Dissension in the Court: January 2013

The same legal issue resolved in the earlier case of Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue (G.R. Nos. 158885 & 170680, 2 October 2009) – regarding the proper interpretation of Section 105 (now Section 111(A)) of the National Internal Revenue Code (“Tax Code”) – was again raised in the recent case of Fort Bonifacio Development Corporation vs. Commissioner of Internal Revenue and Revenue District Officer, Revenue District No. 44, Taguig and Pateros, Bureau of Internal Revenue (G.R. No. 173425, January 22, 2013), resulting in the same decision and dissenting opinion.

Section 105 of the old Tax Code provides:

SEC. 105. Transitional input tax credits. – A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory prescribed by regulations, be allowed input tax on his beginning inventory of good, materials and supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax. (Emphasis supplied.)

The recent case began with the purchase by Fort Bonifacio Development Corporation (“FBDC”) on February 8, 1995 from the national government of a portion of the Fort Bonifacio Global City.  On January 1, 1996, RA 7716 restructured the VAT system by, among others, extending the VAT to real properties held primarily for sale to customers or held for lease in the ordinary course of trade of business.

On September 19, 1996, FBDC submitted to the BIR Revenue District No. 44 an inventory of all its real properties, the book value of which aggregated around Php71.2B, and claimed entitlement to the 8% transitional input tax credit of roughly Php5.7B, pursuant to Section 105 of the old Tax Code.

For the first quarter of 1997, FBDC generated close to Php3.7B from its sales and lease of lots, on which the output VAT payable was Php368.5M.  FBDC credited its Php8.9M unutilized input tax credit on purchases of goods and services (not its transitional input tax credit) and paid Php359.6M.  Realizing that its Php5.7B transitional input tax credit was not applied in computing its output VAT for the first quarter of 1997, FBDC filed with the BIR on November 17, 1998 a claim for refund of the Php359.6M erroneously paid as output VAT for the said period.

The Court of Tax Appeals (“CTA”), to whom the matter was elevated by FBDC due to the inaction of the Commissioner of Internal Revenue (“CIR”), denied on October 12, 2000 FBDC’s claim for refund on the basis that “the benefit of transitional input tax credit comes with the condition that business taxes should have been paid first.”  The CTA noted that since, in this case, FBDC acquired the Global City property from the national government under a VAT-free sale transaction, it cannot avail of the transitional input tax credit.  The CTA likewise pointed out that under Revenue Regulations No. (RR) 7-95, implementing Section 105 of the Tax Code, the 8% transitional input tax credit should be based on the value of the improvements on land, and not on the book value of the real property.

FBDC filed a Petition for Review before the Court of Appeals (CA), but the latter affirmed the decision of the CTA and further ruled, as to the validity of RR 7-95, that the latter is entitled to great weight as it was issued pursuant to the rule-making authority of the Secretary of Finance under Section 245 of the old Tax Code.  FBDC filed a Petition for Review on Certiorari with the Supreme Court, whereupon the latter on September 4, 2012, through Justice Mariano Del Castillo, but with Justice Antonio Carpio (joined by Chief Justice Sereno and Justices Brion, Reyes, and Perlas-Bernabe, and subsequently Justice Leonen) dissenting, reversed the CA decision and ordered the CIR “to refund petitioner FBDC the amount of Php359,652,009.47 paid as output VAT for the first quarter of 1997 in light of the transitional input tax credit available to petitioner for the said quarter, or in the alternative, to issue a tax credit certificate corresponding to such amount.

The CIR moved for reconsideration but this was denied with finality by the Supreme Court in its order promulgated last January 22, 2013. Justice Carpio again took exception to this ruling of the majority and voted to grant the motion for reconsideration filed by the CIR, basing his argument on the same four grounds he had raised in this and in the 2009 FBDC case, which the majority addressed again accordingly as follows:

First, the dissenter argues that prior payment of taxes is a prerequisite before a taxpayer could avail of the transitional input tax credit.  He claims that the VAT provides a tax crediting system that allows a tax credit for taxes previously paid when the same goods and services are sold further in the chain of transactions.  The purpose of this tax crediting system is to prevent double taxation in the subsequent sale of the same product or services that were already previously paid.  Since the national government did not pass on to FBDC any previous sales tax or VAT as part of the purchase price of the Global City land (since (i) the national government is not subject to any tax, including VAT, when the law authorizes it to sell government property like the Global City land, and (ii) in 1995, the old VAT law did not yet impose VAT on the sale of land), FBDC will not be subject to double taxation on its subsequent sale of that land and is thus not entitled to any transitional input VAT refund or credit when it subsequently sells that land.

According to the dissenter, there can be no refund or credit unless there is actual or, in the case of the transitional input tax, assumed tax payment, whether actually paid or not.  In either case, there must be a law imposing the input VAT.  This can be inferred from the provision of Section 105 that a taxpayer is “allowed input tax on his beginning inventory … equivalent to 8% …, or the actual value-added tax paid …, whichever is higher.”  The phrase “actual value-added tax paid” means there was a law imposing the VAT, whether or not it was actually paid.  Since there was no law imposing VAT on the sale of the Global City land, there is no possibility of an actual or even assumed tax payment of input VAT on such sale.  Hence, there can be no refund or credit of input VAT.  The dissenter claims that the transitional input VAT was introduced to ease the transition from the old VAT to the expanded VAT system by allowing an 8% presumptive input VAT on goods and services newly covered by the expanded VAT system without need of substantiating the same, on the legal presumption that the VAT imposed by law prior to the expanded VAT system had been paid, regardless of whether it was actually paid.

The majority believes though that prior payment of taxes in not necessary before a taxpayer could avail of the 8% transitional input tax credit.  First, all that Section 105 requires for a taxpayer to avail of the 8% transitional input tax credit is to file a beginning inventory with the BIR.  Second, since Section 105 does not provide for prior payment of taxes, to require it now would be tantamount to judicial legislation.  Third, a transitional input tax credit is not a tax refund per se but a tax credit and, logically, prior payment of taxes is not required before a taxpayer could avail of transitional input tax credit.  Fourth, as held in the 2009 FBDC case, if the intent of the law were to limit the input tax to cases where actual VAT was paid, it could have simply said that the tax base shall be the actual VAT paid.  Instead, the law as framed contemplates a situation where a transitional input tax credit is claimed even if there was no actual payment of VAT in the underlying transaction.  In such cases, the tax base used shall be the value of the beginning inventory of good, materials and supplies. In this regard, the majority ruled that RR 7-95, insofar as it restricts the definition of “goods” under Section 105 in relation to Section 100 of the old Tax Code (which includes “real properties held primarily for sale to customers or held for lease in the ordinary course of business”) and limits the transitional input tax credit to the value of the improvements of the real properties, is an administrative regulation that contravenes the law on which it is based and is hence a nullity.  Fifth, as held in Commissioner of Internal Revenue v. Central Luzon Drug Corp (496 Phil. 307 (2005):

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not.  On the contrary, for the existence or grant solely of such tax credit, neither a tax liability nor a prior tax payment is needed.  The Tax Code is replete with provisions granting or allowing tax credits even though no taxes have been previously paid (e.g., Tax Code Section 86(E) on estate taxes and Section 101(C) on donor’s taxes which allow tax credits for taxes paid to a foreign country, even if not made to our government; and Sections 110, 111(B), 112(A), 28(B)(5)(b), and 34(C)(3) in relation to Section 34(C)(7)(b) which allow a tax credit where no tax is actually paid prior to availment of the credit)

x x x

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws (e.g., Article 48 of PD 1789, as amended by BP 391) that grant or allow tax credits, even though no prior tax payments have been made.

x x x

Citing further the history of the transitional input tax credit, the majority dispels dissenter’s claim that the transitional input tax credit is integrally related to previously paid sales taxes since Congress has reenacted the transitional input tax credit several times, belying the absence of any relationship between such tax credit and the long-abolished sales taxes.  Section 105 states that the transitional input tax credit may be claimed by a newly-VAT registered person such as a starting enterprise. It is not always true that the acquisition of goods, materials and supplies by a new business entails the payment of taxes on its part.  For example, if the goods are not acquired from a person in the course of trade or business, the sale would be subject to capital gains tax, not VAT, and it is the seller who would shoulder the tax.  If acquired through donation, again it is not subject to VAT but to donor’s tax which the donor would be liable to pay.  If through succession, again the transfer would not be subject to VAT but liable instead for estate tax.  The interpretation proffered by the CTA and the dissenter would exclude goods which are acquired through the foregoing means from the beginning inventory on which the transitional input tax credit is based. Nothing in the Tax Code qualifies the previous payment of VAT or any other taxes on the goods as a prerequisite for inclusion in the beginning inventory.

Second, the dissenter argues that Section 110(B) of the Tax Code does not allow any cash refund of input VAT (which the decision of September 4, 2012 erroneously allowed), only a tax credit of the input VAT against output VAT, and any excess of the input VAT can only be carried over to the succeeding quarters until totally credited or used up.

The majority believes, as it had already held in the 2009 FBDC case, that, while Section 110 only provides for a tax credit, a taxpayer who excessively pays his output tax is entitled to recover the payments either as a tax credit or tax refund, and notes that both the 2009 FBDC decision and the September 4, 2012 decision did not outrightly direct the cash refund but instead directed the CIR to either refund the amount paid as output VAT or to issue a tax credit certificate.

Third, the dissenter claims that Section 112(A) of the Tax Code does not allow any cash refund or credit of transitional input tax even for zero-rated or effectively zero-rated taxpayers:

Sec. 112. Refunds or Tax Credits of Input Tax

(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, except transitional input tax, to the extent that such input tax has not been applied against output tax: xxx (Emphasis supplied)

Contrary to the dissent, the majority believes that Section 112 does not prohibit cash refund or tax credit of transitional input tax and that the phrase “except transitional input tax” was inserted not to exclude tax refunds or credits of transitional input tax but to distinguish transitional input tax from creditable input tax.  Transitional input tax credits are input taxes on a taxpayer’s beginning inventory and may only be availed of once by first-time VAT taxpayers.  On the other hand, creditable input taxes which are the subject of Section 112 are input taxes of VAT taxpayers in the course of their trade of business, which should be applied within two years after the close of the taxable quarter when the sales were made.

Fourth, the dissenter claims that the cash refund, not being supported by any prior actual tax payment, is unconstitutional since public funds will be used to pay for the refund which is for the exclusive benefit of petitioner, a private entity, contrary to Section 4(2) of the Government Auditing Code requiring that “government funds or property shall be spent or used solely for public purposes.”  Moreover, such refund without prior tax payment is an expenditure of public funds without an appropriation law.  Without any previous tax payment as source, a tax refund or credit will be paid out of the general funds of the government, a payment that requires an appropriation law.  The Tax Code, particularly its provisions on VAT, is a revenue measure, not an appropriation law.

The majority believes, however, that the grant of a refund or tax credit would not be unconstitutional and would not contravene the Government Auditing Code because it is precisely pursuant to Section 105 of the old Tax Code which allows a refund or tax credit.

In sum, the majority believes that adopting the arguments presented by the dissenter would result in the courts limiting the application or coverage of a law or imposing conditions not provided therein and that to do so would constitute judicial legislation.

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