MAK MOTOREN GmBH — Philippine Branch (MAK, for short)

November 17, 2003 VAT RULING NO. 046-03 Sec. 109 (B) (3) VAT Ruling No. 033-96 Punong Bayan & Araullo 20th Floor, Tower I, The Enterprise Center 6766 Ayala Avenue Attention: Ms. S. C. Espao Tax Partner SUBJECT : MAK MOTOREN GmBH Philippine Branch (MAK, for short) Gentlemen : This refers to your letter, dated January 13, 2000, stating that your above mentioned client (MAK) is a corporation organized and existing under the laws of the Philippines and duly registered with the Securities and Exchange Commission (SEC) under SEC Certificate of Registration No. A1997-14239, dated August 15, 1997; that MAK's principal office address is at 6/F Vernida IV Building, Alfaro St., Salcedo Village, Makati City; that, on the other hand CIP II POWER CORPORATION (CIP II, for short) is a Philippine Economic Zone Authority (PEZA) registered enterprise with PEZA Registration Certificate No. 93-03-U and with principal office at Carmelray Industrial Park II-SEZ, Barangay Punta, Calamba Laguna; that as a PEZA-registered enterprise, CIP II is subject to the 5% special tax, in lieu of all taxes, pursuant to the provisions of R.A. No. 7916, as amended; that, on January 22, 1999, MAK and CIP II entered into a service contract for the design, execution, completion and commissioning of CIP II's 6.614MW Diesel Generator Power Plant; that, a portion of the contract was subcontracted by MAK to AVI, another domestic corporation; that, during the period from January to September 1999, MAK paid the value added tax (VAT) due on the receipts arising from portions of the works completed under the service contract with CIP II; that, in addition, MAK paid VAT to AVI and its other VAT-registered suppliers/contractors; and that on September 15, 1999, MAK filed an application with the Bureau of Internal Revenue (BIR) for VAT zero-rating of its sale of services to CIP II, which was subsequently approved by the BIR. Based on the foregoing, you requested for a confirmation of your opinion that: "1. The receipts of MAK, prior to the approval of its application for zero-rating, in relation to its service contract with CIP II, shall be considered exempt, hence, the VAT payments made relative thereto shall be refunded to MAK on the ground that the VAT payments were erroneous; and" "2. MAK's failure to earlier file an application for zero-rating was understandable and excusable and, therefore, MAK is entitled to a refund of the VAT paid to its subcontractor and other VAT-registered suppliers/contractors, prior to the BIR 's approval of the zero-rating." It appears from your foregoing representations that MAK is a VAT-registered business enterprise; that even before the issuance of a BIR Permit for VAT-zero rating of MAK's sale of services to CIP II, MAK issued VAT-registered invoices to CIP II for its gross receipts from sale of services to CIP II; that MAK passed on to CIP II the 10% VAT as part of MAK's invoice billing but the tax shifted was not paid; and that MAK reported these gross receipts and paid the 10% VAT thereon in its VAT return/s filed. In support of MAK's claim that CIP II refused to pay and did not pay the VAT billed to the latter, the following documents were submitted: 1. Schedule showing the breakdown of the amount billed by MAK under each of the invoices it issued to CIP II and the corresponding payments by the latter; 2. Schedule showing the VAT paid by MAK in respect of services rendered to CIP II; 3. Copies of the monthly and quarterly VAT Returns filed by MAK covering gross receipts during the period covered, which include receipts under the contract with CIP II; and 4. Duly notarized certification issued by CIP II stating that payments to MAK were made exclusive of the VAT component in the invoices, and accordingly, it did not recognize nor claim any input tax arising from its transaction with MAK, nor does it intend to file a claim for tax refund nor tax credit on such non-existent input tax. In reply, please be informed that your opinion that MAK's sale to CIP II is VAT exempt during the period that it has no approved application for zero-rating is hereby confirmed. Section 109(B)(3) of the Tax Code of 1997 provides that services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate. Such being the case, since R.A. 7916 is a special law which grants exemptions from national taxes to PEZA-registered business establishments operating within the ECOZONE, except payment of the preferential tax rate of 5% on gross income earned, the sales of goods and services by VAT-registered enterprises shall be effectively zero-rated. It shall be understood, however, that the VAT-registered enterprises shall apply with the Revenue District Officer concerned having jurisdiction over their principal place of business for the effective zero-rating of their sales of goods and services to PEZA-registered enterprises within the ECOZONE pursuant to Revenue Regulations No. 7-95, as amended. Without an approved application for zero-rating, the transactions otherwise entitled to zero-rating shall be considered exempt. (BIR VAT Ruling No. 033-96 dated November 11, 1996). Clearly, therefore, the billing of the VAT and the subsequent remittance thereof by MAK was erroneous. But the VAT system cures this basic defect through the input tax credit mechanism as regards transactions between two VAT registered persons wherein the seller is required to remit the VAT and the buyer is allowed to claim the input tax credit. However, in a situation where the purchaser of services upon whom the VAT was shifted refuses, as in fact it did not pay the tax shifted, the seller has no recourse to recover the tax which under the law, may be shifted or passed on to the buyer, it being in the nature of an indirect tax. If the credit system is in place, the Government should have not collected any VAT because the remittance of the seller should be offset by an input tax credit of the buyer. But the system was distorted because the buyer did not pay the tax and accordingly did not claim an input tax credit making the government unjustly enriched by such VAT remittance. Accordingly, MAK should be entitled to claim for refund based on the principle that nobody, not even the government, shall enrich himself at the expense of another (Philex Mining Corp., v. CIR et. al., G.R. No. 125704, 1998). cTAaDC It should be borne in mind, however, that the amount refundable should not exceed the benefit that actually accrued to the government. In making the remittance of the VAT on its transactions, from the inception of the contract with CIP II up to the approval of its application for zero-rating, MAK claimed input tax credits. If its sale of services will be considered exempt, which is the basis of filing a claim for refund, no input tax should be allowed. But rather than adopt a cumbersome process of requiring MAK to pay for the unallowable input VAT, after which the BIR will refund the entire output tax, the VAT payable which were paid per return on its transactions with CIP II for the period beginning from the inception of the contract up to the approval of its application for zero-rating, should be the amount refundable. This Office agrees to the proposition that the aforesaid 10% VAT that was erroneously billed to CIP II, by MAK, and that portion actually paid to the BIR, may be refunded to MAK, provided, a claim for the refund thereof is filed within two (2) years from date of erroneous payment, pursuant to the provisions of Section 204, NIRC of 1997. With respect to your second request, we regret to inform you that the input taxes you paid to your suppliers are not allowed to be refunded because these are attributable to exempt sales of service and therefore, they should not have been recognized as input taxes in the first place. But since you have in fact utilized them against the output taxes that you have erroneously billed, in effect you have already recovered them. This is the very reason why the refund you were asking for should be limited only to the net VAT payments per returns. 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 null and void. Very truly yours, (SGD.) GUILLERMO L. PARAYNO Commissioner of Internal Revenue