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FORT BONIFACIO DEVELOPMENT CORPORATION v. CIR

FACTS:

The value-added tax (VAT) system was introduced in the Philippines on January 1, 1988, under Executive Order No. 273 (E.O. 273) which amended provisions of the National Internal Revenue Code of 1986 (Old NIRC). E.O. 273 allowed newly liable VAT-registered persons to avail of a transitional input tax credit, as provided for in Section 105 of the Old NIRC. Section 105 allowed VAT-registered persons to claim input tax on their beginning inventory of goods, materials, and supplies, equivalent to 8% of the value of such inventory or the actual VAT paid, whichever is higher, which can be credited against their output tax.

E.O. 273 also included other measures in its transitory provisions, allowing VAT-registered persons to claim transitional input taxes that can be credited against their output tax. These measures included the deferred sales tax credit account balance as of December 31, 1987, presumptive input tax equivalent to 8% of the inventory as of that date for materials and supplies not for sale or goods for sale not claimed as deferred sales tax credit. VAT-registered persons are required to file an inventory of the goods as provided by regulations.

On January 1, 1996, Republic Act No. 7716 (Rep. Act No. 7716) took effect, amending the Old NIRC by restructuring the VAT system. Under Rep. Act No. 7716, VAT was imposed for the first time on the sale of real properties.

The provisions of Section 105 on transitional input tax credit in the Old NIRC remained intact despite the enactment of Rep. Act No. 7716. However, with the passage of the new National Internal Revenue Code of 1997 (New NIRC), also known as Rep. Act No. 8424, Section 105 was renumbered to Section 111(A) of the New NIRC. The amendments to the transitional input tax credit were relatively minor and were highlighted. Rep. Act No. 8424 also introduced the concept of "presumptive input tax credits" for the first time, with Section 111(b) of the New NIRC.

The case involves petitioner Fort Bonifacio Development Corporation (FBDC), a real estate developer engaged in the development and sale of properties. FBDC acquired a vast tract of land in Fort Bonifacio Global City in 1995 and started selling the lots in October 1996. After the implementation of Republic Act No. 7716, real estate transactions such as those of FBDC became subject to value-added tax (VAT). As the vendor, FBDC was required to remit output VAT payments to the Bureau of Internal Revenue (BIR). FBDC claimed a transitional input tax credit and submitted an inventory list of its real properties. In October 1996, FBDC entered into contracts to sell two parcels of land within the Global City. It earned a total amount from the sale of lots in the fourth quarter of 1996 and paid output VAT to the BIR. FBDC utilized a portion of its transitional input tax credit and its regular input tax credit on the purchase of goods and services. FBDC requested the BIR to validate its use of the presumptive input VAT in partial payment of its output VAT, but the BIR disallowed the claimed presumptive input tax credit. The CIR cited Revenue Regulation 7-95 and Revenue Memorandum Circular 3-96 as the basis for disallowing the presumptive input tax credit.

The case involves two petitions filed by Fort Bonifacio Development Corporation (FBDC) regarding its claim for transitional/presumptive input tax credit under the old National Internal Revenue Code (NIRC). In the first petition (G.R. No. 158885), FBDC sought the reversal of the Court of Tax Appeals' (CTA) decision affirming the assessment made by the respondents. FBDC claimed that it is entitled to a transitional/presumptive input tax credit of P28,413,783.00. In the second petition (G.R. No. 170680), FBDC claimed that it is entitled to claim a similar transitional/presumptive input tax credit, this time for the third quarter of 1997. FBDC argued that its input tax credit was more than enough to offset the VAT paid for the third quarter of 1997. Both petitions were consolidated and Oral arguments were held to discuss the issues of whether the 8% transitional input tax credit is applied only to the improvements on the real property or the entire real property, and whether certain revenue regulations limiting the transitional input tax credit are valid. The court noted that Section 105 of the Old NIRC does not explicitly prohibit the inclusion of real properties, together with the improvements thereon, in the beginning inventory of goods for the computation of the transitional input tax credit. It also pointed out that the amendment to the NIRC made real estate transactions subject to VAT but did not make any differentiation in the application of the transitional input tax credit for real estate dealers.

ISSUES:

  1. Whether Section 105 of the Old NIRC prohibits the inclusion of real properties in the beginning inventory of goods, materials, and supplies for the computation of transitional input tax credit.

  2. Whether the transitional input tax credit under Section 105 of the National Internal Revenue Code (NIRC) is limited to the transition from sales tax to value-added tax (VAT) regime.

  3. Whether newly VAT-registered persons are entitled to claim transitional input tax credit even if they did not pay taxes in acquiring their beginning inventory.

  4. Whether the transitional input tax credit is premised on the previous payment of VAT.

  5. Whether the limitations imposed by RR 7-95 on real estate brokers' ability to claim the transitional input tax credit based on the value of their real properties are justified.

  6. Whether there is a need to prove that taxes were previously paid on the acquisition of goods, materials, and supplies comprising the taxpayer's beginning inventory in order to claim transitional input tax credit.

  7. Whether the disallowance of real estate dealers from including the value of their real properties in the beginning inventory of goods, materials, and supplies is valid.

RULING:

  1. Section 105 of the Old NIRC does not prohibit the inclusion of real properties, together with the improvements thereon, in the beginning inventory of goods, materials, and supplies. The court ruled that there is no differentiated VAT treatment on real properties or real estate dealers that justifies the suggested limitations on the application of the transitional input tax. The court held that the amendments introduced by Rep. Act No. 7716 to Section 100, coupled with the fact that the said law left Section 105 intact, reveal the lack of any legislative intention to make persons or entities in the real estate business subject to a VAT treatment different from those engaged in the sale of other goods or properties or in any other commercial trade or business.

  2. The transitional input tax credit under Section 105 of the NIRC is not limited to the transition from sales tax to VAT regime. It could also refer to the transition of becoming a VAT-registered person or starting a business. The purpose of the transitional input tax credit is not solely to allow accreditation of previously paid sales taxes, but also to alleviate the impact of VAT on newly VAT-registered persons.

  3. Newly VAT-registered persons are entitled to claim transitional input tax credit, regardless of whether they paid taxes in acquiring their beginning inventory. The requirement of previous payment of VAT or any other taxes on goods, materials, and supplies as a prerequisite for inclusion in the beginning inventory is not stated in the NIRC.

  4. The transitional input tax credit is not premised on the previous payment of VAT. The rate of the transitional input tax credit is either 8% of the value of the inventory or the actual value-added tax paid on the goods, materials, and supplies, whichever is higher. The intent of the law is to mitigate the initial diminution of the taxpayer's income by allowing them to offset losses through the remittance of output VAT at a stage when they are yet unable to credit input VAT payments.

  5. The limitations imposed by RR 7-95 on real estate brokers' ability to claim the transitional input tax credit based on the value of their real properties are not justified. The definition of "goods" in the Old NIRC includes real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business. By excluding real properties from the beginning inventory, RR 7-95 contravenes the statutory definition of "goods" and exceeds the CIR's authority to prescribe regulations.

  6. The Supreme Court held that there is no need to prove that taxes were previously paid on the acquisition of goods, materials, and supplies comprising the taxpayer's beginning inventory in order to claim transitional input tax credit. The dissenting view that introduced a new requisite of proof was rejected. The transitional input tax credit does not involve a presumption of previous payment of taxes, and it is not necessary to latch on to the term "presumptive input tax credit" for the purpose of the case.

  7. The Supreme Court declared that the provision disallowing real estate dealers from including the value of their real properties in the beginning inventory of goods, materials, and supplies has already been repealed with the enactment of Revenue Regulation No. 6-97. Therefore, the disallowance is no longer valid.

PRINCIPLES:

  • The plain text of a law should be the basis of interpretation and should be followed absent any contrary statutory provision.

  • The lack of any legislative intention to make persons or entities in the real estate business subject to a VAT treatment different from those engaged in the sale of other goods or properties or in any other commercial trade or business.

  • Transitional input tax credit serves to alleviate the impact of VAT on newly VAT-registered persons.

  • Transitional input tax credit is not limited to the transition from sales tax to VAT regime but also applies to the transition of becoming a VAT-registered person or starting a business.

  • Newly VAT-registered persons are entitled to claim transitional input tax credit, regardless of previous payment of taxes on their beginning inventory.

  • The rate for the transitional input tax credit is either 8% of the value of the inventory or the actual value-added tax paid on the goods, materials, and supplies, whichever is higher.

  • Tax laws enforce uniform tax treatment to persons or classes of persons who share minimum legislated standards.

  • A rule or regulation must be consistent with the provisions of the enabling statute to be valid.

  • The CIR cannot limit the meaning and coverage of a term in the law, such as "goods," without statutory authority or basis.

  • Transitional input tax credit does not require proof of previous payment of taxes on the acquisition of goods, materials, and supplies comprising the taxpayer's beginning inventory.

  • The term "presumptive input tax credit" is not applicable to the claim of transitional input tax credit.

  • The disallowance of real estate dealers from including the value of their real properties in the beginning inventory of goods, materials, and supplies has been repealed and is no longer valid.