(Article published in WEALTH magazine)
It my quick scan is correct, the Bureau of Internal Revenue got a terrible beating on its VAT cases with the Supreme Court decided in the second half of 2006. It won only one VAT case. The other three were won by the taxpayer. Since the VAT is second only to the Income Tax in terms of general application, it is worthwhile examining how its collection in the future is affected by the outcome of those four VAT cases.
The first VAT case decided from 01 June to 31 December last year resulted in a reminder to the Bureau to observe “justice and elementary requirements of fair play” in collecting taxes. Commissioner of Internal Revenue v. Benguet Corporation, G.R. No. 145559, promulgated July 14, 2006 centered on the question of whether the sale of gold to the Bangko Sentral (at the time relevant to the case known as the “Central Bank”) is considered under the value-added tax system as an export sale and therefore subject to the zero tax rate.
On 28 August 1988, then Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No. 378-88 declaring that sales of gold to the Central Bank was an export sale and thus zero-rated. Then, on 14 December 1988, then the said Deputy Commissioner further issued Revenue Memorandum Circular (RMC) No. 59-88 reiterating the rule in Ruling No. 378-88. Since then, the Bureau of Internal Revenue issued at least five rulings to the same effect.
Benguet Corporation, a domestic corporation engaged in mining, among other mine products, gold is a VAT-registered enterprise and was issued VAT-Registration No. 31-0-000027 on 01 Janaury 1988. It filed, prior to all these declarations by the BIR, an application for zero-rating of its mine products and the application was duly approved.
From 01 January 1988 to 31 July 1989, Benguet Corporation sold gold to the Central Bank and, accordingly, treated the sales as zero-rated. Then, it applied for tax credit for the input VAT credits attributable to such sales.
While the claims for tax credit were pending, the BIR changed its mind.
In Ruling No. 008-92, issued on 23 January 1992, BIR Commissioner Jose
U. Ong held that the sale of gold to the Central Bank was, instead of
export sale, a domestic sale subject to the VAT, then at 10%. It
further issued Ruling No. 59-92 on 28 April 1992 giving retroactive
application to Ruling No. 008-92, claiming that such retroactive
application did not prejudice the taxpayers who, anyway, could deduct
their input tax against their output taxes on their sales to the
Central Bank as well as on other VAT sales.
While the claims for tax credit were pending, the BIR changed its mind. In Ruling No. 008-92, issued on 23 January 1992, BIR Commissioner Jose U. Ong held that the sale of gold to the Central Bank was, instead of export sale, a domestic sale subject to the VAT, then at 10%. It further issued Ruling No. 59-92 on 28 April 1992 giving retroactive application to Ruling No. 008-92, claiming that such retroactive application did not prejudice the taxpayers who, anyway, could deduct their input tax against their output taxes on their sales to the Central Bank as well as on other VAT sales.
The BIR’s excuse for retroacting its ruling did not sit well with the Supreme Court. The Supreme Court did not agree that the retroactive application of Ruling No. 008-92 was not prejudicial to the taxpayer. It noted that Benguet Corporation was in fact not been able to pass on the input taxes to the Central Bank on reliance of the then current BIR rulings and the other means of recovery suggested by the BIR were neither practical nor available.
What is striking in this decision is the Supreme Court’s clear statement that “to retroact a later ruling-AT Ruling NO. 008-92—revoking the grant of zero-rating status to the sales of gold to the CB and applying a new and contrary position that such sales are now subject to 10% is clearly inconsistent with justice and elementary requirements of fair play.”
The reminder to the Bureau to observe justice and elementary fair play in Benguet turned into an outright correction of the Bureau’s understanding of the VAT law. In Commissioner of Internal Revenue v. Magsaysay Lines, Inc., G.R. No. 146984, promulgated July 28, 2006, the Supreme Court gave the Bureau a walk-through of the basics of the VAT.
The transaction in question was the sale of the vessels owned by the National Development Company to Magsaysay Lines.
At issue was whether the mere fact that such a transaction was one of those “deemed sales” under the VAT law would make it subject to the VAT. The Bureau of Internal Revenue, among the other arguments it offered to defend its denial of the claim for refund of Magsaysay Lines, effectively said, “yes”. The Supreme Court disagreed.
In a pronouncement of far- reaching importance, the Supreme Court reminded the Bureau that the “VAT is not a singular-minded tax on every transactional level. Its assessment bear direct relevance to the taxpayer’s role or link in the production chain. Hence…the tax is levied only on the sale, barter, exchange of goods or services by persons who engage in such activities, in the course of trade or business. (Bold is the Court’s). These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arising in the first place only through the ordinary course of trade or business.”
In other words, for purposes of the VAT, the transaction should first be determined to be in the ordinary course of trade or business before there is a need to ask whether it is deemed a sale or not. Just because a transaction is “deemed a sale” does not necessarily mean that the sale is subject to the VAT. The BIR was in effect told that it did not understand the fundamental character of the VAT.
The third lost case was an undisguised rebuke. In Commissioner of Internal Revenue v. Mirant Pagbilao Corporation, G.R. No. 159593, promulgated October 12, 2006, said:
“It should be emphasized that the BIR Commissioner is invoking a suspension of the general rules of procedure or an exception thereto, thus, it is incumbent upon him to present sufficient cause or justifiable circumstance that would qualify his case for such a suspension or exception. That this Court had previously allowed in another case such a suspension of or exception to technical or procedural rules does not necessarily mean that the same shall be allowed in the present case. The BIR Commissioner has the burden of persuading this Court that the same causes or circumstances that justified the suspension of or exception to the technical or procedural rules in other cases are also present in the case at bar.”
What elicited the Supreme Court’s stern rebuke was the Bureau’s change of theory. At the Court of Tax Appeals, the Bureau resisted a claim for refund by Mirant of input VAT by raising what the Supreme Court observed to be “general and standard arguments used by the BIR to oppose any claim by a taxpayer for refund. The Answer did not posit any allegation or contention that would defeat the particular claim for refund” of Mirant.
Thus, at the Court of Tax Appeals, the Commissioner admitted that Mirant was a VAT registered taxpayer but imposed on it the burden of proving its right to the refund. But, on appeal, the Bureau in effect denied that Mirant was subject to the VAT and asserted that it was subject to the franchise tax, instead. The change of theory went into the substance of the case, hence, the rebuke.
But, as stated earlier, the Bureau won one VAT case. That is Commissioner of Internal Revenue v. Philippine Global Communications, Inc., G.R. No. 144696, promulgated on August 16, 2006. The issue was whether the taxpayer, which was undoubtedly a telecommunications company operating under a franchise, subject to the franchise tax under Section 117(b) of Presidential Decree No. 1158, which imposed a three percent (3%) tax on telecommunications companies, during the suspension of the enforcement or implementation of the Expanded Value Added Tax law, R.A. No. 7616.
As a franchisee, the taxpayer was clearly subject initially to the franchise tax imposed by Section 117(b). However, that section was amended by Section 12 of R.A. No. 7616 with an omission of the payment of the 3% tax imposed on telecommunications companies. The clear implication was that they would instead be subject to the expanded VAT.
However, the Supreme Court, in the case of Tolentino v. Secretary of Finance et al., G.R. No. 115455, issued a temporary restraining order on the expanded VAT’s implementation. The taxpayer wanted to have its cake and eat it too: it argued that its obligation to pay the franchise tax ceased when R.A. No. 7616 became law on May 28, 1994 but its obligation as a VAT taxpayer instead was not effective during life of the temporary restraining order.
The Supreme Court, obviously could not tolerate a theory that would make the taxpayer immune from paying both the franchise tax and the VAT during the period when it was considering the new law. It accepted the view of the Bureau that, in the interim, the taxpayer had to pay the old franchise tax. Said the court: “To grant a refund of the franchise tax it paid prior to the effectivity and implementation of the VAT would grant a vacuum and thereby deprive the government from collecting either the VAT or the franchise tax.”
Three losses to one win. Not bad, actually, for a government agency that is publicly contesting what its mother unit says should be its collection target.