Principles&Concepts of Estate Tax & VAT

7/21/2019 Principles&Concepts of Estate Tax & VAT

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PRINCIPLES/ CONCEPTSOF ESTATE TAX & VAT

I. Estate tax

Post-mortem dispositions typically -

(1) Convey no title or ownership to the transferee before the death of thetransferor; or, what amounts to the same thing, that the transferor should retainthe ownership (full or naked) and control of the property while alive;

(2) That before the [donor's] death, the transfer should be revocable by thetransferor at will, ad nutum; but revocability may be provided for indirectly bymeans of a reserved power in the donor to dispose of the properties conveyed;

(3) That the transfer should be void if the transferor should survive the

transferee;

[4] [T]he specification in a deed of the causes whereby the act may be revokedby the donor indicates that the donation is inter vivos, rather than a dispositionmortis causa;

[5] That the designation of the donation as mortis causa, or a provision in thedeed to the effect that the donation is "to take effect at the death of the donor"are not controlling criteria; such statements are to be construed together withthe rest of the instrument, in order to give effect to the real intent of the

transferor; and

(6) That in case of doubt, the conveyance should be deemed donation inter vivos ratherthan mortis causa, in order to avoid uncertainty as to the ownership of the propertysubject of the deed. (GONZALO VILLANUEVA vs. SPOUSES FROILAN, G.R. No. 172804,January 24, 2011)

The conveyance in question is not, first of all, one of mortis causa, which should be embodied ina will. In this case, the monies subject of savings account were in the nature of conjugal funds.In the case relied on, Rivera v. People's Bank and Trust Co., we rejected claims that asurvivorship agreement purports to deliver one party's separate properties in favor of the other,but simply, their joint holdings. (ROMARICO G. VITUG vs. THE HONORABLE COURT OF

APPEALS and ROWENA FAUSTINO-CORONA, G.R. No. 82027, March 29, 1990)

But although the survivorship agreement is per se not contrary to law its operation or effectmay be violative of the law. For instance, if it be shown in a given case that such agreement is amere cloak to hide an inofficious donation, to transfer property in fraud of creditors, or to defeat


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the legitime of a forced heir, it may be assailed and annulled upon such grounds. (ROMARICO G.VITUG vs. THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO-CORONA, G.R. No.82027, March 29, 1990)

As held in Propstra v. U.S., where a lien claimed against the estate was certain and enforceableon the date of the decedent's death, the fact that the claimant subsequently settled for lesser

amount did not preclude the estate from deducting the entire amount of the claim for estate taxpurposes. These pronouncements essentially confirm the general principle that post-deathdevelopments are not material in determining the amount of the deduction. (RAFAEL ARSENIOS. DIZON vs. COURT OF TAX APPEALS, G.R. No. 140944, April 30, 2008)

We express our agreement with the date-of-death valuation rule. There is no law, nor do wediscern any legislative intent in our tax laws, which disregards the date-of-death valuationprinciple and particularly provides that post-death developments must be considered indetermining the net value of the estate. It bears emphasis that tax burdens are not to beimposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports,tax statutes being construed strictissimi juris against the government. (RAFAEL ARSENIO S.DIZON vs. COURT OF TAX APPEALS, G.R. No. 140944, April 30, 2008)

Such construction finds relevance and consistency in our Rules on Special Proceedings whereinthe term "claims" required to be presented against a decedent's estate is generally construed tomean debts or demands of a pecuniary nature which could have been enforced against thedeceased in his lifetime, or liability contracted by the deceased before his death. Therefore, theclaims existing at the time of death are significant to, and should be made the basis of, thedetermination of allowable deductions. (RAFAEL ARSENIO S. DIZON vs. COURT OF TAXAPPEALS, G.R. No. 140944, April 30, 2008)

Administration expenses, as an allowable deduction from the gross estate of the decedent forpurposes of arriving at the value of the net estate, have been construed by the federal and

state courts of the United States to include all expenses "essential to the collection of the assets,payment of debts or the distribution of the property to the persons entitled to it." In otherwords, the expenses must be essential to the proper settlement of the estate and expendituresincurred for the individual benefit of the heirs, devisees or legatees are not deductible.(COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R. No. 123206, March 22,2000)

Thus, in Lorenzo v. Posadas, the Court construed the phrase "judicial expenses of thetestamentary or intestate proceedings" as not including the compensation paid to a trustee ofthe decedent's estate when it appeared that such trustee was appointed for the purpose ofmanaging the decedent's real estate for the benefit of the testamentary heir. In another case,the Court disallowed the premiums paid on the bond filed by the administrator as an expense of

administration since the giving of a bond is in the nature of a qualification for the office, and notnecessary in the settlement of the estate. Neither may attorney's fees incident to litigationincurred by the heirs in asserting their respective rights be claimed as a deduction from thegross estate. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R. No.123206, March 22, 2000)


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The notarial fee paid for the extrajudicial settlement is clearly a deductible expense since suchsettlement effected a distribution of Pedro Pajonar's estate to his lawful heirs. Similarly, theattorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property should alsobe considered as a deductible administration expense as PNB provided a detailed accounting ofdecedent's property and gave advice as to the proper settlement of the latter's estate, actswhich contributed towards the collection of decedent's assets and the subsequent settlement of

the estate. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R. No. 123206,March 22, 2000)

Neither is the survivorship agreement a donation inter vivos, for obvious reasons, because itwas to take effect after the death of one party. Secondly, it is not a donation between thespouses because it involved no conveyance of a spouse's own properties to the other.(ROMARICO G. VITUG vs. THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO-CORONA, G.R. No. 82027, March 29, 1990)

In the case at bar, when the spouses Vitug opened savings account, they merely put whatrightfully belonged to them in a money-making venture. They did not dispose of it in favor ofthe other, which would have arguably been sanctionable as a prohibited donation. (ROMARICOG. VITUG vs. THE HONORABLE COURT OF APPEALS and ROWENA FAUSTINO-CORONA, G.R.No. 82027, March 29, 1990)

The granting clause shows that Diego donated the properties out of love and affection for thedonee which is a mark of a donation inter vivos; second, the reservation of lifetime usufructindicates that the donor intended to transfer the naked ownership over the properties; third, thedonor reserved sufficient properties for his maintenance in accordance with his standing insociety, indicating that the donor intended to part with the six parcels of land; lastly, the doneeaccepted the donation. (SPS. AGRIPINO GESTOPA and ISABEL SILARIO GESTOPA vs. COURTOF APPEALS, G.R. No. 111904, October 5, 2000)

In the case of Alejandro vs. Geraldez, 78 SCRA 245 (1977), we said that an acceptance clause isa mark that the donation is inter vivos. Acceptance is a requirement for donations inter vivos.Donations mortis causa, being in the form of a will, are not required to be accepted by thedonees during the donors' lifetime. (SPS. AGRIPINO GESTOPA and ISABEL SILARIO GESTOPAvs. COURT OF APPEALS, G.R. No. 111904, October 5, 2000)

Crucial in resolving whether the donation was inter vivos or mortis causa is the determination ofwhether the donor intended to transfer the ownership over the properties upon the execution ofthe deed. (SPS. AGRIPINO GESTOPA and ISABEL SILARIO GESTOPA vs. COURT OF APPEALS,G.R. No. 111904, October 5, 2000)

A remuneratory donation is one where the donee gives something to reward past or future

services or because of future charges or burdens, when the value of said services, burdens orcharges is less than the value of the donation. (De Luna v. Abrigo, G.R. No. L-57455, January18, 1990)


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B. Value-Added Tax (VAT)1. Concept

As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer inthe chain of transactions. For simplicity and efficiency in tax collection, the VAT is imposed notjust on the value added by the taxpayer, but on the entire selling price of his goods, properties

or services. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION,G.R. No. 187485, February 12, 2013)

However, the taxpayer is allowed a refund or credit on the VAT previously paid by those whosold him the inputs for his goods, properties, or services. The net effect is that the taxpayerpays the VAT only on the value that he adds to the goods, properties, or services that heactually sells. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWERCORPORATION, G.R. No. 187485, February 12, 2013)

VAT is a tax on transactions, imposed at every stage of the distribution process on the sale,barter, exchange of goods or property, and on the performance of services, even in the absenceof profit attributable thereto. The term "in the course of trade or business" requires the regularconduct or pursuit of a commercial or an economic activity, regardless of whether or not theentity is profit-oriented. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R.No. 125355, March 30, 2000)

The VAT is not a license tax; it is not a tax on the exercise of a privilege, much less aconstitutional right. It is imposed on the sale, barter, lease or exchange of goods or propertiesor the sale or exchange of services and the lease of properties purely for revenue purposes.(ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OFINTERNAL REVENUE, G.R. No. 115455, October 30, 1995)

2. Characteristics/ Elements of a VAT-Taxable transaction

VAT is not a singular-minded tax on every transactional level; its assessment bears directrelevance to the taxpayer's role or link in the production chain. Hence, as affirmed by Section 99[now Sec. 105] of the Tax Code and its subsequent incarnations, the tax is levied only on thesale, barter or exchange of goods or services by persons who engage in such activities, in thecourse of trade or business. (COMMISSIONER OF INTERNAL REVENUE vs. MAGSAYSAY LINES,INC., G.R. No. 146984. July 28, 2006)

The Court rules that given the undisputed finding that the transaction in question was not madein the course of trade or business of the seller, NDC that is, the sale is not subject to VATpursuant to Section 99 [now Sec. 105] of the Tax Code, no matter how the said sale may hew

to those transactions deemed sale as defined under Section 100 [now Sec. 106].(COMMISSIONER OF INTERNAL REVENUE vs. MAGSAYSAY LINES, INC., G.R. No. 146984. July28, 2006)


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Thus, there must be a sale, barter or exchange of goods or properties before any VAT may belevied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS toSony; it was but a dole out by SIS and not in payment for goods or properties sold, bartered orexchanged by Sony. (COMMISSIONER OF INTERNAL REVENUE vs. SONY PHILIPPINES, INC.,G.R. No. 178697, November 17, 2010)

Goods or properties must be used directly or indirectly in the production or sale of taxablegoods and services. (Kepco Philipppines Corp. v. CIR, G.R. No. 179356, December 14, 2009)

it is immaterial whether the primary purpose of a corporation indicates that it receives paymentsfor services rendered to its affiliates on a reimbursement-on-cost basis only, without realizingprofit, for purposes of determining liability for VAT on services rendered. As long as the entityprovides service for a fee, remuneration or consideration, then the service rendered is subject toVAT. (COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, G.R. No. 125355,March 30, 2000)

3. Impact of tax

Under Section 105 of the Tax Code, VAT is imposed on any person who, in the course of tradeor business, sells or renders services for a fee. In other words, the seller of services, who in thiscase is the tollway operator, is the person liable for VAT. The latter merely shifts the burden ofVAT to the tollway user as part of the toll fees. (RENATO V. DIAZ and AURORA MA. F. TIMBOLvs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

4. Inc idence of tax

The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods,properties or services to the buyer. In such a case, what is transferred is not the seller's liabilitybut merely the burden of the VAT. (RENATO V. DIAZ and AURORA MA. F. TIMBOL vs. THE

SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bearsits burden since the amount of VAT paid by the former is added to the selling price. Onceshifted, the VAT ceases to be a tax and simply becomes part of the cost that the buyer mustpay in order to purchase the good, property or service. (RENATO V. DIAZ and AURORA MA. F.TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

A seller who is directly and legally liable for the payment of an indirect tax, such as the VAT ongoods or services is not necessarily the person who ultimately bears the burden of the same tax.It is the final purchaser of consumer of such goods or services who, although not directly and

legally liable for the payment thereof, ultimately bears the burden of the tax. (Contex v. CIR,G.R. No. 151135, July 2, 2004)

In the case of the VAT, the law minimizes the regressive effects of indirect taxation by providingfor zero rating of certain transactions, while granting exemptions to other transactions. On theother hand, the transactions which are subject to the VAT are those which involve goods and


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services which are used or availed of mainly by higher income groups. (ARTURO M. TOLENTINOv. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No.115455, October 30, 1995)

According to the Destination Principle, goods and services are taxed only in the country wherethese are consumed. In connection with the said principle, the Cross Border Doctrine mandates

that no VAT shall be imposed to form part of the cost of the goods destined for consumptionoutside the territorial border of the taxing authority. Hence, actual export of goods and servicesfrom the Philippines to a foreign country must be free of VAT, while those destined for use orconsumption within the Philippines shall be imposed with 10% VAT. (ATLAS CONSOLIDATEDMINING AND DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R.Nos. 141104 & 148763, June 8, 2007)

Applying the destination principle to the exportation of goods, automatic zero rating is primarilyintended to be enjoyed by the seller who is directly and legally liable for the VAT, making suchseller internationally competitive by allowing the refund or credit of input taxes that areattributable to export sales. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATETECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

Under the cross-border principle of the VAT system being enforced by the Bureau of InternalRevenue (BIR), no VAT shall be imposed to form part of the cost of goods destined forconsumption outside of the territorial border of the taxing authority. If exports of goods andservices from the Philippines to a foreign country are free of the VAT, then the same rule holdsfor such exports from the national territory - except specifically declared areas - to an ecozone.(COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No.153866, February 11, 2005)

While an ecozone is geographically within the Philippines, it is deemed a separate customsterritory and is regulated in laws as foreign soul. Sales by supplies outside the borders of

ecozone to this separate customs territory are deemed exports and treated as export sales. (CIRv. Seksui Jushi Phils, Inc. G.R. No. 149671, July 21, 2006)

For as long as the goods remain within the zone, whether we call it an economic zone or afreeport zone, for as long as we say in this law that all goods entering this particular territorywill be duty-free and tax-free, for as long as they remain there, consumed there or re-exportedor destroyed in that place, then they are not subject to duties and taxes in accordance with thelaws of the Philippines. (Coconut Oil Refiners Association v. Executive Secretary, G.R. No.132527, July 29, 2005)

8. VAT on sale of goods or properti es

Goods, as commonly understood in the business sense, refer to the product which the VAT-registered person offers for sale to the public. With respect to real estate dealers, it is the realproperties themselves which constitute their goods. Such real properties are the operatingassets of the real estate dealer. (Fort Bonifacio Development Corporation vs. CIR, G.R. Nos.158885 and 170630, April 2, 2009)


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a) Requisites of taxability of sale of goods or propertie s

Mindanao II's sale of the Nissan Patrol is said to be an isolated transaction. However, it does notfollow that an isolated transaction cannot be an incidental transaction for purposes of VATliability. Indeed, a reading of Section 105 of the 1997 Tax Code would show that a transaction

"in the course of trade or business" includes "transactions incidental thereto." (MINDANAO IIGEOTHERMAL PARTNERSHIP vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 193301,March 11, 2013)

Prior to the sale, the Nissan Patrol was part of Mindanao II's property, plant, and equipment.Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course ofMindanao II's business which should be liable for VAT. (MINDANAO II GEOTHERMALPARTNERSHIP vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 193301, March 11, 2013)

9. Zero-rated sales of goods or properties , and e ffectively zero-rated sales of goodsor properties

Zero-rated transactions generally refer to the export sale of goods and supply of services. Thetax rate is set at zero and when applied to the tax base, such rate obviously results in no taxchargeable against the purchaser. The seller of such transactions charges no output tax, butcan claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.(COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No.153866, February 11, 2005)

Effectively zero-rated transactions, however, refer to the sale of goods or supply of services topersons or entities whose exemption under special laws or international agreements to whichthe Philippines is a signatory effectively subjects such transactions to a zero rate. Again, asapplied to the tax base, such rate does not yield any tax chargeable against the purchaser. The

seller who charges zero output tax on such transactions can also claim a refund of or a taxcredit certificate for the VAT previously charged by suppliers. (COMMISSIONER OF INTERNALREVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

If respondent is located in an export processing zone within that ecozone, sales to the exportprocessing zone, even without being actually exported, shall in fact be viewed as constructivelyexported under EO 226. Considered as export sales, such purchase transactions by respondentwould indeed be subject to a zero rate. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATETECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

PAGCOR's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughlyand extensively discussed in Commissioner of Internal Revenue v. Acesite (Philippines) HotelCorporation. Acesite sought the refund of the amount it paid as VAT on the ground that itstransaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity.The Court ruled that PAGCOR and Acesite were both exempt from paying VAT. (PHILIPPINEAMUSEMENT AND GAMING CORPORATION (PAGCOR) vs. THE BUREAU OF INTERNAL REVENUE,G.R. No. 172087, March 15, 2011)


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No prior application for the effective zero rating of its transactions is necessary. The BIRregulations additionally requiring an approved prior application for effective zero rating cannotprevail over the clear VAT nature of respondent's transactions. Other than the generalregistration of a taxpayer the VAT status of which is aptly determined, no provision under ourVAT law requires an additional application to be made for such taxpayer's transactions to be

considered effectively zero-rated. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATETECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

The Omnibus Investments Code of 1987 recognizes as export sales the sales of export productsto another producer or to an export trader, provided that the export products are actuallyexported. For purposes of VAT zero-rating, such producer or export trader must be registeredwith the BOI and is required to actually export more than 70% of its annual production. (ATLASCONSOLIDATED MINING AND DEVELOPMENT CORPORATION vs. COMMISSIONER OFINTERNAL REVENUE, G.R. Nos. 141104 & 148763, June 8, 2007)

In terms of the VAT computation, zero rating and exemption are the same, but the extent ofrelief that results from either one of them is not. In both instances of zero rating, there is totalrelief for the purchaser from the burden of the tax but in an exemption there is only partialrelief, because the purchaser is not allowed any tax refund of or credit for input taxes paid.(COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No.153866, February 11, 2005)

13. VAT on sale of service and use or lease of properties

Service has been defined as the art of doing something useful for a person or company for a feeor useful labor or work rendered or to be rendered another for a fee. (CIR v. American ExpressInternational, Inc., G.R. No. 152609, June 29, 2005)

By qualifying "services" with the words "all kinds," Congress has given the term "services" an all-encompassing meaning. The listing of specific services are intended to illustrate how pervasiveand broad is the VAT's reach rather than establish concrete limits to its application; thus, everyactivity that can be imagined as a form of "service" rendered for a fee should be deemedincluded unless some provision of law especially excludes it. (RENATO V. DIAZ and AURORA MA.F. TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

Tollway operators not only come under the broad term "all kinds of services," they also comeunder the specific class described in Section 108 as "all other franchise grantees" who aresubject to VAT, "except those under Section 119 of this Code." Tollway operators are franchisegrantees and they do not belong to exceptions (the low-income radio and/or television

broadcasting companies with gross annual incomes of less than P10 million and gas and waterutilities) that Section 119 spares from the payment of VAT. (RENATO V. DIAZ and AURORA MA.F. TIMBOL vs. THE SECRETARY OF FINANCE, G.R. No. 193007, July 19, 2011)

In specifically including by way of example electric utilities, telephone, telegraph, and


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broadcasting companies in its list of VAT-covered businesses, Section 108 opens othercompanies rendering public service for a fee to the imposition of VAT. Businesses of a publicnature such as public utilities and the collection of tolls or charges for its use or service is afranchise. (RENATO V. DIAZ and AURORA MA. F. TIMBOL vs. THE SECRETARY OF FINANCE,G.R. No. 193007, July 19, 2011)

In the case of CIR v. Court of Appeals (CA), the Court had the occasion to rule that servicesrendered for a fee even on reimbursement-on-cost basis only and without realizing profit arealso subject to VAT. In that case, COMASERCO rendered service to its affiliates and, in turn, theaffiliates paid the former reimbursement-on-cost which means that it was paid the cost orexpense that it incurred although without profit. (COMMISSIONER OF INTERNAL REVENUE vs.SONY PHILIPPINES, INC., G.R. No. 178697, November 17, 2010)

Among those included in the enumeration is the "lease of motion picture films, films, tapes and discs."This, however, is not the same as the showing or exhibition of motion pictures or films. The legislativeintent is not to impose VAT on persons already covered by the amusement tax and this holds true evenin the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law wasintended to replace the percentage tax on certain services. (CIR v. SM Prime Holdings, Inc. and FirstAsia Realty Development Corp., G.R. No. 183505, February 26, 2010)

15. VAT exempt transactions

An exempt transaction involves goods or services which, by their nature, are specifically listed inand expressly exempted from the VAT under the Tax Code, without regard to the tax status -VAT-exempt or not - of the party to the transaction. Indeed, such transaction is not subject tothe VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.(COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No.153866, February 11, 2005)

An exempt party, on the other hand, is a person or entity granted VAT exemption under the TaxCode, a special law or an international agreement to which the Philippines is a signatory, and byvirtue of which its taxable transactions become exempt from the VAT. Such party is also notsubject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, dependingon its registration as a VAT or non-VAT taxpayer. (COMMISSIONER OF INTERNAL REVENUE vs.SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

a) VAT exempt transactions, in general

By extending the exemption to entities or individuals dealing with PAGCOR, the legislatureclearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT,

as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods,properties, or services subject to VAT. Thus, by extending the tax exemption to entities orindividuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being liableto indirect taxes. (PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) vs. THEBUREAU OF INTERNAL REVENUE, G.R. No. 172087, March 15, 2011)


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The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extensionof such exemption to entities or individuals dealing with PAGCOR in casino operations are bestelucidated from the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons,Inc., where the absolute tax exemption of the World Health Organization (WHO) upon aninternational agreement was upheld. We held in said case that the exemption of contracteeWHO should be implemented to mean that the entity or person exempt is the contractor itself

who constructed the building owned by contractee WHO, and such does not violate the rule thattax exemptions are personal because the manifest intention of the agreement is to exempt thecontractor so that no contractor's tax may be shifted to the contractee WHO. (PHILIPPINEAMUSEMENT AND GAMING CORPORATION (PAGCOR) vs. THE BUREAU OF INTERNAL REVENUE,G.R. No. 172087, March 15, 2011)

Pawnshops- considered as non-bank financial intermediary is exempted from VAT but liable topercentage tax. (Tambunting Pawnshop, Inc. v. CIR, G.R. No. 179085, January 21, 2010)

16. Input tax and output tax, defined

Under the present method that relies on invoices, an entity can credit against or subtract fromthe VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.(COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No.153866, February 11, 2005)

If at the end of a taxable quarter the output taxes charged by a seller are equal to the inputtaxes passed on by the suppliers, no payment is required. It is when the output taxes exceedthe input taxes that the excess has to be paid. (COMMISSIONER OF INTERNAL REVENUE vs.SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

Prior payment of taxes is not necessary before a taxpayer could avail of the 8% transitionalinput tax credit: first, it was never mentioned in Section 105 of the old NIRC [now Sec. 111]

that prior payment of taxes is a requirement; second, since the law (Section 105 of the NIRC)does not provide for prior payment of taxes, to require it now would be tantamount to judiciallegislation which, to state the obvious, is not allowed; third, a transitional input tax credit is nota tax refund per se but a tax credit; fourth, if the intent of the law were to limit the input tax tocases where actual VAT was paid, it could have simply said that the tax base shall be the actualvalue-added tax paid; and fifth, this Court had already declared that prior payment of taxes isnot required in order to avail of a tax credit. (FORT BONIFACIO DEVELOPMENT CORPORATIONvs . COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425, January 22, 2013)

Section 112 of the Tax Code does not prohibit cash refund or tax credit of transitional input taxin the case of zero-rated or effectively zero-rated VAT registered taxpayers, who do not have

any output VAT. The phrase "except transitional input tax" in Section 112 of the Tax Code wasinserted to distinguish creditable input tax from transitional input tax credit. (FORT BONIFACIODEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425,January 22, 2013)

It is apparent that the transitional input tax credit operates to benefit newly VAT-registered


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persons, whether or not they previously paid taxes in the acquisition of their beginninginventory of goods, materials and supplies. During that period of transition from non-VAT toVAT status, the transitional input tax credit serves to alleviate the impact of the VAT on thetaxpayer. (FORT BONIFACIO DEVELOPMENT CORPORATION vs . COMMISSIONER OF INTERNALREVENUE, G.R. No. 173425, January 22, 2013)

In a VAT-exempt transaction, the seller is not allowed to charge VAT to his customer. Since nooutput tax is shifted by the seller, there is no output tax against which the related input taxesmay be credited. Neither can he credit this input tax against the VAT due on other sales. In thiscase, he is treated as the end user who will shoulder the cost of the input VAT.(COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION, G.R. No.187485, February 12, 2013)

Unlike the input taxes related to exempt sales, input taxes related to zero-rated sales may becredited against output taxes on other sales and in case it is not fully utilized, the excess maybe carried over to the succeeding quarter or quarters and there is no prescription period for thecarry-over. The law gives the taxpayer another option for the recovery of used input taxes:application for refund or tax credit certificate. (COMMISSIONER OF INTERNAL REVENUE vs.SAN ROQUE POWER CORPORATION, G.R. No. 187485, February 12, 2013)

If, however, the input taxes exceed the output taxes, the excess shall be carried over to thesucceeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any excess over the output taxesshall instead be refunded to the taxpayer or credited against other internal revenue taxes.(COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES), G.R. No.153866, February 11, 2005)

While a tax liability is essential to the availment or use of any tax credit, prior tax payments arenot. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a

prior tax payment is needed. (FORT BONIFACIO DEVELOPMENT CORPORATION vs.COMMISSIONER OF INTERNAL REVENUE, G.R. No. 173425, January 22, 2013)

As regards Section 110, while the law only provides for a tax credit, a taxpayer who erroneouslyor excessively pays his output tax is still entitled to recover the payments he made either as atax credit or a tax refund. In this case, since petitioner still has available transitional input taxcredit, it filed a claim for refund to recover the output VAT it erroneously or excessively paid forthe 1st quarter of 1997. Thus, there is no reason for denying its claim for tax refund/credit.(FORT BONIFACIO DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNALREVENUE, G.R. No. 173425, January 22, 2013)

Even if the law does not expressly state that the Ironcon's excess creditable VAT withheld isrefundable, it may be the subject-of a claim for refund as an erroneously collected tax underSec. 204 (C) and 229 of the NIRC. It should be clarified that this ruling only refers to creditableVAT withheld pursuant to Sec. 114 of the NIRC prior to its amendment. After its amendment byR.A. 9337, the amount withheld under Sec. 114 of the NIRC is now treated as final VAT, no


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longer under the creditable withholding tax system (CIR v. Ironcon Builders and DevelopmentCorp., G.R. No. 180042, February 8, 2010)

The input VAT is not "excessively" collected as understood under Section 229 because at thetime the input VAT is collected the amount paid is correct and proper. The personlegally liable for the input VAT cannot claim that he overpaid the input VAT by the mere

existence of an "excess" input VAT. The term "excess" input VAT simply means that the inputVAT available as credit exceeds the output VAT, not that the input VAT is excessively collectedbecause it is more than what is legally due. Thus, the taxpayer who legally paid the input VATcannot claim for refund or credit of the input VAT as "excessively" collected under Section 229.(COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION, G.R. No.187485, February 12, 2013)

If such "excess" input VAT is an "excessively" collected tax, the taxpayer should be able to seeka refund or credit for such "excess" input VAT whether or not he has output VAT. The VATSystem does not allow such refund or credit and such "excess" input VAT is not an "excessively"collected tax under Section 229. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUEPOWER CORPORATION, G.R. No. 187485, February 12, 2013)

Who may claim for refund/apply f or issuance of tax credit certificate

Having determined that respondent's purchase transactions are subject to a zero VAT rate, thetax refund or credit is in order. To repeat, the VAT is a tax imposed on consumption, not onbusiness. Although respondent as an entity is exempt, the transactions it enters into are notnecessarily so. The VAT payments made in excess of the zero rate that is imposable maycertainly be refunded or credited. (COMMISSIONER OF INTERNAL REVENUE vs. SEAGATETECHNOLOGY (PHILIPPINES), G.R. No. 153866, February 11, 2005)

Pe riod to f ile claim/ apply for issuance of tax credit certificate

The Court, in San Roque, ruled that equitable estoppel had set in when respondent issued BIRRuling No. DA-489-03 which was a general interpretative rule, which effectively misled alltaxpayers into filing premature judicial claims with the CTA. Thus, taxpayers could rely on theruling from its issuance on 10 December 2003 up to its reversal on 6 October 2010, when CIR v.Aichi Forging Company of Asia, lnc. was promulgated. (PROCTER & GAMBLE ASIA PTE LTD.vs.COMMISSIONER OF INTERNAL REVENUE, G.R. No. 202071, February 19, 2014)

In a nutshell, the rules on the determination of the prescriptive period for filing a tax refund orcredit of unutilized input VAT, as provided in Section 112 of the Tax Code, are as follows:

(1) An administrative claim must be filed with the CIR within two years after the close of

the taxable quarter when the zero-rated or effectively zero-rated sales were made.

(2) The CIR has 120 days from the date of submission of complete documents insupport of the administrative claim within which to decide whether to grant a refund orissue a tax credit certificate. The 120-day period may extend beyond the two-year


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period from the filing of the administrative claim if the claim is filed in the later part ofthe two-year period. If the 120-day period expires without any decision from the CIR,then the administrative claim may be considered to be denied by inaction.

(3) A judicial claim must be filed with the CTA within 30 days from the receipt of theCIR's decision denying the administrative claim or from the expiration of the 120-day

period without any action from the CIR.

(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of itsissuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October2010, as an exception to the mandatory and jurisdictional 120+30 day periods.(COMMISSIONER OF INTERNAL REVENUE vs.TOLEDO POWER, INC., G.R. No. 183880,January 20, 2014)

Its summary:

A. Two-Year Prescriptive Period

1. It is only the administrative claim that must be filed within the two-year prescriptiveperiod. (Aichi)

2. The proper reckoning date for the two-year prescriptive period is the close of thetaxable quarter when the relevant sales were made. (San Roque)

3. The only other rule is the Atlas ruling, which applied only from 8 June 2007 to 12September 2008. Atlas states that the two-year prescriptive period for filing a claim fortax refund or credit of unutilized input VAT payments should be counted from the dateof filing of the VAT return and payment of the tax. (San Roque)

B. 120+30 Day Period

1. The taxpayer can file an appeal in one of two ways: (1) file the judicial claim withinthirty days after the Commissioner denies the claim within the 120-day period, or (2) filethe judicial claim within thirty days from the expiration of the 120-day period if theCommissioner does not act within the 120-day period.

2. The 30-day period always applies, whether there is a denial or inaction on the part ofthe CIR.

3. As a general rule, the 3 0-day period to appeal is both mandatory and jurisdictional.(Aichi and San Roque)

4. As an exception to the general rule, premature filing is allowed only if filed between10 December 2003 and 5 October 2010, when BIR Ruling No. DA-489-03 was still in


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force. (San Roque)

5. Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-489-03 was in force. (San Roque) (COMMISSIONER OF INTERNAL REVENUE vs. MINDANAOII GEOTHERMAL PARTNERSHIP, G.R. No. 191498, January 15, 2014)

It is indisputable that compliance with the 120-day waiting period is mandatory andjurisdictional. Failure to comply with the 120-day waiting period violates a mandatory provisionof law. It violates the doctrine of exhaustion of administrative remedies and renders the petitionpremature and thus without a cause of action, with the effect that the CTA does not acquirejurisdiction over the taxpayer's petition. (MINDANAO II GEOTHERMAL PARTNERSHIP vs.COMMISSIONER OF INTERNAL REVENUE, G.R. No. 193301, March 11, 2013)

Stated otherwise, the two-year prescriptive period does not refer to the filing of the judicialclaim with the CTA but to the filing of the administrative claim with the Commissioner. As heldin Aichi, the "phrase within two years x x x apply for the issuance of a tax credit or refund'refers to applications for refund/credit with the CIR and not to appeals made to the CTA."

(MINDANAO II GEOTHERMAL PARTNERSHIP vs. COMMISSIONER OF INTERNAL REVENUE, G.R.No. 193301, March 11, 2013)

San Roque's failure to comply with the 120-day mandatory period renders its petition forreview with the CTA void as Article 5 of the Civil Code provides, "Acts executed againstprovisions of mandatory or prohibitory laws shall be void, except when the law itself authorizestheir validity." San Roque's void petition for review cannot be legitimized by the CTA or thisCourt because Article 5 of the Civil Code states that such void petition cannot be legitimized"except when the law itself authorizes [its] validity," and there is no law authorizing thepetition's validity. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWERCORPORATION, G.R. No. 187485, February 12, 2013)

Sec. 112(A) clearly provides in no uncertain terms that unutilized input VAT payments nototherwise used for any internal revenue tax due the taxpayer must be claimed within two yearsreckoned from the close of the taxable quarter when the relevant sales were madepertaining to the input VAT regardless of whether said tax was paid or not. Thereckoning frame would always be the end of the quarter when the pertinent sales or transactionwas made, regardless when the input VAT was paid. ( COMMISSIONER OF INTERNAL REVENUEvs. MIRANT PAGBILAO CORPORATION, G.R. No. 172129. September 12, 2008)

This prescriptive period has no relation to the date of payment of the "excess" inpu t VAT sincethe "excess" input VAT may have been paid for more than two years but this does not bar the

filing of a judicial claim for "excess" VAT under Section 112 (A), which has a different reckoningperiod from Section 229. Moreover, the person claiming the refund or credit of the input VAT isnot the person who legally paid the input VAT. (COMMISSIONER OF INTERNAL REVENUE vs.SAN ROQUE POWER CORPORATION, G.R. No. 187485, February 12, 2013)


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The mere filing by a taxpayer of a judicial claim with the CTA before the expiration of the 120-day period cannot operate to divest the Commissioner of his jurisdiction to decide anadministrative claim within the 120-day mandatory period, unless the Commissioner has clearlygiven cause for equitable estoppel to apply as expressly recognized in Section 246 of the TaxCode. (COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORPORATION, G.R.No. 187485, February 12, 2013)

Because the 120+30 day period is jurisdictional, the issue of whether petitioner complied withthe said time frame may be broached at any stage, even on appeal. (NIPPON EXPRESS(PHILIPPINES) CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 196907,March 13, 2013)

For a judicial claim for refund to prosper, however, respondent must not only prove that it is aVAT registered entity and that it filed its claims within the prescriptive period. It mustsubstant iate the input VAT paid by purchase invoices or of fic ial receipts: 1) A "sales orcommercial invoice" is a written account of goods sold or services rendered indicating the pricescharged therefor or a list by whatever name it is known which is used in the ordinary course ofbusiness evidencing sale and transfer or agreement to sell or transfer goods and services; and 2)A "receipt" on the other hand is a written acknowledgment of the fact of payment in money orother settlement between seller and buyer of goods, debtor or creditor, or person renderingservices and client or customer. (ATLAS CONSOLIDATED MINING AND DEVELOPMENTCORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. Nos. 141104 & 148763, June8, 2007)

a) Invoicing requirements in general

The requisite that the receipt be issued showing the name, business style, if any, and addressof the purchaser, customer or client is precise so that when the books of accounts are subjectedto a tax audit examination, all entries therein could be shown as adequately supported and

proven as legitimate business transactions. The absence of official receipts issued in thetaxpayer's name is tantamount to non-compliance with the substantiation requirementsprovided by law. (BONIFACIO WATER CORPORATION (formerly BONIFACIO VIVENDI WATERCORPORATION) vs. THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 175142, July 22,2013)

Taxpayers claiming for a refund or tax credit certificate must comply with the strict andmandatory invoicing and accounting requirements provided under the 1997 NIRC, as amended,and its implementing rules and regulations. Thus, the change of petitioner's name to "BonifacioGDE Water Corporation," being unauthorized and without approval of the SEC, and the issuanceof official receipts under that name which were presented to support petitioner's claim for taxrefund, cannot be used to allow the grant of tax refund or issuance of a tax credit certificate inpetitioner's favor. (BONIFACIO WATER CORPORATION (formerly BONIFACIO VIVENDI WATERCORPORATION) vs. THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 175142, July 22,2013)


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Failure to print the word "zero-rated" on the invoices or receipts is fatal to a claim for credit ofrefund of input VAT on zero-rated sales (J.R.A. Philippines, Inc. v. CIR, G.R. No. 177127,October 11, 2010)

If the claim for refund/ tax credit certificate is based on the existence of zero-rated sales by thetaxpayer but it fails to comply with the invoicing requirements in the issuance of sales invoices

(e.g. failure to indicate the TIN), its claim for tax credit/refund of VAT on its purchases shall bedenied considering that the invoice it is issuing to its customers does not depict its being a VAT-registered taxpayer whose sales are classified as zero-rated sales. Nonetheless, this treatment iswithout prejudice to the right of the taxpayer to charge the input taxes to the appropriateexpense account or asset account subject to depreciation, whichever is applicable (PanasonicComm. Imaging Corp. of the Phil. v. CIR, G.R. No. 178090, February 8, 2010)

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Principles&Concepts of Estate Tax & VAT