Punongbayan & Araullo

April 25, 2007 BIR RULING [DA-254-07] Punongbayan & Araullo 20TH Floor, Tower I The Enterprise Center 6766 Ayala Avenue Makati City Attention: Maria Victoria C. Espao Tax Partner Gentlemen : This refers to your letter dated June 2, 2005 stating that your client, SANYO SEMICONDUCTOR MFG. PHILIPPINES CORPORATION ("SSMP"), is a domestic corporation existing and organized under the laws of the Philippines; that it is duly registered with the Securities and Exchange Commission (SEC) to engage in the manufacture of semi-conductor devices (large scale integrated circuits); that SSMP is likewise registered with the Philippine Economic Zone Authority (PEZA) and is doing business at the Luisita Industrial Park, Special Export Processing Zone, San Miguel, Tarlac City, Province of Tarlac; that SSMP is registered with the Bureau of Internal Revenue as VAT taxpayer on September 28, 1995; that on various dates, SSMP filed applications for the issuance of Tax Credit Certificates ("TCCs") with the One-Stop Shop Inter-Agency and Duty Drawback Center of the Department of Finance ("OSS-DOF"). These applications are summarized, as follows: Claimant Information Period Covered Amount Date Application Sheet (CIS) Nos. Filed with OSS-DOF 17783 October to December 1995 30,959,680.00 December 23, 1997 17784 July to September 1996 6,985,861.58 October 8, 1998 17785 October to December 1996 2,535,476.02 January 11, 1999 That CIS No. 17783 covers the refund of input taxes in the total amount of P30,959,680 relative to the following transactions in 1995, as follows: Date of Official Amount Name of Vendor VAT Official Receipt Receipt (In Phil. Pesos) Hazama Phils. Inc. No. 003 August 15, 1995 12,430,000 Hazama Phils. Inc. No. 004 October 24, 1995 5,000,000 Hazama Phils. Inc. No. 009 December 22, 1995 13,529,680 Total 30,959,680 ========= That these transactions pertain to payments made by the SSMP to its contractor, Hazama Phils. Inc., for progress billings made in connection with the construction of the factory; that on December 12, 2002, the Examiners of the Tax and Revenue Group of the OSS-DOF recommended the denial of these claims for the following reasons: i) Payment of input tax amounting to P12,430,000, as evidenced by Official Receipt No. 003, was generated before the Company became VAT-registered; and ii) Payment of input taxes of P5,000,000, as evidenced by Official Receipt No. 004, and P13,529,680, as evidenced by Official Receipt No. 009, were disallowed because the two-year period had already lapsed when the application was filed on December 23, 1997. The denial was based on the provision provided in Revenue Regulations No. 3-88 which provides that the application shall be made within two years from the date of payment of the tax. That this was later referred to Revenue District Office (RDO) No. 17 of Tarlac City for re-audit and re-evaluation; that on February 10, 2004, the Revenue District Officer of RDO No. 17 issued a letter denying the application for TCC, adopting the above reasons cited by the Examiners of the OSS-DOF. That for CIS Nos. 17784 and 17785, the OSS-DOF issued a letter informing SSMP that the claims are denied in accordance with Revenue Memorandum Circular (RMC) No. 42-2003, to wit: "The claim may be filed within two (2) years after the close of the taxable quarter when the sales were made pursuant to Section 112(A) of the Tax Code of 1997. For input taxes paid on capital goods imported or locally purchased, the claim may be filed within two years after the close of the quarter when the importation or purchase was made, pursuant to Section 112(B) of the Tax Code of 1997. . . ." That within three (3) days from receipt of the said letter-denial, or on November 24, 2003, SSMP replied to protest the denial of the abovementioned claims; that on December 16, 2004, SSMP requested the OSS-DOF to re-evaluate the denials of the application for TCCs covered by CIS Nos. 17783, 17784 and 17785, citing Court decisions and BIR Rulings supporting its position that SSMP is entitled to the claims; that on April 13, 2005, the OSS-DOF issued its response again denying SSMP's application; and that the OSS-DOF, however, advised SSMP to present its arguments before the BIR National Office, particularly with respect to the decisions of the Court of Tax Appeals interpreting the meaning of "close of taxable period" in relation to the period of time to file a claim for input tax credit. DaTEIc In connection therewith, you now request confirmation of your opinion that On CIS No. 17783 1. SSMP's input tax arising from a VAT Official Receipt issued to it by a VAT registered supplier can be included in SSMP's claim for issuance of a tax credit certificate, notwithstanding that such VAT official receipt was issued prior to the registration of SSMP as a VAT-taxpayer. 2. The two-year period for the filing of application for refund of input taxes paid in 1995 arising from SSMP's purchases of capital goods should be counted from the lapse of the two quarters following the quarter in which the purchase was made; and On CIS Nos. 17784 and CIS No. 17785 3. The two-year prescriptive period for the filing of application for refund/TCC of SSMP's input taxes paid in 1996 should be counted from the close of the taxable quarter or from the date required for filing of the VAT return. In reply thereto, please be informed that your opinion is hereby confirmed as follows: On CIS No. 17783 Kindly note that Section 2.1.1 of Revenue Delegation Authority Order No. 3-02 states that "tax refund/credit request of taxpayers covering all internal revenue taxes shall be processed by the RDO/BIR Office where the taxpayer is registered or required to be registered." In relation to the abovementioned delegated authority, Section 2 of the Revenue Bulletin No. 1-03 also provides that: "The following shall hereby be construed and identified as No-Ruling Areas: a) . . . b) . . . o) Claim for tax refund or issuance of tax credit certificate as covered by Revenue Delegation Authority Order No. 3-2002. Considering that SSMP was advised by the OSS-DOF to obtain from the BIR an official interpretation of the phrase "close of taxable period" as used in relation to the period of time to file a claim for refund of input tax paid on capital goods, this Office is of the opinion that the proper venue for your query on CIS No. 17783 is Revenue District Office No. 17 of Tarlac City. Accordingly, your query on CIS No. 17783 should be lodged before RDO No. 17 of Tarlac City. On CIS Nos. 17784 and 17785 Considering that the input taxes at issue pertain to input taxes in 1996, it is governed by the law applicable in 1996. Thus, Section 106 (c) of the 1977 Tax Code, as amended by Executive Order No. 273, as further amended by Republic Act No. 7716, which took effect on January 01, 1996, applies, which read as follows: "Sec. 106. Refunds or tax credits of creditable input tax . "(a) . . . "(b) Capital goods . A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years, after the close of the taxable quarter when the importation or purchase was made." The aforesaid provision has been implemented by Section 4.106-1 (b) of Revenue Regulations No. 7-95 (Consolidated Value Added Tax Regulations), which reads as follows: "SEC. 4.106-1. Refunds or tax credits or input tax. "(a) . . . "(b) Capital Goods . Only a VAT-registered person may apply for issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased. The refund shall be allowed to the extent that such input taxes have not been applied against output taxes. The application should be made within two (2) years after the close of taxable quarter when the importation or purchase was made. CSIcTa "Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used in exempt operations; the input tax refundable shall only be ratable portion corresponding to the taxable operations." As specifically provided, the application shall be made within two-years after the close of the taxable quarter when the importation or purchase was made. The phrase "close of the taxable quarter" has been interpreted by the Courts to mean the date of filing of the corresponding quarterly VAT return which is within twenty (20) days (now 25 days) after the close of each taxable quarter. As clearly explained by the Court "The reckoning of the prescriptive period in the above provision of the NIRC should be counted from the date of filing of the corresponding VAT quarterly return which must be made within twenty (20) days from the close of the taxable quarter, as elucidated by this court in a Resolution promulgated on July 20, 1998, in Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5296 . This court ratiocinated that said reckoning of the prescriptive period will harmonize Section 108 with Section 230 of the Tax Code which was interpreted by the Supreme Court in the cases of Commissioner of Internal Revenue vs. TMX Sales Inc. and the Court of Appeals, G.R. No. 83736, dated January 15, 1992; and ACCRA Investments Corporation vs. Commissioner of Internal Revenue, 204 SCRA 957 , that the two-year period should be counted from the filing of the final income tax return, because it is only during that date that the exact tax liability or refundability of tax can be determined. In the same manner, it is only after the filing of the quarterly VAT return that we can determine the VAT liability or refundability of VAT. It should be noted that the basic requirement is that VAT refund can only be granted to the extent that the input taxes have not been applied against output tax. All these things can only be determined if a return is filed. It is logical therefore, to conclude that the two-year period should not immediately be counted from the close of the quarter but from the date of filing of the VAT return." The aforesaid decision was reiterated by the Court of Tax Appeals in Jideco Manufacturing Philippines, Inc. vs. Commissioner of Internal Revenue (C.T.A. Case No. 6552, September 16, 2004) . This case is similar to SSMP's case in that it also involves input taxes related to the construction of factory building for a PEZA entity. Other than confirming that the input taxes on the payments for the construction of a building are classified as input taxes on capital goods and so the rule on the refund of input taxes related to capital goods should apply, the Court also reconfirmed that the two-year period should not immediately be counted from the close of the quarter but from the prescribed date of filing of the VAT return. On the bases of the foregoing, this Office confirms your opinion that the two-year period should be counted not from the end of the quarter but from the date the quarterly return was filed. The end of the two-year period should, thus, be determined as follows: CIS Period/Quarter Filing of End of Two- Date of Filing No. Quarterly Return Year Period with DOF-OSS 17784 July to September 1996 October 20, 1996 October 20, October 8, 1998 1998 17785 October to December 1996 January 20, 1997 January 20, 1999 January 11, 1999 WHEREFORE, in view of the foregoing, this Office holds that SSMP's application with the DOF OSS for the refund or tax credit is likewise well within the prescriptive period. DaACIH This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service