G.R. No. 180173 ; April 6, 2011
MICROSOFT PHILIPPINES, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

FACTS

Petitioner Microsoft Philippines, Inc. (Microsoft), a VAT-registered taxpayer, rendered marketing services to its affiliated non-resident foreign corporations, Microsoft Operations Pte Ltd. (MOP) and Microsoft Licensing, Inc. (MLI). These services, paid for in acceptable foreign currency, qualified as zero-rated sales under Section 108(B)(2) of the National Internal Revenue Code (NIRC) of 1997. For the year 2001, Microsoft had total sales of ₱261,901,858.99, of which ₱235,724,614.68 were from these zero-rated sales. It paid VAT input taxes of ₱11,449,814.99 on its domestic purchases. On December 27, 2002, Microsoft filed an administrative claim for tax credit of this input VAT amount with the Bureau of Internal Revenue (BIR). Due to the BIR’s inaction, Microsoft filed a petition for review with the Court of Tax Appeals (CTA) on April 23, 2003. The CTA Second Division denied the claim, ruling that Microsoft failed to comply with the invoicing requirements under Sections 113 and 237 of the NIRC and Section 4.108-1 of Revenue Regulations No. 7-95 (RR 7-95), as its official receipts did not bear the imprinted word “zero-rated.” The CTA En Banc affirmed this decision. Microsoft elevated the case to the Supreme Court, arguing that the failure to imprint “zero-rated” should not result in the outright invalidation of the receipts and disallowance of the refund.

ISSUE

Whether Microsoft is entitled to a claim for tax credit or refund of VAT input taxes attributable to its zero-rated sales for the year 2001 despite its official receipts not having the word “zero-rated” imprinted on them.

RULING

The Supreme Court DENIED the petition and held that Microsoft is NOT entitled to the tax credit or refund. The Court ruled that a tax credit or refund, like a tax exemption, is strictly construed against the taxpayer, who bears the burden of proving compliance with all legal requirements. The invoicing requirements for VAT-registered persons are mandatory. Section 4.108-1 of RR 7-95 explicitly requires that the word “zero-rated” be imprinted on the invoice covering zero-rated sales and states that “All purchases covered by invoices other than a ‘VAT invoice’ shall not give rise to any input tax.” Since Microsoft’s receipts lacked the imprinted word “zero-rated,” they did not constitute a valid “VAT invoice” as defined by the regulations and, therefore, could not give rise to any creditable input tax. The subsequent codification of these regulatory requirements into law ( Republic Act No. 9337 ) merely affirmed regulations that already had the force and effect of law. Thus, Microsoft’s failure to comply with a mandatory invoicing requirement was fatal to its claim for refund or credit of input VAT.