GR 158885; (April, 2009) (Digest)
G.R. No. 158885 and G.R. No. 170680; April 2, 2009
FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, et al., Respondents.
FACTS
Petitioner Fort Bonifacio Development Corporation (FBDC) is engaged in the development and sale of real property. On February 8, 1995, it acquired a vast tract of land from the national government, a transaction not subject to VAT as it occurred before the effectivity of Republic Act (R.A.) No. 7716. Following the effectivity of R.A. No. 7716, which imposed VAT on the sale of real properties, FBDC became liable for output VAT on its sales. For the fourth quarter of 1996, FBDC, in remitting its output VAT, utilized a portion of its claimed transitional input tax credit of P5,698,200,256.00, which was based on an inventory of its real properties (land and improvements) with a total book value of P71,227,503,200.00. The Bureau of Internal Revenue (BIR) disallowed this claim, citing Section 4.105-1 of Revenue Regulation (R.R.) No. 7-95, which limited the basis for the presumptive input tax for real estate dealers to “improvements… constructed on or after the effectivity of E.O. 273 (January 1, 1988),” thereby excluding the value of the land itself. This led to the issuance of a Pre-Assessment Notice and a formal letter of disallowance from the Commissioner of Internal Revenue (CIR). FBDC protested the assessment. The Court of Tax Appeals (CTA) and the Court of Appeals (CA) upheld the CIR’s position, ruling that the transitional input tax credit under Section 105 of the National Internal Revenue Code (NIRC) applied only to “goods” intended for sale or conversion in the ordinary course of business, and that “goods” under the VAT law, prior to its amendment by R.A. No. 7716, did not include real property. They concluded that since FBDC’s land inventory was not considered “goods” at the time it was acquired, it could not be the basis for the credit. The cases were consolidated as they involved the same legal issue.
ISSUE
Whether the transitional input tax credit under Section 105 of the NIRC (later Section 111[A]) may be claimed on the beginning inventory of real property held for sale, including the value of the land itself, by a taxpayer who became VAT-registered upon the effectivity of R.A. No. 7716 which first imposed VAT on the sale of real properties.
RULING
Yes. The Supreme Court granted the petitions and reversed the decisions of the CA and CTA.
The Court held that FBDC is entitled to the transitional input tax credit based on the total value of its beginning inventory of real properties (land and improvements) held for sale or use in its trade or business. The transitional input tax credit is a relief mechanism designed to alleviate the impact of the shift to the VAT system on businesses with existing inventories. Section 105 of the NIRC, as amended, allows a person who becomes liable to VAT to claim an input tax on the “beginning inventory of goods, materials and supplies.” The term “goods” must be interpreted in light of the law in effect at the time the taxpayer becomes liable for VAT. R.A. No. 7716, which made FBDC VAT-liable, explicitly expanded the definition of “goods or properties” subject to VAT to include “[r]eal properties held primarily for sale to customers.” Consequently, at the point FBDC became subject to VAT, its inventory of real properties held for sale fell within the statutory definition of “goods.” Therefore, the value of this inventory, including the land, properly constitutes the “beginning inventory of goods” upon which the 8% transitional input tax credit can be computed. The Court rejected the application of the restrictive provision in R.R. No. 7-95, noting that it had been superseded by R.R. No. 6-97, which removed the limitation to improvements and allowed the credit based on “land and/or improvements.” This beneficial regulation was given retroactive application. The Court emphasized that the credit is a statutory privilege granted to cushion the effect of the new tax liability on previously tax-free inventories, and FBDC’s land inventory, though acquired VAT-free, became part of its stock-in-trade subject to output VAT upon the law’s change.