CTA Case No. 4950 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY MARCOPPER MINING CORPORATION, Petitioner. - versus - C.T.A. CASE NO_ 49 50 JOSE U_ONG, COMMISSIONER Promulgated: ~� OF INTERNAL REVENUE, . JUL 231996 Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X This case mvolves petitioner's claim for refund or tax credit of unapplied input value added tax from its output value added tax for the year 1991. Petitioner is a corporation duly organized and existing under 1;he laws oi the Philippines. It is primarily engaged in the business of producing and exporting copper concentrates subject to a zero-rate value added tax. It is duly registered with the Board oi Investment (BOI) as an Export Producer (E:xhs. B and A). It is also a VAT registered enterprise having been issued a VAT Registration Certificate No. 32-2-001014 (Admitted in -"~ Respondent's Answer). Being a VAT registered enterprise and an 789

DECISIOJI- C.T.A. CASE JIO. 49:)0 -2- Export Producer, petitioner is subject to the 0% Vl�..T pursuant to Section lOO(a)( 1) of the National Internal Revenue Code. For tl1e year 1991, petitioner's sales amounting to US$13,786,830.60 or P383,466,146.97 were all made in favor of Philippine Association of Smelters and Refiners Inc. (PASAR). Petitioner regularly filed its Quarterly VAT Returns for said year. Unable to apply the input VAT on its domestic purchases and importation from the 0% output VAT, petitioner applied for a tax credit or refund with the BIR in the sum of P37,493573.83, itemized as follows: Period �a�pplication Unapplied Year-199 1 Covered for Tax Credit/ Input VAT Refund filed on 1st Qtr. Jan.- March March 31, 1992 p 7,614,337.33 2nd Qtr. April- June 3rdQtr. July- Sept. March 31, 1992 10,698,884.82 4th Qtr. Oct.- Dec. Jan. 22, 1993 9,903,671.55 Jan. 22, 1993 Q,2 76.680.13 Total Of the total input VAT of P37,493573.83, P29,949,910.83 represents petitioner's input VAT for its domestic purchases and P7543~663.00 for its importations. On February 4, 1993, petitioner filed a petition with this Court seeking for the refund of the input taxes, not applied against any output tax for 1991, in the sum of P37,493573.33. An investigation was conducted by respondent's revenue officers regarding petitioner's administrative claim for refund or tax 790

DECISIOJI- C.T .A. CASE JfO_ 4950 -3- credit. It was found that petitioner is entitled to the refund or tax credit of P23,074,765.90, computed as follows: Total Input Tax Claimed P37,493,573.83 Less: Disallowances of input tax 2 30.086.54 due to non -compliance on P37,263,487.29 invoicing requirements Allov.ro.ble Input Tax 3,969,32 1.39* Less: Input Tax Attributable to percentage of PASAR's 219.400.00 local sales Output tax on deemed sale transactions (P2, 194,000.00 X 10%) Recommended amount for TCC * Computed as: Allov.;rable input tax P3 7,263, 437.29 Multiplied by the Percentage of local sales of PASAR X 24.07% ** Input Tax attributable to the local sales of PASAR p 8,969J2 1.39 ** Based on PASAR's percentage of local sales for tile year 1991 as certified by the Board of Investment (BOI). PASAR's local sales is 24.07% and 75.93% for export sales. On January 19, 1994, respondent approved and issued in the name of petitioner a Tax Credit Certificate {SN 002 165) in the amount of P20531, 102.90, representing the input VAT paid on its domestic purchases for the year 1991 (EXh. E). However, �vith respect to the P7,543,663.00 input VAT paid on its importation, respondent V�lrote a letter addressed to the Commissioner of the 791

DECISIOB- C.T ..A. CASE HO. 4950 -4- Bureau of Customs authorizing him to issue in favor of petitioner a Tax Credit Certificate in tl1e amount of P7,543_663.00, pursuant to tileir agreement, dated .!. ...pril 3, 1933. On March 24, 1994, tl1e Commissioner of Customs approved tl1e issuance of a Tax Credit Certificate in favor of petitioner in tile amount of P7,543_663.00 (E~. H). Thus, tile total amount of P23,074,765.90 has been av'larded to petitioner by way of a tax credit. Petitioner now limits its appeal witl1 regard to tile disallowed input tax of P3,969,32 1.39, representing 24.07% of its input ..,lAT attribut-'J.ble to tile local sales of PASAR. Petitioner claims tilat it is still entitled to a tax credit of P3,969,32 1.39 on tl1e following grounds: "a. The sales to PASAR of copper concentrates by petitioner are treated as export sales pursuant to Article 23 of tl1e Omnibus Investrnent Code of 1937 (Executive order No. 226). Therefore, petitioner is entitled to zero rate (0%) output VAT and to tile refund of input taxes for such zero rated sales of goods pursuant to tlle Tax Code including tlle implementing Revenue Regulations (RR) No. 2-aa considering tllat for 1991 PASAR actually exported more than 70% (actually 75.93%) of its manufactured goods as confirmed by respondent's exammers; b. The disallowance by petitioner of input tax corresponding to tlle percentage of PASl�..R's local sale is not autilorized under RR No. 2-66; and c. The rav�l materials (copper concentrates) supplied or sold by petitioner to PASAR were used in tile production oi tlle latter's registered export products, which are actually exported" (Petitioner's Amendec! Petition for Review, p. 69, CTA record.) 792

DECISIOH- C.I.A. CASE HO. 4950 -5 - The issue is limited to whether or not the disallo\"lance of P8,969,321.39, equivalent to 24.07% of petitioner's input Vi�~T attributable to the local sales of PASAR, was proper? Petitioner contended that the provisions of i�..rticle 23 of the Omnibus Invest.r.nent Code of 1987 (Executive Order No. 226) and Section 2 of Revenue Regulations No. 2-88 gives it the right to claim for a tax credit, the input t3.xes which were not applied to any output Vl�..T. The pertinent portions of i�..rticle 2.3 of E.O. 226 and Section 2 of Rev. Regs. No. 2-88, provide as follo\o\o'S: -Article 2 3- 'Export sales' shall mean the Philippine port F.O.B. value. determined from invoices, b11ls of lading, in-ward. letters of credit, landing certificates, and other commercial documents, of ei!o=port products exported directly by a registered export producer to another export producer. or to an export trader that subsequently exports the same: x x x.- -REVENUE REGULATIONS NO. 2-88 (February 15, 1988) SUBJECT: Regulations governing the application of zero-rate exemption on cert3.in transactions related to e}..>porters, and refunds of input t3.xes. SECTION L Purpose.. - X X X. SEC. 2. Zero-ratiog. - (a) Sales of raw materials UJ BOI- registered expcrters. - Sales of raw materials to export-oriented BOI- registered enterprises whose export sales, under rules and regulations of the Board of Investments, exceed seventy percent (70%) of tot3.1 annual 793

DECISIOH- C.T.A. CASE HO. 4950 -6- production, shall be subject to zero-rate under t11e follov�ling conditions: ( 1) The seller shall file an application 'With tlN BIR. ATTN.: VAT Division, applying for zero- rating for each and every separate buyer, in accordance \hlith Section &(d) of Revenue Regulations No. 5-87. The application should be accompanied with a favorable recommendation from the Board of Investments. (2) The raw materials sold are to be used exclusively by the buyer in t11e manufacture, processing or repacking of his own registered export product; (3) The words "Zero-Rated Sales" shall be prominently indicated in the sales invoice. The exporter (buyer) can no longer claim from t11e Bureau of Internal Revenue or any other government office tax credits on their zero-rated purchases.:" Petitioner's sales for 1991 were all made to PASAR. PASAR is a duly registered BOI ek-port producer. For the year in question, PASAR had exported 75.93% of its manufactured goods. Petitioner professed that since more than 70% of PASAR's goods were ~xported then tile sale of raw materials to PASAR are deemed to be "export sales" under Article 2.3 of tile Omnibus Investment Code of 1987. These are tilerefore considered zero- rated sales under Section 2 of Rev. Regs. No. 2-88. Being zero- rated, petitioner claims it has tile right to apply for a tax credit of tile unapplied input taxes for tl1e same year. 794

DECISIOH- C.T.A. CASE 110. 4950 -7- i~4n examination of the pertinent provisions of Sections 1OO(a), 106(a) and (b) of the National Internal Revenue Code, relevant to this case, provide as folloV%: �sEC. 100. V:~Jue-added tax oo s:~Je of g(){)ds. - (a) Jl:~te 3Dd b:~se 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: Pr{'>vided, That the follo~ving sales by VAT -registered persons shall be subject to 0%: ( 1) Export sales; and (2) Sales to persons or entities V.Jhose exemption under special laws� or international agreements to which the Philippines is a signatory effectively subject such sales to zero rate. "Export Sale" means the sale and shipment or exportation of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon whicll may influence or determine the transfer of ownership of the goods so exported, or foreign currency denominated sales. "Foreign currency denominated sales", means sales to non-residents of goods assembled or manufactured in the Philippines, for �delivery to residents in the Philippines and paid for in convertible foreign currency remitted through the banking system in the Philippines.- �sEC. 106. Jlefuods or tax credits t?f ioput tax - (a) Export S:~les. - An exporter ~lho is a VAT -registered person may >;l�lithin two years from t11e date of exportation, apply for t11e issuance of a tax credit certificate or refund of the 795

DECISIOH- C.T.A. CASE HO. 4950 -8- input tax attributable to the goods exported, to the extent that such input tax has not been applied to output tax and upon presentation of proof t11at the foreign exchange proceeds has been accounted for in accordance with the regulations of the Central Bank of tl1e Philippines. (b) Zero-rated or effectively zero- rated sales. - Any person, except those covered by paragraph (a) above, t:lvhose sales are zero-rated or are effectively zero-rated may, within t'\o\TO years after the close of the quarter when such sales were made, apply for the issuance of a tax credit certificate or refund of the input taxes attributable to such sales to the extent tllat such input tax has not been applied against output tax.- In a more recent case involving tl1e same parties and under similar circumstances, the Court hereby follows and adopts its previous ruling in MARCOPPER MINING CORPORATION vs. JOSE U. ONG.. Commissioner of Internal Revenue.. CTA Case Nos. 4603 and 4607.. October 3.. 1995.. herein quoted as follot;Ns: "From the foregoing, it is indubitably clear that in order for the Petitioner to avail of 'zero- .rating� of input taxes, the only requirement to be complied is for it to sell its �raw materials to export- oriented BOI- registered enterprises vvt"1ose export sales . . . exceed seventy percent (70%) of total annual production .. .' In other VvTords, the la-~N does not require a one-hundred percent export sales. Hence, local sales in excess of the 70% requirement may be allowed, contrary to the contention of the Respondent. The above requirement, although also subject to the condition t11at 'the raw materials sold are to be used exclusively by tl1e buyer in t11e 796

DECISIOB- C.I.A. CASE BO. 4950 -9- manufacture, processing or repacking of his o"YYm registered export product' yet, in this particular case, was satisfactorily established by the Petitioner through documentary and testimonial evidences. Hence, We cannot do othenV'ise but grant Petitioner's claim for refund." Like'Wise, in this case, Marcopper (a BOI registered enterprise) sold its copper concentrate to PASAR (also a BOI registered eb.-port producer) for t11e year 1991. These copper concentrates have been used as raw materials in the production of goods for export b;l PASAR. In addition, PASAR had actually exported 75.93% (Exll. I-1) of its manufactured goods in 1991 (Exhs. J and I). Thus, considering that the goods exported by PASAR exceeded 70% of tile total annual production, then tile sales of l\tlarcopper to PASAR is subject to zero-rate pursuant to Section 2 of Revenue Regulations No. 2-&& (The ~8.~.pplication of Zero Rate, Exemption on Certain Transactions Related to Eii."})Orts and Refunds of Input Taxes). From the evidence presented by petitioner, there is no doubt that it had satisfactorily proven its case. . _WHEREFORE~ finding the petition meritorious, the same is hereby GRANTED. Respondent Commissioner of Internal Revenue is hereby ordered to issue a Tax Credit Certificate in favor of petitioner Marcopper Mining Corporation in the amount of P&,969,32 1.39, representing 1991 input taxes improperly 797

DECISIOli- C.T.A. CASE 110. 49:50 - 10 - disallowed by the respondent. No pronouncement as to cost. SO ORDERED. ~ERNQES'TO-D. QAC~ Presiding Judge I CONCUR: / RA!!i~~# / / I I I I CERTIFICATION I hereby certify that this decision was reached after due consultation with the member of the Court of Tax Appeals in accordance with Section 13, Article VI II of the Constitution. ~lQ~~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 798