The Supreme Court has affirmed that a taxpayer claiming a refund or tax credit for unutilized input Value-Added Tax (VAT) must first demonstrate the existence of zero-rated or effectively zero-rated sales to which the input VAT can be attributed. Maibarara Geothermal, Inc. (MGI) sought a refund for unutilized input VAT for taxable year 2011, but the claim was denied because MGI had no sales during that period. This ruling underscores the principle that VAT refunds are incentives tied to export activities and requires a clear link between input taxes and zero-rated sales. This article provides an in-depth analysis of the case, its implications, and frequently asked questions.

Unlocking VAT Refunds: Why Zero-Rated Sales are Key for Geothermal Firms

Maibarara Geothermal, Inc. (MGI), a registered VAT taxpayer and Renewable Energy Developer, filed administrative claims for a refund of its unutilized input VAT for the first, second, third, and fourth quarters of taxable year 2011. When the Commissioner of Internal Revenue failed to act on these claims, MGI filed petitions for review before the Court of Tax Appeals (CTA). The CTA First Division denied the petitions, a decision affirmed by the CTA En Banc. The central issue before the Supreme Court was whether MGI was entitled to a refund of its unutilized input VAT for the specified periods, hinging on whether MGI met the legal requirements for such claims.

The Supreme Court began its analysis by outlining the nature of VAT within the Philippine tax system, emphasizing its role as an indirect tax. Indirect taxes, the Court noted, are those where the tax liability initially falls on one party but is intended to be shifted to another. Quoting Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, the Court reiterated that indirect taxes are imposed upon goods before reaching the consumer, who ultimately bears the burden. This foundational principle sets the stage for understanding the mechanisms of input and output VAT.

Under Section 105 of the National Internal Revenue Code (NIRC), any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to value-added tax (VAT). The VAT is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. Since VAT is an indirect tax, the seller of goods and services which also serves as an intermediary in a chain of manufacturers, suppliers, distributors, and consumers (i) shoulders the economic burden of VAT imposed on its purchases, and (ii) pays the VAT imposed on its sales. The first is called input tax and the second, output tax.

The mechanics of VAT involve input and output taxes. Input tax refers to the VAT paid by a VAT-registered person on purchases of goods or services, while output tax is the VAT due on the sale or lease of taxable goods or services. In a typical production chain, manufacturers, suppliers, and distributors pass on the VAT to final consumers. To illustrate, a manufacturer’s output VAT becomes the input VAT for a wholesale distributor, which in turn passes on its own output VAT to a retail distributor. This process continues until the final consumer bears the ultimate VAT burden. At each stage, the excess of output taxes over input taxes is paid by the relevant party and passed on to their immediate buyer. Section 110(B) of the NIRC provides:

(B) Excess Output or Input Tax. — If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: Provided, however, That any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.

The court then addressed the concept of zero-rated transactions, particularly export sales. In the Philippines, the VAT system generally adheres to the destination principle, where goods and services are taxed only in the country of consumption. Exports are zero-rated, meaning they do not generate an output tax, while imports are taxed. A seller-intermediary engaged in export sales incurs input taxes but cannot offset them with output taxes. This is why Section 112(A) of the NIRC allows such businesses to claim a refund or tax credit on input taxes attributable to zero-rated transactions. Section 106 of the NIRC provides, in part:

(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:

(a) Export Sales. — The term “export sales” means:

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

To successfully claim a refund or tax credit under Section 112(A), the Supreme Court, citing San Roque Power Corporation v. Commissioner of Internal Revenue, outlined nine specific criteria that a taxpayer must meet. These include being VAT-registered, engaging in zero-rated or effectively zero-rated sales, ensuring the input taxes are duly paid and not transitional, and demonstrating that the input taxes have not been applied against output taxes. Critically, the claimant must prove that the input taxes are attributable to zero-rated or effectively zero-rated sales. The Court emphasized the importance of adhering to these requirements, underscoring that the refund or tax credit is contingent upon the existence of zero-rated sales to which the input VAT can be tied.

MGI argued that the two-year prescriptive period for filing a refund claim should be reckoned from the close of the taxable quarter when the relevant sales—specifically, the sales of its suppliers—were made, relying on the case of Commissioner of Internal Revenue v. Mirant Pagbilao Corporation. MGI also contended that there was no requirement that the zero-rated sales and the input taxes sought to be refunded must occur during the same period. The Court disagreed with MGI’s interpretation. It cited Luzon Hydro Corporation v. Commissioner of Internal Revenue, which held that a claim for refund must be supported by evidence showing zero-rated sales for the relevant period. The absence of such evidence, as in MGI’s case, is fatal to the claim. The Court also clarified the ruling in Mirant, stating that the two-year prescriptive period begins from the close of the taxable quarter when the relevant sales (i.e., the zero-rated sales) were made, not when the input VAT was incurred.

In this case, MGI admitted that it had no sales during taxable year 2011 and only began selling in 2014. Because MGI had no zero-rated sales during the periods in question, there was no output VAT against which the input VAT could be deducted. The Supreme Court found that MGI failed to establish its claim for a refund or tax credit, as the existence of zero-rated sales is a prerequisite under Section 112(A). The court rejected MGI’s interpretation of Mirant, clarifying that the phrase “relevant sales” refers to the zero-rated or effectively zero-rated sales of the taxpayer-claimant, not the purchases made by the taxpayer or the sales made by its suppliers.

The Court emphasized that the tax credit system allows VAT-registered entities to offset VAT on sales with VAT paid on purchases. However, for exporters subject to zero-rated VAT, the tax refund mechanism provides an incentive by allowing them to claim a refund or tax credit for unutilized input VAT. This incentive is specifically tied to zero-rated sales. To accept MGI’s argument would lead to an illogical situation where input VAT is attributed to purchases made by the taxpayer or sales made by its suppliers, rather than the sales made by the taxpayer-claimant itself. Such an interpretation would undermine the purpose of Section 112(A).

The Supreme Court reiterated that taxpayers bear the burden of proving the legal and factual bases of their claims for tax credits or refunds. Tax refunds, being akin to exemptions from taxation, are construed strictly against the claimant. The Court held that MGI failed to meet this burden, and therefore, its claim for a refund or tax credit was denied.

FAQs

What was the key issue in this case?	The central issue was whether Maibarara Geothermal, Inc. (MGI) was entitled to a refund of its unutilized input VAT for taxable year 2011, given that it had no sales during that period. The court examined whether MGI met the requirements under Section 112(A) of the NIRC.
What is Value-Added Tax (VAT)?	VAT is an indirect tax imposed on the sale of goods, properties, or services in the Philippines. It is an indirect tax, meaning the seller initially pays the tax but can shift the burden to the buyer.
What are zero-rated sales?	Zero-rated sales are export sales of goods and services where the tax rate is set at zero percent. Sellers of zero-rated transactions do not charge output tax but can claim a refund or tax credit for previously charged input VAT.
What is input tax and output tax?	Input tax is the VAT paid by a VAT-registered person on purchases of goods or services used in their business. Output tax is the VAT due on the sale or lease of taxable goods or services by a VAT-registered person.
What does Section 112(A) of the NIRC cover?	Section 112(A) of the NIRC allows VAT-registered persons with zero-rated or effectively zero-rated sales to apply for a tax credit certificate or refund of creditable input tax attributable to such sales.
When does the prescriptive period for filing a VAT refund claim begin?	The two-year prescriptive period for filing an administrative claim for a VAT refund begins to run from the close of the taxable quarter when the relevant sales (zero-rated or effectively zero-rated) were made, not when the input VAT was incurred.
What was the main reason MGI’s claim was denied?	MGI’s claim was denied because it had no zero-rated or effectively zero-rated sales during the taxable year 2011. The Supreme Court ruled that the existence of such sales is a prerequisite for claiming a refund or tax credit of unutilized input VAT.
What is the destination principle in VAT?	The destination principle means that goods and services are taxed only in the country where they are consumed. Exports are zero-rated, while imports are taxed to adhere to this principle.
What evidence is needed to support a claim for VAT refund based on zero-rated sales?	To support a VAT refund claim, a taxpayer must provide evidence showing zero-rated or effectively zero-rated sales to which the input VAT being refunded is attributable, along with VAT official receipts and VAT returns.

In conclusion, the Supreme Court’s decision in Maibarara Geothermal, Inc. v. Commissioner of Internal Revenue reinforces the stringent requirements for claiming VAT refunds, particularly the necessity of establishing zero-rated sales. This ruling serves as a reminder to taxpayers that VAT refunds are tied to specific economic activities, particularly exports, and compliance with the legal requirements is paramount.

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: Maibarara Geothermal, Inc. vs. Commissioner of Internal Revenue, G.R. No. 250479, July 18, 2022