Commissioner Of Internal Revenue Vs. Seagate Technology (2005).docx

Commissioner of Internal Revenue vs. Seagate Technology | G.R. No. 153866 | February 11, 2005 | Panganiban, J. Petitioner: COMMISSIONER OF INTERNAL REVENUE Respondent: SEAGATE TECHNOLOGY (PHILIPPINES) 1)

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The Respondent  A resident foreign corporation duly registered with the Securities and Exchange Commission to do business in the Philippines and is registered with the Philippine Export Zone Authority (PEZA).  VAT-registered entity Respondent filed VAT returns for the period 1 April 1998 to 30 June 1999. An administrative claim for refund of VAT input taxes was filed with RDO No. 83 in Talisay, Cebu. The claim was not acted upon. Respondent elevated the case to the CTA. Petitioner claims that business is not subject to VAT pursuant to Section 24 of Republic Act No. R.A. 7916 in relation to Section 103 of the Tax Code; hence, the capital goods and services it alleged to have purchased are considered not used in VAT taxable business therefore is not entitled to refund of input taxes on such capital goods The CTA granted the claim for refund. The CA affirmed the Decision of the CTA, but in a reduced amount.  This sum represented the unutilized but substantiated input VAT paid on capital goods purchased for the period.  Seagate availed itself only of the fiscal incentives under the Omnibus Investment Code (E.O. No. 226) not of those under Presidential Decree No. 66.  Therefore, respondent was considered exempt only from the payment of income tax when it opted for the income tax holiday in lieu of the 5 percent preferential tax on gross income earned.  As a VAT-registered entity, though, it was still subject to the payment of other national internal revenue taxes, like the VAT.

Whether the Respondent is entitled to refund or issuance of tax credit certificate representing unutilized input VAT paid on capital goods purchased – YES! 

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Respondent enjoys preferential tax treatment. It is not subject to internal revenue laws and regulations and is even entitled to tax credits. o As a PEZA-registered enterprise within a special economic zone, respondent is entitled to the fiscal incentives and benefits provided for in either PD 66 (Law creating the Export Processing Zone Authority or EPZA) or EO 226. o In addition, it enjoys all privileges, benefits, advantages or exemptions under both RA 7727 (Bases Conversion and Development Act of 1992) and 7844 (Export Development Act of 1994)  In the zone, there is a privilege on tax and duty-free importation of raw materials, capital and equipment.  In addition, no local or national taxes shall be imposed therein.  Respondent also benefits from negotiable tax credits for locally-produced materials used as inputs. o Under EO 226, respondent is entitled to an income tax holiday VAT is levied on every importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of services in the course of trade or business as they pass along the production and distribution chain. Tax Credit Method o An entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. o At the end of a taxable quarter:  Output = Input: no payment is required  Output > Input: excess has to be paid  Output < Input: excess shall be carried over to the succeeding quarter or quarters o Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes. o Zero-Rated vs. Effectively Zero-Rated  Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set at Zero. The seller charges no output tax  but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

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Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate  The seller who charges zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers Application of the Destination Principle: Effect on the extent of relief o Destination Principle: goods and services are taxed only in the country where these are consumed. Thus, exports are zero-rated, but imports are taxed. o Automatic Zero rating is primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT. o Effective zero rating is intended to benefit the purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers  The purchaser, however, is not allowed any tax refund or credit for input taxes. Exempt Transaction vs. Exempt Party o An exempt transaction involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code.  the seller is not allowed any tax refund of or credit for any input taxes paid. o An exempt party is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from the VAT.  Party may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer. o The purchase transactions entered into by respondent are not VAT-exempt.  The party is not relieved as a purchaser from its indirect burden of the VAT shifted to it by its VATregistered suppliers. Its sales transactions, VAT will either be zero-rated or taxed at the standard rate of 10 percent depending on the application of the destination principle o Use or consumption outside PH = 0% o Use or consumption in PH = 10% (unless purchaser is exempt from VAT, therefore zero-rate) Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero because the ecozone within which it is registered is managed and operated by the PEZA as a separate customs territory (legal fiction of a foreign territory) Cross-border Principle o No VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the taxing authority. o Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports to a foreign country. o Conversely, sales by a PEZA-registered entity to a VAT-registered person in the customs territory are deemed imports from a foreign country If respondent is located in an export processing zone, within that ecozone, sales to the export processing zone, even without being actually exported, shall in fact be viewed as constructively exported. Hence, subject to a zero rate. Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The non-taxability of transactions that are otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an entity, not upon the transactions themselves.

Whether by virtue of the PEZA registration of respondent it is not subject to the VAT, hence no VAT refund or credit is due – NO! 

By the VAT’s very nature as a tax on consumption, the capital goods and services respondent has purchased are subject to the VAT, although at zero rate.

Whether the Tax Refund or Credit is in order – YES!   

Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the tax refund or credit is in order. Being subject to VAT, payments erroneously collected thereon may then be refunded or credited. The VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited.

Petition DENIED