In a ruling with significant implications for businesses engaged in zero-rated sales, the Supreme Court affirmed the Court of Tax Appeals’ decision to deny Eastern Telecommunications Philippines, Inc.’s (ETPI) claim for a VAT refund. The Court emphasized strict adherence to invoicing requirements, particularly the mandatory inclusion of the term ‘zero-rated’ on sales invoices. This case serves as a stark reminder that failure to comply with even seemingly minor procedural rules can result in the loss of substantial tax benefits, regardless of other evidence presented.

Zero Tolerance: Why a Missing Phrase Cost ETPI Millions in VAT Refunds

Eastern Telecommunications Philippines, Inc. (ETPI), a domestic corporation, sought a refund of P9,265,913.42 in unutilized input value-added tax (VAT) for the 1998 taxable year. ETPI argued that these input taxes were attributable to zero-rated sales of services to non-resident foreign corporations. As a telecommunications company, ETPI had entered into international service agreements, handling incoming telecommunications services and relaying calls within the Philippines. Payments from these foreign corporations were received in US dollars through local banks, following internationally established procedures.

However, ETPI’s claim was denied by both the Court of Tax Appeals (CTA) and later affirmed by the Supreme Court. The core reason for the denial stemmed from ETPI’s failure to comply with the invoicing requirements outlined in Section 4.108-1 of Revenue Regulations (RR) No. 7-95. This regulation explicitly requires VAT-registered persons to imprint the word ‘zero-rated’ on invoices covering zero-rated sales.

Sec. 4.108-1. Invoicing Requirements.– All VAT-registered persons shall, for every sale or lease of goods or properties or services, issue duly registered receipts or sales or commercial invoices which must show:

1. the name, TIN and address of seller;
2. date of transaction;
3. quantity, unit cost and description of merchandise or nature of service;
4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client;
5. the word “zero-rated” imprinted on the invoice covering zero-rated sales; and
6. the invoice value or consideration. x x x

The court underscored that the Secretary of Finance is authorized to issue rules and regulations for the effective enforcement of the National Internal Revenue Code (NIRC). These regulations, possessing the force of law, are accorded significant weight by the courts, recognizing the expertise of those who formulate them. The Supreme Court emphasized that claiming a tax refund or credit requires not only proving entitlement but also demonstrating full compliance with all documentary and evidentiary requirements. This includes strict adherence to VAT invoicing regulations.

Furthermore, the Supreme Court cited Sections 237 and 238 of the NIRC, as well as Section 4.108-1 of RR No. 7-95, which detail the invoicing requirements that all VAT-registered taxpayers must follow. These requirements encompass aspects such as the BIR Permit to Print, the Tax Identification Number (TIN) of the VAT-registered purchaser, and the crucial imprint of the word ‘zero-rated.’ The absence of the ‘zero-rated’ designation on invoices and receipts, the court affirmed, results in the disallowance of refund or tax credit claims.

Revenue Memorandum Circular No. 42-2003 further clarifies this position, stating that failure to comply with invoicing requirements will lead to the disallowance of input tax claims. The rationale behind this strict requirement, as explained in Panasonic Communications Imaging Corporation of the Philippines v. CIR, is to prevent buyers from falsely claiming input VAT from purchases where no VAT was actually paid. The ‘zero-rated’ label also serves to distinguish sales subject to VAT from those that are zero-rated. Without proper invoices, claims for refunds cannot be substantiated.

Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to the Secretary of Finance under Section 245 of the 1977 NIRC (Presidential Decree 1158) for the efficient enforcement of the tax code and of course its amendments.  The requirement is reasonable and is in accord with the efficient collection of VAT from the covered sales of goods and services. As aptly explained by the CTA’s First Division, the appearance of the word “zero-rated” on the face of invoices covering zero-rated sales prevents buyers from falsely claiming input VAT from their purchases when no VAT was actually paid.  If, absent such word, a successful claim for input VAT is made, the government would be refunding money it did not collect.

The court was not persuaded by ETPI’s argument that its quarterly returns and other submitted documents were sufficient to support its claim. Tax refunds, being in the nature of tax exemptions, are construed strictissimi juris against the taxpayer and liberally in favor of the government. The burden of proving the factual basis of a claim for refund or tax credit lies squarely on the claimant.

Since ETPI was engaged in mixed transactions involving zero-rated, taxable, and exempt sales, it was incumbent upon them to present competent evidence to validate all entries in its returns and accurately identify the zero-rated transactions. Compliance with VAT invoicing requirements is mandatory; failure to comply results in the rejection of claims for unutilized input taxes.

Further discrepancies were noted between the amounts declared as taxable or exempt sales in ETPI’s amended quarterly VAT returns and the revenue allocation provided by the company. These inconsistencies created doubts about the accuracy of ETPI’s claim, especially considering that the audited financial statements, which formed the basis of the revenue allocation, were available much earlier than the amended VAT returns.

In summary, both the old CTA and the CTA en banc found that ETPI had not adequately substantiated the existence of its effectively zero-rated sales for the 1998 taxable year. The Supreme Court deferred to the expertise of the CTA, acknowledging its specialized knowledge in revenue-related matters, and affirmed the denial of ETPI’s claim.

FAQs

This case highlights the critical importance of strict adherence to tax regulations, even seemingly minor ones. The omission of a single phrase, ‘zero-rated,’ led to the denial of a substantial VAT refund claim. Businesses must ensure their invoicing practices fully comply with all relevant regulations to avoid similar costly outcomes.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Eastern Telecommunications Philippines, Inc. v. CIR, G.R. No. 183531, March 25, 2015