claim was filed beyond the two-year period prescribed by law. However, when the claim is made before the CTA on February 24, there is definitely no appealable decision as yet because the 120-day period for the Commissioner to act on the claim for refund has not yet lapsed. Hence, the act of the taxpayer in elevating the claim to the CTA is premature and the CTA has no jurisdiction to rule thereon (CIR V.. Aichi Forging Company of Asia, Inc., G.R. No. 184823, October 6, 2010; CIR ..v. San Roque, G.R. No. 187485, February 12, 2013).

VIII

Masarap Kumain, Inc. (MKI) is a Value Added Tax (VAT)-registered company which has been engaged in the catering business for the past 10 years. It has invested a substantial portion of its capital on flat wares, table linens, plates, chairs, catering equipment, and delivery vans. MKI sold its first delivery van, already 10 years old and idle,to Magpapala Gravel and Sand Corp. (MGSC), a corporation engaged in the business of buying and selling gravel and sand. The selling price of the delivery van was way below its acquisition cost.

Is the sale of the delivery van by MKI to MGSC subject: to VAT? (4%)

SUGGESTED ANSWER:

Yes, the sale of the delivery van is subject to VAT being a transaction incidental to the catering business which is a VAT-registered activity of MKI. Transactions that are undertaken incidental to the pursuit of a commercial or economic activity are considered as entered into in the course of trade or business (Section 105, NIRC). A sale of a fully depreciated vehicle that has been used in business is subject to VAT as an incidental transaction, although such sale may be considered *. isolated (Mindanao II Geothermal Partnership V. CIR, G.R. Nos. 193301, 194637, March 11, 2013).

XIX

The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 65-2012 imposing Value Added Tax (VAT) on association dues and membership fees collected by condominium corporations from its member condominium-unit owners. The RMC’s validity is challenged before the Supreme Court (SC) by the condominium corporations. The Solicitor General, counsel for BIR, claims that association dues, membership fees, and other assessment/charges collected by a condominium corporation are subject to VAT since they constitute income payments or compensation for the beneficial services it provides to its members and tenants.

On the other hand, the lawyer of the condominium corporations argues that such dues and fees are merely held in trust by the condominium corporations exclusively for their members and used solely for administrative expenses in implementing the condominium corporations purposes. Accordingly, the condominium corporations do not actually render services for a fee subject to VAT.

Whose argument is correct? Decide. (5%)

SUGGESTED ANSWERS: (either answer should be given credit):

SUGGESTED ANSWER 1:

The lawyer of the condominium corporations is correct. The association dues, membership fees, and other assessments/charges do not constitute incoine payments because they were collected for the benefit ‘ “of the unit owners and the condominium corporation is not created as a business entity. The collection is the money of the unit owners pooled together and will be .. spent exclusively for the purpose of maintaining and preserving the building and its premises which they themselves own and possess (First e-Bank Tower Condominium Corp., V. BIR, Special Civil Action No. 12-1236,  RTC Br. 146, Makati City).

SUGGESTED ANSWER 2:

In the case of office Metro Philippines, Inc. (formerly Regus Centres, Inc.) v. Commissioner of Internal Revenue, CTA Case No. 8382, the Court only dealt with the EWT issue as the VAT Section 105 shows that transactions in the course of a trade or business (sells, barters, exchanges, leases goods or properties, renders services, imports goods) are those subject to VAT, In the case of a condominium corporation, the function of the entity is merely for administrative purposes and not a trade or business. Thus, payments in the form of association dues should not be subjected to VAT.

XXV

Which of the following transactions is subject to Value Added Tax (VAT)? (1%)

(A) sale of shares of stock-listed and traded through the local stock (B) importation of personal and household effects belonging to residents of the Philippines returning from abroad subject to custom: duties under the Tariff and Customs Code.

(C) services rendered by individuals pursuant to an employer-employee relationship.

(D). gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the  Cooperative Development Authority.

SUGGESTED ANSWER:

(B) importation of personal and household effects belonging to residents of the Philippines returning from abroad subject to custom duties under the Tarifi and Customs Code (exempt from VAT only if exempt from customs duties, Section 109(1)(C), NIRC).

The relevant provisions of the NIRC, as amended, state:

——–Jurisprudence——–

SEC. 105. Persons Liable. – Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.(Power Sector Assets And Liabilities Management Corporation v. CIR G.R. No. 226556 July 3, 2019)

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act 7716.(Power Sector Assets And Liabilities Management Corporation v. CIR G.R. No. 226556 July 3, 2019)

The phrase ‘in the course of trade or business’ means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.(Power Sector Assets And Liabilities Management Corporation v. CIR G.R. No. 226556 July 3, 2019)

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business.(Power Sector Assets And Liabilities Management Corporation v. CIR G.R. No. 226556 July 3, 2019)

Under Section 112 of the Tax Code, only the administrative claim for refund of input value-added tax must be filed within the two (2)-year prescriptive period, the judicial claim need not be.

Section 112(A) states that:

(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT ­ registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales[.] (Emphasis supplied)

In Aichi Forging Company of Asia, Inc. and San Roque Power Corporation, the phrase “within two (2) years … apply for the issuance of a tax credit certificate or refund” refers to administrative claims for refund or credit filed with the Commissioner of Internal Revenue, not to appeals made before the Court of Tax Appeals.

This is apparent in Section 112(D), Paragraph 1 of the Tax Code, which gives the Commissioner [120] days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) within which he or she can decide on the claim. On the other hand, Section 112(D), Paragraph 2 provides a 30-day period within which one may appeal a judicial claim before the Court of Tax Appeals. (Steag State Power, Inc. (Formerly State Power Development Corporation) v. CIR G.R. No. 205282 January 14, 2019)

As correctly argued by the respondent, the basis for the VAT zero-rated treatment of the supplier is the tax exemption of the purchaser of services, and not the qualification of the supplier itself, in order to relieve the tax-exempt purchaser from tax burden considering that it may not be able to offset or utilize any input tax passed on by its supplier of services, had the services it purchased been subject to VAT of 12%.

It bears emphasis that effective zero-rating is not intended as benefit to the person legally liable to pay the tax, such as the [respondent,] but to relieve certain exempt entities, such as the NPC, from the burden of indirect tax so as to encourage the development of particular industries. Before, as well as after, the adoption of the VAT, certain special laws were enacted for the benefit of various entities and international agreements were entered into by the Philippines with foreign governments and institutions exempting sale of goods or supply of services from indirect taxes at the level of their suppliers. Effective zero-rating was intended to relieve the exempt entity from being burdened with the indirect tax which is or which will be shifted to it had there been no exemption. In this case, respondent is being exempted from paying VAT on its purchases to relieve NPC of the burden of additional costs that respondent may shift to NPC by adding to the cost of the electricity sold to the latter.

In fine, respondent is entitled to a refund or credit of its unutilized input VAT attributable to its effectively zero-rated sales of electricity to NPC. (CIR v. Team Energy Corporation (Formerly Mirant Pagbilao Corporation G.R. No. 230412 March 27, 2019 )

A VAT-registered person may opt, however, to apply for tax refund or credit certificate of VAT paid corresponding to the zero-rated sales of goods, properties, or services to the extent that this input tax has not been applied against the output tax; strict compliance with substantiation and invoicing requirements is necessary considering VAT’s nature and VAT system’s tax credit method, where tax payments are based on output and input taxes and where the seller’s output tax becomes the buyer’s input tax that is available as tax credit or refund in the same transaction. (Team Energy Corp. vs. Commissioner of Internal Revenue, G.R. No. 197663, March 14, 2018)

In claims for VAT refund/credit, applicants must satisfy the substantiation and invoicing requirements under the NIRC and other implementing rules and regulations; under Sec. 110(A)(1) of the 1997 NIRC, creditable input tax must be evidenced by a VAT invoice or official receipt, which must in turn reflect the information required in Secs. 113 and 237 of the Code. (Team Energy Corp. vs. Commissioner of Internal Revenue, G.R. No. 197663, March 14, 2018)

 The output tax due from VAT-registered sellers becomes the input tax paid by VAT-registered purchasers on local purchase of goods or services, which the latter in turn may credit against their output tax liabilities; on the other hand, for a non-VAT purchaser, the VAT shifted forms part of the cost of goods, properties, and services purchased, which may be deductible as an expense for income tax purposes. (Team Energy Corp. vs. Commissioner of Internal Revenue, G.R. No. 197663, March 14, 2018)

VAT is a tax imposed on each sale of goods or services in the course of trade or business, or importation of goods as they pass along the production and distribution chain; it is an indirect tax, which may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. (Team Energy Corp. vs. Commissioner of Internal Revenue, G.R. No. 197663, March 14, 2018)

 VAT-registered entity is liable to VAT, or the output tax at the rate of 0% or 10% (now 12%) on the gross selling price of goods or gross receipts realized from the sale of services; Secs. 106(D) and 108(C) of the Tax Code expressly provide that VAT is computed at 1/11 of the total amount indicated in the invoice for sale of goods or official receipt for sale of services; this tax shall also be recognized as input tax credit to the purchaser of the goods or services. (Team Energy Corp. vs. Commissioner of Internal Revenue, G.R. No. 197663, March 14, 2018)

Under Sec. 112 (c) of the NIRC, the CIR is given 120 days within which to grant or deny a claim for refund; upon receipt of CIR’s decision or ruling denying the said claim or upon the expiration of the 120-day period without action from the CIR, the taxpayer has thirty (30) days within which to file a petition for review with the CTA. (Sitel Phils. Corp. [Formerly Clientlogic Phils., Inc.] vs. Commissioner of Internal Revenue, G.R. No. 201326, Feb. 08, 2017)

Tax credit system allows a VAT-registered entity to credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports; the VAT paid by a VAT-registered entity on its imports and purchases of goods and services from another VAT-registered entity refers to input tax; on the other hand, output tax refers to the VAT due on the sale of goods, properties, or services of a VAT-registered person. (CE Luzon Geothermal Power Co., Inc. vs. Commissioner of Internal Revenue, G.R. No. 197526, July 26, 2017)

The VAT is a tax on consumption, an indirect tax that the provider of goods or services may pass on to his customers. Under the VAT method of taxation, which is invoice-based, an entity can subtract from the VAT charged on its sales or outputs the VAT it paid on its purchases, inputs and imports.(Panasonic Communications v. CIR G.R. No. 178090 February 8, 2010)

For example, when a seller charges VAT on its sale, it issues an invoice to the buyer, indicating the amount of VAT he charged. For his part, if the buyer is also a seller subjected to the payment of VAT on his sales, he can use the invoice issued to him by his supplier to get a reduction of his own VAT liability. The difference in tax shown on invoices passed and invoices received is the tax paid to the government. In case the tax on invoices received exceeds that on invoices passed, a tax refund may be claimed. (Panasonic Communications v. CIR G.R. No. 178090 February 8, 2010)

Zero-rated transactions generally refer to the export sale of goods and services. The tax rate in this case is set at zero. When applied to the tax base or the selling price of the goods or services sold, such zero rate results in no tax chargeable against the foreign buyer or customer. But, although the seller in such transactions charges no output tax, he can claim a refund of the VAT that his suppliers charged him. The seller thus enjoys automatic zero rating, which allows him to recover the input taxes he paid relating to the export sales, making him internationally competitive.(Panasonic Communications v. CIR G.R. No. 178090 February 8, 2010)

For the effective zero rating of such transactions, however, the taxpayer has to be VAT-registered and must comply with invoicing requirements.

A claim for refund of this tax is in the nature of a tax exemption, which is based on Secs. 110(B) and 112(A) of 1997 NIRC, allowing VAT-registered persons to recover the excess input taxes they have paid in relation to their zero-rated sales; the term “excess” input VAT simply means that the input VAT available as refund credit exceeds the output VAT, not that the input VAT is excessively collected because it is more than what is legally due. (Team Energy Corp. vs. Commissioner of Internal Revenue, G.R. No. 197663, March 14, 2018)

––      Actions for tax refund or credit, as in the instant case, are in the nature of a claim for exemption and the law is not only construed in strictissimi juris against the taxpayer, but also the pieces of evidence presented entitling a taxpayer to an exemption is strictissimi scrutinized and must be duly proven; burden on the taxpayer to show that he has strictly complied with the conditions for the grant of the tax refund or credit. (Coca-Cola Bottlers Phils., Inc. vs.  Commissioner of Internal Revenue, G.R. No. 222428, Feb. 19, 2018)

––      Claims for tax refund/credit of excess input tax are governed not by Sec. 229 but only by Sec. 112 of the NIRC; a claim for input VAT refund or credit is construed strictly against the taxpayer; there must be strict compliance with the prescriptive periods and substantive requirements set by law before a claim for tax refund or credit may prosper; the 120+30-day periods in Sec. 112 is not a mere procedural technicality that can be set aside if the claim is otherwise meritorious; it is a mandatory and jurisdictional condition imposed by law. (Team Energy Corp. vs. Commissioner of Internal Revenue, G.R. No. 197663, March 14, 2018)

––      Necessarily, when taxes were withheld and deducted from its income, PAL is deemed to have paid them; considering that PAL is exempted from paying the withholding tax, it is rightfully entitled to a refund. (Phil. Airlines, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 206079-80, Jan. 17, 2018)

––      The prescriptive periods regarding judicial claims for refunds or tax credits of input VAT are explicitly set forth in Sec. 112(D) of the 1997 NIRC; resort to an appeal with the Court of Tax Appeals should be made within 30 days either from receipt of the decision denying the claim or the expiration of the 120-day period given to the Commissioner to decide the claim. (Team Energy Corp. vs. Commissioner of Internal Revenue, G.R. No. 197663, March 14, 2018)

Leave a Reply

Your email address will not be published.