CIR vs. Toshiba Information Equipment GR No. 150154 dated August 9, 2005
The phrases “Automatic zero-rate” and “Effectively zero-rate”, are not expressly stated in the case,
however, it was impliedly discussed by the Court. Below are notes lifted from the internet.
Notes:
Automatic zero-rate vs. Effectively zero-rate
Automatically zero-rated sale
- refers to a sale of goods, properties, and services to freeport zone – registered enterprise (or
economic – zone enterprise by a VAT – registered seller/supplier that is regarded as either an
export sale or a foreign currency denominated sale under Section 106 of the Tax Code of 1997.
-
The tax rate is set at zero. When applied to the tax base, such rate obviously results in no
tax chargeable against the purchaser. The seller of such transactions charges no output
tax, but can claim a refund of or a tax credit certificate for the value- added tax (VAT)
previously charged by suppliers. (G.R. No. 153866. February 11, 2005)
Effective zero-rated sale
- Effectively zero-rated sales shall only apply to sales of goods and services rendered to persons or
entities who have direct and indirect tax exemption granted pursuant to special laws or international
agreements to which the Philippines is a signatory.
-
Effectively subjects such transactions to a zero rate. Again, as applied to the tax base, such
rate does not yield any tax chargeable against the purchaser. The seller who charges zero
output tax on such transactions can also claim a refund of or a tax credit certificate for the
VAT previously charged by suppliers. (G.R. No. 153866. February 11, 2005)
Brief Facts:
The case stemmed from the tax refund/tax credit filed by respondent Toshiba Information Equipment
(Phils.),Inc. (Toshiba) for its unutilized input VAT in the amount of P19,338,422.07 from the first and second
quarters of 1996. Upon evaluation, the Court of Tax Appeals (CTA) ordered CIR to refund or issue a tax
credit certificate to Toshiba in the amount of P16,188,045.44, the decision was subsequently affirmed by
the Court of Appeals (CA) which constrained the petitioner Commissioner of Internal Revenue (CIR) to file
a Petition for Review under Rule 45 with the Supreme Court, seeking to overturn the decision, arguing,
among others, that the Court of Appeals erred in holding that respondent is entitled to a refund or tax credit
of input taxes it paid on zero-rated transactions.
Facts:
The Commissioner of Internal Revenue (CIR) filed a Petition for Review under Rule 45, seeking to overturn
the Court of Appeals' decision in CA-G.R. SP No. 59106. The appellate court had affirmed the CTA ruling,
which ordered CIR to refund or issue a tax credit certificate to Toshiba Information Equipment (Phils.), Inc.
amounting to P16,188,045.44 for unutilized input VAT from the first and second quarters of 1996.
Respondent Toshiba, a domestic corporation, was registered with the Securities and Exchange
Commission (SEC) in 1995 and later with the Philippine Economic Zone Authority (PEZA) as an Ecozone
Export Enterprise. [It is important to note herein that respondent Toshiba is located within an
ECOZONE]. Toshiba was also registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer
Toshiba filed VAT returns for first and second quarters of 1996, reporting total input VAT of P18,247,303.94,
which remained unutilized as it had no output VAT liability.
In March 1998, Toshiba applied for a tax refund or credit amounting to P19,338,422.07, later filing a Petition
for Review with the CTA to stop the two-year prescriptive period
The CTA ruled in favor of Toshiba, ordering CIR to refund or issue a tax credit certificate for P16,188,045.44.
The Court of Appeals upheld the CTA decision, rejecting CIR’s petition. Hence, the present petition with
the Supreme Court wherein one of the contentions of the CIR was that the appellate court wrongly ruled
that Toshiba was entitled to a refund for zero-rated transactions.
In its Petition, petitioner CIR opposed the grant of tax credit/refund to respondent Toshiba,
reasoning thus:
In the first place, respondent could not have paid input taxes on its purchases of goods and services
from VAT-registered suppliers because such purchases being zero-rated, that is, no output tax was
paid by the suppliers, no input tax was shifted or passed on to respondent. The VAT 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 (Section 105, 1997 Tax Code).
Thus, it essentially argued that, if the VAT-registered supplier from the Customs Territory did not charge
any output VAT to respondent Toshiba believing that it is exempt from VAT or it is subject to zero-rated
VAT, then respondent Toshiba did not pay any input VAT on its purchase of capital goods and it could not
claim any tax credit/refund thereof.
Issue:
Whether or not Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods
and service – YES.
Whether or not any output VAT was actually passed on to respondent Toshiba which it could claim
as input VAT subject to credit/refund.
Ruling:
Yes. Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods
and service.
It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from
VAT-exempt entities. Section 103(q) of the Tax Code of 1977, as amended, relied upon by
petitioner CIR, relates to VAT-exempt transactions. These are transactions exempted from VAT
by special laws or international agreements to which the Philippines is a signatory. Since
such transactions are not subject to VAT, the sellers cannot pass on any output VAT to the
purchasers of goods, properties, or services, and they may not claim tax credit/refund of
the input VAT they had paid thereon.
Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of
respondent Toshiba because although the said section recognizes that transactions
covered by special laws may be exempt from VAT, the very same section provides that
those falling under Presidential Decree No. 66 are not. Presidential Decree No. 66, creating
the Export Processing Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as amended,
under which the EPZA evolved into the PEZA.
The Court agrees, however, that PEZA-registered enterprises, which would necessarily be located
within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as
amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered
enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes
the fiction that ECOZONES are foreign territory.
It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or a
Special Economic Zone has been described as —
The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall
be referred to as the Customs Territory.
ECOZONE is a foreign territory.
As a result:
-
Sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be
treated as an exportation from the Customs Territory.
-
Conversely, Sales made by a supplier from the ECOZONE to a purchaser in the Customs
Territory shall be considered as an importation into the Customs Territory.
Given the preceding discussion, what would be the VAT implication of sales made by a supplier from the
Customs Territory to an ECOZONE enterprise?
The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined for consumption outside of the territorial border of
the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country
must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed
with ten percent (10%) VAT [12% now].
Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT exempt entity.
The VAT treatment of sales to it, however, varies depending on whether the supplier from the
Customs Territory is VAT-registered or not.
Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-registered
supplier, they shall be subject to VAT at zero percent (0%).
In zero-rated transactions, the VAT-registered supplier shall not pass on any output VAT to the
ECOZONE enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input
VAT attributable to such sales.
Zero-rating of export sales primarily intends to benefit the exporter (i.e.,the supplier from the Customs
Territory),who is directly and legally liable for the VAT, making it internationally competitive by allowing it to
credit/refund the input VAT attributable to its export sales.
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only
be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.
Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-exempt
entity that could not have engaged in a VAT-taxable business, the Court still believes, given the
particular circumstances of the present case, that it is entitled to a credit/refund of its input VAT.