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KEPCO PHILIPPINES CORPORATION v. CIR

FACTS:

Kepco Philippines Corporation (Kepco) is a domestic corporation engaged in the production and sale of electricity. It filed an application for zero-rating of its sales of electricity to the National Power Corporation (NPC) and claimed to have incurred input VAT on its domestic purchases. Kepco filed a claim for refund, which was denied by the Court of Tax Appeals (CTA) Second Division due to failure to properly substantiate its zero-rated sales. Kepco appealed to the CTA En Banc, but its petition was dismissed for failure to imprint the words "zero-rated" on its official receipts. The Presiding Justice dissented. Kepco's motion for reconsideration was denied. Kepco filed a petition for review before the Supreme Court arguing that the failure to imprint the words "zero-rated" on its official receipts does not justify an outright denial of its refund claim.

ISSUES:

  1. Whether or not services rendered by a VAT-registered person to the National Power Corporation (NPC) are subject to zero percent (0%) rate.

  2. Whether or not the invoicing requirements under the National Internal Revenue Code (NIRC) must be complied with for the effective zero rating of services rendered to NPC.

  3. Whether the word "zero-rated" must be imprinted on VAT official receipts and invoices for sales to qualify for zero-rating.

  4. Whether the absence of the word "zero-rated" on the invoices is a ground for the outright denial of a claim for tax refund or credit.

  5. Whether Kepco's failure to substantiate its effectively zero-rated sales for the taxable year 1999 is fatal to its claim for refund of input VAT.

  6. Whether the failure to print the word "zero-rated" on the invoices or receipts is a ground for denial of a claim for refund or credit of input VAT on zero-rated sales.

RULING:

  1. Yes. Services rendered by a VAT-registered person to NPC are subject to zero percent (0%) rate because NPC is an entity with a special charter and is exempt from payment of all forms of taxes, including VAT.

  2. Yes. The VAT-registered taxpayer must comply with the invoicing requirements under the NIRC for the effective zero rating of services rendered to NPC.

  3. The word "zero-rated" must be imprinted on VAT official receipts and invoices for sales to qualify for zero-rating. The imprinting requirement is mandatory and necessary to distinguish sales subject to 10% VAT from those subject to 0% VAT and exempt sales. Failure to comply with this requirement violates Section 4.108-1 of R.R. No. 7-95 and the condition imposed under the approved Application/Certificate for Zero-rate.

  4. The absence of the word "zero-rated" on the invoices is a ground for the outright denial of a claim for tax refund or credit. Compliance with the invoicing requirement is necessary to justify a claim for refund on input VAT. Non-compliance may subject the taxpayer to penalties under Section 264 of the Tax Code.

  5. The Supreme Court denied Kepco's claim for refund of input tax. The Court held that Kepco's failure to substantiate its effectively zero-rated sales for the taxable year 1999 rendered its claimed input VAT refund of P10,527,202.54 ineligible. The Court emphasized that the invoicing requirement, specifically the printing of the word "zero-rated" on the invoices or receipts, must be strictly complied with. Failure to meet this requirement is fatal to a claim for refund or credit of input VAT on zero-rated sales.

PRINCIPLES:

  • Services rendered to entities with special charters and exempt from payment of taxes, including VAT, are subject to zero percent (0%) rate.

  • Invoicing requirements under the NIRC must be complied with for the effective zero rating of services rendered to entities exempt from VAT.

  • The imprinting requirement of the word "zero-rated" on VAT official receipts and invoices is necessary to distinguish sales subject to different VAT rates and enable the proper implementation and enforcement of other provisions of the Tax Code on VAT.

  • The imposition of penalties under Section 264 of the Tax Code is for violations related to the issuance and printing of receipts or invoices, and not for the failure to comply with the substantative invoicing requirement. Compliance with the invoicing requirement is necessary to justify a claim for refund on input VAT.

  • Failure to substantiate effectively zero-rated sales is fatal to a claim for refund of input VAT.

  • The failure to print the word "zero-rated" on invoices or receipts denies a claim for refund or credit of input VAT on zero-rated sales.

  • Actions for tax refund are construed strictly against the taxpayer, and the pieces of evidence presented to support an exemption claim are strictly scrutinized and must be duly proven.