The Importance of Proving Actual Exportation for Zero-Rated VAT Claims

Commissioner of Internal Revenue v. Filminera Resources Corporation, G.R. No. 236325, September 16, 2020

Imagine a business owner eagerly awaiting a tax refund, believing they have complied with all the necessary regulations, only to find their claim denied due to a missing piece of evidence. This scenario is not uncommon in the realm of Value Added Tax (VAT) refunds, particularly when it comes to zero-rated sales. The Supreme Court case of Commissioner of Internal Revenue v. Filminera Resources Corporation underscores the critical importance of proving actual exportation for VAT-registered taxpayers claiming zero-rated sales to Board of Investments (BOI)-registered enterprises.

In this case, Filminera Resources Corporation sought a refund of P111,579,541.76 for its unutilized input VAT, arguing that its sales to Philippine Gold Processing and Refining Corporation (PGPRC) should be considered zero-rated export sales. The central legal question was whether the BOI certification presented by Filminera was sufficient to establish that PGPRC had actually exported its products, a key requirement under Philippine tax law.

Legal Context: Understanding Zero-Rated VAT and Export Sales

The Philippine VAT system operates under the Cross Border Doctrine and the Destination Principle. The Cross Border Doctrine states that no VAT should form part of the cost of goods destined for consumption outside the territorial border of the taxing authority. The Destination Principle, on the other hand, dictates that goods and services are taxed only in the country where they are consumed. These principles are crucial for understanding the treatment of export sales under the 1997 National Internal Revenue Code (NIRC).

Section 106(A)(2)(a)(5) of the 1997 NIRC defines export sales as those considered under Executive Order No. 226, the Omnibus Investments Code of 1987. For a sale to be considered zero-rated, it must be proven that the goods were actually exported and consumed in a foreign country. Revenue Memorandum Order No. 09-00 further clarifies that sales to BOI-registered enterprises qualify for zero-rating if the buyer’s products are 100% exported, and this must be certified by the BOI.

A key term to understand is “constructively exported,” which refers to products sold to bonded manufacturing warehouses of export-oriented manufacturers. This concept is important because it allows certain domestic sales to be treated as export sales for VAT purposes.

Case Breakdown: The Journey of Filminera’s Refund Claim

Filminera Resources Corporation entered into an Ore Sales and Purchase Agreement with PGPRC, a BOI-registered enterprise, on July 5, 2007. For the third and fourth quarters of the fiscal year ending June 30, 2010, Filminera’s sales were exclusively to PGPRC. In March and June of 2012, Filminera filed amended VAT returns and claims for refund, asserting that these sales were zero-rated.

The Commissioner of Internal Revenue (CIR) contested the claims, arguing that Filminera failed to prove actual exportation of PGPRC’s products. Initially, the Court of Tax Appeals (CTA) Division denied Filminera’s petitions due to insufficient evidence. However, upon reconsideration and the submission of a BOI Certification dated January 27, 2010, the CTA Division amended its decision, granting the refund.

The CIR appealed to the CTA En Banc, which upheld the amended decision, reasoning that the BOI Certification was valid for the period in question. The CIR then brought the case to the Supreme Court, arguing that the certification did not cover the relevant period and thus did not satisfy the legal requirement for zero-rated sales.

The Supreme Court sided with the CIR, emphasizing the need for proof of actual exportation. The Court stated, “Without the certification from the BOI attesting actual exportation by PGPRC of its entire products from January 1 to June 30, 2010, the sales made during that period are not zero-rated export sales.” The Court further clarified that the validity period of the BOI certification should not be confused with the period identified in the certification when the buyer actually exported its products.

Practical Implications: Navigating Zero-Rated VAT Claims

This ruling has significant implications for businesses engaged in zero-rated sales. It underscores the necessity of obtaining and presenting a valid BOI certification that covers the specific period of the sales in question. Businesses must ensure that their BOI-registered buyers actually export the entire products purchased, as failure to do so could result in denied refund claims.

For businesses seeking VAT refunds, it is crucial to maintain meticulous records and comply with invoicing requirements. The Supreme Court emphasized that taxpayers must justify their claims with clear evidence, as tax refunds are regarded as exemptions and are construed strictly against the claimant.

Key Lessons:

• Ensure that sales to BOI-registered enterprises are backed by a valid BOI certification covering the relevant period.
• Verify that the BOI-registered buyer actually exports 100% of its products.
• Comply with all invoicing requirements, including prominently marking invoices as “zero-rated sales.”
• Maintain detailed records to support refund claims, as the burden of proof lies with the taxpayer.

Frequently Asked Questions

What is a zero-rated sale under Philippine tax law?

A zero-rated sale is a transaction subject to VAT but does not result in any output tax. The input tax on purchases related to these sales can be claimed as a tax credit or refund.

How does a business prove actual exportation for zero-rated sales?

A business must obtain a certification from the BOI attesting that the buyer exported 100% of its products during the relevant period. This certification must cover the specific period of the sales in question.

What are the consequences of failing to prove actual exportation?

Failure to prove actual exportation can result in the denial of a VAT refund claim, as the sales will not be considered zero-rated.

Can a business rely solely on the validity period of a BOI certification?

No, the validity period of a BOI certification should not be confused with the period when the buyer actually exported its products. The certification must specifically attest to the actual exportation during the relevant period.

What steps should a business take to ensure compliance with VAT refund requirements?

Businesses should maintain detailed records, ensure compliance with invoicing requirements, and obtain a valid BOI certification that covers the specific period of their sales. Regular audits and consultations with tax professionals can also help ensure compliance.

How can ASG Law assist with VAT refund claims?

ASG Law specializes in tax law and can provide expert guidance on navigating the complexities of VAT refund claims. Our team can help ensure that your business meets all legal requirements and maximizes its refund potential.

ASG Law specializes in tax law. Contact us or email hello@asglawpartners.com to schedule a consultation.