VAT refund legalities: Of discouraged foreign investors

Does the taxman always ring twice? Fr. Bernas' on the discontent among foreign investors.


Of discouraged foreign investors



By Fr. Joaquin G. Bernas S. J.
May 19th, 2013

I am not saying that I can name specific foreign investors who are ready to pull out.  But there must be a good number of them. This I surmise from a joint letter to Finance Secretary Cesar Purisima from the heads of various foreign chambers of commerce in the Philippines.
The joint letter starts on a positive note saying that the Joint Foreign Chambers (JFC) are promoting the Philippines to potential investors by highlighting fiscal incentives as one of the reasons the country should be chosen as an investment location. Among the incentives mentioned are the Bureau of Investments’ and Philippine Economic Zone Authority’s offer of duty- and VAT-free imports for capital equipment in priority sectors. But the joint letter cites a recent fly that has landed on the ointment.
The fly is the change in the implementation of the legal requirement for obtaining the refund of VAT on the importation of capital equipment. Under the law, for investors to be able to bring in capital equipment, they must pay the VAT but with the promise that the VAT will be refunded upon the filing of a proper claim. This is where the investors get into trouble with the system.
There are two steps in the refund process.  The first step is administrative: filing  a claim for refund with the Bureau of Internal Revenue (BIR). The second step, when needed, is the filing for refund with the Court of Tax Appeals (CTA). The law says that the BIR has 120 days to act on the claim and the investor has 30 days from the denial of the claim by the BIR, or from the inaction of the BIR, to file the claim for refund with the CTA.
The practice allowed in the past was that the investor did not need to wait for the 120 days to lapse before going to the CTA.  But if he does go to the CTA early and in the meantime the BIR approves his claim for refund, that terminates the case before the CTA.  This was the practice followed by the BIR and the CTA for several years and it had the approval of the Supreme Court.
In 2010, however, the Supreme Court ruled that filing the claim with the CTA before the lapse of the 120 days for the BIR to decide is premature and gives the CTA no authority to decide the case.
The logic of this rule is clear enough. The CTA gets its authority only from the law and the law says that the CTA has no authority before the lapse of 120 days.  But both the BIR and the CTA were for years allowing appeals to the CTA before the lapse of 120 days. What happened to these cases after the 2010 decision of the Supreme Court?
The cases which were already decided by the CTA and had become final before the 2010 decision of the Supreme Court are already untouchable. But the appeals still pending before the CTA when the 2010 decision came out, according to the 2010 decision, have to be dismissed.
The logic of this rule is that when the Supreme Court interprets a law or executive issuance, the interpretation goes back to the date the law or executive issuance was promulgated.  But what about those who had relied on the law or the executive issuance before its invalidation?  This is the basis of the lament of foreign chambers of commerce.
As they said in their joint letter:  “The rule established by the Supreme Court should only be given a prospective effect. Otherwise, it will result (in) grave damage and prejudice of … taxpayers who have complied fully and in good faith with the then prevailing procedures sanctioned by the BIR and accepted by the courts. The long line of decisions by the Supreme Court, the Court of Appeals and the Court of Tax Appeals clearly indicate that prior to the [latest] ruling, the BIR and the CTA did not observe the 120+30 day periods in actual practice. We believe that if these decisions are taken into consideration, it will radically change the outcome of the case. We also believe that the failure of the courts to rule in favor of a prospective application will undeniably result in an unwitting yet palpable and grave violation of the constitutional guarantee of due process (notice requirement) as well as equal protection.  The Supreme Court unreasonably elevates and exalts strict adherence to procedural rules and technicalities over and above the taxpayer’s clear, substantive legal right to the refund sought, to the point that the taxpayer’s compliance in good faith with procedures approved and sanctioned by the BIR and CTA and accepted by the Supreme Court over a period of several years has come to be branded an outright violation of law grave enough to defeat the taxpayer’s proven substantive right to the refund.”
What can be said about this? The answer to this question will depend on how one applies the jurisprudential rule called the “doctrine of operative fact,”  an American rule which has been applied in the Philippines.  The rule says: “The actual existence of a statute, prior to such a determination [of unconstitutionality], is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects, with respect to particular relations, individual and corporate, and particular conduct, private and official.”
In the recent Hacienda Luisita case, the Court said that the “operative fact” rule could be applied even to executive acts depending on the equities of the case.
As applied to VAT refund, do the equities of the case demand, as the joint letter of the chambers of commerce points out, only prospective application of the rule? PDI