Maibarara Geothermal, Inc. vs. Commissioner of Internal Revenue

A claim for refund or tax credit of unutilized input VAT under Section 112(A) of the NIRC requires the taxpayer-claimant to prove the existence of zero-rated or effectively zero-rated sales during the taxable quarter for which the refund is sought; input VAT cannot be attributed to sales that have not yet occurred.

MGI is a domestic corporation whose primary purpose includes exploring, extracting, and exploiting geothermal steam for conversion into electric power. It is registered as a VAT taxpayer and as a Renewable Energy Developer for a 20 MW geothermal power generation project in Batangas and Laguna. During 2011, MGI was constructing its power plant and purchasing taxable goods and services, thereby incurring input VAT. It did not commence commercial operations or sell electricity until the first quarter of 2014. MGI filed quarterly VAT returns for 2011 reflecting no output VAT because it had no sales. It later sought to recover the accumulated input VAT by filing administrative refund claims, asserting that its future electricity sales would be zero-rated.

• MGI is a VAT-registered corporation engaged in geothermal steam extraction and electricity generation. It holds a Certificate of Registration as a Renewable Energy Developer and a Board of Investments registration.
• During the first to fourth quarters of 2011, MGI filed quarterly VAT returns showing no sales. It incurred input VAT on local purchases of goods and services for the construction of its power plant, totalling: P10,095,979.46 for Q1; P3,134,942.99 for Q2; P1,534,692.20 for Q3; and P1,023,598.99 for Q4.
• MGI did not generate any revenue from electricity sales until the first quarter of 2014. It had no zero-rated or effectively zero-rated sales during any of the 2011 quarters.
• MGI filed administrative claims for refund of each quarter’s unutilized input VAT with the BIR in 2013. The BIR did not act on any of the claims.
• In the proceedings before the CTA, MGI’s Accounting Manager, Helenio B. Seraspi, admitted under oath that MGI “had no sales during the taxable year 2011 and only started selling during the first quarter of 2014.”
• The CTA First Division and CTA En Banc both denied the refund claims, holding that without zero-rated sales in the same period, the input VAT could not be attributed to any zero-rated transaction as required by Section 112(A).

• Reckoning of Prescriptive Period: Petitioner argued that under Commissioner of Internal Revenue v. Mirant Pagbilao Corporation, the two-year prescriptive period in Section 112(A) should be reckoned from the close of the taxable quarter when the “relevant sales” were made, and that “relevant sales” referred to the sales of its suppliers—the purchases from which it incurred input VAT—not its own sales.
• Attribution to Future Zero-Rated Sales: Petitioner contended that there is no statutory requirement that zero-rated sales and the input taxes subject of a refund fall within the same taxable quarter. It maintained that the only requirement is that the input VAT be attributable to zero-rated or effectively zero-rated sales, and that its future electricity sales, once generation commenced in 2014, would be zero-rated, thus entitling it to a refund of input VAT incurred during construction.

• Absence of Zero-Rated Sales: The Commissioner of Internal Revenue, through the CTA’s rulings adopted on appeal, maintained that MGI failed to prove that it had zero-rated or effectively zero-rated sales during the 2011 quarters. Without such sales, the input VAT could not be “attributable to zero-rated or effectively zero-rated sales” as Section 112(A) requires, and the claim must fail for non-compliance with a statutory requisite.
• Strict Construction of Tax Refunds: The Commissioner invoked the principle that tax refunds are in the nature of tax exemptions and must be strictly construed against the claimant, who bears the burden of proving entitlement by clear and convincing evidence.

• Existence of Zero-Rated Sales: Whether MGI is entitled to a refund or tax credit of unutilized input VAT for the four quarters of 2011 despite having no zero-rated or effectively zero-rated sales during that period.
• Interpretation of “Relevant Sales”: Whether the phrase “when the relevant sales were made” in Section 112(A), as interpreted in Mirant, refers to the taxpayer-claimant’s own zero-rated sales or to the purchases from suppliers from which input VAT arose.

• Existence of Zero-Rated Sales: The claim for refund was denied. Under Section 112(A), the creditable input VAT must be attributable to zero-rated or effectively zero-rated sales of the taxpayer-claimant. Petitioner’s admission that it had no sales—let alone zero-rated sales—during the 2011 quarters left no transaction to which the input VAT could be attributed. Without such attribution, the statutory precondition for a refund is not met. The refund mechanism operates as an incentive for actual export or zero-rated transactions; it cannot be invoked on the expectation of future sales.
• Interpretation of “Relevant Sales”: The phrase “when the relevant sales were made” in Section 112(A) refers to the zero-rated or effectively zero-rated sales of the taxpayer-claimant, not the sales of its suppliers. The pronouncement in Mirant that the prescriptive period runs from “the close of the taxable quarter when the relevant sales were made pertaining to the input VAT” means the input VAT incurred must be directly related to the taxpayer’s own zero-rated sales. Adopting petitioner’s contrary interpretation would absurdly shift the focus from the taxpayer-claimant’s sales to its purchases, contravening the plain language and structure of Section 112(A), which consistently references the taxpayer’s sales for purposes of attribution and proportional allocation.

• Doctrine on Attribution of Input VAT to Zero-Rated Sales — A claim for refund or credit of unutilized input VAT under Section 112(A) requires that the taxpayer prove the actual existence of zero-rated or effectively zero-rated sales during the taxable quarter to which the input taxes are sought to be attributed. Input VAT incurred in the course of a taxpayer’s trade or business cannot be refunded in the absence of zero-rated sales; anticipated future sales are insufficient. The refund is an incentive tied to consummated zero-rated transactions.
• Requisites for Refund of Input VAT (San Roque Test) — To claim a refund or tax credit under Section 112(A), the taxpayer must establish: (1) it is VAT-registered; (2) it is engaged in zero-rated or effectively zero-rated sales; (3) the input taxes are due or paid; (4) the input taxes are not transitional; (5) the input taxes have not been applied against output taxes; (6) the input taxes are attributable to zero-rated or effectively zero-rated sales; (7) for specified zero-rated sales, the foreign currency exchange proceeds have been duly accounted for under BSP rules; (8) where there are both zero-rated and taxable or exempt sales, input taxes are proportionately allocated based on sales volume; and (9) the claim is filed within two years from the close of the taxable quarter when the zero-rated sales were made.
• Prescriptive Period for Refund of Input VAT — The two-year prescriptive period under Section 112(A) runs from the close of the taxable quarter when the taxpayer-claimant’s zero-rated or effectively zero-rated sales were made, not from the time the input VAT was paid or from the date of the supplier’s sales.

• “It is clear under Section 112(A) that the refund or tax credit of unutilized input VAT is premised on the existence of zero-rated or effectively zero-rated sales.”
• “[W]hether applied as a refund or tax credit, the requisite of attribution to the zero-rated or effectively zero-rated sales must clearly be shown; otherwise, it is not covered by the provisions of Section 112(A) and the claim for refund or tax credit will not prosper.”
• “[W]ithout any zero-rated or effectively zero-rated sales being shown by petitioner, the attribution requirement or that the input tax due or paid must be attributable ‘to such sales’ cannot be fulfilled or complied with.”
• “Tax refunds partake the nature of exemption from taxation, and as such, must be looked upon with disfavor. It is regarded as in derogation of the sovereign authority, and should be construed in strictissimi juris against the person or entity claiming the exemption.”

• Commissioner of Internal Revenue v. Mirant Pagbilao Corporation, 586 Phil. 712 (2008) — Clarified and distinguished. The phrase “when the relevant sales were made” in the prescriptive period refers to the taxpayer’s zero-rated sales, not its purchases. The Court explained that Mirant did not shift the reckoning point to the supplier’s sales.
• Luzon Hydro Corporation v. Commissioner of Internal Revenue, 721 Phil. 202 (2013) — Followed. A taxpayer must present evidence of zero-rated sales to which the input VAT is attributable; financial statements and generic assertions are insufficient.
• San Roque Power Corporation v. Commissioner of Internal Revenue, 620 Phil. 554 (2009) — Applied for its nine-point test enumerating the requisites for a valid input VAT refund claim under Section 112(A).
• Commissioner of Internal Revenue v. Seagate Technology (Philippines), 491 Phil. 317 (2005) — Cited for the nature of VAT as an indirect tax on consumption and the tax credit method.
• Commissioner of Internal Revenue v. Filminera Resources Corporation, G.R. No. 236325, September 16, 2020 — Cited for the rule that claims for tax refund are construed strictly against the taxpayer.

• Section 105, NIRC — Identifies persons liable for VAT and declares VAT an indirect tax shiftable to the buyer. Relevant to the structural principle that input VAT passed on to a taxpayer may be credited or refunded only when linked to zero-rated output.
• Section 110(A)(3), NIRC — Defines “input tax” as VAT due from or paid by a VAT-registered person on importation or local purchases, and “output tax” as VAT due on sales. Applied to underscore that MGI’s input taxes existed independently but lacked correlative output tax from zero-rated sales.
• Section 110(B), NIRC — Governs excess input or output tax. Where input tax exceeds output tax and is attributable to zero-rated sales, it may be refunded or credited. The condition was not satisfied because MGI had no zero-rated sales.
• Section 106(A)(2)(a)(1), NIRC — Defines export sales subject to zero percent VAT. Though MGI’s future sales might fall under this provision, no such sales occurred in 2011.
• Section 112(A), NIRC — The controlling provision. Grants a VAT-registered person with zero-rated sales the right to apply for refund or tax credit of attributable input VAT within two years after the close of the taxable quarter when those sales were made. The Court interpreted “sales” as the taxpayer-claimant’s zero-rated sales.

Leonen, SAJ. (Chairperson), Lazaro-Javier, M. Lopez, and Kho, Jr., JJ., concurred.