Manila: The Supreme Court (SC) has clarified that businesses registered with the Philippine Economic Zone Authority (PEZA) are not completely exempt from paying value-added tax (VAT). In a decision made public on Monday, the SC Third Division partially granted Coral Bay Nickel Corporation’s claim for a VAT refund.
According to Philippines News Agency, Coral Bay is a PEZA-registered company that manufactures and exports nickel and cobalt mixed sulfide. It sought a refund from the Bureau of Internal Revenue for unutilized input VAT it paid for goods and services used outside the PEZA zone. Businesses generally pay VAT on the goods and services they purchase, called input VAT. They also charge VAT to their customers when selling products or services, or output VAT. At the end of a tax period, they then subtract their input VAT from their output VAT and pay the difference to the government.
After the Bureau of Internal Revenue failed to act on Coral Bay’s refund claim, the company brought the case to the Court of Tax Appeals (CTA). The CTA Third Division granted the refund, but only for purchases proven to be consumed outside the ecozone, after allocating the input VAT in proportion to Coral Bay’s sales. However, the CTA en banc reversed the ruling and treated Coral Bay as fully exempt from VAT. Thus, its purchases were considered zero-rated, making it ineligible for a VAT refund. Coral Bay appealed to the SC, which ruled in its favor.
‘Under Republic Act No. 7916, or the Special Economic Zone Act of 1995, as amended, PEZA companies are exempt from national and local taxes, except for real property tax on land owned by developers. Instead, they pay a 5 percent tax on gross income,’ the SC said. ‘However, this exemption does not include VAT. Nevertheless, companies operating within ecozones — which are treated by law as foreign territory — may claim zero-rated VAT and no VAT is charged on goods or services intended for use outside the country of the taxing authority,’ it added.
If the goods are used outside the ecozone but still within the Philippines, the SC said the cross-border principle does not apply. Instead, it said the destination principle applies, which states that goods are taxed in the country where they are consumed. ‘Thus, when a PEZA company purchases goods outside the ecozone and consumes them within the Philippines, those goods are subject to VAT,’ the SC said. In Coral Bay’s case, the purchases were consumed outside the ecozone, but within Philippine territory. ‘As they are subject to VAT, Coral Bay is entitled to a refund for the unutilized input VAT.’
