CTA CASES DECEMBER 2009

Refund of input VAT on capital goods

For purposes of claiming refund or issuance of tax credit of unutilized input VAT
arising from purchases of capital goods, the goods and services purchased by the
taxpayer must fall under the definition of capital goods or properties. Under
Section 4.106-1(b) of RR 07-95, the term capital goods or properties is defined as
goods or properties with estimated useful life greater than one year and which are
treated as depreciable assets under Section 29(f), used directly or indirectly in the
production or sale of taxable goods or services.
The Supreme Court (SC) upheld the regulations when it laid down the following
requisites for purchases of goods and services to be considered as capital goods or
properties: (a) useful life of goods or properties must exceed one year; (b) the
goods or properties are treated as depreciable asset; (c) the goods or properties
must be used directly or indirectly in the production or sale of taxable goods and
services.
To support its claim that the goods and services purchased qualify as capital goods,
the taxpayer submitted its account vouchers, which listed the goods purchased
under inventory accounts. The taxpayers senior accountant also testified that the
subject goods and services were treated as capital goods in the general ledger and
accounting records. The SC held that the account vouchers presented by the
taxpayer confirm that the purchases are held as inventory items but not as capital
goods since they were recorded under inventory accounts, instead of depreciable
assets accounts.
Moreover, as explained by the SC, a general ledger is a record of a business entitys
accounts, which make up its financial statements. The information contained in the
general ledger is gathered from source documents such as account vouchers,
purchase orders and sales invoices. In case of variance between the source
documents and the general ledger, the former is preferred. Hence, for failure to
establish that the goods and services it purchased are classified as capital goods,
the taxpayers claim for refund of unutilized input VAT was denied. (Kepco
Philippines Corporation v. Commissioner of Internal Revenue, GR No. 179356,
December 14, 2009)
VAT refund on zero-rated sales involving offsetting arrangements
In claims for refund or issuance of tax credit certificate of unutilized excess input
VAT on purchase of goods and services directly attributable and/or allocable to a
taxpayers zero-rated sale, the taxpayer-refund claimant must prove, among others,
that its sales of goods and services qualify for VAT zero rating.
In the case of export sales that are paid for in acceptable foreign currency and
accounted for in accordance with the rules of the BSP, Section 106(A)(2)(a)(1) of the
Tax Code in relation to Section 4.108-1 of RR 7-95 requires the presentation of at
least three types of documents to prove that the export sales qualify for VAT zero
rating, to wit: (a) sales invoice as proof of sales of goods; (b) export declaration and
bill of lading as proof of actual shipment of goods from the Philippines to a foreign
country; (c) bank credit advice, certificate of bank remittance or any other

document proving payment for the goods in acceptable foreign currency or its
equivalent in goods and services.
However, in case the proceeds of export sales are partially offset against the
payable to a foreign parent or affiliated company, and partially inwardly remitted
and accounted for in accordance with rules and regulations of the BSP, the Court of
Tax Appeals (CTA) noted that it is not enough for the taxpayer to submit bank credit
advices, bank statements and mutual account ledgers for its export sales to qualify
for VAT zero rating. As held by the CTA, the taxpayer should comply with the
documents required in offsetting arrangements as prescribed under Revenue
Memorandum Circular No. 42-03, to wit: (a) import documents that create liability
accounts in favor of the foreign parent or affiliated company; (b) other contracts
with the foreign or affiliated company that brought about the liabilities, which are
offset against receivables from export sales; (c) evidence of proceeds of loans, in
case the claimant received loans or advances from the foreign company; (d)
documents or correspondence on the offsetting arrangement; and (e) confirmation
of the offsetting arrangements by the heads of the business organizations.
Thus, in the absence of proof showing how much of a taxpayers export sales are
offset against its payable to its parent company and how much of its export
proceeds are inwardly remitted and accounted for in accordance with the BSP rules
and regulations, its export sales cannot be classified as zero-rated sales. Hence, its
claim for refund or issuance of TCC on its unutilized input VAT on its alleged export
sales is denied. (Marubeni Philippines Corporation v. Commissioner of Internal
Revenue, CTA Case No. 7223, December 15, 2009)
Excise tax on rubbing alcohol
A rubbing alcohol containing 70 percent ethyl alcohol by volume, which is
manufactured using denatured alcohol as its chief ingredient, is exempt from excise
tax imposed under Section 141 of the Tax Code. Section 141 subjects to excise tax
medicinal preparations that use distilled spirits as chief ingredient. The term spirits
or distilled spirits is defined as the substance known as ethyl alcohol, ethanol or
spirits of wine, including all dilutions, purifications and mixtures thereof, from
whatever source, by whatever process produced.
In the preparation of the rubbing alcohol, denatured alcohol (ethyl alcohol mixed
with methyl salicylate and menthol as denaturants) was used as a raw material/
chief ingredient. Hence, the BIR classified the rubbing alcohol as a medicinal
preparation subject to excise tax under Section 141 of the Tax Code. However, the
CTA held that pursuant to Section 134 of the Tax Code, domestic denatured alcohol,
when suitably denatured and rendered unfit for oral intake, is exempt from excise
tax prescribed under Section 141 of the Tax Code. According to the CTA, the
classification of denatured alcohol is distinct from ethyl alcohol, whether diluted,
purified and mixed thereof, from whatever source, and by whatever process
produced. Thus, it is only when the denatured alcohol is reprocessed to make it fit
for oral intake does the same become subject to excise tax. (International
Pharmaceuticals, Inc. v. BIR Commissioner Lilian Hefti and Elvira Vera, Head
Revenue Executive Assistant LTS Excise Large Taxpayers, CTA Case No. 7736,
December 11, 2009)

RPT on GSIS properties

The Government Service Insurance System (GSIS) is liable for the real property tax
(RPT) on its properties from 1992 when the Local Government Code (LGC) took
effect and withdrew the tax exemption privileges including the RPT exemption of
GSIS under Presidential Decree No. 1146 up to 1996, upon the restoration of its
taxexempt status by virtue of passage into law of Republic Act (RA) 8291, which reenacted the tax exemption clause proviso under Section 33 of PD 1146.
The SC held that RA 7160 or the LGC of 1991 withdrew the full tax exemption
granted to GSIS under PD 1146. This was, however, restored by RA 8291 in 1997.
Thus, according to the SC, GSIS should only be made liable to the RPT from 1992 to
1996. The SC ruled that although GSIS is subject to RPT for said period, there is a
specific condoning proviso under Section 39 of RA 8291 that rendered its RPT
assessments paid. Said Section 39 of RA 8291 provides that any assessment
against the GSIS as of the approval of this Act are hereby considered paid.
Moreover, the SC held that GSIS does not qualify as a government-owned and
-controlled corporation (GOCC) but instead should be considered as an
instrumentality of the government, and is thus outside the purview of local taxation
under Section 133 of the LGC of 1991. Unless otherwise provided, local
governments cannot tax national government instrumentalities. According to the
SC, GSIS is not a GOCC following the ruling in the case of Manila International
Airport Authority (MIAA) v. City of Paranaque (GR 155650, July 20, 2006), since the
GSIS is not organized as a stock corporation, its capital is not divided into shares,
and it has no members (not the compulsory members who are government
employees) who, under Section 87 of the Corporation Code, make up the non-stock
corporation.
As regards the GSIS property that was leased to a private entity, the SC held that
the leased property is subject to RPT pursuant to the beneficial use principle
under Section 234(a) of the LGC of 1991. The SC noted that while the LGC exempts
from real estate taxes the real property owned by the Republic, the same will be
subject to RPT if the beneficial use of the property is, for consideration, transferred
to a taxable person. The SC declared that the taxable person who had actual or
beneficial use and possession of the property, regardless of whether or not he is the
owner, should pay the accrued real estate tax.
Notwithstanding the real estate delinquency, however, the SC held that the GSIS
properties cannot be the subject of a levy to answer for real estate tax deficiencies
because of Section 39 of RA 8291, which exempts the funds and/or properties of the
GSIS from attachment, garnishment, execution or levy or other processes issued by
the courts, quasijudicial agencies or administrative bodies. Hence, the LGU has to
satisfy its tax claim by serving the accrued realty tax assessment on the beneficial
user of the property and, in case of nonpayment, through means other than the sale
of the property at a public auction. (Government Service Insurance System v. City
Treasurer and City Assessor of the City of Manila, GR No. 186242, December 23,
2009)
Due process in the cancellation of PEZA registration

In administrative proceedings such as the cancellation of the registration of a PEZAregistered enterprise by the PEZA Board for violations of implementing rules and
regulations of the PEZA law, due process means the opportunity to explain ones
side and to seek reconsideration of the action or ruling. According to the SC, there is
due process when the PEZA Board informs the PEZA company of its unaccounted
importation of used clothing and instructs it to submit its explanation, which results
in the conduct of a special audit by the PEZA. Subsequently, the company was
informed of the PEZA Boards decision to cancel its registration on the basis of its
assessment of the evidence.
The PEZA company appealed the PEZA Board decision with the Office of the
President (OP), which denied the appeal. The PEZA company then filed an appeal
with the Court of Appeals (CA), which ruled in its favor. According to the CA, the
PEZA Board should have conducted interrogations and inquiries to give the PEZA
company the opportunity to defend itself from any charge directed at it. The SC held
that the primary authority to conduct inquiries and fact-finding investigations is
bestowed upon the office of the PEZA Director General simply because no
complaint, protest or claim can be properly addressed, and neither can any
reasonable recommendation to the PEZA Board be made by the PEZA Director
General without conducting any such inquiry or fact-finding. The SC further averred
that while nothing prohibits the PEZA Board from conducting its own inquiry on
matters brought before it, it does not mean that the absence of such inquiry by the
Board is a denial of due process on the part of the entity being investigated.
Moreover, the SC ruled that any defect in the proceedings before the PEZA Board
was cured when the PEZA company appealed its case before the Office of the
President (OP). The fact that the company was able to move for reconsideration of
the decision of the PEZA Board and of the adverse decision of the OP cured any
seeming defect in the observance of due process. Thus, denial of due process
cannot be invoked by the PEZA company. (PEZA v. Pearl City Manufacturing
Corporation, GR 168668, December 16, 2009)

CTA CASES JANUARY 2010

Period to appeal an assessment at the CTA
Under Section 228 of the Tax Code, a taxpayer who is adversely affected by the
decision of or inaction by the BIR on its protest to an assessment may appeal to the
Court of Tax Appeals (CTA) within 30 days from receipt of the decision or from the
lapse of the 180-day period. Otherwise, the decision shall become final, executory
and demandable.
In the instant case, the taxpayer received a final decision on disputed assessment
(FDDA), which denied the administrative protest filed by the taxpayer with regard to
the final assessment notice issued by the BIR. However, instead of appealing the
assessment to the CTA within 30 days from receipt of the FDDA, the taxpayer filed
with the BIR a motion for reconsideration of the denial of the administrative protest.
The taxpayer only went to the CTA after the BIR issued a collection letter
demanding payment of its deficiency tax assessments.
According to the CTA, the filing of a motion for reconsideration of denial of the
administrative protest (FDDA) does not toll the 30-day period granted to taxpayers

to appeal the decision to the CTA. Hence, the CTA held that the petition for review
was filed out of time since it was filed after 30 days from the denial by the BIR of its
protest by FDDA. (Fishwealth Canning Corporation v. Commissioner of Internal
Revenue, GR 179343, January 21, 2010)
No FWT on interest paid on cooperative members deposits
The SC ruled that cooperatives are not required to withhold the 20% final
withholding tax (FWT) on the interest income paid on savings and time deposits of
their members. This reversed the earlier decision by the CTA and the CTA en banc,
which held that the interest income paid by cooperatives falls under the phrase
similar arrangements under Section 24(B)(1) of the NIRC, and thus, should be
subjected to 20% FWT.
The Supreme Court (SC) affirmed the interpretation by the BIR in its previous rulings
that the 20% FWT under Section 24(B)(1) and Section 27(D)(1) covers only interest
income from currency bank deposits and deposit substitutes. Since cooperatives are
not banks, they are not required to impose the 20% FWT on interest paid on the
savings and time deposits of their members. The SC acknowledged that similar
interpretation by the BIR in earlier rulings is in perfect harmony with the
Constitution and existing laws.
Moreover, the SC held that the legislative intent to give cooperatives preferential
tax treatment is apparent under Articles 61 and 62 of Republic Act (RA) 6938
(Cooperative Code of the Philippines). This exemption, according to the SC, should
likewise extend to the members of the cooperative pursuant to Article 126 of RA
6938.
The SC also pointed out that the tax exemption provision has been retained under
Article 61 of the amended cooperative code, RA 9520 (The Philippine Cooperative
Code of 2008), with an expressed clarification that members of cooperatives are not
subject to final taxes on their deposits. This affirms the interpretation of earlier BIR
rulings that Section 24(B)(1) of the Tax Code does not apply to cooperatives and
confirms that such rulings carry out the legislative intent. (Dumaguete Cathedral
Credit Cooperative v. Commissioner of Internal Revenue, GR 182722, January 22,
2010)
Waiver of penalty on late payment due to stay order
A company under rehabilitation that is unable to pay its withholding tax liabilities
within the due date cannot be held liable for the surcharges, interests and
compromise penalties if the late payment is due to the stay order, which legally
restrains the company from making any disbursements of its funds without the
approval of the court-appointed rehabilitation receiver.
The CTA ruled that under a stay order, the restriction covers the liability of the
company to remit taxes withheld, even if the taxes withheld are merely held in trust
and should not be considered under the category of claim or liability covered by the
stay order. According to the CTA, even if the relationship is one of trust, there is no
provision in the Interim Rules of Procedure on Corporate Rehabilitation of 2000 that
a claim arising from a trust relationship is excluded from the stay order. Hence, the
CTA ruled that the company should not be made liable for the surcharge, interest

and compromise penalties for late payment of its creditable withholding taxes.
(Commissioner of Internal Revenue v. Pacific Plans, Inc., CTA EB 502, January 6,
2010)
Waiver of irrevocability rule for dissolving corporations
Under Section 76 of the Tax Code, once the taxpayer has exercised the option to
carry over and apply its excess quarter income tax against its income tax due for
the taxable quarters of the succeeding taxable years, such option is irrevocable for
that taxable year and no application for cash refund or issuance of a tax credit
certificate shall be allowed. However, where the corporation permanently ceases its
operation before full utilization of the tax credits that it opted to carry over, such
corporation may then be allowed to claim the refund of its remaining excess tax
credits provided that it files its administrative and judicial claim for refund two years
from the filing of the final adjustment return. In such a case, the irrevocability rule
ceases to apply.
Accordingly, in order to exclude the company from the application of the
irrevocability rule and therefore allow it to refund its remaining tax credits, the CTA
requires that the company show it has indeed ceased its operations. It must thus
amend its articles of incorporation to shorten its corporate term pursuant to the
Corporation Code of the Philippines and submit the same to the Securities and
Exchange Commission (SEC) for its approval. Moreover, the Tax Code requires
corporations that are contemplating dissolution to notify the Commissioner of
Internal Revenue and to not complete the dissolution until the company is cleared of
any tax liability. In relation to this, Section 3 of BIR-SEC Regulations No. 1 also
provides that the SEC shall issue the final order of dissolution only after a certificate
of tax clearance has been submitted by the dissolving corporation.
The CTA deems it necessary for the taxpayer to present the certificate of tax
clearance in order to ascertain that it has paid all of its tax liabilities and conclude
that the company has already dissolved or permanently ceased operations. Thus,
although the taxpayer was able to notify the BIR of the expiration of its corporate
term, its failure to present or offer the certificate of tax clearance that would show it
has already been cleared, and/or has settled any, of its tax liability means it is not
excluded from the irrevocability rule. As such, the companys claim for refund of its
excess tax credits is denied. (Philam Financial Advisory Services, Inc. v.
Commissioner of Internal Revenue, CTA Case No. 7765, January 8, 2010)

CTA CASES FEBRUARY 2010

Refund of excess creditable VAT withheld
Although the law does not expressly state that excess creditable VAT withheld is
refundable, it may be the subject of a claim for refund as an erroneously collected
tax under Sections 204(C) and 229 of the Tax Code.
In the instant case, the excess creditable VAT withheld consists of amounts withheld
and remitted to the Bureau of Internal Revenue (BIR) by government agencies that
applied the 6% withholding rate on their payments to the taxpayer-refund claimant.
Since the taxpayer had no more output VAT against which the excess creditable VAT
withheld may be applied or credited, the taxpayer claimed for refund of its excess
creditable VAT withheld.

The Supreme Court (SC) held that creditable VAT withheld should be treated as
advance payment for the taxpayerrefund claimants VAT liability payable and,
therefore, the difference should be treated as the taxpayers overpaid taxes. Citing
Citibank N.A. v. Court of Appeals, which dealt with excessive income taxes withheld
but considered applicable by the SC, the Court held that tax withheld, while
collected legally, became untenable and took on the nature of erroneously collected
taxes.
It was, however, clarified by the SC that its ruling only refers to the creditable VAT
withheld imposed previously under Section 114 of the Tax Code. After the
amendment by RA 9337, the amount withheld under Section 114 will now be
treated as a final VAT and will thus no longer be under the creditable withholding
tax system. (Commissioner of Internal Revenue v. Ironcon Builders and
Development Corporation, GR 180042, February 8, 2010)
Tax on offline international carriers
An offline international carrier selling passage documents through an independent
sales agent in the Philippines is considered engaged in trade or business in the
Philippines subject to the 32% (now 30%) tax imposed under Section 28(A)(1) of the
NIRC of 1997.
The SC held that although an offline carrier, which does not maintain flights to or
from the Philippines, is not taxable to the 2 % tax having no gross Philippine
billings (GPB) as defined under Sec. 28(A)(3)(a) of the 1997 NIRC it is not exempt
from paying any income tax for its sale of passage documents in the Philippines. As
the SC ruled, such offline international carrier should be considered a resident
foreign corporation subject to the 32% (now 30%) tax under Sec. 28(A)(3) of the Tax
Code.
The rule promulgated by the SC is that, if the 2 % tax on GPB under Sec. 28(A)(3)
(a) is applicable to a taxpayer, then the general rule imposing 32% tax under Sec.
28(A)(1) of the Tax Code would not apply. If, however, Sec. 28(A)(3)(a) does not
apply, a resident foreign corporation whether an international air carrier or not
shall be liable to the 32% tax under Sec. 28(A)(1) of the Tax Code. This means that
an international air carrier that maintains flights to and from the Philippines shall be
taxed at the rate of 2 1/2% of its GPB, while an international air carrier that does not
have flights to and from the Philippines, although exempt from 2 % tax on GPB, is
subject to 32% (now 30%) tax on its income earned from other activities in the
country. (South African Airways v. Commissioner of Internal Revenue, February 16,
2010, GR 180356)
VAT on cinema ticket sales
The activity of showing cinematographic films is not a service covered by VAT under
the National Internal Revenue Code (NIRC) of 1997, as amended, since it is not
included in the enumeration of sale or exchange of services. The activity does not
fall under the phrase similar services either, which would have subjected it to the
VAT.

The SC held that the activity is instead subject only to the amusement tax under RA
7160, otherwise known as the Local Government Code (LGC) of 1991. According to
the SC, although it was the national government that imposed the amusement
taxes on operators and proprietors of theaters under the NIRC of 1939, this power to
impose tax on amusement has been transferred to, and remains exclusively with,
the local government units (LGUs).
The SC pointed out that the legislature never intended to impose VAT on operators
or proprietors of cinema/theater houses, which are already covered by the
amusement tax under the LGC. It also stressed that levying the 10% VAT, in addition
to the 30% amusement tax imposed by Section 140 of the LGC, would impose an
unreasonable burden on operators or proprietors of cinema/theater houses,
resulting in injustice since persons taxed under the NIRC of 1997 would be in a
better position than those taxed under the LGC of 1991. Hence, in the absence of
any provision of law imposing VAT on the gross receipts of cinema/theater operators
or proprietors derived from admission tickets, the SC upheld the cancellation of the
deficiency VAT assessment issued against the taxpayer. (Commissioner of Internal
Revenue v. SM Prime Holdings Inc., and First Asia Realty Development Corporation,
GR 183505, February 26, 2010)

CTA CASES MARCH 2010

Incidental transaction for VAT purposes
Under Section 105 of the NIRC of 1997, VAT is imposed on a sale or transaction
entered into by a person in the course of any trade or business. A transaction is
characterized as having been entered into by a person in the course of trade or
business if it is: (a) regularly conducted, and (2) undertaken in pursuit of a
commercial or economic activity. Transactions that are made incidental to the
pursuit of a commercial activity are considered as entered into in the course of
trade or business, and are subject to the 12% VAT.
In carrying out its business, a power generating company acquired a motor vehicle
that formed part of its assets used in its business operations. When the motor
vehicle was already fully depreciated, the company sold the motor vehicle, which is
considered a one-time sale transaction. The Court of Tax Appeals (CTA) held that the
sale of the companys fully depreciated motor vehicle is considered an incidental
transaction since the vehicle was purchased and used in the furtherance of the
companys business. Hence, the sale should be subject to the 12% VAT. (Mindanao II
Geothermal Partnership v. Commissioner of Internal Revenue, CTA EB No. 513 re
CTA Case Nos. 7227, 7287, and 7317, March 10, 2010)
Contesting a real property tax assessment
Payment of tax under protest pursuant to Section 252 of the Local Government
Code (LGC) before appealing an assessment with the Local Board of Assessment
Appeals (LBAA) and Central Board of Assessment Appeals (CBAA) is not required
when what is being questioned is the legality and not the reasonableness of the real
property tax (RPT) assessment. Also, while a taxpayer may be excused from
exhausting administrative remedies of lodging an appeal before the LBAA and CBAA
in cases involving purely legal questions, he cannot be excused if the resolution of

the case requires the presentation and evaluation of evidence. Otherwise, the
appeal to the court will be considered premature and not yet ripe for judicial
determination.
The CTA en banc dismissed the petition of a power company that claimed
exemption from real property tax imposed on its machineries and equipment, due
to its failure to exhaust the administrative remedy of appealing the assessment to
the LBAA and CBAA pursuant to Section 226 and 229 of the LGC. The CTA en banc
held that although cases raising purely legal questions may be excused from
exhausting administrative remedies before going to the courts (Ty vs. Trampe, GR
N0. 117577, December 1, 1995), the legal questions raised by the taxpayer require
proof of facts to prove its claim for exemption (Figuerres vs. Court of Appeals, et. Al.,
GR No. 119172, March 25, 1999). According to the CTA en banc the taxpayer raises
a question on the legality of the RPT assessment based on its claim that its
machineries and equipment are exempted from RPT. The Court noted that this claim
must be proven by the taxpayer with sufficient and competent evidence.
Under Section 206 of the LGC, every person by or for whom real property is
declared, who shall claim tax exemption for such property, should file with the
provincial, city or municipal assessor sufficient documentary evidence in support of
its claim of exemption within 30 days from the date of declaration of real property.
Thus, a taxpayer claiming exemption from RPT has to file a claim before the
provincial, city or municipal assessor, and the latter officers have the authority to
determine the validity of the claim through pieces of evidence submitted by the
taxpayer.
According to the CTA en banc, the decision of the provincial, city or municipal
assessor on the taxability of property can be appealed to the LBAA and CBAA
pursuant to Section 226 and 229 of the LGC. In the instant case, the taxpayer
sought judicial relief by filing a petition with the Regional Trial Court (RTC) after
receiving the notice of assessment by the municipal assessor when what it should
have done was to first appeal the assessment to the LBAA and then elevate the
case to the CBAA before going to the court.
On the requirement under Section 252 of LGC that the tax due must be paid first
before initiating any protest to an assessment, the CTA en banc held that since the
legality is at issue, and not the excessiveness or reasonableness of the real property
tax assessment, there is no need for the taxpayer to pay first the real property tax
assessment before initiating a protest. Hence, the taxpayer is not required to first
pay the tax under protest before initiating a protest or appeal to the LBAA.
(National Power Corporation v. Municipal Government of Navotas, et.al., CTA EB No.
461 re CTA AC No. 37, March 10, 2010)
VAT zero-rating of sale of power generation services
To qualify for VAT zero-rating under Republic Act No. (RA) 9136 (EPIRA Law), a power
generation company should, among others, be able to establish that the company is
a generation company and it derived revenues from power generation.
Under Section 4(w) of RA 9136, the term generation company refers to any
person or entity authorized by the Energy Regulatory Commission (ERC) to operate

facilities used in the generation of electricity. It is thus necessary that a company

seeking refund of its unutilized input VAT attributable to its revenues from power
generation present proof that it was registered and authorized by the ERC to
operate facilities used in the generation of electricity in order for its sales to qualify
for VAT zero-rating.
For failure to submit its ERC registration and certificate of compliance, the
generation companys sales of generated power cannot qualify for VAT zero-rating
under the EPIRA Law, and thus, its claim for refund of input VAT was denied by the
CTA. [GBH Power Resources, Inc (formerly Mirant Philippines Island Generation
Corporation) v. Commissioner of Internal Revenue, CTA Case Nos. 7462, March 26,
2010)
Use of sales invoice for zero-rated sale of service
In order to claim for refund or issuance of tax credit certificate of input tax arising
from zero-rated sales, the taxpayer must, among others, comply with the
documentary requirements for supporting the sale of goods and services.
Under Section 113 of the Tax Code, a VAT-registered person shall, for every sale,
issue an invoice or receipt. While Section 113 of the Tax Code makes no clear
distinction on the evidentiary value of an invoice or official receipt, the Court of Tax
Appeals (CTA) en banc stressed that Section 113 of the Tax Code is a general
provision that covers all sales of a VAT-registered person, whether sale of goods or
services. Thus, according to the CTA en banc, it cannot be concluded that the
invoice or official receipt can be used interchangeably for either sale of goods or
service.
The CTA held that Section 108 of the Tax Code is applicable in a refund case that
involves the sale of services. By express provision of Section 108 of the Tax Code,
the determination of taxpayers tax liabilities with respect to sale of services should
be based on the official receipts issued to clients. Hence, a company engaged in the
sale of service should present official receipts to prove its zero-rated sales of
services and, therefore, be entitled to a refund of its input taxes.
Since the company presented sales invoices, not official receipts, on the sale of
service to clients that are registered with the Philippine Economic Zone Authority
(PEZA), the payment received by the company cannot qualify for VAT zero-rating.
(Commissioner of Internal Revenue v. Takenaka Corporation Philippine Branch, CTA
EB No. 514 re CTA Case No. 6886, March 29, 2010)
Submission of complete documents for tax refund cases
Submission of relevant and complete supporting documents is necessary for the
granting of refund or tax credit certificates in both the administrative and judicial
level. However, the submission of the complete supporting documents in the
administrative level is not a requirement before a taxpayer can elevate its claim
before the CTA.
The case at bar involves a claim for refund or issuance of tax credit of a power
generating company on its unutilized input tax attributable to its zero-rated sale of
electricity. The BIR contends that the claim should be denied because it was not

properly documented in the administrative proceedings. CTA en banc, however,

held that the alleged nonsubmission of complete documents at the administrative
level does not bar the court from receiving evidence, evaluating and appreciating
the materiality, relevancy, probative value and sufficiency of taxpayers claim for
refund considering that the BIR did not state and identify what documents the
taxpayer failed to submit to warrant their denial.
The CTA en banc further held that the Commissioner of Internal Revenue (CIR) failed
to controvert the documentary and testimonial evidence presented by the taxpayer.
According to the CTA en banc, the BIR neither presented evidence nor expressed
opposition before submitting the case to the Court for its resolution. After a
thorough examination of the documentary and testimonial evidence, the CTA en
banc found the evidence sufficient to act on the taxpayers claim for tax refund.
(Commissioner of Internal Revenue v. San Roque Power Corporation, CTA EB No.
523 re CTA Case No. 7173, April 15, 2010)
Prior ITAD ruling required for availing of tax treaty relief
The Supreme Courts (SC) minute resolutions in the case of Mirant Philippines (GR
168531) which upheld the requirement for an International Tax Affairs Division
(ITAD) ruling prior to availing of a preferential tax rate cannot be considered
binding precedents, according to the CTA. Nonetheless, the CTA maintained that the
requirement for application for tax treaty relief before a taxpayer can avail of the
preferential tax treatment under Philippine tax treaties is mandatory, pursuant to
Revenue Memorandum Order (RMO) No. 1-00.
The CTA held that administrative issuances like RMO 1-00 have the force and effect
of law, and they benefit from the presumption of validity and constitutionality
enjoyed by statutes. As pointed out by the CTA, the requirement for prior
application of ITAD ruling under RMO 1-00 is intended to avoid the consequences of
any erroneous interpretation and/or application of tax treaty provisions. According
to the CTA, this requirement is in accord with the strict construction of tax
exemptions.
The CTA held that RMO 1-00 uses the term shall, which is a word of command,
and one which has always and must be given compulsory meaning, and is generally
imperative or mandatory. This is contrary to the view that the application for treaty
relief with ITAD is not mandatory. Thus, for failure to obtain an ITAD ruling, a power
companys claim for refund of final withholding taxes paid to the BIR in excess of
the treaty rate was denied by the CTA. (Commissioner of Internal Revenue v. CBK
Power Company Limited, CTA EB Nos. 469 and 494 re CTA Case Nos. 6699, 6884,
and 7166, March 29, 2010)

CTA CASES MAY 2010

Prescriptive period for refund of DST loaded on imprinting machine
A bank authorized by the BIR to operate and use an online documentary stamp
metering machine (DS imprinting machine) may file a claim for issuance of tax
credit certificate or refund for its alleged erroneous payments of DST. The
application should be filed within two years reckoned from the date of the filing of

its DST declaration under BIR Form No. 2000, and not from the date appearing on
the documentary stamp imprinted through the DS imprinting machine.
As provided under Section 200 (A) and (B) of the Tax Code, any person liable to pay
DST upon any document subject to tax should file the required tax return (DST Form
2000) within 10 days after the close of the month when the taxable document was
made, signed, issued, accepted or transferred. The tax should be paid at the same
time the return is filed.
This due date, however, does not apply in case the DST is imprinted through a DS
imprinting machine. Under Section 200(D) of the Tax Code, the DST may be paid
either through purchase and actual affixture, or by imprinting the stamp on the
taxable document through a documentary stamp imprinting machine.
As implemented by Section 5.3 of Revenue Regulations No. (RR) 05-97, the DST
declaration (BIR Form 2000) for persons authorized to use the DST imprinting
machine should be filed each time the documentary stamp is purchased for loading
or reloading on the machine.
The Court of Tax Appeals (CTA) held that insofar as the taxpayers using DS
imprinting machines are concerned, the DST is deemed paid upon purchase for
loading or reloading of documentary stamps. It follows that for said taxpayers, the
two-year prescriptive period for taxpayers claiming refund of DST should commence
from the date of filing of BIR Form 2000, and not on the date that appears on the
DST imprinted through the DS imprinting machine. (Philippine Bank of
Communications v. Commissioner of Internal Revenue, May 13, 2010)
Reiteration of PAN in FAN
Audit findings in the preliminary assessment notice (PAN) that are reiterated in the
final assessment notice (FAN) despite the taxpayers submission of its reply to the
FAN and documents explaining its position does not constitute a violation of due
process.
The total disregard of the explanations and documents presented by the taxpayer in
order to dispute the PAN, which eventually led to the issuance of the FAN, cannot be
considered a deprivation of due process since the BIR gave the taxpayer the
opportunity to present its side to the BIR through its submission of reply to the PAN
and of supporting documents. According to the CTA, it is basic that as long as a
party is given the opportunity to defend its interests in due course, it would have no
reason to complain, for it is the opportunity to be heard that makes up the essence
of due process.
The CTA further held that while the BIR has the duty to receive the clarification,
explanation and conjectures of the taxpayer, it does not have the duty to accept
them on face value. The determination of actual liability of a taxpayer relies on the
appreciation of evidence presented to the BIR. In the absence of any arbitrariness,
the presumption is that the BIR made the assessment in good faith.
As further pointed out by the CTA, what beset the taxpayer is not the lack of
opportunity to present its side, but rather the BIRs failure to appreciate the

documents submitted by the taxpayer. The difference in the appreciation by the BIR
of the taxpayers supporting documents leading to the assessment of the taxpayers
deficiency taxes does not violate due process. (Avon Products Manufacturing, Inc. v.
Commissioner of Internal Revenue, May 13, 2010)
Proper execution of waiver of statute of limitations
To protect the taxpayer from unreasonable investigation and from indefinite
issuances of assessment, Section 203 of the Tax Code provides a period of three
years within which the BIR may issue an assessment for internal revenue taxes. This
period is reckoned from the last day prescribed by law for the filing of a return or
from the day when the return was filed, whichever is later.
The taxpayer may, however, stipulate in writing the extension of the period of
assessment by a written agreement executed prior to the lapse of the period
prescribed by law, and by subsequent written agreements before the expiration of
the period previously agreed upon, in conformity with Section 222 of the Tax Code,
and in conjunction with Revenue Memorandum Order (RMO) 20-90, which provides
for the procedures for executing a valid waiver of statute of limitations.
In the instant case, the BIR and the taxpayer executed written waivers of the
statute of limitations. The CTA found that the taxpayer had not received a copy of
the waiver signed by the BIR representative, which is one of the requirements
imposed under RMO 20-90 that should be strictly followed by any revenue official in
executing a valid waiver. According to the CTA, this infirmity has the effect of
making the waiver invalid and ineffective. The CTA cited the case of Philippine
Journalist, Inc. v. CIR where the Supreme Court (SC) explained the importance of the
requirement under RMO 20-90 to provide taxpayers with a copy of the accepted
waivers. According to the SC, the requirement to furnish the taxpayer with a copy of
the waiver is meant to not only give notice of the existence of the document but
also to confirm the BIRs approval and the perfection of the agreement. Hence,
considering that no duly BIR-approved waiver was received by the taxpayer
involving its deficiency assessments, the CTA held that the waiver of statute of
limitation executed by the BIR and the taxpayer is deemed invalid and defective,
and therefore, the waiver does not extend the three-year prescriptive period of
assessment. (Avon Products Manufacturing, Inc. v. Commissioner of Internal
Revenue, May 13, 2010)

Application of doctrine of estoppel

After the CTA en banc ruled that the waiver executed by the BIR and the taxpayer is
invalid, the BIR filed an appeal with the SC claiming that the taxpayer is now
estopped from claiming prescription since it was the one that asked for additional
time to submit the required documents when it executed the waiver. The SC held
that the doctrine of estoppel cannot be applied in the instant case as an exception
to the statute of limitation on the assessment of taxes considering that there is a
detailed procedure for the proper execution of the waiver, which the BIR must
strictly follow.

The SC ruled that the BIR cannot hide behind the doctrine of estoppel to cover its
failure to comply with Revenue Memorandum Order (RMO) 20-90 and Revenue
Delegation Authority Order (RDAO) 05- 01 when it executed the waiver.
Having caused the defects in the waiver, the SC maintained that the BIR must suffer
the consequence, and not shift the burden to the taxpayer. As such, considering
that the waiver is deemed incomplete and defective for failure to comply with the
requisites under RMO 20-90, the three-year prescriptive period was not extended,
and therefore it continued to run. Consequently, the SC concluded that the
assessments issued by the BIR were beyond the three-year period and were
deemed void. (Commissioner of Internal Revenue v. Kudos Metal Corporation, GR
178087, May 5, 2010)
Input VAT invoicing requirements
The VAT invoices or receipts supporting a claim for input tax must contain the
required information to be considered VAT invoices under contemplation of the
mandatory invoicing requirements, as provided under Sections 113 and 237 of the
Tax Code. Otherwise, the VAT component of the purchase cannot be claimed as
input tax.
Aside from making it mandatory for a VAT-registered person to issue an invoice or
receipt for every sales transaction, Section 113(A) of the Tax Code also requires said
person to reflect the information that the seller is a VATregistered person, followed
by the tax identification number (TIN) and the total amount that the purchaser paid
or is obligated to pay to the seller with the indication that such amount includes the
VAT. All this is in addition to the information required under Section 237 of the Tax
Code.
The information referred to under Section 237 of the Tax Code pertains to the
following: the name, business style, if any, and address of the purchaser, customer
or client, and where the purchaser is a VAT-registered person. In addition thereto,
the invoice or receipt shall further show the TIN of the purchaser.
In the taxpayers claim for input tax, the supporting invoices or receipts that it
submitted were undated, while others did not contain the address and TIN of the
purchaser. The CTA held that the taxpayers alleged input VAT on purchases, which
are supported by such defective invoices or receipts, should be disallowed for
violation of the invoicing requirements under the Tax Code. As maintained by the
CTA, full compliance with the invoicing requirements is mandatory and the failure on
the part of the taxpayer to comply with the invoicing requirements is fatal to its
claim for recognition of its input tax credits. (Nesic Philippines, Inc. v. Commissioner
of Internal Revenue, May 6, 2010)
CWT on car rental payments
Income payments made by a taxpayer to a car rental company are covered by
Section 2.57.2(E)(4)(e) of RR 2-98, which subjects income payments made to
transportation contractors to 1% (now 2%) creditable withholding tax (CWT).
The said Section imposes a 1% (now 2%) CWT on gross payment made to
transportation contractors, which include common carriers for the carriage of goods

and merchandise of whatever kind by land, air or water, where the gross payments
by the payor to the same payee amounts to at least P2,000 per month, regardless
of the number of shipments during the month.
According to the CTA, said Section does not limit itself to payments for the
transportation of goods and merchandise. As discussed by the CTAs second division
and as quoted by the CTA en banc, the term transportation contractors, whether
for carriage of goods/merchandise or passengers, is the item subject to expanded
withholding tax, and the subsequent phrase which include common carriers for the
carriage of goods and merchandise, is a point of clarification that the payments
thereto must at least be P2,000 pesos per month regardless of shipments during
the month. Clearly, as further quoted by the CTA en banc, the term transportation
contractors is a generic term that is not limited to the carriage or movement of
goods, but also refers to movement of persons from one place to another. Hence,
income payments to transportation contractors engaged in the movement of
persons, such as car rental companies, should be subject to the 1% (now 2%) CWT
under Section 2.57.2(E)(4)(e) of RR 2-98. (Nesic Philippines, Inc. v. Commissioner of
Internal Revenue, May 6, 2010)

CTA CASES JUNE 2010

VAT on services of ROHQs to head office
For a supply of service to be VAT-zero rated, the recipient of the service must be
other persons doing business outside the Philippines as contemplated under
Section 108(b)(1) and (2) of the Tax Code. Applying this requirement in the case of a
regional operating headquarter (ROHQ) that renders services solely and exclusively
to its affiliates, subsidiaries or branches of its head office, it must be determined
that the head office of the ROHQ for whom the services were rendered can be
categorized as other persons doing business outside the Philippines for its
services to qualify for VAT zero-rating.
The CTA held that based on the definition of an ROHQ as provided for under RA
8756, the head office of the ROHQ may not be considered an affiliate, subsidiary or
branch since the ROHQ, like a regional or area headquarter, is only an
administrative arm of the head office and for which reason, they must be
considered one and the same entity for tax purposes.
Based on the SEC registration, the purpose of the head office in establishing an
ROHQ in the Philippines is to engage in logistics services, research and development
services, product development, data processing and communication, and business
development. The CTA thus held that it is clear that the ROHQ is actually an
instrumentality by which the head company engages in business in the Philippines.
Hence, for the ROHQs failure to prove that its sale of services to its mother
company qualify for zerorating, its claim for refund or issuance of tax credit for its
unutilized input VAT attributable was denied by the CTA. (Institutional Shareholder
Services, Inc. - Philippine ROHQ v. Commissioner of Internal Revenue, CTA Case No.
7662, June 3, 2010)
Establishing the fact of withholding in refund claims

There is a two-year prescriptive period for applying for refund or issuance of tax
credit certificate of excess or unapplied creditable withholding tax (CWT) under
Section 204 of the Tax Code. In addition, Section 2.58.3(B) of Revenue Regulations
No. (RR) 2-98 requires that a taxpayer claiming refund of excess or unapplied CWT
must show on the return that the income payment subjected to the withholding tax
was declared as part of its gross income. The taxpayer should also establish the fact
of withholding by submitting a copy of the withholding tax statement (BIR Form
2307) issued by the payor/buyer (withholding agent) in the name of the taxpayer as
payee, showing the amount paid and the amount of tax withheld.
In the instant case, the payee/seller took charge of deducting the amount of
withholding tax from the payment he received and remitting the same to the BIR.
Hence, to prove the fact of withholding of CWT, the taxpayer/refund claimant
presented BIR Form 1606 (withholding tax remittance return), which it filed relative
to the sale of its real property. The CTA held that the BIR Form 1606 presented by
the taxpayer, although it indicated the name of the payor, the income payment
basis of the tax withheld, the amount of tax withheld and the nature of the tax paid,
does not suffice because it did not emanate from the payor. The CTA explained that
the document that may be accepted as evidence to establish the fact of withholding
should come from the payor and not from the payee since the payor is in a better
position to state that the withholding of tax was in fact made, being the duly
constituted withholding agent. The CTA also pointed out that in case of taxable
sales, exchanges or transfers of real property, the buyers (not the sellers)
whether or not engaged in trade or business are constituted as withholding
agents. Furthermore, the CTA held that based on Section 2.58(B) of RR 3-2002, BIR
Form 2307 issued by the income payor to the payee should be submitted by the
taxpayer since it is the only acceptable evidence that establishes the fact of
withholding relative to the taxpayers sale of its real property. (Mermac, Inc. v.
Commissioner of Internal Revenue, CTA Case No. 7758, June 28, 2010)
Matching requirement on claims for unutilized input VAT on zero-rated
sales
Although Section 112(A) of the Tax Code, as amended, requires the presence of
zero-rated or effectively zero-rated sales to refund unutilized input VAT attributable
to such sales, there is no requirement that the zero-rated or effectively zero-rated
sales must be made during the same quarter when the input taxes sought to be
refunded were incurred or paid.
In the instant case, the taxpayer claimed a refund of its unutilized input VAT
incurred during the fourth quarter of 2006 and first and second quarter of 2007. In
the said quarters, no amount of zero-rated sales/receipts was reported in the
taxpayers VAT returns. As explained by the taxpayer, it was only able to generate
zero-rated sales only in the third quarter of 2007. On the ground that no amount of
zero-rated sales/receipts was reported in the taxpayers VAT returns for the relevant
quarters, the CTA initially denied the refund of its input VAT claim.
In its amended decision, however, the CTA held that the input taxes that are the
subject of the refund need not be incurred or paid during the same quarter when
the zero-rated or effectively sales were made. As long as there were zerorated
sales, although at a later date, the input taxes incurred relating to the goods sold

should be refunded. Hence, the taxpayer should be entitled to a refund of its

unutilized input VAT that is attributable to its zero-rated sales. (GST v.
Commissioner of Internal Revenue, CTA EB No. 475 re CTA Case No. 6522, June 23,
2010)
Period to appeal a tax assessment at the CTA
Under Section 228 of the Tax Code, decisions, rulings or inaction of the
Commissioner of Internal Revenue (CIR) are appealable to the Court of Tax Appeals
(CTA) within 30 days from receipt of the decision or ruling, or within 30 days from
the lapse of the 180-day period fixed by law for the Commissioner to act on the
disputed assessment.
After receiving the final decision on disputed assessment (FDDA), the taxpayer,
instead of appealing the FDDA to the CTA, filed a request for
reconsideration/reinvestigation of the FDDA with the Assistant Associate
Commissioner of Internal Revenue - Large Taxpayers Service (ACIR-LTS), which was
granted by the latter. Subsequent to its submission of the pertinent documents
supporting its request for reconsideration/reinvestigation, the taxpayer filed a
petition for review with the CTA.
The CTA held that under Section 3.1.5 of RR 12-99 implementing Section 228 of the
Tax Code, if a taxpayer elevates his protest to the CIR upon receipt of the FDDA that
was issued by the CIRs duly authorized representative, the latters decision shall
not be considered final, executory, and demandable. However, the FDDA shall be
considered the final decision if the protest is filed with another authorized
representative of the CIR, not the CIR himself. In the instant case, the taxpayer filed
the request for reconsideration of the FDDA with the ACIR-LTS, and not with the CIR.
Although the taxpayer subsequently filed an appeal with the CTA, this was denied
considering that the petition was filed beyond the 30-day period from the receipt of
the FDDA . Thus, the request for reconsideration filed by the taxpayer with the ACIRLTS did not toll the running of the 30-day period to appeal the FDDA with the CTA.
(College Assurance Plan Phils., Inc. v. Commissioner of Internal Revenue, CTA EB No.
475 re CTA Case No. 6522, June 1, 2010)

CTA CASES SEPTEMBER 2014

FAN issued before lapse of 15- day period to reply to PAN
Under Revenue Regulations No. (RR) 12-99, as amended, a taxpayer who
receives a Preliminary Assessment Notice (PAN) is given 15 days from receipt
within which to file his reply to the PAN. If the taxpayer fails to respond within
said 15 days, he shall be considered in default, which will trigger the
issuance of the formal letter of demand and assessment notice (FAN) by the
BIR.
In the instant case, the taxpayer received the PAN assessing it for deficiency
taxes. On the 14th day from receipt of the PAN, the taxpayer submitted its
reply but on the same day, the FAN was also issued. The taxpayer alleged

that the FAN was void for disregarding the 15-day period accorded taxpayers
to protest the PAN.
The CTA held that the issuance of the FAN before the lapse of the 15- day
period for the taxpayer to file its protest to the PAN inflicts no prejudice on
the taxpayer for as long as the taxpayer is properly served a FAN and it was
able to intelligently contest the FAN by filing a protest letter within the
prescribed period provided by law. The CTA noted that the taxpayer was
afforded the procedural due process required by law when it was fully
apprised of legal and factual bases of the FAN issued against it and that the
taxpayer was given the opportunity to substantially protest or dispute the
assailed assessment via its protest letter to the FAN. (Medtex Corporation v.
Commissioner of Internal Revenue, CTA Case No. 8508, September 1, 2014)
Withholding agent as refund claimant
As a withholding agent, an employer is entitled to claim a refund of
withholding taxes on employees separation pay that were erroneously
subjected to withholding tax. The separation paid by the employer was the
result of the involuntary termination from service (i.e., cessation of
business), which is exempt from income tax and consequently from
withholding tax pursuant to Section 32(B)(6)(b) of the Tax Code, as amended.
In the case of Commissioner of Internal Revenue v. SMART Communications,
Inc. (GR 179045-46, August 25, 2010) cited by the CTA, the Supreme Court
held that the withholding agent has the right to recover the taxes
erroneously or illegally collected for two reasons: First, he is considered a
taxpayer under the Tax Code as he is personally liable for the withholding
tax as well as for deficiency assessments, surcharges, and penalties, should
the amount of the tax withheld be finally found to be less than the amount
that should have been withheld under the law. Second, as an agent of the
taxpayer, his authority to file the necessary income tax return and to remit
the tax withheld to the government impliedly includes the authority to file a
claim for refund and to bring an action for recovery of such claim. (Ong Ben
Gui v. Commissioner of Internal Revenue, CTA Case No. 8410, September 8,
2014)
Proof of receipt of assessment
Although a presumption exists that an assessment sent by registered mail is
received in the regular course of mail, a direct denial by the taxpayer shifts
to the BIR the burden to prove that the assessment was indeed received by
the taxpayer.
In the instant case, the taxpayer claims that the PAN was sent through
personal delivery while the amended PAN and FAN were sent through
registered mail. To prove receipt of the assessment notices, the BIR
presented the PAN bearing the signature of a certain person who received

the notice, registry return receipts, and testimony of the person who
purportedly served the assessment notices. The taxpayer denied that the
person who received the PAN is his employee or authorized representative.
The CTA held that the PAN, which was sent through personal delivery, was
not properly served since the person who served the assessment notice was
short of the diligence required in ensuring the proper service of the
assessment notice. No effort was exerted by the person delivering the
assessment notices to determine if the person was an employee of the
taxpayer or its authorized agent. The CTA held that the law, regulation, and
jurisprudence require the service of the PAN upon the taxpayer or at least,
upon its agent, and not upon any other person. The CTA maintained that to
consider the receipt of the PAN by another person as receipt by the taxpayer
itself, despite the lack of prior verification of the formers authority or
agency, would put taxpayers in a disadvantageous position at the mercy of
revenue officers. (Manuel B. Palaganas v. Commissioner of Internal Revenue,
CTA Case No. 8394, September 17, 2014)

CTA CASES OCTOBER 2014

False returns may be assessed within 10 years; 50% surcharge
applies only in case of fraud
Pursuant to Section 203 of the Tax Code, internal revenue taxes shall be
assessed within three years after the last day prescribed by the law for the
filing of the return except as provided in Section 222 of the same Code.
Section 222 provides that the three-year assessment period does not apply
in three instances:
filing a false return
filing a fraudulent return with intent to evade tax
failure to file a return
In all these instances, the period within which to assess deficiency taxes is
10 years from discovery of the fraud, falsification or omission. There is a
difference between false and fraudulent return: the former merely implies
deviation from the truth -- whether intentional or not while the latter
implies intentional or deceitful entry with intent to evade the taxes due.
Failure to declare a substantial portion of VATable receipts in the VAT return
constitutes a deviation from truth and shall be tantamount to filing of a false
return which can be covered by the 10-year prescription period. However,
the 50% fraud penalty under Section 248 of the Tax Code cannot be imposed
in the absence of a willful fraudulent act on the part of the taxpayer. Section

248 authorizes the Commissioner of Internal Revenue (CIR) to add a 50%

surcharge on the deficiency tax in case a false or fraudulent return or list is
willfully made.
Fraud cannot be presumed but must be proven. Fraudulent intent could not
be deduced from mistakes however frequent they may be, especially if such
mistakes emanate from erroneous entries or erroneous classification of items
in accounting methods utilized for determination of tax liabilities. In the case
at bar, the taxpayers failure to declare its interest income in its VAT returns
did not arise from a deliberate attempt on its part to evade tax but on the
honest belief that such interest income is not subject to VAT. This is
supported by the fact that such interest income were disclosed in the
taxpayers audited financial statements and reported as taxable income in
its annual income tax return. In such case, the Court ruled that the BIR can
assess the deficiency VAT plus the 20% interest per annum, but not the 50%
surcharge. (McDonalds Philippines Realty Corporation v. Commissioner of
Internal Revenue, CTA Case No. 8506, October 29, 2014)
Validity of a waiver
Revenue Memorandum Order No. (RMO) 20-90 clearly states the requirement
for strict compliance with the mandatory requisites for a valid waiver. Hence,
failure to comply with such requirements will make the waiver invalid and
without any binding effect.
In the case at bar, the waiver was executed without the notarized written
authority of the companys accountant to sign on behalf of the company.
Furthermore, the fact of receipt by the company of its file copy of the waiver
was not indicated in the original copy, and no other evidence was presented
to prove the fact of receipt of the waiver accepted by the CIR. The waiver,
therefore, is invalid and cannot suspend the running of the prescription
period for the assessment of the deficiency taxes. (Commissioner of Internal
Revenue v. Nikken Philippines, Inc., CTA EB Case No. 1058, October 23,
2014)

CTA CASES OCTOBER-NOVEMBER 2014

Failure to comply with RMO 20-90 renders the waiver invalid
Section 203 of the Tax Code, as amended, provides that the BIR ordinarily
has a period of three years within which to assess internal revenue taxes.
Any assessment notice issued beyond the three-year prescriptive period shall
be deemed invalid. Such rule is subject to certain exceptions, such as upon a
written agreement between the tax authorities and taxpayer through the
execution of a waiver of the defense of prescription under the statute of
limitations of the Tax Code, as amended.

RMO 20-90 sets out the requirements for the validity of waiver. One such
requirement is the CIRs (or her authorized representatives) signature on the
waiver indicating the BIRs acceptance and agreement to the waiver. The
date of such acceptance by the BIR should also be indicated.
Failure to comply with these requirements would render the waiver invalid
and would not extend the prescriptive period.
In the instant case, the taxpayer executed a waiver in September 2008 for
the taxable year 2005 assessment. Notwithstanding the CIRs signature
affixed on the waiver, the Court found the waiver invalid because the
requirement under RMO 20-90 to include the date of acceptance was not
met. Given the failure to fully comply with the RMO, no valid agreement
between the taxpayer and the BIR could have taken place. Consequently, the
waiver did not toll the running of the prescriptive period of three years from
the filing of the return as required by the Tax Code. (Joanna Lee O. Santos v.
Commissioner of Internal Revenue, CTA Case No. 8214, November 26, 2014)
Out-of-time claim for the VAT refund
Section 112 (C) of the Tax Code is explicit on the mandatory and
jurisdictional nature of the 120+30 day period that has been effective since
January 1, 1998.
In the present case, since the administrative claim for refund was filed on
July 21, 1999, the CIR had 120 days (until November 18, 1999) to act on the
application. When the 120-day prescriptive period lapsed without an action
by the CIR, the taxpayer should have filed its judicial claim before the Court
of Tax Appeals (CTA) within 30 days or until December 18, 1999. However,
since the taxpayer filed its judicial claim only on January 9, 2001, the
application was, therefore, a year and 22 days late.
As a result of the late filing of said petition, the SC held that the CTA did not
properly acquire jurisdiction over the claim. Thus, the SC reversed the
decision of the CTA En Banc granting the VAT refund, stating that despite the
taxpayers timely filing its administrative case, the Court is constrained to
deny the averred tax refund or credit, as its judicial claim was filed beyond
the 120+30 day period, and hence deemed to be filed out of time.
(Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian
Contractor, GR No. 190021, October 22, 2014)
Certificate of exemption not a prerequisite for income tax
exemption
A certificate of exemption, as prescribed in RMO 20-2013 and RMO 14-2001,
is not a prerequisite for the exemption from income tax of a qualified nonstock, non-profit educational institution pursuant to Section 30 of the Tax

Code. Since the Tax Code does not provide such requirement for exemption,
the BIR cannot add an additional requirement to implement the law.
To qualify for income tax exemption, the entity only has to prove that it is a
non-stock, non-profit educational institution and that no part of its income is
derived from activities conducted for profit. (The Abbas Orchard School, Inc.
v. Commissioner of Internal Revenue, CTA Case No. 8377, November 4,
2014)
When an assessment based on best evidence obtainable is deemed
valid
The Court upheld that the taxpayers failure to submit to the BIR adequate
records substantiating its expenses for taxable year 2007 makes the BIRs
assessment based on the best evidence obtainable rule justified and in full
accord with Section 6(B) of the National Internal Revenue Code (NIRC) of
1997, as amended, as implemented by Revenue Memorandum Circular No.
(RMC) 23-2000, specifically Sections 2.3 and 2.4(c) thereof. Hence, the
disallowance of 50 percent of the expenses claimed by the taxpayer was
deemed justified.
During the administrative proceedings both before and after the issuance
of the preliminary assessment notice (PAN), final assessment notice (FAN),
and final decision on the taxpayers protest the taxpayer failed to submit
relevant documents/records (e.g., expense vouchers, purchase invoices)
substantiating expenses incurred for taxable year 2007. Additionally, the
direct connection of the said expenses to the taxpayers trade or business
was also not explained.
Not a single explanation was offered by the taxpayer as to why these
documents were not presented during trial. The taxpayer neither claims the
occurrence of fraud, mistake or inadvertence to its omission to present the
documents, nor alleges the commission of excusable negligence which
ordinary prudence could not have guarded against.
Further, the proffered documents consisting of mere photocopies of checks
and receipts cannot be categorized as in the nature of newly discovered
evidence. The concurrence of the following requisites must be established in
order that a newly discovered evidence may be appreciated as a ground for
granting a motion for new trial: (1) the evidence was discovered after trial;
(2) such evidence could not have been discovered and produced at the trial
even with the exercise of reasonable diligence; (3) it is material, not merely
cumulative, corroborative, or impeaching; and (4) the evidence is of such
weight that it would probably change the judgment if admitted. (VillageGreen Hog Farm, Inc. v. CIR, CTA Case No. 8375, Second Division Resolution,
November 14, 2014)

CTA CASES DECEMBER 2014

Strict compliance with the requirements for claiming tax exemption
Under the franchise of the Philippine Airlines (PAL), as amended, the
payment of basic corporate income tax or the franchise tax (now the valueadded tax) is in lieu of all other taxes, which include the excise tax on its
importation of cigarettes, liquor and wine. However, the exemption only
applies if the following requisites are complied with:
The imported liquors, wines and cigarettes must be commissary and
catering supplies.
The imported liquors, wines and cigarettes are imported for the use
of the grantee in its transport and non-transport operations and other
activities incidental thereto.
The imported liquors, wines and cigarettes are not locally available in
reasonable quantity, quality, or price.
The Court of Tax Appeals (CTA) noted that PAL failed to conduct the requisite
comprehensive study on the availability, quantity, and price of the subject
imported wines or alcohol drinks and cigarettes in the local market, which
would help justify the importation of the said items. The taxpayer only
inquired from Philippine Wine Merchant and Duty Free Philippines in
complete disregard of other suppliers of the same imported items. The
alleged inquiry could not even approximate substantial compliance with the
legal requirement on the matter.
Without any study or at least solid information on the non-availability in the
local market in terms of quantity, quality, and price of the subject imported
cigarettes, the petitioner cannot possibly claim compliance with the third
requirement to justify exemption from payment of excise tax.
A statute granting tax exemption is strictly construed against the person or
entity claiming the exemption for it is a derogation of the sovereign authority.
Therefore, strict compliance with the requirements to claim exemption
should be strictly enforced. (Philippine Airlines v. CIR and Commissioner of
Customs, CTA Case No. 8130, Third Division, December 1, 2014)
Sale of generation assets of generation companies is subject to VAT
The enactment of RA 9337 on July 1, 2005 placed the electric power industry
under the value-added tax (VAT) system. Particularly, the amended
provisions mandated that the sale of electricity by generation, transmission
and distribution companies shall be subject to VAT on the basis of Sections
106 and 108 of the Tax Code, as amended. Since the taxpayers income from
its main business activity is classified as VATable, it follows that its incidental
income shall likewise be subject to VAT.

Section 106 imposes VAT on all kinds of goods and properties sold in the
Philippines. The term goods and properties has an all-encompassing
meaning to include the sale of the generation assets of the taxpayer.
Therefore, the sale of the Masinloc Plant, Ambuklao/Binga and the collection
from the Pantabangan sales fall under that umbrella and should be deemed
subject to VAT unless some provision of law expressly exempt it.
RR 16-2005 was amended by RR 4-2007 to be in harmony with the
amendments of RA 9337 and made the sale of real properties not primarily
held for sale or for lease but used in business subject to VAT. (Power Sector
Assets and Liabilities Corporation v. CIR, CTA Case No. 8475, December 02,
2014)
Disputable presumption of received notices through registered mail
Section 228 of the Tax Code requires that the taxpayer must be afforded due
process of law in assessing tax liability. A valid assessment is a substantive
prerequisite to tax collection. Due process dictates that proper sending and
actual receipt by taxpayer of the assessment notice.
When a letter or document is sent by registered mail, it is presumed that it
was received in the regular course of mail. The facts to be proved in order to
raise this presumption are: (a) that the letter was properly addressed with
the postage prepaid; and (b) that it was mailed.
However, even if a mailed letter is deemed received by the addressee in the
ordinary course of mail, this is still a disputable presumption, and a direct
denial of the receipt thereof shifts the burden upon the party favoured by the
presumption to prove that the mailed letter was indeed received by the
addressee.
In this case, the taxpayer directly denied that he received the preliminary
assessment notice (PAN) and the final letter of demand (FLD) with the
assessment notices. With such denial, the burden of proof shifts to the BIR to
prove that the aforesaid documents were actually received by the taxpayer.
Upon review of the records, the BIR failed to present evidence that would
show that the taxpayer actually received the PAN, FLD and the assessment
notices. The failure of the BIR to prove receipt of such notices and letters by
the taxpayer leads to the conclusion that no assessment was issued.
(Kenneth C. Pundanera v. CIR, CTA Case No. 8333, December 2, 2014)
Failure to submit documents shall not automatically render the
assessment as final and executory
In the present case, the BIR considered the tax assessment final, executory
and demandable because of the taxpayers failure to submit the required
documents for assessment within 60 days from filing its protest.

The CTA ruled against this defense stating that the petitioners submission of
protest without supporting documents does not invalidate the filing of the
protest. The lack of documentation will only matter when the BIR evaluates
the merits of the said protests, but should not automatically result in the
deficiency assessment becoming final and executory. (Phil Foods Properties,
Inc. v. CIR, CTA Case No. 8185, Third Division, December 3, 2014)
Exception to strict interpretation of the law
The general rule is that tax collection cannot be suspended. In case of nonredemption foreclosure sale, capital gains tax (CGT) and documentary stamp
tax (DST) should be paid within 30 days and five days, respectively, after the
lapse of the redemption period. Consequently, any penalties and surcharges
that may be imposed should, likewise, be counted from said redemption
period.
However, the peculiar circumstances of the case warrant special
consideration. The taxpayer attempted to pay the CGT and DST after the
expiration of the redemption period but was told by the receiving clerk of the
RDO that the certificates of final sale are required before payment of CGT
and DST. However, when the certificates of final sale were issued and the
taxpayer paid the taxes, it was additionally charged interest and penalties.
Given the circumstances, the CTA approved the taxpayers application for
refund of the interest and penalties charged on the CGT and DST.
While procedural rules must be followed, special cases merit exemption to
relieve a litigant of an injustice not commensurate to the degree of his
thoughtlessness in noncompliance with the procedure prescribed by law.
The government should not use technicalities to hold on to money that does
not belong to it. Only a preponderance of evidence is needed to grant a
claim for tax refund based on excess payment. The BIR should thus refund or
issue a tax credit certificate (TCC) to the taxpayer representing erroneously
paid surcharges on the CGT and real property tax (RPT) for the sale of real
properties. (George T. Olivo and Cash World Lending Inc. v. CIR, CTA Case No.
8755, December 15, 2014)
Appeal on RPT assessments
Sections 226 to 231 of the Local Government Code (LGC) specify the
administrative remedies available to a real property owner who is not
satisfied with the action of the provincial, city or municipal assessor in the
assessment of his property. Under said provision, the taxpayer must first pay
the RPT assessment before filing a written protest with the treasurer
concerned. The protest must then be filed within 30 days from payment of
the RPT. From the receipt of the protest, the treasurer has 60 days to decide
the same. Upon denial of the protest or the lapse of the 60-day period, the

taxpayer is afforded the remedy of filing an appeal with the Local Board of
Assessment Appeals (LBAA). If the taxpayer is not satisfied with the decision
of the LBAA, he can appeal the decision to the Central Board of Assessment
Appeals (CBAA) within 30 days after the receipt of the decision.
In the present case, the taxpayer filed an appeal directly with the Regional
Trial Court (RTC) for the denial of cancellation of RPT assessment, invoking
Section 195 of the LGC. The Municipal Assessor and Treasurer contested the
appeal stating that it is under the jurisdiction of LBAA (not the RTC) and as
provided under Section 226 to 231, the RPT under protest should have been
paid as a condition precedent to its appeal.
Considering that the LBAA has jurisdiction to rule on the correctness of the
subject assessment, the RTC cannot decide on the case. Likewise, since the
taxpayer failed to pay the RPT under protest and appeal before the LBAA
within the mandated period, the RPT assessments have become final and
collectible. (Lepanto Consolidated Mining Company v. Marieta A. Bondad, in
her capacity as Municipal Treasurer, and Joel D. Tingbaoen, in his capacity as
Municipal Assessor, of the Municipality of Mankayan, Benguet, CTA EB Case
No. 1092, December 16, 2014)
Appeals from RPT assessments should be made to the LBAA within
60 days
In claiming that its real properties were erroneously and excessively
assessed, the taxpayer is in effect questioning the validity of the
assessments made by the City Assessor. Under Section 226 of the LGC, a
dissatisfied owner or person having legal interest in the property has only 60
days from receipt of the notice of assessment within which to appeal or to
question before the LBAA the assailed assessment. Failure to do so will
render the assessment of the local assessor final, executory and
demandable. It will also preclude the taxpayer from questioning the
correctness of the assessment, or from invoking any defense that would
reopen the question of its liability on the merits.
In this case, the taxpayer filed its appeal with the LBAA beyond the 60-day
reglementary period, rendering the assessment final, executor and
demandable. (Bay Resources Development Corporation v. LBAA and Local
Treasurer of Paranaque, CTA EB Case No. 1036, December 16, 2014)
Deficiency taxes not subject to set off against refundable taxes
Taxes cannot be subject to set-off or compensation for the simple reason that
the government and the taxpayer are not creditors and debtors of each
other. There is a material distinction between tax and debt. Debts are due to
the government in its corporate capacity, while taxes are due to the
government in its sovereign capacity.

A person cannot refuse to pay tax on the ground that the government owes
him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the
government. (Bay Resources Development Corporation v. LBAA and Local
Treasurer of Paranaque, CTA EB Case No. 1036, December 16, 2014)
VAT Zero-rating of services to nonresident clients
Under Section 108(B)(2) of the National Internal Revenue Code (NIRC) of
1997, as amended, the following requisites must be met in order for the
supply of services to be VAT zero-rated:
1. services of a VAT-registered person must not involve processing,
manufacturing or repacking of goods
2. payment for such services must be in acceptable foreign currency and
accounted for in accordance with the Bangko Sentral ng Pilipinas (BSP)
rules and regulations
3. recipient of such services is doing business outside the Philippines.
In addition, to be considered as a nonresident foreign corporation doing
business outside the Philippines, each entity must be supported, at the very
least, by both the Securities and Exchange Commission (SEC) certificate of
non-registration of the corporation and the articles of foreign incorporation.
Hence, only the clients of taxpayers who can present these documents may
be considered as nonresident foreign corporations doing business outside the
Philippines and may then qualify for VAT zero-rating. (Deutsche Knowledge
Services, Pte Ltd. v. CIR, CTA Case No. 7808, December 16, 2014)
Apportionment of input VAT refund for unreported zero-rated sales
Pursuant to Section 114 (A), in relation to Section 108 of the 1997 Tax Code,
a taxpayer should report all its zero-rated sale of services in the period the
payments were received.
In case a taxpayer fails to report some of its zero-rated sales in the
appropriate period when such sales were made, only the amount of input VAT
claimed during the period proportionate to the zero-rated sales reported in
the VAT return during the period may be allowed for refund. The input VAT
proportionate to the amount of zero-rated sales not reported during the
period (i.e., reported in the succeeding period) will be disallowed.
There is no plausible reason why a taxpayer should be entitled to a refund of
the substantiated input VAT without allocating its reported zero-rated sales to
sales per official receipts because the substantiated input VAT covers the
entire zero-rated sales, both reported and unreported sales for the quarter. In
disallowing a portion of a taxpayers zero-rated sales, it essentially follows
that a portion of the claim for refund of input VAT attributable to such zero-

rated sales should also be disallowed by the CTA. Otherwise, it would be to

disregard the substantiation of the taxpayers zero-rated sales thereby
negating its effect on the amount of unutilized input VAT claimed for refund.
(Northwind Power Development Corporation v. CIR, CTA EB Nos. 1037 &
1042, December 16, 2014)
Refunding of amortized input VAT from capital goods
Section 110 (A) of the 1997 Tax Code is clear that if the aggregate
acquisition cost of the capital goods, excluding the VAT component, exceeds
one million pesos in a calendar month, the input tax on capital goods shall be
spread over 60 months or the estimated useful life of the capital goods,
whichever is shorter. Since there is no provision for exemption, a company
generating 100% export or VAT zero-rated sales is not exempt from the
requirement to spread the input VAT.
Hence, even if the taxpayer is subjected to zero-rated tax on all its sales, it
can only claim refund based on its creditable input tax attributable to the
zero-rated sale during the period. In case of input taxes on capital goods,
such refundable input tax refers only to the portion amortized during the
period of claim.
This rule will not prevent the taxpayer from refunding the rest of the
amortized input taxes beyond the two-year prescription period. The
spreading over of the input VAT does not run counter to the provisions of
Section 112(A) of the 1997 Tax Code because the spreading over merely
delays the crediting of the input tax and not the filing of the claim. The
taxpayer is not deprived of his privilege to credit the input tax as long as it
filed its claim within two years from the close of the taxable quarter when
the sales were made. To emphasize, the reckoning period for the claim is two
years from the end of the quarter when the pertinent sale or transactions
were made regardless of when the input VAT was paid. (Taganito Mining
Corporation v. CIR, CTA EB Case Nos. 935 & 936, December 16, 2014; and
CIR v. Northwind Power Development Corporation, CTA EB Nos. 1037 & 1042,
December 16, 2014)
Proving that income on which CWT refund is sought is declared in
the ITR
A taxpayer claiming for a tax credit or refund of CWT must prove that it was
shown in the income tax return (ITR) that the income received was declared
as part of the gross income and the fact of withholding must be established
by a copy of a statement duly issued by the payor to the payee showing the
amount paid and the amount of tax withheld.
Although the taxpayer submitted documents like General Ledger, Trial
Balance, Audited Financial Statements for 2007, 2008 and 2009, Annual
Income Tax Returns for 2007 and 2008, Quarterly Income Tax Returns for

2007 and 2008, schedules and other supporting documents, the court noted
that it failed to present detailed General Ledger, reconciliation schedules or
any other document whereby the court can trace the discrepancy and can
determine with certainty that the all income payments related to the claimed
CWT formed part of its taxable gross income in its annual ITR.
Tax refunds partake of the nature of tax exemptions and are thus construed
strictissimi juris against the person or entity claiming the exemption. The
burden in claiming tax refund rests upon the taxpayer. In this case, petitioner
failed to discharge the necessary burden of proof. (United Coconut Planters
Bank v. CIR, CTA EB No. 1017, December 16, 2014)
Refund of erroneously withheld tax
Proceeds from the sale land of the former military camp are tax exempt
pursuant to RA 7227 otherwise known as the Bases Conversion and
Development Act of 1992, as amended by RA 7917, which provides that the
proceeds of the sale of portion of camps located in Metro Manila shall not be
diminished and therefore, exempt from all forms of taxes and fees. The sale
is therefore also exempt from withholding tax.
Since Bases Conversion and Development Authority (BCDA) has been
erroneously subjected to withholding tax on its sale of land formerly forming
part of Fort Bonifacio, BCDA applied for refund of the tax withheld.
The BIR argued that, in a claim for refund of CWT, the taxpayer must prove
that the income from which taxes were withheld was included as part of the
gross income. BIR states that the certificates of CWT, payment forms and
deposit slips are not sufficient to justify its refund claim. The BIR further
argues the taxpayer is required to choose an option to refund or for issuance
of tax credit certificate in its annual income tax return pursuant to Section 76
of the 1997 Tax Code. Since BCDA opted to carry over its unutilized
creditable withholding tax, said carry-over could no longer be converted into
a claim for tax refund because of the irrevocability rule provided in Section
76 of the 1997 Tax Code. BIR concludes that BCDA is already barred from
claiming the refund.
The CTA En Banc ruled that, since the BCDA is claiming for a refund of
erroneously withheld tax on an income exempt from tax (which the
withholding agents should not have withheld and remitted to the BIR in the
first place), the requirements under Section 76 of the Tax Code should not
apply. BCDA is not required to declare the sale of the lots as part of its gross
income. Compliance with this requirement is vital only for refund of
excessive income tax payments or excess creditable withholding tax
sanctioned under Section 76 of the NIRC.

It is a truism that tax refunds are in the nature of tax exemptions and are to
be construed in strictissimi juris against the taxpayer and liberally in favor of
the taxing authority. However, the rule on strict interpretation of tax
exemption does not justify a denial of a claim for refund where the taxpayer
has sufficiently proven the factual and legal basis for its exemption and the
fact of payment to the taxing authorities. (Bases Conversion and
Development Authority v. CIR, CTA EB No. 1123, December 16, 2014)
Refund of excess income tax credits upon cessation of business
Under Section 76 of the 1997 Tax Code, a corporations excess income tax
credit or overpaid income tax in a given year may either be refunded (in the
form of cash or TCCs) or carried over and applied against the income tax
liabilities of the succeeding taxable years. Once the option to carry-over has
been made, such option becomes irrevocable for that taxable period and no
application for cash refund or issuance of tax credit certificate shall then be
allowed.
In exercising its option, the corporation is mandated to signify in its annual
ITR (by marking the box provided in an appropriate BIR Form) its intention
either to carry over the excess credit or to claim a refund; the remedies are
in the alternative and the choice of one precludes the other. However, in the
event of cessation of business, a taxpayer may opt to claim for refund/TCC
even if it had previously chosen or exercised the irrevocable option to carryover since there is no more opportunity for it to utilize such excess credits.
However, in order to be exempted from the irrevocability rule, the taxpayer
must prove that it has indeed permanently ceased its business operations. A
dissolving corporation must abide by the requirements as stated in Sections
52(C) and 235(e) of the 1997 Tax Code, as amended, viz., (1) secure a
Certificate of Tax Clearance from the BIR, and (2) to secure a Certificate of
Dissolution from the Securities and Exchange Commissioner (SEC). (NEC
Logistics Phil., Inc., v. CIR, CTA Case No. 8533, December 18, 2014)
CTA CASES JANUARY 2015
Prescriptive period for refund of indirect taxes passed on to PEZA
enterprises
A PEZA-registered entity is qualified to apply for refund of passed-on customs
duties from the purchase of petroleum products. Customs duties are a form
of indirect tax. Since the PEZA Law (Republic Act No. 7916, otherwise known
as the Special Economic Zone Act of 1995) grants PEZA-registered entities an
exemption from both direct and indirect taxes, a PEZA enterprise may claim
a tax refund when the economic burden of tax is shifted to it.

In such case, neither the prescriptive periods nor procedural requirements

provided under Section 2313 of the Tariff and Customs Code of the
Philippines (TCCP) could bar a claim for refund of duly registered enterprise.
The prescriptive periods under the TCCP and other revenue laws are
inapplicable on claims for refund of passed-on customs duties arising from
purchases of supplies brought into the ecozone and used, directly or
indirectly, by a duly-registered PEZA enterprise.
The Civil Code provisions on solutio indebiti [Article 1145 (2)] find application
in this case: the claim for refund must be commenced within six years from
date of payment. (Commissioner of Customs & Bureau of Customs v. DOLE
Phil. Inc., CTA EB Case No. 1142, January 5, 2015)
Under-declaration of purchase shall not result in deficiency income
tax and VAT
The three elements for the imposition of income tax are: (1) there must be
gain or profit, (2) such gain or profit is realized or received, actually or
constructively, and (3) it is not exempted by law or treaty from income tax.
Income tax is assessed on income received from any property, activity or
service. Such being the case, the imposition or assessment of income tax
does not happen when there is an undeclared purchase, but only when there
was an income, and such income was received or realized by the taxpayer.
Furthermore, it must be emphasized that for income tax purposes, a
taxpayer is free to deduct from its gross income a lesser amount, or not
claim any deduction at all. What the income tax law prohibits is the claiming
of deduction beyond the amount authorized therein. Hence, even granting
that there is an undeclared purchase, the same is not prohibited by law. A
taxpayer can exercise its discretion on whether or not it will declare a lesser
amount of deductions or none at all.
In the same vein, no deficiency value-added tax (VAT) assessment should
arise from underdeclared purchase. Note that VAT is imposed on the seller of
the goods, pursuant to Section 105 of the 19997 Tax Code. VAT is assessed
on the gross selling price or gross value in money of the goods or properties
sold and is to be paid by the seller or transferor. (CIR v. Agrenurture, Inc.,
CTA EB No. 1054, 13 January 2015)