158885 & 170680

G.R. No. 158885 - FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner, - versus - COMMISSIONER OF INTERNAL REVENUE, REGIONAL DIRECTOR, REVENUE REGION No. 8, BIR; and CHIEF, ASSESSMENT DIVISION, REVENUE REGION No. 8, BIR, Respondents.

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G.R. No. 170680 - FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner, - versus - COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT No. 44, TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.

Promulgated:

April 2, 2009

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DISSENTING OPINION

CARPIO, J.:

I dissent. The majority inexplicably grants to petitioner a credit for an input value-added tax (VAT) that petitioner never paid and could never have paid. At the time of the sale by the government of the land, there was still no VAT on the sale of land, and the government as seller was, and still is today, not subject to VAT. There is no dispute that if the sale were to take place today, when there is already VAT on the sale of land, the sale transaction would still be VAT-free because the government is not subject to VAT, and hence petitioner as buyer cannot avail of any input VAT since petitioner can never present a VAT receipt. Ironically, the majority allows petitioner an input VAT in a transaction that took place when there was still no VAT on the sale of land, and the government as seller was, as it is still, not subject to VAT.

The Cases

Before the Court are two petitions for review[1] filed by Fort Bonifacio Development Corporation (FBDC).

In G.R. No. 158885, FBDC assails the Decision promulgated on 15 November 2002[2] by the Court of Appeals in CA-G.R. SP No. 60477 which affirmed with modification the 11 August 2000[3] Decision of the Court of Tax Appeals (CTA). The CTA ordered FBDC to pay to the Bureau of Internal Revenue (BIR), for the fourth quarter of 1997, the assessed amount of P45,188,708.08 representing disallowed transitional input tax claim, plus 20% delinquency interest per annum from 1 June 1998 until fully paid.

In G.R. No. 170680, FBDC assails the Decision promulgated on 30 October 2003[4] by the Court of Appeals in CA-G.R. SP No. 61517 which affirmed the 17 October 2000 Decision[5] of the CTA. The CTA denied FBDC’s claim for refund of overpaid value-added tax (VAT) amounting to P347,741,695.74 covering the third quarter of 1997.

The Antecedent Facts

FBDC is owned to the extent of 45% by the Bases Conversion Development Authority (BCDA)[6] and to the extent of 55% by private domestic corporations. FBDC is engaged in the development and sale of real properties. On 8 February 1995, FBDC acquired from the national government, under a VAT-free sale transaction, the Fort Bonifacio Global City (Global City) located within Fort Bonifacio, Taguig, Metro Manila. The acquisition was done by virtue of Republic Act No. 7227[7] and Executive Order No. 40[8] dated 8 December 1992. FBDC started developing and selling lots in Global City in October 1996.

Meanwhile, on 1 January 1996, Republic Act No. 7716 (RA 7716) took effect. RA 7716 restructured the VAT system by further amending pertinent provisions of the National Internal Revenue Code (NIRC). RA 7716 imposed a VAT, among others, on the sale of real properties, a transaction not previously subject to VAT. Section 2 of RA 7716 further amended Section 100 of the NIRC, as amended, thus:

SEC. 2. Section 100 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

SEC. 100. Value-added tax on sale of goods or properties. - (a) Rate and base of tax. - There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to 10% of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.

(1) The term “good or properties” shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include:

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;

x x x x

The term “gross selling price” means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price.

Pursuant to RA 7716, the sale of parcels of land to FBDC’s customers became subject to 10% VAT.

However, Section 105 of the NIRC grants to a person who becomes liable to VAT or who elects to be a VAT-registered person a transitional input tax, as follows:

Sec. 105. Transitional input tax credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8% of the value of such inventory or the actual value-added paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.

On 19 September 1996, in order to avail itself of the transitional input tax credit, FBDC submitted to the BIR, Revenue District No. 44, Taguig and Pateros, an inventory of its real properties with a total book value of P71,227,503,200 on which it claims a transitional input tax credit of P5,698,200,256. FBDC also registered itself as a VAT taxpayer.

G.R. No. 158885

On 14 October 1996, FBDC executed two contracts to sell in favor of Metro Pacific Corporation (Metro Pacific) covering two lots located in Global City. The lots were both payable in installments. For the fourth quarter of 1996, FBDC received P3,498,888,713.60 from the sale of the two lots, on which the output VAT payable to the BIR amounted to P318,080,792.14.[9] FBDC paid cash to the BIR amounting to P269,340,469.45 and utilized (1) P28,413,783 out of its total transitional input tax credit of P5,698,200,256 (the amount of P28,413,783 represents the portion of the total transitional input tax credit allocated by FBDC to the two lots sold to Metro Pacific); and (2) its regular input tax credit of P20,326,539.69 on purchases of goods and services.[10]

On 28 July 1997 and 29 October 1997, FBDC submitted to the BIR two letters dated 18 July 1997[11] and 28 October 1997,[12] respectively, informing it of the transaction and computation of its VAT payments and requesting for a ruling on whether its transitional input VAT on the land inventory, amounting to P28,413,783, was in order. After investigation of FBDC’s VAT return for the fourth quarter of 1996, the BIR recommended the disallowance of the claimed transitional input VAT on land inventory, and the issuance of a notice of assessment for deficiency VAT equivalent to the disallowed amount. The BIR issued a Pre-Assessment Notice dated 23 December 1997 for deficiency VAT for the fourth quarter of 1996.

On 5 March 1998, FBDC received an undated letter[13] from then BIR Commissioner Liwayway Vinzons-Chato disallowing the presumptive input tax arising from land inventory on the ground that “the basis of the 8% presumptive input tax of real estate dealers shall be limited to the book value of the improvements [made upon the land], in addition to its inventory of supplies and materials for use in its business,”[14] and not on the book value of the actual land in FBDC’s inventory. The BIR Commissioner cited Revenue Regulation No. 7-95 (RR 7-95) dated 9 December 1995 and Revenue Memorandum Circular No. 3-96 dated 15 January 1996.[15] Specifically, the BIR Commissioner referred to Section 4.105-1 and the Transitory Provisions of RR 7-95 issued in implementation of the amendments made by RA 7716, as follows:

Sec. 4.105-1. Transitional input tax on beginning inventories. - Taxpayers who became VAT-registered persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of P500,000.00 or who voluntarily register even if their turnover does not exceed P500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of December 31, 1995 on the following: (a) goods purchased for resale in their present condition; (b) materials purchased for further processing, but which have not yet undergone processing; (c) goods which have been manufactured by the taxpayer; (d) goods in process and supplies, all of which are for sale or for use in the course of the taxpayer’s trade or business as a VAT-registered person.

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of EO 273 (January 1, 1988).

The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher, which amount may be allowed as tax credit against the output tax of the VAT-registered person.

x x x x

TRANSITORY PROVISIONS

(a) Presumptive Input Tax Credits -

x x x x

(iii) For real estate dealers, the presumptive input tax of 8% of the book value of improvements constructed on or after January 1, 1988 (the effectivity of E.O. 273) shall be allowed.

For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995 of such goods or properties and improvements showing the quantity, description and amount filed with the RDO not later than January 31, 1996.

The BIR Commissioner directed FBDC to pay VAT equivalent to the disallowed presumptive input tax on land inventory in the amount of P28,413,783, including any surcharges, interest and penalties by the Chief, Assessment Division, Revenue Region No. 8, Makati City, subject to audit verification. In a letter dated 11 March 1998,[16] FBDC requested the BIR Commissioner for the computation of the surcharges, interest and penalties and for the issuance of assessment notice to enable it to pursue its remedy under the NIRC.

In a letter dated 4 May 1998,[17] Acting Assistant Chief Pascual M. De Leon of the Assessment Division, Revenue Region 8, Makati City sent FBDC a letter informing it that the total amount due was P45,188,708.08. An assessment notice[18] was attached to the letter. In a letter dated 1 July 1998[19] filed on 2 July 1998, FBDC requested for “reconsideration/protest” of the 4 May 1998 letter and the assessment notice. In a letter dated 15 July 1998[20] which FBDC received on 10 August 1998, Regional Director Antonio I. Ortega of Revenue Region 8 ruled that FBDC’s request for “reconsideration/protest” was barred by the statute of limitations because it was filed more than 30 days from 5 March 1998 when FBDC received the undated letter from the BIR Commissioner disallowing the claim for transitional input tax.

On 11 August 1998, FBDC filed an appeal by certiorari before the CTA, docketed as CTA Case No. 5665.

G.R. No. 170680

For the third quarter of 1997, FBDC received from its sale and lease of lots P3,591,726,328.11 on which output VAT payable to the BIR amounted to P359,172,623.81. FBDC made cash payments amounting to P347,741,695.74 and utilized its regular input tax credit of P19,743,565.73 on its purchases of goods and services.

On 11 May 1999, FBDC filed with the BIR a claim for tax refund of its output VAT cash payments for the third quarter of 1997, amounting to P347,741,695.74. FBDC alleged that the amount was illegally collected because the BIR did not take into account its transitional input tax credit. Earlier, on 8 October 1998, 17 November 1998, and 11 February 1999, FBDC filed claims for refunds amounting to P269,340,469.45, P359,652,009.47, and P486,355,846.78, respectively, representing VAT paid on proceeds received from its sale and lease of lots for the quarters ending on 31 December 1996, 31 March 1997, and 30 June 1997. After deducting P269,340,469.45, P359,652,009.47, and P486,355,846.78 from P5,698,200,256 which FBDC claimed as its total transitional input tax credit, the remaining input tax credit still sufficiently covered the amount of P347,741,695.74.[21]

The BIR did not act upon FBDC’s claim. The two-year prescriptive period for actions to recover illegally collected tax provided under Section 230 of the NIRC was to expire on 25 August 1999. Thus, on 24 August 1999, FBDC filed a petition for review before the CTA, docketed as CTA Case No. 5926. FBDC alleged that its input credit tax was more than enough to offset the VAT paid for the third quarter of 1997 and as such, it was entitled to a refund or tax credit of P347,741,695.74.

The Ruling of the Court of Tax Appeals

G.R. No. 158885

In its 11 August 2000 Decision, the CTA denied the petition for review and ordered FBDC to pay to the BIR the assessed amount of P45,188,708.08 plus 20% delinquency interest per annum from 1 June 1998 until fully paid pursuant to Section 249[22] of the NIRC.

The CTA ruled that FBDC’s protest was filed on time. The CTA ruled that the undated letter from the BIR Commissioner which FBDC received on 5 March 1998 showed that FBDC’s liability was not yet definite and final because it was still subject to audit verification. The CTA ruled that it was the 4 May 1998 letter, with the assessment notice, which constituted the assessment contemplated under Section 228[23] of the NIRC. FBDC received the 4 May 1998 letter on 4 June 1998. Hence, FBDC’s request for “reconsideration/protest” filed on 2 July 1998 was timely filed.

The CTA sustained the BIR’s application of Section 4.105-1 of RR 7-95 that the basis of the transitional input tax for real estate dealers shall be the improvements constructed on or after the effectivity of Executive Order No. 273 (EO 273). The CTA rejected FBDC’s argument that Section 4.105-1 of RR 7-95 is contrary to Sections 100 and 105 of the NIRC. The CTA traced the origin of the transitional input tax credit from the original VAT law, EO 273, until Republic Act No. 8424 or the Tax Reform Act of 1997, which took effect on 1 January 1998. The CTA ruled that the purpose of granting transitional input tax credit was to give recognition to the sales tax component of inventories which would qualify as input tax credit had the goods been acquired during the effectivity of the EO 273. The CTA ruled that RA 7716 amended EO 273 to widen its tax base to include other sale of goods and services not previously subject to VAT. However, RA 7716 did not touch Section 105 of the NIRC on transitional input tax credit, and it remained with the same purpose as when it was introduced by EO 273.

The CTA also ruled that FBDC purchased the lots in Global City from the national government under a VAT-free sale transaction. The CTA noted that in 1995, sale of real properties was still exempt from VAT. Hence, FBDC is precluded from availing of transitional input tax credit.

The dispositive portion of the CTA Decision reads:

WHEREFORE, in view of all the foregoing, the instant Petition for Review is hereby DENIED. Petitioner is ordered to pay the assessed amount of P45,188,708.08 to the Respondent Commissioner of Internal Revenue plus 20% delinquency interest per annum from June 1, 1998 until fully paid pursuant to Section 249 of the 1996 Tax Code.

SO ORDERED.[24]

FBDC filed a petition for review before the Court of Appeals, docketed as CA-G.R. SP No. 60477.

G.R. No. 170680

In a Decision promulgated on 17 October 2000, the CTA denied FBDC’s claim for tax refund. Thus:

WHEREFORE, premises considered, the instant Petition for Review on the refund of the overpaid value-added tax in the amount of P347,741,695.74 covering the third quarter of 1997 is hereby DENIED for lack of merit.

SO ORDERED.[25]

The CTA ruled that FBDC is not automatically entitled to the 8% transitional input tax allowed under Section 105 of the NIRC. The CTA stated that FBDC purchased the land at the Global City from the government under a VAT-free sale transaction. The government, which is a tax-exempt entity, did not pass on any VAT or business tax upon FBDC. Thus, the CTA ruled that to allow FBDC 8% transitional input tax to offset its output VAT liability without having paid any previous taxes has the net effect of granting FBDC an outright bonus equivalent to the 10% VAT it may tack on to the goods it would sell to its subsequent purchasers. The CTA also ruled that the inventory under Section 105 of the NIRC is limited to improvements, such as buildings, roads, drainage system and other similar structures constructed on the land because in their construction, the contractors and suppliers have presumably passed on to the owner of the land or the real estate dealer the business tax due thereon. The CTA also ruled that Section 4.105-1 of RR 7-95 is not contrary to Sections 100 and 105 of the NIRC. The CTA also cited its 11 August 2000 Decision in CTA Case No. 5665.

FBDC filed a petition for certiorari before the Court of Appeals assailing the 17 October 2000 Decision of the CTA, docketed as CA-G.R. SP No. 61517.

The Ruling of the Court of Appeals

G.R. No. 158885

In a Decision promulgated on 15 November 2002, the Court of Appeals affirmed with modification the CTA’s 11 August 2000 Decision.

The Court of Appeals ruled that the regulations embodied in RR 7-95 were a valid exercise of the BIR’s delegated rule-making power and were consistent with the letter and spirit of substantive laws establishing the VAT system. The Court of Appeals ruled that RA 7716 amended the government’s VAT system instituted under EO 273 and imposed, for the first time, VAT on sale of real properties. A first-time taxpayer who becomes liable for VAT is entitled to a transitional input tax under Section 105 of the NIRC. Section 105 provides that the basis for the inventory of goods, materials and supplies upon which the 8% input VAT will be based shall be left to the regulation by the appropriate administrative authority. The Court of Appeals ruled that the decision of the BIR to use the improvements introduced by the taxpayer upon real properties as the basis for the transitional input tax credit satisfied established constitutional and legal precepts.

However, the Court of Appeals modified the CTA’s 11 August 2000 Decision by deleting the imposition of surcharge, interest and penalty upon the assessed amount of additional VAT. Thus:

WHEREFORE, premises considered, the Decision of the Court of Tax Appeals, is hereby AFFIRMED with the MODIFICATION that the assessment of surcharge, interests and penalty by the BIR upon the principal deficiency amount of value added taxes payable by the petitioner, to be determined by the BIR, is hereby REMOVED from petitioner’s liability.

SO ORDERED.[26]

FBDC filed a motion for reconsideration of the Court of Appeals’ 15 November 2002 Decision. In its 1 July 2003 Resolution,[27] the Court of Appeals denied the motion.

Hence, the petition before this Court.

G.R. No. 170680

In its 30 October 2003 Decision, the Court of Appeals denied FBDC’s petition and affirmed the 17 October 2000 CTA Decision. The Court of Appeals again traced the origin of transitional input tax from EO 273 to RA 7716. The Court of Appeals ruled that the grant of transitional input tax presupposes that the VAT taxpayer had previously paid some form of business tax on his inventory of goods. Here, FBDC purchased the land from the national government under a VAT-free transaction. The Court of Appeals sustained the CTA that to allow FBDC to avail of the 8% transitional input tax to offset its output tax liability will have the effect of granting FBDC an outright bonus equivalent to the 10% VAT which it may tack on the purchase price of the lands it would sell to its buyers. The Court of Appeals further ruled that RR 7-95 limiting the transitional input tax to the value of the improvements is a valid implementation of the NIRC.

The dispositive portion of the Court of Appeals’ Decision reads:

WHEREFORE, the instant Petition is DENIED. The assailed Decision of the Court of Tax Appeals dated October 17, 2000 denying petitioner’s claim for refund of the value-added tax it paid for the third quarter of 1997 in the amount of P347,741,695.74 is hereby AFFIRMED.

SO ORDERED.[28]

FBDC filed a motion for reconsideration. In its 12 December 2005 Resolution,[29] the Court of Appeals denied FBDC’s motion.

Hence, the petition before this Court.

The Issue

The main issue is whether petitioner is entitled to transitional input tax credit under Section 105 of the NIRC, on its Global City land inventory, which petitioner purchased from the government under a VAT-free transaction in 1995.

Overview of the VAT Law

The VAT is essentially a tax on transactions. It is imposed at every stage of the distribution process on the sale, barter, exchange of goods or property and in the performance of services until it finally reaches the consumer.[30] Since it is a value-added tax, it is levied on the value added to goods and services at every link of the chain of transactions in order to prevent doubly taxing a prior transaction in the subsequent use or sale of the same product.

In computing the tax liability, the taxpayer subtracts from the tax due on sales the taxes on his purchases of raw materials. He pays only the difference between the tax on sales (output tax) and the tax on outlays for materials, supplies, services and capital goods (input tax). As a result, previously paid taxes are allowed as input tax credits deductible from the output VAT liability in subsequent transactions involving the same product. This is substantially how transitional input tax credit works. The term “transitional” had been placed to distinguish this from an ordinary input tax since essentially this innovative tax credit’s function is to pave the smooth transition from the non-VAT to the VAT system.

The VAT traces its roots from the sales tax and under forms of percentage tax under the old Tax Code. Since 1939, when the turnover tax was replaced by the manufacturer’s sales tax, the Tax Code had provided for a single stage value-added tax on original sales by manufacturers, producers and importers computed on the “cost deduction method” and later on the basis of the “tax credit method.” Up until 1987, the system of taxing goods consisted of (1) an excise tax on selected articles, (2) fixed and percentage taxes on original and subsequent sales, on importations and on milled articles, and (3) mining taxes on mineral products. Services were subjected to percentage taxes based mainly on gross receipts.[31]

Beginning 1 January 1988, the multi-staged value-added tax had been adopted under EO 273. Among the new provisions included were the persons liable,[32] the VAT on sale of goods,[33] and the transitional input tax credit. The BIR released Revenue Regulation No. 5-87, the implementing rules of EO 273, which took effect on the same date.

On 5 May 1994, Congress approved RA 7716 or the Expanded Value-Added Tax Law, commonly known as the E-VAT. The new law was enacted in order to extend the scope of the VAT not only to goods but also to properties. In this law, the VAT was expanded to include real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business.[34] The provision pertaining to transitional input tax credit, Section 105, was not touched and remained in effect.

However, the constitutionality of the E-VAT law was questioned before this Court. In the consolidated cases of Tolentino v. Secretary of Finance,[35] we issued a temporary restraining order (TRO) on the implementation of RA 7716. On 25 August 1994, this Court ruled in favor of the tax law’s validity. After the denial with finality of the motions for reconsideration assailing the constitutionality of the E-VAT, the TRO was lifted on 30 October 1995.[36]

Following the release of the decision and the lifting of the TRO, the BIR released RR 7-95 dated 9 December 1995 pertaining to the consolidated VAT regulations of RA 7716. Thus, both RA 7716 and RR 7-95 were made effective and implemented only on 1 January 1996. Another BIR-issued directive, Revenue Memorandum Circular No. 3-96 dated 15 January 1996, followed suit. The contents of this memorandum were the same as RR 7-95 although in question and answer form.

On 20 December 1996, Congress approved Republic Act No. 8241 which took effect on 1 January 1997. This tax law amended several provisions of RA 7716 including Section 105, which segregated the definition of input tax credit to transitional and presumptive.[37] To implement this law, the BIR released a new ruling, Revenue Regulation No. 6-97 dated 2 January 1997.

The most recent full revision of the NIRC is Republic Act No. 8424 or the Tax Reform Act of 1997, which took effect on 1 January 1998. From the years 2000 to 2004, several other amendments[38] to the VAT law followed and the latest one is Republic Act No. 9337, popularly called the Reformed Value-Added Tax Law or R-VAT for short, which was approved by Congress on 24 May 2005 and which took effect on 1 July 2005. This new law increased the tax base of the VAT from 10% to 12%.

Acquisition of the Fort Bonifacio property from the

national government under a tax-free transaction

As mentioned earlier, the Global City land was previously part of Fort Bonifacio, a military reservation. Being part of a military reservation, the lands comprising Fort Bonifacio formed part of the public domain. It was only in 1992 when a portion of Fort Bonifacio ceased to be part of the public domain when Congress passed Republic Act No. 9227, classifying the lands as alienable and disposable, and authorizing the President to sell and dispose of a portion of the military reservation, now consisting of the Global City land.[39]

Petitioner contends that the CA erred in holding that there must have been previous payment of sales tax or VAT by petitioner on its land before it may claim the input tax credit granted by Section 105 of the NIRC.

Petitioner’s contention has no merit.

Sections 104 (now Section 110) and 105 (now Section 111) of EO 273, as amended by RA 7716, provide:

SEC. 104. Tax Credits. — (a) Creditable input tax. —

x x x

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 purchases of goods or services, including lease or use of property, from a VAT-registered person. It shall also include the transitional input tax determined in accordance with Section 105 of this Code.

SEC. 105. Transitional input tax credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.

Petitioner is not entitled to a refund or credit of any transitional input tax since the entire Global City land was bought by petitioner from the national government in 1995 under a tax-free sale transaction and without any VAT component. This means that no previous business tax, whether in the form of sales tax or VAT, was paid by petitioner on its purchase of land from the national government. Simply put, since the national government is outside the operation of the VAT and is tax-exempt, the national government did not pass on any VAT to petitioner as part of the purchase price.

However, petitioner asserts that the 8% input tax credit provided for in Section 105 is one that is statutorily presumed to have been paid and as a consequence, it need not show that taxes were previously paid on its inventory of land.

Petitioner’s assertion also has no merit.

True, there exists a presumption in Section 105 that tax was paid, whether or not it was actually paid. This can be inferred from the provision that a taxpayer is “allowed input tax on his beginning inventory x x x equivalent to 8% x x x, or the actual value-added tax paid x x x, whichever is higher.” However, such presumption assumes the existence of a law imposing the tax presumed to have been paid. Otherwise, the presumption will have no basis because if no tax has been imposed by law, then there can be no presumption that such a tax has been paid.

If no tax has been imposed by law, whether it be VAT or sales, percentage, excise or privilege taxes, no such tax is legally due and payable, and thus there can be no presumption that any such tax has been paid. When the law says “transitional input tax” or “presumptive input tax,” the presumption is that there exists a law imposing the input tax and such tax is presumed to have been paid.

In the present case, when the national government sold the Global City land to petitioner in 1995, VAT on real properties was not yet in existence. RA 7716 had not yet been enacted and the sale of real properties was still exempt from VAT. Transitional or presumptive input tax necessarily requires a transaction where a tax had been imposed by law. Without any VAT on land imposed by law at the time, the 8% input tax credit cannot be presumed to have been paid. Thus, petitioner is not entitled to claim input VAT on the purchase of the land against its output VAT liability.

Even if the sale transaction by the national government to petitioner happens today with the VAT on real properties already in existence, and petitioner subsequently resells the land, petitioner will still not be entitled to any input tax credit. The simple reason is that the sale by the national government of government-owned land is not subject to VAT.[40] Thus, petitioner cannot now claim any input tax credit if it buys the same land today, and resells the same.

To illustrate, supposing petitioner buys land from the national government today, constructs a condominium and thereafter sells the units to third parties, will petitioner be subject to VAT? The simple answer is YES. Indisputably, petitioner is now subject to output tax as a real estate dealer liable to VAT. Can petitioner charge any input tax against its output tax liability for the sale? The simple answer is NO. This is because under the present Tax Code, specifically Section 110,[41] the rule is that any input tax shall be creditable against the output tax only if it is evidenced by a VAT invoice or official receipt. A VAT invoice can be used only for the sale of goods and services that are subject to VAT. Petitioner will not be able to present a VAT invoice since the national government is exempt from VAT. Without the invoice to prove that the transaction had been subjected to VAT, petitioner cannot claim any input tax which may be offset against its output tax. Thus, if a real estate dealer like petitioner cannot claim an input tax today on its purchase of government land, when VAT on real properties is already in effect, then all the more petitioner cannot claim any input tax for its 1995 purchase of government land when the E-VAT law was still inexistent and petitioner had not yet been subjected to VAT.

Petitioner further asserts that there is nothing in Section 105 which states that the 8% transitional input tax credit may be based only on the improvements on the land. Petitioner insists that in the sale of real properties, VAT is imposed not only on the “improvements” but also on the land and improvements. Thus, in issuing RR 7-95, particularly Section 4.105-1, the BIR limited the application of Section 105 to the “improvements” on real properties, resulting in unwarranted legislation.

Again, petitioner’s assertion has no merit.

Section 4.105-1 of RR 7-95 and its Transitory Provisions relating to transitional input tax on beginning inventories provide:

SEC. 4.105-1. Transitional input tax on beginning inventories. —

Taxpayers who became VAT-registered persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of P500,000 or who voluntarily register even if their turnover does not exceed P500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of December 31, 1995 on the following: (a) goods purchased for resale in their present condition; (b) materials purchased for further processing, but which have not yet undergone processing; (c) goods which have been manufactured by the taxpayer; (d) goods in process and supplies, all of which are for sale or for use in the course of the taxpayer's trade or business as a VAT-registered person.

The value allowed for income tax purposes on inventories shall be the basis for the computation of the 8% excluding goods that are exempt from VAT under Sec. 103. Only VAT-registered persons shall be entitled to presumptive input tax credits.

x x x

TRANSITORY PROVISIONS

(b) Presumptive Input Tax Credits –

x x x

(iii) For real estate dealers, the presumptive input tax of 8% of the book value of improvements constructed on or after January 1, 1988 (the effectivity of E.O. 273) shall be allowed.

According to RR 7-95, the basis of the 8% input tax is simply the value of the improvements on the land and not the value of the taxpayer’s entire inventory of real properties. This provision finds its basis in Section 105 which provides that input tax is allowed on the taxpayer’s “beginning inventory of goods, materials and supplies.” Here, the presumptive input tax contemplated by law pertains to the input tax paid for the goods, materials or supplies passed on to the taxpayer by his suppliers, and used to build improvements on the land. Even before real estate dealers like petitioner became subject to VAT under RA 7716, improvements on land were already subject to VAT. However, since the land itself was not subject to VAT or any input tax prior to RA 7716, the land then could not be considered part of the beginning inventory under Section 105. Thus, the 8% transitional input tax applies only to improvements on land, but not on the land itself.

In sum, petitioner’s cause must fail because petitioner acquired the Global City land from the national government under a tax-free transaction. Consequently, petitioner is not entitled to a refund or credit of any transitional input tax.

Accordingly, I vote to deny the petitions and affirm the 15 November 2002 Decision and 1 July 2003 Resolution of the Court of Appeals in CA-G.R. SP No. 60477 and the 30 October 2003 Decision and 12 December 2005 Resolution of the Court of Appeals in CA-G.R. SP No. 61517.

ANTONIO T. CARPIO

Associate Justice

[1] Under Rule 45 of the 1997 Rules of Civil Procedure.

[2] Rollo (G.R. No. 158885), pp. 402-411. Penned by Associate Justice Rodrigo V. Cosico with Associate Justices Rebecca De Guia-Salvador and Regalado E. Maambong, concurring.

[3] Id. at 214-234. Penned by Presiding Judge Ernesto D. Acosta with Associate Judge Ramon O. De Veyra, concurring and Associate Judge Amancio Q. Saga, dissenting.

[4] Rollo (G.R. No. 170680), pp. 316-328. Penned by Associate Justice Noel G. Tijam with Associate Justices Ruben T. Reyes (retired) and Edgardo P. Cruz, concurring.

[5] Id. at 127-143. Penned by Associate Judge Ramon O. De Veyra with Presiding Judge Ernesto D. Acosta, concurring and Associate Judge Amancio Q. Saga, dissenting.

[6] BCDA is a wholly-owned government corporation created by Republic Act No. 7227 for the purpose of accelerating the conversion of military reservations into alternative productive uses and raising funds through the sale of portions of said military reservations in order to promote the economic and social development of the country in general.

[7] An Act Accelerating the Conversion of Military Reservations into Other Productive Uses, Creating the Bases Conversion and Development Authority for the Purpose, Providing Funds Therefor and For Other Purposes.

[8] Implementing the provisions of Republic Act No. 7227 Authorizing the Bases Conversion and Development Authority (BCDA) to Raise Funds Through the Sale of Metro Manila Military Camps Transferred to BCDA to Form Part of Its Capitalization and to be used for the Purposes Stated in said Act.

[9] Rollo (G.R. No. 158885), p. 31.

[10] Id.

[11] Id. at 184.

[12] Id. at 185-186.

[13] Id. at 187.

[14] Id. Underscoring in the original.

[15] The contents of RR 7-95 were reiterated in BIR’s Revenue Memorandum Circular No. 3-96 dated 15 January 1996 in a question and answer format.

[16] Rollo (G.R. No. 158885), p. 188.

[17] Id. at 189.

[18] Id. at 190.

[19] Id. at 191-204.

[20] Id. at 205-207.

[21] Rollo (G.R. No. 170680), p. 29.

[22] SEC. 249. Interest. —

(A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid.

(B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof.

(1) The amount of the tax due on any return to be filed, or

(2) The amount of the tax due for which no return is required, or

(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax.

(D) Interest on Extended Payment. - If any person required to pay the tax is qualified and elects to pay the tax on installment under the provisions of this Code, but fails to pay the tax or any installment hereof, or any part of such amount or installment on or before the date prescribed for its payment, or where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof, there shall be assessed and collected interest at the rate hereinabove prescribed on the tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is paid.

[23] SEC. 228. Protesting of Assessment. —

When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or

(d) When the excise tax due on exciseable articles has not been paid; or

(e) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.

The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable.

[24] Rollo (G.R. No. 158885), p. 233.

[25] Rollo (G.R. No. 170680), p. 142.

[26] Rollo (G.R. No. 158885), p. 411.

[27] Id. at 505-506.

[28] Rollo (G.R. No. 170680), p. 327.

[29] Id. at 382-390.

[30] Commissioner of Internal Revenue v. Court of Appeals, 385 Phil. 875 (2000).

[31] Vitug, Jose C. and Acosta, Ernesto D., Tax Law and Jurisprudence, 2006 edition, p. 230.

[32] SEC. 99. Persons liable. — Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code.

[33] SEC. 100. Value-added tax on sale of goods. — (a) Rate and base of tax. - There shall be levied, assessed and collected on every sale, barter or exchange of goods, a value-added tax equivalent to 10% of the gross selling price or gross value in money of the goods sold, bartered or exchanged, such tax to be paid by the seller or transferor x x x.

[34] Section 2 of RA 7716.

[35] G.R. Nos. 115455, 115525, 115543, 115544, 115754, 115781, 115852, 115873, 115931, 25 August 1994, 235 SCRA 630.

[36] 319 Phil. 755 (1995).

[37] SEC. 105. Transitional/Presumptive Input Tax Credits. –

(a) Transitional input tax credits. – A person who becomes liable to value-added tax or any person who elects to be a VAT registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to eight percent (8%) of the value of such inventory or the actual value added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.

(b) Presumptive input tax credits. –

(1) Persons or firms engaged in the processing of sardines, mackerel, and milk, and in manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to one and one-half percent (1.5%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.

As used in this paragraph (b), the term ‘processing’ shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition.

(2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1.5%) of the contract price with respect to government contracts only in lieu of actual input taxes therefrom.

[38] Republic Act No. 8761, which was approved by Congress on 15 February 2000 and took effect on 1 January 2001; Republic Act No. 9010, approved on 27 February 2001 and retroacted to 1 January 2001; and Republic Act No. 9238, which took effect on 1 January 2004.

[39] The National Government, as the seller of the Global City land, is a tax-exempt entity and such sale had been mandated by RA 9227 or The Bases Conversion and Development Act of 1992, which states:

Sec. 8. Funding Scheme. — The capital of the Conversion Authority shall come from the sales proceeds and/or transfers of certain Metro Manila military camps, including all lands covered by Proclamation No. 423, series of 1957, commonly known as Fort Bonifacio and Villamor (Nichols) Air Base x x x

The President is hereby authorized to sell the above lands, in whole or in part, which are hereby declared alienable and disposable pursuant to the provisions of existing laws and regulations governing sales of government properties: Provided, That no sale or disposition of such lands will be undertaken until a development plan embodying projects for conversion shall be approved by the President in accordance with Paragraph (b), Section 4, of this Act. However, six (6) months after approval of this Act, the President shall authorize the Conversion Authority to dispose of certain areas in Fort Bonifacio and Villamor as the latter so determines. The Conversion Authority shall provide the President a report on any such disposition or plan for disposition within one (1) month from such disposition or preparation of such plan. x x x (Emphasis supplied)

[40] Under Section 105 of the present NIRC, the person liable for the payment of value-added tax is “any person who, in the course of trade or business, sells goods or properties.” In Section 22 of the same statute, the term “person” is defined as an individual, a trust, estate, or corporation. The national government does not fall under any of the enumerated entities. It is neither an individual or a corporation which comes under the purview of the law.

Neither can it be said that the national government, in selling the Global City land, is engaged in “trade or business.” The phrase “in the course of trade or business” as defined in Section 105, means the regular conduct or pursuit of a commercial or an economic activity. In this case, the objective of RA 9227 is to use the proceeds from the sale of portions of Fort Bonifacio to finance military-related activities and provide housing loan assistance. Accordingly, the national government, as the seller with these policies in mind, does not fall under the definition “engaged in the regular conduct or pursuit of an economic activity.”

Thus, not being expressly included in the tax law as one liable for value-added tax, the national government is exempt therefrom.

[41] SEC. 110. Tax Credits. —

(A) Creditable Input Tax. —

(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the output tax: xxx (Emphasis supplied)