Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corp.

SPECIAL SEVENTH DIVISION [CA-G.R. SP No. 56816. November 17, 2000.] THE COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . ACESITE (PHILIPPINES) HOTEL CORPORATION , respondent . D E C I S I O N GUERRERO , B.J . , J p : Before Us is a petition for review of the decision of the Court of Tax Appeals, dated 03 January 2000, granting respondent Acesite Hotel Corporation's (hereafter, Acesite) claim for refund of Value-Added Taxes (hereafter, VAT) paid for the period April 1996 to April 1997 in the amount of P30,054,148.64. TcAECH The pertinent facts: Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along United National Avenue in Manila. It leases 6,768.53 square meters of the hotel's premises to the Philippine Amusement and Gaming Corporation (hereafter, PAGCOR) for casino operations. 1 It also caters food and beverages to PAGCOR'S casino patrons through the hotel's restaurant outlets. 2 For the period January 96 to April 1997, Acesite incurred VAT amounting to P30,152,892.02 from its rental income and sale of food and beverages to PAGCOR during said period. Acesite tried to shift to said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR but the latter refused to pay the taxes on account of its tax exempt status: 3 Thus PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT while the latter paid the VAT to the Commissioner of Internal Revenue (hereafter, CIR) as it feared the legal consequences of non-payment of the tax. However, Acesite belatedly arrived at the conclusion that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. 4 On 21 May 1998, Acesite filed an administrative claim for refund with the CIR 5 but the latter failed to resolve the same. Thus, on 29 May 1998, Acesite filed a petition with the Court of Tax Appeals (hereafter, CTA) which was decided in this wise: "As earlier stated, Petitioner is subject to zero percent tax pursuant to Section 102 (b)(3) [now 106(A)(C)] insofar as its gross income from rentals and sales to PAGCOR, a tax exempt entity by virtue of a special law. Accordingly, the amounts of P21,413,026.78 and P8,739,865.24, representing the 10% EVAT on its sales of food and services and gross rentals, respectively from PAGCOR shall, as a matter of course, be refunded to the petitioner for having been inadvertently remitted to the respondent. Thus, taking into consideration the prescribed portion of Petitioner's claim for refund of P98,743.40, and considering further the principle of ' solutio indebiti ' which requires the return of what has been delivered through mistake, Respondent must refund to the Petitioner the amount of P30,054,148.64 computed as follows: Total amount per claim P30,152,892.02 Less Prescribed amount (Exhs. A, X, & X-20) January 1996 P2,199.94 February 1996 26,205.04 March 1996 70,338.42 98,743.40 P30,054,148.64 =========== WHEREFORE, in view of all the foregoing, the instant Petition for Review is partially GRANTED. The Respondent is hereby ORDERED to REFUND to the petitioner the amount of THIRTY MILLION FIFTY FOUR THOUSAND ONE HUNDRED FORTY EIGHT PESOS AND SIXTY FOUR CENTAVOS (P30,054,148.64) immediately. SO ORDERED." 6 Hence, this petition, which raises the following issues: "1. Whether or not EVAT may be shifted or passed on to a tax-exempt entity such as PAGCOR; and 2. Whether or nor respondent is entitled to its claim for refund based on the evidence on record." 7 We sustain the Court of Tax Appeals. The VAT is a privilege tax 8 levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services. 9 It is an indirect tax, the amount of which may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. 10 In the case of Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, 11 the Supreme Court held that although the burden of an indirect tax, such as a sales tax, is ultimately borne by the purchaser or consumer, it is not a tax on the latter 12 . The person directly liable for the tax is the seller, who may opt to absorb the tax burden as a "matter of economics." 13 Consequently, a tax exempt entity, such as the National Power Corporation (hereafter, NPC) is not exempted from indirect taxes because it does not really pay for such taxes but merely pays the seller more due to the latter's tax obligation. 14 Therefore, as a rule, a tax exempt person is not exempt from indirect taxes. However, in the case of Maceda v. Macaraig, Jr ., 15 the high court clarified that under certain circumstances, a tax exempt person may likewise be exempt from indirect taxes, such as where the previous charter of the NPC specifically stated that said entity was exempted from both direct and indirect taxes and the revised charter while silent on the indirect tax liability of the NPC nonetheless mandates that the rule on strictissimi juris in the interpretation of tax statutes could not be invoked against the NPC. 16 Under such circumstances, the high court found the legislative intent to exempt the NPC from indirect taxes to be unmistakable. Hence, by way of exception to the aforementioned rule, a tax exempt person is also exempt from indirect taxes if the law so states or if there are unmistakable circumstances warranting such conclusion. 17 In the instant case, under P.D. 1869, PAGCOR is definitely exempt from taxes. But does this exemption extend to indirect taxes? Let us examine Section 13 (2) b of P . D . 1869 , to wit: "(b) Others: The exemption herein granted for earnings derived from the operations conducted under the franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees, or levies, shall inure to the benefit of and extend to corporation[s], association[s], agency[ies], or individual[s] with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino[s] authorized to be conducted under this Franchise and to those receiving compensation or other remuneration from the Corporation or operator as a result of essential facilities furnished and/or technical services rendered to the Corporation or operator." Under the above provision, the term "Corporation" or operator refers to PAGCOR. 18 Although the law does not specifically mention PAGCOR's exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities contracting with PAGCOR in casino operations. Although, differently worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is not liable for the P30,152,892.02 VAT and neither is Acesite as the latter is effectively subject to zero percent rate under Sec. 108 B[3], R.A. 8424. A zero-rated or "effectively zero-rated" transactions is a taxable transaction for VAT purposes but it does not result in any output tax. Moreover, the input tax on the purchase of goods, properties or services related to such zero-rated sale is available as a tax credit or refund. 19 The tax code defines an "input tax" as VAT due from or paid by a VAT-registered person in the course of his trade or business or importation of goods or local purchase of goods or services, including lease or use of property. An "output tax," on the other hand, is the VAT due on the sale or lease of taxable goods or properties or services by a VAT-registered person. 20 Indeed, the VAT on a taxable transaction is equivalent to 10% of the gross selling price or gross receipts. 21 However, this is not the amount actually paid by the Bureau of Internal Revenue (hereafter, BIR). The VAT paid is only the excess of the output tax, i.e. the 10% of the gross receipts or gross selling price, over the input tax, i.e., the VAT passed on to the VAT-registered person in the process of acquiring inputs, raw materials or services for his final product. 22 If the input tax exceeds the output tax, no tax is remitted to the BIR and the excess is carried over to the succeeding taxable quarters. 23 Herein lies the difference between a zero-rated and an exempt transaction. In the former, if there is an output tax due from a VAT-registered person, he is not liable for such output tax and his input tax is refunded. In the latter, the taxpayer is not liable for the output tax but he is not entitled to a refund of his input tax. 24 Hence, a zero-rated transaction is completely free from VAT while an exempt transaction is not. In the instant case, Acesite's transaction with PAGCOR is denominated as an "effectively zero-rated" transaction because it involves the rendition of services to an entity exempt from indirect taxes. 25 As such, Acesite is not only exempt from payment of the output tax amounting to P30,152,892.02 but is also entitled to a refund of its input tax. However, to enjoy an "effectively zero-rates" status, prior application with the Revenue District Office is necessary otherwise the transaction is considered merely exempt. 26 Unfortunately, Acesite is not entitled to a refund of its input tax because it failed to secure an approved application for effective zero-rating. Therefore, Acesite is only entitled to a refund of the P30,152,892.02 output VAT paid by it although such amount must be reduced by P98,743.40, which has already prescribed. Thus, the CTA correctly granted the refund of P30,054,148.64 WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED and the 03 January 2000 decision of the Court of Tax Appeals is AFFIRMED in toto . No costs. SO ORDERED. * Sabio, Jr. and ** Delos Santos, JJ., concur. Footnotes 1. Rollo , pp. 30-31. 2. Ibid . 3. Id ., p. 20. 4. Rollo , p. 32. 5. Id ., p. 20. 6. Rollo , pp. 26.27. 7. Id ., p. 12. 8. De Leon, Hector S., The Law on Transfer and Business Taxation , 1995 Ed., p. 132. 9. Tolentino v. Secretary of Finance , 25 August 1994. 10. Sec. 105, RA 8424, The Tax Reform Act of 1997 . 11. 20 SCRA 1056 [1967]. 12. Phil. Acetylene Co., Inc. v. CIR, supra , p. 1060. 13. Id ., p. 1064. 14. Id ., pp. 1059-1060, citing Justice Holmes in Lash's Products v . United States , 278 U.S. 175 [1928]. 15. 197 SCRA 771 [1991]; 223 SCRA 217 [1993]. 16. Id ., pp. 798-799. 17. See also Commissioner of Internal Revenue v. Gotamco , 148 SCRA 36, 41 [1987]. 18. Sec. 2, P.D. 1869. 19. Sec. 4, 100-2 Revenue Regulation 7-95; Section 110 (B), RA 8424; De Leon, Hector S., The Law on Transfer and Business Taxation . 20. Sec. 110(A), RA 8424. 21. Sec. 106(A), Sec. 108(A), RA 8424. 22. Sec. 110B, RA 8424. 23. Ibid . 24. Ibid ; De Leon, supra , p. 161. 25. Sec. 108 b(3), RA 8424; Revenue Regulation 7-95, Sec. 4.102-2(d). 26. Sec. 4.107-1(d), Rev. Reg. 7-95; Sec. 11(2), Rev. Reg. 10-94; Revenue Audit Memorandum Order No. 2-93, III C(1) a.3.5. * Acting Senior Member. ** Vice J. Demetrio G. Demetria, who is on leave.