THE Philippine Economic Zone Authority (Peza) manages and operates the ecozone as a separate Customs territory. An ecozone is a foreign territory separate and distinct from the Customs territory of the Bureau of Customs (BOC), and that accordingly, the sales made by suppliers from the BOC territory to a purchaser within an ecozone will be considered exportations.
Under the Cross Border Doctrine and Destination Principle, no value-added tax (VAT) shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Supplies of goods or services by a supplier from the BOC territory to any registered enterprise operating in the ecozone, regardless of the latter’s registration, is entitled to zero-percent VAT (if the supplier is VAT-registered) or VAT exemption (if the supplier is VAT exempt).
In other words, because of the fiction that an ecozone is considered a foreign territory, no VAT should be passed on to that entity in that “foreign territory” in the same way as any exports made to another country.
The purchases of goods and services by an ecozone enterprise that were destined for consumption within the ecozone should be free of VAT; hence, no input VAT should then be paid on such purchases, rendering the ecozone entity not entitled to claim a tax refund or credit. In a recent ruling (GR 190506), the Supreme Court (SC) held that, if the ecozone enterprise had paid the input VAT, the ecozone enterprise’s proper recourse was not against the government but against the seller who had shifted to it the output VAT.
The SC further explained that the nature of VAT as an indirect tax should be taken into consideration. Although the seller is statutorily liable for the payment of VAT, the amount of the tax is allowed to be shifted or passed on to the buyer. However, reporting and remittance of the VAT paid to the Bureau of Internal Revenue remained to be the seller/supplier’s obligation.
Hence, the proper party to seek the tax refund or credit should be the suppliers, not the ecozone enterprise.
In a claim for refund, the basis is Section 112 of the Tax Code. There are only two instances where a claim for refund of unutilized input taxes can be made. The first one is input taxes related to VAT zero-rated sales. The other one is refund of VAT upon cancellation of VAT registration. In both cases, the premise is that the input taxes had not been utilized against output taxes.
Input tax and output tax are defined as follows: “The term ‘input tax’ means the value-added tax due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services. The term ‘output tax,’ on the other hand, means the value-added tax due on the sale or lease of taxable goods or properties by any person registered or required to register. Hence, the input tax refers to the purchaser, as opposed to the seller where the VAT is considered the output tax. Since in a claim for refund what is involved is the input tax, the rightful party to claim the same is the buyer.
Besides, the claim for refund of input tax is anchored on the fact that the said input taxes on purchases are related to the claimant’s own zero-rated sales. Thus, it must really be the buyer who has the right to claim the same, as he or she is the only party who can relate/attribute said input taxes to his or her sales. The seller, on the other hand, cannot relate that transaction to a zero-rated sale as that transaction is itself its sale.
This ruling is novel in the realm of VAT refunds. This time, the seller is found to be the proper party to seek the tax refund or credit of input tax related to zero-rated sales. There will be instances when a seller has no zero-rated sales to show but will be granted a VAT refund anyway. When this happens, the VAT system might be put in jeopardy.
The author is a partner of Du-Baladad and Associates Law Offices (BDB Law), a member- firm of World Tax Services (WTS) Global.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported, therefore, by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at irwin.nidea@bdblaw.com.ph or call 403-2001 local 330.