DIGESTS
VAT
Brief legislative history of the Philippine VAT system until RA No. 9337.
In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different mode. Prior to 1978, the system was a single-stage tax computed under the “cost deduction method” and was payable only by the original sellers. The single-stage system was subsequently modified, and a mixture of the “cost deduction method” and “tax credit method” was used to determine the value-added tax payable. Under the “tax credit method,” an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.
It was only in 1987, when President Corazon C. Aquino issued EO No. 273, that the VAT system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the “tax credit method.”
EO No. 273 was followed by RA No. 7716 or the Expanded VAT Law, RA No. 8241 or the Improved VAT Law, RA No. 8424 or the Tax Reform Act of 1997, and finally, the presently beleaguered RA No. 9337, also referred to by respondents as the VAT Reform Act.
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Nature of VAT.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties and services. Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to the buyer, with the seller acting merely as a tax collector. The burden of VAT is intended to fall on the immediate buyers and ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in, without transferring the burden to someone else. Examples are individual and corporate income taxes, transfer taxes, and residence taxes.
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In the present case, the VAT is a tax on the value added by the performance of the service by the taxpayer. It is, thus, this service and the value charged thereof by the taxpayer that is taxable under the NIRC.
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VAT is a percentage tax imposed at every stage of the distribution process on the sale, barter, exchange or lease of goods or properties and rendition of services in the course of trade or business, or the importation of goods. It is an indirect tax, which may be shifted to the buyer, transferee, or lessee of the goods, properties, or services. However, the party directly liable for the payment of the tax is the seller.
In transactions taxed at a 10% rate (now 12%), when at the end of any given taxable quarter the output VAT exceeds the input VAT, the excess shall be paid to the government; when the input VAT exceeds the output VAT, the excess would be carried over to VAT liabilities for the succeeding quarter or quarters. On the other hand, transactions which are taxed at zero-rate do not result in any output tax. Input VAT attributable to zero-rated sales could be refunded or credited against other internal revenue taxes at the option of the taxpayer.
To illustrate, in a zero-rated transaction, when a VAT-registered person (“taxpayer”) purchases materials from his supplier at P80.00, P7.30 of which was passed on to him by his supplier as the latter’s 10% output VAT, the taxpayer is allowed to recover P7.30 from the BIR, in addition to other input VAT he had incurred in relation to the zero-rated transaction, through tax credits or refunds. When the taxpayer sells his finished product in a zero-rated transaction, say, for P110.00, he is not required to pay any output VAT thereon. In the case of a transaction subject to 10% VAT, the taxpayer is allowed to recover both the input VAT of P7.30 which he paid to his supplier and his output VAT of P2.70 (10% the P30.00 value he has added to the P80.00 material) by passing on both costs to the buyer. Thus, the buyer pays the total 10% VAT cost, in this case P10.00 on the product.
In both situations, the taxpayer has the option not to carry any VAT cost because in the zero-rated transaction, the taxpayer is allowed to recover input tax from the BIR without need to pay output tax, while in 10% rated VAT, the taxpayer is allowed to pass on both input and output VAT to the buyer. Thus, there is an elemental similarity between the two types of VAT ratings in that the taxpayer has the option not to take on any VAT payment for his transactions by simply exercising his right to pass on the VAT costs in the manner discussed above.
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For context, VAT is a tax imposed on each sale of goods or services in the course of trade or business, or importation of goods “as they pass along the production and distribution chain.” It is an indirect tax, which “may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.” The output tax due from VAT-registered sellers becomes the input tax paid by VAT-registered purchasers on local purchase of goods or services, which the latter in turn may credit against their output tax liabilities. On the other hand, for a non-VAT purchaser, the VAT shifted forms part of the cost of goods, properties, and services purchased, which may be deductible as an expense for income tax purposes.
Panasonic Communications Imaging Corp. v. Commissioner of Internal Revenue explained the concept of VAT and its collection through the tax credit method:
The VAT is a tax on consumption, an indirect tax that the provider of goods or services may pass on to his customers. Under the VAT method of taxation, which is invoice-based, an entity can subtract from the VAT charged on its sales or outputs the VAT it paid on its purchases, inputs and imports. For example, when a seller charges VAT on its sale, it issues an invoice to the buyer, indicating the amount of VAT he charged. For his part, if the buyer is also a seller subjected to the payment of VAT on his sales, he can use the invoice issued to him by his supplier to get a reduction of his own VAT liability. The difference in tax shown on invoices passed and invoices received is the tax paid to the government. In case the tax on invoices received exceeds that on invoices passed, a tax refund may be claimed.
Under the 1997 NIRC, if at the end of a taxable quarter the seller charges output taxes equal to the input taxes that his suppliers passed on to him, no payment is required of him. It is when his output taxes exceed his input taxes that he has to pay the excess to the BIR. If the input taxes exceed the output taxes, however, the excess payment shall be carried over to the succeeding quarter or quarters. Should the input taxes result form zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer. (Citations omitted)
Our VAT system is invoiced-based, i.e., taxation relies on sales invoices or official receipts. A VAT-registered entity is liable to VAT, or the output tax at the rate of 0% or 10% (now 12%) on the gross selling price of goods or gross receipts realized from the sale of services. Sections 106(D) and 108(C) of the Tax Code expressly provide that VAT is computed at 1/11 of the total amount indicated in the invoice for sale of goods or official receipt for sale of services. This tax shall also be recognized as input tax credit to the purchaser of the goods or services.
Under Section 110 of the 1997 NIRC, the input tax on purchase of goods or properties, or services is creditable:
(a) To the purchaser upon consummation of sale and on importation of goods or properties;
(b) To the importer upon payment of the VAT prior to the release of the goods from the custody of the Bureau of Customs; and
(c) [T]o the purchaser [of services], lessee [of property] or licensee upon payment of the compensation, rental, royalty or fee.
A VAT-registered person may opt, however, to apply for tax refund or credit certificate of VAT paid corresponding to the zero-rated sales of goods, properties, or services to the extent that this input tax has not been applied against the output tax.
Strict compliance with substantiation and invoicing requirements is necessary considering VAT’s nature and VAT system’s tax credit method, where tax payments are based on output and input taxes and where the seller’s output tax becomes the buyer’s input tax that is available as tax credit or refund in the same transaction. It ensures the proper collection of taxes at all stages of distribution, facilitates computation of tax credits, and provides accurate audit trail or evidence for BIR monitoring purposes.
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Three (3) known taxable transactions under the VAT law.
Under the law on VAT, as contained in Title IV of the NIRC, there are three known taxable transactions, namely: (i) sales of goods or properties (Section 106); (ii) importation (Section 107); and (iii) sale of services and lease of properties (Section 108). Both sale transactions in Section 106 and 108 are qualified by the phrase “in the course of trade or business”, whereas importation in Section 107 is not.
The law had set apart the sale of goods or properties, as contained in Section 106, from the sale of services in Section 108.
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Input VAT and output VAT.
Input VAT or input tax represents the actual payments, costs and expenses incurred by a VAT-registered taxpayer in connection with his purchase of goods and services. Thus, “input tax” means the value-added tax paid by a VAT-registered person/entity in the course of his/its trade or business on the importation of goods or local purchases of goods or services from a VAT-registered person.
On the other hand, when that person or entity sells his/its products or services, the VAT-registered taxpayer generally becomes liable for 10% of the selling price as output VAT or output tax. Hence, “output tax” is the value-added tax on the sale of taxable goods or services by any person registered or required to register under Section 107 of the (old) Tax Code.
The VAT system of taxation allows a VAT-registered taxpayer to recover its input VAT either by (1) passing on the 10% (now 12%) output VAT on the gross selling price or gross receipts, as the case may be, to its buyers, or (2) if the input tax is attributable to the purchase of capital goods or to zero-rated sales, by filing a claim for a refund or tax credit with the BIR.
Simply stated, a taxpayer subject to 10% (now 12%) output VAT on its sales of goods and services may recover its input VAT costs by passing on said costs as output VAT to its buyers of goods and services but it cannot claim the same as a refund or tax credit, while a taxpayer subject to 0% on its sales of goods and services may only recover its input VAT costs by filing a refund or tax credit with the BIR.
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Definition of gross receipts for VAT purposes.
It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base under the N1RC does not contain any specific definition. Therefore, absent a statutory definition, this Court has construed the term gross receipts in its plain and ordinary meaning, that is, gross receipts is understood as comprising the entire receipts without any deduction. Congress, under Section 108, could have simply left the term gross receipts similarly undefined and its interpretation subjected to ordinary acceptation. Instead of doing so, Congress limited the scope of the term gross receipts for VAT purposes only to the amount that the taxpayer received for the services it performed or to the amount it received as advance payment for the services it will render in the future for another person.
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The amounts earmarked for payment to unrelated third-party do not form part of gross receipts for VAT purposes; An HMO’s VAT base and corresponding liability is determined under Section 108(A) of the NIRC of 1997, as amended by RA No. 9337; The sale of services of an HMO is exempt from VAT under Section 109(G).
MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CTA Division that the gross receipts of an HMO for VAT purposes shall be the total amount of money or its equivalent actually received from members undiminished by any amount paid or payable to the owners/operators of hospitals, clinics and medical and dental practitioners. MEDICARD explains that its business as an HMO involves two different although interrelated contracts. One is between a corporate client and MEDICARD, with the corporate client’s employees being considered as MEDICARD members; and the other is between the healthcare institutions/healthcare professionals and MEDICARD.
Under the first, MEDICARD undertakes to make arrangements with healthcare institutions/healthcare professionals for the coverage of MEDICARD members under specific health related services for a specified period of time in exchange for payment of a more or less fixed membership fee. Under its contract with its corporate clients, MEDICARD expressly provides that 20% of the membership fees per individual, regardless of the amount involved, already includes the VAT of 10%/20% excluding the remaining 80% because MEDICARD would earmark this latter portion for medical utilization of its members. Lastly, MEDICARD also assails CIR’s inclusion in its gross receipts of its earnings from medical services which it actually and directly rendered to its members.
Since an HMO like MEDICARD is primarily engaged in arranging for coverage or designated managed care services that are needed by plan holders/members for fixed prepaid membership fees and for a specified period of time, then MEDICARD is principally engaged in the sale of services. Its VAT base and corresponding liability is, thus, determined under Section 108(A) of the Tax Code, as amended by RA No. 9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a dealer in securities whose gross receipts is the amount actually received as contract price without allowing any deduction from the gross receipts. This restrictive tenor changed under RR No. 16-2005. Under this RR, an HMO’s gross receipts and gross receipts in general were defined, thus:
Section 4.108-3. x x x
x x x x
HMO’s gross receipts shall be the total amount of money or its equivalent representing the service fee actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding the value-added tax. The compensation for their services representing their service fee, is presumed to be the total amount received as enrollment fee from their members plus other charges received.
Section 4.108-4. x x x. “Gross receipts” refers to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments for services rendered, and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding the VAT.
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the definition of gross receipts in general.
According to the CTA en banc, the entire amount of membership fees should form part of MEDICARD’s gross receipts because the exclusions to the gross receipts under RR No. 4-2007 does not apply to MEDICARD. What applies to MEDICARD is the definition of gross receipts of an HMO under RR No. 16-2005 and not the modified definition of gross receipts in general under the RR No. 4-2007.
The CTA en banc overlooked that the definition of gross receipts under RR No. 16-2005 merely presumed that the amount received by an HMO as membership fee is the HMO’s compensation for their services. As a mere presumption, an HMO is, thus, allowed to establish that a portion of the amount it received as membership fee does NOT actually compensate it but some other person, which in this case are the medical service providers themselves. It is a well-settled principle of legal hermeneutics that words of a statute will be interpreted in their natural, plain and ordinary acceptation and signification, unless it is evident that the legislature intended a technical or special legal meaning to those words. The Court cannot read the word “presumed” in any other way.
It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base under the N1RC does not contain any specific definition. Therefore, absent a statutory definition, this Court has construed the term gross receipts in its plain and ordinary meaning, that is, gross receipts is understood as comprising the entire receipts without any deduction. Congress, under Section 108, could have simply left the term gross receipts similarly undefined and its interpretation subjected to ordinary acceptation. Instead of doing so, Congress limited the scope of the term gross receipts for VAT purposes only to the amount that the taxpayer received for the services it performed or to the amount it received as advance payment for the services it will render in the future for another person.
In the proceedings below, the nature of MEDICARD’s business and the extent of the services it rendered are not seriously disputed. As an HMO, MEDICARD primarily acts as an intermediary between the purchaser of healthcare services (its members) and the healthcare providers (the doctors, hospitals and clinics) for a fee. By enrolling membership with MEDICARD, its members will be able to avail of the pre-arranged medical services from its accredited healthcare providers without the necessary protocol of posting cash bonds or deposits prior to being attended to or admitted to hospitals or clinics, especially during emergencies, at any given time. Apart from this, MEDICARD may also directly provide medical, hospital and laboratory services, which depends upon its member’s choice.
Thus, in the course of its business as such, MEDICARD members can either avail of medical services from MEDICARD’s accredited healthcare providers or directly from MEDICARD. In the former, MEDICARD members obviously knew that beyond the agreement to pre-arrange the healthcare needs of its members, MEDICARD would not actually be providing the actual healthcare service. Thus, based on industry practice, MEDICARD informs its would-be member beforehand that 80% of the amount would be earmarked for medical utilization and only the remaining 20% comprises its service fee. In the latter case, MEDICARD’s sale of its services is exempt from VAT under Section 109(G).
The CTA’s ruling and CIR’s Comment have not pointed to any portion of Section 108 of the NIRC that would extend the definition of gross receipts even to amounts that do not only pertain to the services to be performed: by another person, other than the taxpayer, but even to amounts that were indisputably utilized not by MEDICARD itself but by the medical service providers.
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative is preferred over that which makes some words idle and nugatory. This principle is expressed in the maxim Ut magis valeat quam pereat, that is, we choose the interpretation which gives effect to the whole of the statute – its every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, the Court adopted the principal object and purpose object in determining whether the MEDICARD therein is engaged in the business of insurance and therefore liable for documentary stamp tax. The Court held therein that an HMO engaged in preventive, diagnostic and curative medical services is not engaged in the business of an insurance, thus:
To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician and patient together, the preventive features, the regularization of service as well as payment, the substantial reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to these features, the indemnification for cost after the services is rendered. Except the last, these are not distinctive or generally characteristic of the insurance arrangement. There is, therefore, a substantial difference between contracting in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost when or after it is rendered. (Emphasis ours)
In sum, the Court said that the main difference between an HMO and an insurance company is that HMOs undertake to provide or arrange for the provision of medical services through participating physicians while insurance companies simply undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit. In the present case, the VAT is a tax on the value added by the performance of the service by the taxpayer. It is, thus, this service and the value charged thereof by the taxpayer that is taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of membership fees to VAT. But the Court’s task however is not to weigh these policy considerations but to determine if these considerations in favor of taxation can even be implied from the statute where the CIR purports to derive her authority. This Court rules that they cannot because the language of the NIRC is pretty straightforward and clear. As this Court previously ruled:
What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the similar doctrine as applied to tax. exemptions. The rule in the interpretation tax laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. (Citation omitted and emphasis and underlining ours)
For this Court to subject the entire amount of MEDICARD’s gross receipts without exclusion, the authority should have been reasonably founded from the language of the statute. That language is wanting in this case. In the scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that Congress may not have the opportunity or competence to provide. The regulations these authorities issue are relied upon by taxpayer, who are certain that these will be followed by the courts. Courts, however, will not uphold these authorities’ interpretations when clearly absurd, erroneous or improper. The CIR’s interpretation of gross receipts in the present case is patently erroneous for lack of both textual and non-textual support.
As to the CIR’s argument that the act of earmarking or allocation is by itself an act of ownership and management over the funds, the Court does not agree. On the contrary, it is MEDICARD’s act of earmarking or allocating 80% of the amount it received as membership fee at the time of payment that weakens the ownership imputed to it. By earmarking or allocating 80% of the amount, MEDICARD unequivocally recognizes that its possession of the funds is not in the concept of owner but as a mere administrator of the same. For this reason, at most, MEDICARD’s right in relation to these amounts is a mere inchoate owner which would ripen into actual ownership if, and only if, there is underutilization of the membership fees at the end of the fiscal year. Prior to that, MEDICARD is bound to pay from the amounts it had allocated as an administrator once its members avail of the medical services of MEDICARD’s healthcare providers.
Before the Court, the parties were one in submitting the legal issue of whether the amounts MEDICARD earmarked, corresponding to 80% of its enrollment fees, and paid to the medical service providers should form part of its gross receipt for VAT purposes, after having paid the VAT on the amount comprising the 20%. It is significant to note in this regard that MEDICARD established that upon receipt of payment of membership fee it actually issued two official receipts, one pertaining to the VATable portion, representing compensation for its services, and the other represents the non-vatable portion pertaining to the amount earmarked for medical utilization. Therefore, the absence of an actual and physical segregation of the amounts pertaining to two different kinds of fees cannot arbitrarily disqualify MEDICARD from rebutting the presumption under the law and from proving that indeed services were rendered by its healthcare providers for which it paid the amount it sought to be excluded from its gross receipts.
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Zero-rates sales.
Zero-rated sales are, for all intents and purposes, subject to VAT, only that the rate imposed upon them is 0%. Thus, while these sales will not mathematically yield output VAT, the input VAT arising therefrom is nonetheless creditable or refundable, as the case may be.
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Conditions for zero-rating of sales of “other services” under Section 108(B)(2) of the NIRC of 1997, as amended; Components to prove the second condition.
Sales of “other services,” such as those qualifying services rendered by DKS to its foreign affiliates-clients, shall be zero-rated pursuant to Section 108(B)(2)53 of the Tax Code if the following conditions are met: First, the seller is VAT-registered. Second, the services are rendered “to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed.” Third, services are “paid for in acceptable foreign currency and accounted in accordance with [BSP] rules and regulations.”
With regard to these conditions, it is no longer disputed that DKS is VAT-registered and that it received payments for its qualifying services in acceptable foreign currency and accounted for as required by applicable BSP rules. What remains in contention is whether or not DKS’s foreign affiliates-clients are NRFCs doing business outside the Philippines.
Proof of NRFC Status
For purposes of zero-rating under Section 108(B)(2) of the Tax Code, the claimant must establish the two components of a client’s NRFC status, viz.: (1) that their client was established under the laws of a country not the Philippines or, simply, is not a domestic corporation; and (2) that it is not engaged in trade or business in the Philippines. To be sure, there must, be sufficient proof of both of these components: showing not only that the clients are foreign corporations, but also are not doing business in the Philippines.
Such proof must be especially required from ROHQs such as DKS. That the law expressly authorizes ROHQs to render services to local and foreign affiliates alike only stresses the ROHQ’s burden to distinguish among their clients’ nationalities and actual places of business operations and establish that they are seeking refund or credit of input VAT only to the extent of their sales of services to foreign clients doing business outside the Philippines.
To recall, the CTA found that the SEC Certification of Non- Registration of Company and Authenticated Articles of Association and/or Certificates of Registration/Good Standing/Incorporation sufficiently established the NRFC status of 11 of DKS’s affiliates clients.
The Court upholds these findings.
The Court accords the CTA’s factual findings with utmost respect, if not finality, because the Court recognizes that it has necessarily developed an expertise on tax matters. Significantly, both the CTA Division and CTA En Banc gave credence to the aforementioned documents as sufficient proof of NRFC status. The Court shall not disturb its findings without any showing of grave abuse of discretion considering that the members of the tax court are in the best position to analyze the documents presented by the parties.
In any case, after a judicious review of the records, the Court still do not find any reason to deviate from the court a quo‘s findings. To the Court’s mind, the SEC Certifications of Non-Registration show that their affiliates are foreign corporations. On the other hand, the articles of association/certificates of incorporation stating that these affiliates are registered to operate in their respective home countries, outside the Philippines are prima facie evidence that their clients are not engaged in trade or business in the Philippines.
Proof of the aoove-mentioned second component sets the present case apart from Accenture, Inc. v. Commissioner of Internal Revenue and Sitel Philippines Corp. v. Commissioner of Internal Revenue. In these cases, the claimants similarly presented SEC Certifications and client service agreements. However, the Court consistently ruled that documents of this nature only establish the first component (i.e., that the affiliate is foreign). The absence of any other competent evidence (e.g., articles of association/certificates of incorporation) proving the second component (i.e., that the affiliate is not doing business here in the Philippines) shall be fatal to a claim for credit or refund of excess input VAT attributable to zero-rated sales.
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The VAT exemption of PAGCOR extends to Acesite, who is the lessor/owner of the hotel being leased by the former for its casino operations.
While it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the payment of it as it is exempt in this particular transaction by operation of law to pay the indirect tax. Such exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] of RA No. 8424), which provides:
Section 102. Value-added tax on sale of services – (a) Rate and base of tax – There shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any person engaged in the sale of services x x x; Provided, that the following services performed in the Philippines by VAT-registered persons shall be subject to 0%.
x x x x
(b) Transactions subject to zero percent (0%) rated.—
x x x x
(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero (0%) rate (emphasis supplied).
The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc. (G.R. No. L-31092, 27 February 1987), where the absolute tax exemption of the World Health Organization (WHO) upon an international agreement was upheld. We held in said case that the exemption of contractee WHO 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 that tax exemptions are personal because the manifest intention of the agreement is to exempt the contractor so that no contractor’s tax may be shifted to the contractee WHO. Thus, the proviso in PD No. 1869, extending the exemption to entities or individuals dealing with PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.
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Invoicing and accounting requirements under the VAT law; Sales invoice vs. official receipts.
In establishing the fact that taxable transactions like sale of goods or properties or sale of services were made, the law (Sections 113 and 237) provided for invoicing and accounting requirements.
The CTA En Banc held the view that while Sections 113 and 237 used the disjunctive term “or”, it must not be interpreted as giving a taxpayer an unconfined choice to select between issuing an invoice or an official receipt. To the court a quo, sales invoices must support sales of goods or properties while official receipts must support sales of services.
We agree.
Actually, the issue is no longer novel.
In AT&T Communications Services Philippines, Inc. v. Commissioner (AT&T), we interpreted Sections 106 and 108 in conjunction with Sections 113 and 237 of the NIRC relative to the significance of the difference between a sales invoice and an official receipt as evidence for zero-rated transactions.
Contrary to the petitioner’s position, invoices and official receipts are not used interchangeably for purposes of substantiating input VAT; or, for that matter, output VAT. Nippon Express cites Commissioner v. Manila Mining Corporation (Manila Mining) as its authority in arguing that the law made no distinction between an invoice and an official receipt. We have read said case and therein found just quite the opposite. The Manila Mining case in fact recognized a difference between the two, to wit:
A “sales or commercial invoice” is a written account of goods sold or services rendered indicating the prices charged therefor or a list by whatever name it is known which is used in the ordinary course of business evidencing sale and transfer or agreement to sell or transfer goods and services
A “receipt” on the other hand is a written acknowledgment of the fact of payment in money or other settlement between seller and buyer of goods, debtor or creditor, or person rendering services and client or customer.
At this point, it is worth mentioning that the VAT law at issue in Manila Mining was Presidential Decree No. 1158 (NIRC of 1977). That a distinction between an invoice and receipt was recognized even as against the NIRC of 1977 as the legal backdrop is authority enough to dispel any notion harbored by the petitioner that a distinction between the two, with the legal effects that follow, arose only after the enactment of RA No. 9337. For emphasis, even prior to the enactment of RA No. 9337, which clearly delineates the invoice and official receipt, our Tax Code has already made the distinction.
The Manila Mining case proceed to state –
These sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount or quantity of goods sold and their selling price, and taken collectively are the best means to prove the input VAT payments.
While the words “invoice” and “receipt” in said decision are seemingly used without distinction, it cannot be rightfully interpreted as allowing either document as substantiation for any kind of taxable sale, whether of goods/properties or of services. A closer reading of Manila Mining indeed shows that the question on whether an invoice is the proper documentary proof of a sale of goods or properties to the exclusion of an official receipt, and vice versa, official receipt as the proof of sale of services to the exclusion of an invoice, was not the pivotal issue.
It was in Kepco Philippines Corporation v. Commissioner (Kepco) that the Court was directly confronted with the adequacy of a sales invoice as proof of the purchase of services and official receipt as evidence of the purchase of goods. The Court initially cited the distinction between an invoice and an official receipt as expressed in the Manila Mining case. We then declared for the first time that a VAT invoice is necessary for every sale, barter or exchange of goods or properties while a VAT official receipt properly pertains to every lease of goods or properties, and for every sale, barter or exchange of services. Thus, we held that a VAT invoice and a VAT receipt should not be confused as referring to one and the same thing; the law did not intend the two to be used alternatively. We stated:
[T]he VAT invoice is the seller’s best proof of the sale of goods or services to the buyer while the VAT receipt is the buyer’s best evidence of the payment of goods or services received from the seller. Even though VAT invoices and receipts are normally issued by the supplier/seller alone, the said invoices and receipts, taken collectively, are necessary to substantiate the actual amount or quantity of goods sold and their selling price (proof of transaction), and the best means to prove the input VAT payments (proof of payment). Hence, VAT invoice and VAT receipt should not be confused as referring to one and the same thing. Certainly, neither does the law intend the two to be used alternatively.
In Kepco, the taxpayer tried to substantiate its input VAT on purchases of goods with official receipts and on purchases of services with invoices. The claim was appropriately denied for not complying with the required standard of substantiation. The Court reasoned that the invoicing and substantiation requirements should be followed because it is the only way to determine the veracity of the taxpayer’s claims. Unmistakably, indispensability of an official receipt to substantiate a sale of service had already been illustrated jurisprudentially as early as Kepco.
The doctrinal teaching in Kepco was further reiterated and applied in subsequent cases.
Thus, in Luzon Hydro Corp. v. Commissioner, the claim for refund/tax credit was denied because the proof for the zero-rated sale consisted of secondary evidence like financial statements.
Subsequently, in AT&T, the Court rejected the petitioner’s assertion that there is no distinction in the evidentiary value of the supporting documents; hence, invoices or receipts may be used interchangeably to substantiate VAT. Apparently, the taxpayer-claimant presented a number of bank credit advice in lieu of valid VAT official receipts to demonstrate its zero-rated sales of services. The CTA denied the claim; we sustained the denial.
Then, in Takenaka Corporation-Philippine Branch v. Commissioner, the proofs for zero-rated sales of services were sales invoices. The claim was likewise denied.
Most recently, in Team Energy Corporation v. Commissioner of Internal Revenue/Republic of the Philippines v. Team Energy Corporation, we sustained the CTA En Banc’s disallowance of the petitioner’s claim for input taxes after finding that the claimed input taxes on local purchase of goods were supported by documents other than VAT invoices; and. similarly, on local purchase of services, by documents other than VAT official receipts.
Irrefutably, when a VAT-taxpayer claims to have zero-rated sales of services, it must substantiate the same through valid VAT official receipts, not any other document, not even a sales invoice which properly pertains to a sale of goods or properties.
In this case, the documentary proofs presented by Nippon Express to substantiate its zero-rated sales of services consisted of sales invoices and other secondary evidence like transfer slips, credit memos, cargo manifests, and credit notes. It is very clear that these are inadequate to support the petitioner’s sales of services. Consequently, the CTA, albeit without jurisdiction, correctly ruled that Nippon Express is not entitled to its claim.
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Team Energy submits that the disallowances “essentially result from the non-recognition [by] the [Court of Tax Appeals] En Banc of the interchangeability of VAT invoices and VAT [official receipts] in a claim for refund of excess or unutilized input tax.”
In AT&T Communications Services Philippines, Inc. v. Commissioner of Internal Revenue, this Court was confronted with the same issue on the substantiation of the taxpayer-applicant’s zero-rated sales of services. In that case, AT&T Communications Services Philippines, Inc. (AT&T) applied for tax refund and/or tax credit of its excess/unutilized input VAT from zero-rated sales of services for calendar year 2002. The CTA First Division, as affirmed by the En Banc, denied AT&T’s claim “for lack of substantiation” on the ground that:
[C]onsidering that the subject revenues pertain to gross receipts from services rendered by petitioner, valid VAT official receipts and not mere sales invoices should have been submitted in support thereof. Without proper VAT official receipts, the foreign currency payments received by petitioner from services rendered for the four (4) quarters of taxable year 2002 in the sum of US$1,102,315.48 with the peso equivalent of P56,898,744.05 cannot qualify for zero-rating for VAT purposes. (Emphasis in the original)
Reversing the CTA, this Court held that since Section 113 did not distinguish between a sales invoice and an official receipt, the sales invoices presented by AT&T would suffice provided that the requirements under Section 113 and 237 of the Tax Code were met. It further explained:
Sales invoices are recognized commercial documents to facilitate trade or credit transactions. They are proofs that a business transaction has been concluded, hence, should not be considered bereft of probative value. Only the preponderance of evidence threshold as applied in ordinary civil cases is needed to substantiate a claim for tax refund proper. (Citations omitted)
However, in a subsequent claim for tax refund or credit of input VAT filed by AT&T for the calendar year 2003, the same issue on the interchangeability of invoice and official receipt was raised. This time in AT&T Communications Services Philippines, Inc. v. Commissioner of Internal Revenue, this Court held that there was a clear delineation between official receipts and invoices and that these two (2) documents count not be used interchangeably. According to this Court, Section 113 on invoicing requirements must be read in conjunction with Sections 106 and 108, which specifically delineates sales invoices for sales of goods and official receipts for sales of services.
Although it appears under [Section 113 of the 1997 NIRC] that there is no clear distinction on the evidentiary value of an invoice or official receipt, it is worthy to note that the said provision is a general provision which covers all sales of a VAT[-]registered person, whether sale of goods or services. It does not necessarily follow that the legislature intended to use the same interchangeably. The Court therefore cannot conclude that the general provision of Section 113 of the NIRC of 1997, as amended, intended that the invoice and official receipt can be used for either sale of goods or services, because there are specific provisions of the Tax Code which clearly delineates the difference between the two transactions.
In this instance, Section 108 of the NIRC of 1997, as amended, provides:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. –
….
(C) Determination of the Tax – The tax shall be computed by multiplying the total amount indicated in the official receipt by one-eleventh (1/11).
Comparatively, Section 106 of the same Code covers sale of goods, thus:
SEC. 108. Value-added Tax on Sale of Goods or Properties. –
….
(C) Determination of the Tax – The tax shall be computed by multiplying the total amount indicated in the invoice by one-eleventh (1/11).
Apparently, the construction of the statute shows that the legislature intended to distinguish the use of an invoice from an official receipt. It is more logical therefore to conclude that subsections of a statute under the same heading should be construed as having relevance to its heading. The legislature separately categorized VAT on sale of goods from VAT on sale of services, not only by its treatment with regard to tax but also with respect to substantiation requirements. Having been grouped under Section 108, its subparagraphs, (A) to (C), and Section 106, its subparagraphs (A) to (D), have significant relations with each other.
Legislative intent must be ascertained from a consideration of the statute as a whole and not of an isolated part or a particular provision alone. This is a cardinal rule in statutory construction. For taken in the abstract, a word or phrase might easily convey a meaning quite different from the one actually intended and evident when the word or phrase is considered with those with those with which it is associated. Thus, an apparently general provision may have a limited application if viewed together with the other provisions. (Emphasis supplied, citation omitted)
This Court reiterates that to claim a refund of unutilized or excess input VAT, purchase of goods or properties must be supported by VAT invoices, while purchase of services must be supported by VAT official receipts.
The CTA further pointed out that the noninterchangeability between VAT official receipts and VAT invoices avoids having the government refund a tax that was not even paid.
It should be noted that the seller will only become liable to pay the output VAT upon receipt of payment from the purchaser. If we are to use sales invoice in the sale of services, an absurd situation will arise when the purchaser of the service can claim tax credit representing input VAT even before there is payment of the output VAT by the seller on the sale pertaining to the same transaction. As a matter of fact[,] if the seller is not paid on the transaction, the seller of service would legally not have to pay output tax while the purchaser may legally claim input tax credit thereon. The government ends up refunding a tax which has not been paid at all. Hence, to avoid this, VAT official receipt for the sale of services is an absolute requirement.
In conjunction with this rule, RMC No. 42-03 expressly provides that an “invoice is the supporting document for the claim of input tax on purchase of goods whereas official receipt is the supporting document for the claim of input tax on purchase of services.” It further states that a taxpayer’s failure to comply with the invoicing requirements will result to the disallowance of the claim for input tax. Pertinent portions of this circular provide:
A-13: Failure by the supplier to comply with the invoicing requirements on the documents supporting the sale of goods and services will result to the disallowance of the claim for input tax by the purchaser-claimant.
If the claim for refund/[tax credit certificate] is based on the existence of zero-rated sales by the taxpayer 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 be denied 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 is without prejudice to the right of the taxpayer to charge the input taxes to the appropriate expense account or asset account subject to depreciation, whichever is applicable. Moreover, the case shall be referred by the processing office to the concerned BIR office for verification of other tax liabilities of the taxpayer.
Pursuant to Sections 106(D) and 108(C) in relation to Section 110 of the 1997 NIRC, the output or input tax on the sale or purchase of goods is determined by the total amount indicated in the VAT invoice, while the output or input tax on the sale or purchase of services is determined by the total amount indicated in the VAT official receipt.
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