In Coral Bay Nickel Corporation v. Commissioner of Internal Revenue, the Supreme Court addressed whether a company located within an economic zone (ecozone) is entitled to a refund of unutilized input taxes incurred before it registered with the Philippine Economic Zone Authority (PEZA). The Court ruled against the refund, emphasizing that ecozone enterprises are VAT-exempt under the Cross Border Doctrine and the Destination Principle. This means that goods and services destined for consumption within an ecozone should not be subject to VAT, and therefore, no input VAT should be paid, negating any claim for a tax refund or credit. If input VAT was indeed paid, the recourse lies against the seller who improperly shifted the output VAT, not against the government.

Ecozone Dilemma: Can Coral Bay Claim VAT Refunds Before PEZA Registration?

Coral Bay Nickel Corporation, a manufacturer of nickel and cobalt mixed sulphide, sought a refund of P50,124,086.75, representing unutilized input VAT for the third and fourth quarters of 2002. At the time these taxes were incurred, Coral Bay was a VAT-registered entity but had not yet been registered with PEZA. Coral Bay argued that since it was not yet PEZA-registered during the relevant period, it could not avoid paying VAT on its purchases. The Commissioner of Internal Revenue (CIR) denied the claim, and the Court of Tax Appeals (CTA) upheld the denial. This led to Coral Bay’s appeal to the Supreme Court, questioning the applicability of the Toshiba case and Revenue Memorandum Circular (RMC) No. 42-03.

The Supreme Court began by addressing the procedural issue of Coral Bay’s premature filing of its judicial claim with the CTA. Typically, taxpayers must wait 120 days for the CIR to act on a refund claim before appealing to the CTA, as mandated by Section 112(D) of the National Internal Revenue Code (NIRC). However, due to BIR Ruling No. DA-489-03, which was in effect at the time, taxpayers were allowed to appeal to the CTA even before the 120-day period lapsed. The Court cited Silicon Philippines Inc. vs. Commissioner of Internal Revenue, affirming that during the period when BIR Ruling No. DA-489-03 was in effect (December 10, 2003, to October 5, 2010), premature filing was permissible, granting the CTA jurisdiction over the appeal.

Turning to the substantive issue, the Court affirmed the CTA’s decision, emphasizing the applicability of the Toshiba doctrine. Coral Bay argued that Toshiba was inapplicable because Toshiba Information Equipment (Phils) Inc. was a PEZA-registered entity during the period of its claim. The Court dismissed this argument, clarifying that Toshiba comprehensively discussed the VAT implications for PEZA-registered and ecozone-located enterprises. The crucial point was the effectivity of RMC 74-99, which harmonized the VAT treatment of ecozone enterprises based on the principles of the Cross Border Doctrine and the Destination Principle.

Prior to RMC 74-99, PEZA-registered enterprises faced two possible tax incentives: a 5% preferential tax on gross income (in lieu of all taxes) or an income tax holiday under Executive Order No. 226. Under the old rule, the choice of incentive determined VAT liability. However, RMC 74-99 eliminated this distinction, stating that all sales of goods, properties, and services from the customs territory to an ecozone enterprise are subject to 0% VAT, regardless of PEZA registration status. The Court quoted Toshiba to highlight this shift:

This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the five percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax holiday under Exec. Order No. 226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction was abolished by RMC No. 74-99, which categorically declared that all sales of goods, properties, and services made by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the tatter’s type or class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.

The Court highlighted Section 8 of Republic Act No. 7916, which mandates that PEZA manage ecozones as separate customs territories. This provision effectively treats ecozones as foreign territories, distinct from the customs territory. As a result, sales from the customs territory to an ecozone are considered exportations and are subject to 0% VAT. Applying the Cross Border Doctrine, no VAT should be included in the cost of goods destined for consumption outside the taxing authority’s territorial border. The Supreme Court reiterated that PEZA-registered enterprises, located within ecozones, are VAT-exempt entities, not due to the 5% preferential tax rate, but because ecozones are treated as foreign territories.

Given that Coral Bay’s plant site was located within the Rio Tuba Export Processing Zone, a special economic zone created under Republic Act No. 7916, its purchases of goods and services destined for consumption within the ecozone should have been free of VAT. Therefore, no input VAT should have been paid on such purchases, making Coral Bay ineligible for a tax refund or credit. The Court clarified that if Coral Bay did pay the input VAT, its recourse was against the seller who improperly shifted the output VAT, following RMC No. 42-03, which directs the buyer to seek reimbursement from the supplier:

In the meantime, the claim for input tax credit by the exporter-buyer should be denied without prejudice to the claimant’s right to seek reimbursement of the VAT paid, if any, from its supplier.

Furthermore, the Court underscored that VAT is an indirect tax, allowing the seller to shift the tax burden to the buyer. The seller remains responsible for reporting and remitting the VAT to the BIR. Therefore, the appropriate party to seek a tax refund or credit is the supplier, not the buyer.

The Supreme Court emphasized that claims for tax refunds or credits are akin to tax exemptions and must be strictly construed against the taxpayer. The burden of proving entitlement to such a refund or credit rests on the taxpayer, a burden that Coral Bay failed to meet. This ruling reinforces the principle that businesses operating within ecozones should be aware of their VAT-exempt status and ensure that their suppliers do not improperly shift VAT to them. Understanding the Cross Border Doctrine and Destination Principle is essential for businesses to properly manage their tax obligations and avoid incorrect VAT payments.

FAQs

What was the key issue in this case?	The central issue was whether a company located within an ecozone is entitled to a refund of unutilized input taxes incurred before it became a PEZA-registered entity. The Court ruled against the refund, citing the VAT-exempt status of ecozone enterprises.
What is the Cross Border Doctrine?	The Cross Border Doctrine, essential to the VAT system, dictates that no VAT should form part of the cost of goods destined for consumption outside the territorial border of the taxing authority. It treats sales to ecozones as exportations, subject to 0% VAT.
What is the Destination Principle?	The Destination Principle complements the Cross Border Doctrine by ensuring that goods are taxed in the country where they are consumed. It supports the VAT-exempt status of goods and services destined for ecozones.
Why was Coral Bay’s claim for a refund denied?	Coral Bay’s claim was denied because its plant site was located within an ecozone, making its purchases of goods and services destined for the ecozone VAT-exempt. Therefore, no input VAT should have been paid, negating the basis for a refund.
What recourse does Coral Bay have if it paid the input VAT?	If Coral Bay paid the input VAT, its proper recourse is to seek reimbursement from the seller who improperly shifted the output VAT, as indicated in RMC No. 42-03. The refund should be claimed by the supplier who remitted the VAT to the BIR.
What is the significance of RMC 74-99?	RMC 74-99 clarified the VAT treatment of sales to PEZA-registered enterprises, establishing that all sales of goods and services from the customs territory to an ecozone are subject to 0% VAT, regardless of PEZA registration status, aligning with the Cross Border Doctrine.
What does it mean for an ecozone to be treated as a separate customs territory?	Treating an ecozone as a separate customs territory, as mandated by Section 8 of RA 7916, effectively considers it a foreign territory. This allows sales from the customs territory to the ecozone to be treated as exportations, subject to VAT zero-rating.
Who is responsible for claiming VAT refunds in this scenario?	The supplier, who is statutorily liable for the VAT payment and remittance, is the proper party to seek a tax refund or credit, not the buyer located within the ecozone. The seller must have reported the VAT and remitted it to the BIR.

The Supreme Court’s decision in Coral Bay Nickel Corporation v. Commissioner of Internal Revenue underscores the importance of understanding the VAT implications for businesses operating within ecozones. By adhering to the principles of the Cross Border Doctrine and the Destination Principle, ecozone enterprises can avoid incorrect VAT payments and ensure proper tax compliance.

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: Coral Bay Nickel Corporation v. Commissioner of Internal Revenue, G.R. No. 190506, June 13, 2016