Calamba Premier Realty Corp.

November 11, 2002 VAT RULING NO. 076-02 Sec. 24 RA #7916 000-00 MEMORANDUM TO: The Regional Director Revenue Region No. 9 BIR, San Pablo City, Laguna SUBJECT : Calamba Premier Realty Corp . This refers to your letter dated August 13, 2001 which, in effect, based on the representations shown hereunder, is a request for clarification on the following: 1. Whether CALAMBA PREMIER REALTY CORP. (Vendee) is entitled to a refund of the 10% VAT charged by and paid to STARWORLD CORP.(Vendor), as part of the Vendor's invoice billing on the Vendee's purchase of real property; or 2. If refundable, whether the proper claimant should be the VENDOR rather than the VENDEE since the VENDOR, being a PEZA-registered enterprise, is exempt from all national internal revenue taxes, which includes the VAT. Accordingly, the VENDOR's payment of the 10% VAT thereon was erroneous. It is represented that, the VENDOR is a PEZA-registered enterprise; that it is registered as Ecozone Developer/Operator Corporation; that, on March 31, 1999, the VENDOR sold a piece of real property, located inside the Ecozone, to the VENDEE at a selling price of P326,829,000.00; that, the VENDOR issued a duly registered VAT invoice covering the selling price, plus 10% VAT thereon in the amount of P32,682,900.00; that, the VENDEE is not a PEZA-registered enterprise but, however, doing business inside the Ecozone; that on June 23, 2000 (i.e., within the two-year reglementary period), the VENDEE filed its written application for the refund of its excess input VAT arising out of the aforesaid transaction. In reply, please be informed that, since the VENDOR is a PEZA-registered " Ecozone Developer ," its aforementioned sale of real property to the VENDEE, made on March 13, 1999, was governed by Section 24, R.A. No. 7916, known as the " Special Economic Zone Act of 1995 ," or the PEZA Law, which provided: "SEC. 24. Exemption from Taxes Under the National Internal Revenue Code. Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government . This five percent (5%) shall be shared and distributed as follows: xxx xxx xxx." 1 Accordingly, the said March 13, 1999 sale transaction was exempt from the VAT, pursuant to Section 109 (q), NIRC of 1997, which provides: "(q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws , except those under Presidential Decree Nos. 66, 529 and 1590." Thus, it was held in BIR RULING No. 070-97, June 09, 1997, as follows: "Accordingly, as a duly registered Ecozone developer, your sale of industrial lots shall not be subject to VAT . . . " (BIR RULING No. 070-97, June 09, 1997) However, the foregoing notwithstanding, the last paragraph of Section 109, NIRC of 1997, provides that if a VAT-exempt seller issues a VAT-registered invoice on his VAT-exempt sale transaction, he shall, in addition to the tax normally due on his sale transaction, be liable to the 10% VAT on such VAT-exempt transaction provided, however, that the output VAT thereon shall be recognized as input VAT in the hands of a VAT-registered purchaser, as follows: "The foregoing exemptions to the contrary notwithstanding, any person whose sale of goods or properties or services which are otherwise not subject to VAT, but who issues a VAT invoice or receipt therefor shall, in addition to his liability to other applicable percentage tax, if any, be liable to the tax imposed in Section 106 or 108 without the benefit of input tax credit, and such tax shall also be recognized as input tax credit to the purchaser under Section 110, all of this Code." 2 The above quoted proviso under Section 109 of the Code is in the nature of a penalty on any person whose sale transaction is VAT-exempt but who, despite of such exemption, nevertheless had issued therefor a VAT-registered invoice. In general, the VENDEE has the following courses of action in case of illegal charging of the 10% VAT by the VENDOR: 1. If the VENDEE is a VAT-registered person , he shall recognize the erroneously passed on VAT as his input tax credit, pursuant to Section 109, which he may either use in payment of his output VAT, pursuant to Section 110, or claim the same as a refund, if allowable under Section 112, NIRC of 1997. 2. If the VENDEE is not a VAT-registered person and, therefore, not legally entitled to recognize the erroneously passed on VAT as input tax credit, his recourse is against the VENDOR and not against the BIR. Section 112 (B), NIRC of 1997, provides for the refund of input VAT on purchase of capital goods, as follows: "(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 ." This law is implemented by Section 4.106-1 (c), Revenue Regulations No. 7-95, as follows: "(c) Land Only a VAT-registered person may apply for issuance of a tax credit certificate or refund of input taxes on land purchased to the extent that such input tax has not been applied to output tax . The application should be made within two (2) years after the close of the taxable quarter when the purchase was made . "Refund of input taxes on land shall be allowed only to the extent that such land is used in VAT taxable business ." Since the VENDEE is not a PEZA-registered enterprise, it is not embraced by the tax exemption provision under Section 24, R.A. No. 7916, even if it is doing business inside the Ecozone. Thus, on the premise that, the VENDEE is subject to the provisions of the VAT law; that, it purchased the said real property on March 31, 1999; that, the VENDOR issued therefor a VAT-registered invoice and, accordingly, passed on to the VENDEE 10% Input VAT in the amount of P32,682,900.00; that, the said real property is used in the VAT taxable business of the VENDEE; that, the VENDEE is legally entitled to claim the same as input VAT, even if the same was erroneously billed and passed on by the VENDOR; and that the VENDEE filed its claim for refund of the said input VAT on June 23, 2000 (or within a period of two (2) years from the close of the first quarter ended March 31, 1999, when the said purchase was made), the said VENDEE is, accordingly, entitled to a refund of its aforesaid input VAT, pursuant to the aforequoted laws and regulations. Otherwise, the only recourse of the VENDEE shall be against the VENDOR. The VENDOR, however, is not legally entitled to a refund of the 10% VAT which he illegally charged and passed on to the VENDEE, even if he actually remitted and paid the same to the BIR, because, as to the VENDOR, the imposition of the 10% VAT on the otherwise VAT-exempt sale transaction is in the nature of a penalty. 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, JR. Commissioner of Internal Revenue Footnotes 1. Note . Section 24, R.A. No. 7916, was amended by R.A. 8748, enacted into law on June 01, 1999, to read as follows: "SECTION 24. Exemption from National and Local Taxes . Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE . In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: "(a) Three percent (3%) to the National Government; "(b) Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located." 2. Emphasis supplied.