ANSWERS TO 2017 TAXATION BAR QUESTIONS ON VAT

SUBMITTED BY:
NULUD, RODNEY
PIDO, ELEASAR
PUGONG, HARVEY

NO. I
Question: SMZ, Inc., is a VAT-registered enterprise engaged in the general construction
business. HP International contracts the services of SMZ, Inc. to construct HP
Internationals factory building located in the Laguna Techno Park, a special economic
zone. HP lnternational is registered with the 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., les an application with the Bureau of lnternal Revenue (BIR) for the VAT
zero-rating of its sale of services to HP International. However, the BIR denies SMZ,
lnc.s application on the ground that HP international already enjoys income tax holiday.

Is the BIR correct in denying SMZ, lnc.s application? Explain your answer. (6%)

Answer: NO, the BIR is not correct in denying the application.

The BIR cannot deny the application for VAT zero-rating because the sale made by
SMZ to HP is an export sale which is a zero-rated transaction, HP is a PEZA registered
entity considered as separate custom territory by fiction of law.

In CIR v. Seagate Technology1, the Supreme Court ruled that sales made by a VAT-
registered person in the customs territory to a PEZA-registered entity are considered
exports to a foreign country; conversely, sales by a PEZA registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country.

Such doctrine was revisited in the case of Toshiba Information Equipment, Inc. v. CIR2
where any sale by a supplier from the Customs Territory to a PEZA-registered
enterprise as export sale, shall not be burdened by output VAT, as such was
established with the issuance of RMC No. 74-99 in October 15, 1999. However prior to
RMC No. 74-99, a PEZA-registered enterprise to be considered exempt or subject to
VAT would depend on the type of fiscal incentives the said enterprise availed of.

The old rule or prior to October 15, 1999 does not consider the application of the
Cross Border Doctrine which is essential to the VAT system or the fiction of the
ECOZONE as a foreign territory. The rationale for non-application is that it relied on
the choice of fiscal incentives of the PEZA registered enterprise. For emphasis, under
the old VAT rule for PEZA-registered enterprises was based on their choice of fiscal
incentives:

1 CIR v. Seagate Technology G.R. No. 153866; February 11, 2005

2 Toshiba Information Equipment Inc. v CIR G.R. No. 157594; March 9,2010
 (1) If the PEZA-registered enterprise chose the five percent (5%) preferential tax
on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as
amended, then it would be VAT-exempt;
(2) If the PEZA-registered enterprise availed of the income tax holiday under
Exec. Order No. 226, as amended, it shall be subject to VAT at ten percent
(10%).

Such distinction was abolished by RMC No. 74-99, which categorically declared that
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 latters type or class of PEZA registration; and, thus,
affirming the nature of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt
entity.[60]

Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-

registered firms automatically qualify as zero-rated without seeking prior approval
from the BIR effective October 1999.
Thus a taxpayer who is a PEZA-registered enterprise which previously availed of the
income tax holiday can claim VAT credit provided
a. The taxpayer-claimant is VAT-registered;
b. Purchases are evidenced by VAT invoices or receipts, whichever is
applicable, with shifted VAT to the purchaser prior to the implementation of
RMC No. 74-99; and
c. The supplier issues a sworn statement under penalties of perjury that it
shifted the VAT and declared the sales to the PEZA-registered purchaser as
taxable sales in its VAT returns.

For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for
input VAT by PEZA-registered companies, regardless of the type or class of PEZA-
registration, should be denied.

As to the contention of the CIR, that the application must be denied because HP
International already enjoys tax holiday, such lacks merit because the tax holiday only
exempts the latter from income tax but not from other taxes such as VAT. As such
SMZ, Inc. becomes liable for output VAT on its export sales with HP International, but
at a zero percent (0%) rate, and entitling it to the credit/refund of the input VAT paid
on its purchases of goods and services relative to such zero-rated export sales

Therefore SMZ, Inc. can validly apply for VAT zero-rating of its sale of services because
it is engaged in export sale which is zero-rated transaction.
 NO. V.
Question: 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%)

Answer: YES, the claim for VAT refund is timely filed.

Pursuant to Section 112 of the NIRC, the period to file for refund of unutilized input
VAT must be made 2 years from the close of the taxable quarter when the sales were
made. The period when the CIR shall act on the claim shall be 120 days from the time
the same is filed. As to a Judicial claim for refund, the period for filing must be within
30 days either from a) the receipt of the CIR decision, if made within the 120-day
period or b) from the expiration of the 120-day period, if no decision is made within
the 120-day period.

The said 120-day period is also covered by the two-year prescriptive period to file a
claim for refund or tax credit, as specified in Section 112(A) of the same Code. Section
112(C) provides that the CIR shall the application for refund shall be considered filed
upon submission of complete documents in support of the application.

In the case at bar the application for refund was timely filed because it was made
within 2 years from the close of the taxable quarter when the sales were made. As to
the Administrative claim for refund the inaction of the Commissioner of Internal
Revenue is treated as a denial after the lapse of the 120 day period for the CIR to act
upon the claim.

Administrative claim was filed on March 30, 2016

- End of first quarter of 2014- march 31
- End of second quarter of 2014- june 30
- End of third quarter of 2014- September 30
- End of third quarter of 2014- December 31

In the case of CIR v. Team Sual Corporation (formerly Mirant) 3 it was discussed that a
taxpayer-claimant may seek judicial redress for refund on excess or unutilized input
VAT attributable to zero-rated sales or effectively zero-rated sales with the Court of Tax
Appeals either within thirty (30) days from receipt of the denial of its claim for
refund/tax credit, or after the lapse of the one hundred twenty (120)-day period in the
event of inaction by the Commissioner; provided that both administrative and judicial
remedies must be undertaken within the two (2)-year period from the close of the
taxable quarter when the relevant sales were made. If the two-year period is about to

3 CIR v. Team Sual Corporation G.R. No. 194105; February 5, 2014

lapse, but the BIR has not yet acted on the application for refund, the taxpayer should
file a Petition for Review with this Court within the two year period. Otherwise, the
refund claim for unutilized input value added tax attributable to zero-rated sales or
effectively zero-rated sales is time-barred.

The charter of the CTA expressly provides that if the Commissioner fails to decide
within "a specific period" required by law, such "inaction shall be deemed a denial" of
the application for tax refund or credit. It is the Commissioner's decision, or inaction
"deemed a denial," that the taxpayer can take to the CTA for review. Without a
decision or an "inaction x x x deemed a denial" of the Commissioner, the CTA has no
jurisdiction over a petition for review.4

Alternate Answer: NO, the claim for VAT refund is prematurely filed.

If the judicial claim for refund was filed prior to the lapse of the 120-day period the
claim for VAT refund must be denied for being prematurely filed.

Pursuant to the charter of the CTA it expressly provides that its jurisdiction is to
review on appeal "decisions of the Commissioner of Internal Revenue in cases
involving refunds of internal revenue taxes." When a taxpayer prematurely files a
judicial claim for tax refund or credit with the CTA without waiting for the decision of
the Commissioner, there is no "decision" of the Commissioner to review and thus the
CTA as a court of special jurisdiction has no jurisdiction over the appeal.

In the case of CIR v. San Roque Power Corporation5, emphasis was made that the 120-
day period that is given to the CIR within which to decide claims for refund/tax credit
of unutilized input VAT is mandatory and jurisdictional. A taxpayer-claimant must
wait for the 120-day period to lapse, before a petition for review may be filed with the
CTA, otherwise the petition would be premature and without a cause of action.

Failure to comply with the 120-day waiting period violates a mandatory provision of
law. It violates the doctrine of exhaustion of administrative remedies and renders the
petition premature and thus without a cause of action, with the effect that the CTA
does not acquire jurisdiction over the taxpayer's petition.

4 CIR v. Team Sual Corporation G.R. No. 194105; February 5, 2014

5 CIR v. San Roque G.R. No. 180345; November 25,2009.
 NO. XII
Question: 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%)

Answer: YES.

It is subject to VAT because it is a sale of an ordinary asset in ordinary course of

business.
As provided for by RR 7-2003 Section 2(b) Ordinary assets shall refer to all real
properties specifically excluded from the definition of capital assets under Sec. 39(A)
(1) of the Code, namely:
1. Real property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business; or
2. Real property used in trade or business (i.e., buildings and/or improvements)
of a character which is subject to the allowance for depreciation provided for
under Sec. 34(F) of the Code; 6

In the case at bar Data Realty Inc. is a corporation engaged in the sale of real-estate.
As such a sale of a condominium is treated as a sale of ordinary assets because it is
done in the ordinary course of business and subject to VAT.

The transaction is also subject to Documentary Stamp tax.

The documentary stamp tax is an excise tax levied on documents, instruments, loan
agreements and papers evidencing the acceptance, assignment, sale or transfer of an
obligation, rights, or property incident thereto. Pursuant to Section 196 of the NIRC,
documentary stamp tax shall be collected on deeds of sale and conveyance of real
property.7

The amount of tax is either fixed or based on the par or face value of the document or
instrument. In the case of the sale of real estate properties, the rate shall be 1.5%
based on the highest among the (1)selling price, (2)Bureau of Internal Revenue (BIR)
zonal value, and (3)assessed value by the provincial/city assessor.

6
RR 7-2003
7
Section 196 of the NIRC
 b. Would your answer be the same if the property was sold by a bank in a
foreclosure sale? Explain your answer. (3%)

Answer: NO.

For a transaction to be subject to Value Added Tax there must be a sale, barter,
exchange of real property in the ordinary course of trade or business. Under RR 7-
2003, the following are considered as ordinary assets:

1. Stock in trade of a taxpayer or other real property of a kind which would

properly be included in the inventory of the taxpayer if on hand at the close of
the taxable year; or

2. Real property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business; or

3. Real property used in trade or business (i.e., buildings and/or improvements) of

a character which is subject to the allowance for depreciation provided for
under Sec. 34(F) of the Code; or

4. Real property used in trade or business of the taxpayer

Although the property was considered as ordinary asset by the bank, however the sale
was not in the ordinary course of business since the bank is not considered as
engaged in real estate business.

Under the same regulation, section 3 thereof provides for the taxpayers engaged in
real estate business, who are: Real Estate Dealer, Real Estate Developer, Real Estate
Lessor, Taxpayers habitually engaged in the real estate business. In this case since the
bank is considered as not engage in real estate business then the foreclosed property
cannot be subject to Value Added Tax because it was not made in the ordinary course
of business.

Further, section 2(b) (4) of the regulation provides that Real properties acquired by
banks through foreclosure sales are considered as their ordinary assets. However,
banks shall not be considered as habitually engaged in the real estate business for
purposes of determining the applicable rate of withholding tax imposed under Sec.
2.57.2(J) of Revenue Regulations No. 2-98, as amended.