Melco Resorts Leisure (PHP) Corporation vs. Commissioner of Internal Revenue

The two-year prescriptive period under Section 229 of the Tax Code is reckoned from the actual payment of the tax or penalty sought to be refunded, or from the date of filing of the adjusted final tax return, and not from the date of the supplier's actual remittance of passed-on VAT to the BIR. A taxpayer claiming refund of erroneously passed-on input VAT need not prove the suppliers' actual remittance of VAT to the BIR, as requiring such proof would be administratively infeasible, impractical, and oppressive.

Melco Resorts Leisure (PHP) Corporation is a domestic corporation engaged in developing and operating tourist facilities, including casino entertainment complexes, and is a VAT-registered taxpayer. It holds a valid gaming license issued by the Philippine Amusement and Gaming Corporation (PAGCOR). The Commissioner of Internal Revenue is the duly appointed head of the Bureau of Internal Revenue with authority to decide disputed assessments and refunds of internal revenue taxes. The case involves the interplay between PAGCOR's tax exemption under Presidential Decree No. 1869, the VAT system under the National Internal Revenue Code of 1997, and the prescriptive periods for claiming refunds of erroneously or illegally collected taxes.

Melco Resorts Leisure (PHP) Corporation is a domestic corporation engaged in developing and operating tourist facilities, including casino entertainment complexes with hotel, retail, and amusement areas, and is a VAT-registered taxpayer. On January 28, 2013, PAGCOR issued an Amended Certificate of Affiliation & Provisional License to Melco with other co-licensees as a consortium, applicable to casinos in the Bagong Nayong Pilipino Manila Bay Entertainment City, Parañaque City, and Newport City Integrated Resort, Pasay City. On separate dates in 2015 and 2017, PAGCOR issued gaming licenses in favor of Melco with other co-licensees, applicable to casinos along Asean Avenue and Roxas Boulevard, Tambo, Parañaque City, under the brand name City of Dreams Manila.

Melco paid PHP 81,119,005.84 representing erroneously or illegally collected and passed-on input VAT on purchases attributable to gaming revenues for the material period. On April 25, 2016, Melco filed its quarterly VAT return for the 1st quarter of taxable year 2016 through the BIR's Electronic Filing and Payment System, with amendments made on December 19, 2016, March 23, 2017, and June 22, 2017. On December 19, 2017, Melco filed its administrative claim for refund with the Large Taxpayer Services of the BIR. Through a letter dated February 26, 2018, the BIR informed Melco that its application could not be given due course based on Revenue Memorandum Circular No. 33-2013, which allegedly states that "income derived from operations related to gaming activities as well as other income are subject to VAT at 12% and therefore not entitled to refund of creditable input tax."

The CTA First Division ruled that Melco timely filed its judicial claim under Section 112 but denied the claim because Melco was not engaged in zero-rated activities. The CTA En Banc affirmed, holding that Melco's sales of services were exempt from VAT under Section 109, not zero-rated, and that the two-year prescriptive period under Section 229 should be reckoned from the date of the suppliers' filing of VAT returns and payment of VAT. The CTA En Banc cited Philippine Airlines, Inc. vs. Commissioner of Internal Revenue in ruling that where Melco was not the statutory taxpayer but merely bore the economic burden, the prescriptive period runs from the supplier-statutory taxpayer's payment. The CTA En Banc also held that solutio indebiti was not applicable to tax refund cases since the Tax Code is a special law that prevails over the Civil Code's provisions on quasi-contracts.

• Nugatory Tax Exemption: Melco argued that the CTA En Banc's Decision effectively renders nugatory the tax exemption privilege extended to it under Presidential Decree No. 1869 because of the impractical, unreasonable, and burdensome procedure in claiming the refund of erroneously passed-on input VAT.
• Reckoning of Prescriptive Period: Melco argued that the two-year period should be reckoned from the filing of its own quarterly VAT return because it is at that time that the amount of erroneously passed-on input VAT may be determined.
• Substantive Claims: Melco sought affirmation that: (1) it is exempt from input VAT on purchases attributable to gaming revenues; (2) such input VAT should not be passed on by suppliers; (3) if VAT is passed on, Melco is entitled to a refund based on supporting sales invoices and/or official receipts; and (4) the claim should be filed within the two-year period from the filing of its Quarterly VAT return.
• Administrative Infeasibility: Melco argued that requiring actual remittance by suppliers would be "administratively not feasible or near impossible, impractical and oppressive for the petitioner to demand to be furnished the VAT returns of its hundreds of suppliers," noting that it worked with 400 suppliers, which would require submission of 1,600 Quarterly VAT returns.

• Non-Refundability of Input Taxes: The CIR argued that the input taxes erroneously passed on to Melco by its suppliers are not refundable as they form part of the cost of its purchases.
• Failure to Prove Entitlement: The CIR argued that Melco failed to prove by preponderance of evidence that the suppliers paid the VAT, that the refund was claimed within the prescribed period, and that its suppliers did not themselves claim refund or carry over any excess input VAT to the next taxable quarter.

• Entitlement to Refund: Whether the CTA En Banc erred in ruling that Melco is not entitled to the refund or the issuance of a tax credit certificate in the total amount of PHP 81,119,005.84, representing erroneously or illegally collected and passed-on input VAT on purchases attributable to gaming revenues for the 1st quarter of taxable year 2016.
• Timeliness of Claims: Whether the CTA En Banc erred in ruling that Melco failed to timely file its administrative and judicial claims for refund as the two-year period is counted from the date of payment to the BIR of the VAT passed on to Melco by its suppliers.

• Entitlement to Refund: No. Melco was not entitled to the refund or issuance of tax credit certificate in the total amount of PHP 81,119,005.84. The payment of the said amount was not erroneous nor illegal; hence, not refundable, as it represented and formed part of the purchase price paid to its suppliers.
• Timeliness of Claims: Yes, the CTA erred. Melco timely filed its administrative and judicial claims for refund. The two-year prescriptive period under Section 229 of the Tax Code is not reckoned from the date of the suppliers' actual remittance of VAT to the BIR, but from the actual payment of tax or the filing of the adjusted final tax return.

• Entitlement to Refund: The Court affirmed the CTA's factual findings that Melco's claim for refund under Section 112 failed because Melco, while a VAT-exempt entity, was not engaged in zero-rated or effectively zero-rated sales. The Court adopted the CTA First Division's ruling that Melco's activities "are not considered zero-rated or effectively zero-rated sales under the relevant provisions of the 1997 NIRC, as amended, thus cannot be the source of the claimed input VAT." The Court emphasized that the applicable provision is Section 229 of the Tax Code, which contemplates "a wrongful payment because what is paid, or part of it, is not legally due." However, the Court found that Melco's payment was not erroneous or illegal. Citing Commissioner of Internal Revenue vs. Acesite (Philippines) Hotel Corporation, the Court noted that an erroneous payment occurs when the taxpayer pays under a mistake of fact, as when the taxpayer is not aware of an existing exemption at the time of payment. Unlike Acesite, Melco's payment of the passed-on input VAT formed part of the purchase price it paid to its suppliers, and being a VAT-exempt entity, the input taxes passed on to it by its suppliers cannot be the subject of a claim for refund.

• Timeliness of Claims: The Court ruled that the CTA En Banc erred in reckoning the two-year prescriptive period from the date of the suppliers' actual remittance of VAT. The Court clarified that the phrase "payment of taxes" under Section 204(C) in relation to Section 229 has been interpreted in jurisprudence in two ways: (1) the actual payment of tax or penalty sought to be refunded, regardless of the existence of any supervening cause after payment; and (2) the date of the filing of the adjusted final tax return. Citing Manila Peninsula Hotel, Inc. vs. Commissioner of Internal Revenue, the Court emphasized that "both administrative and judicial claims must be filed within the two-year period counted from the payment of the tax." Citing Commissioner of Internal Revenue vs. TMX Sales, Inc., the Court noted that the two-year period commences from the date of filing of the Final Adjustment Return, not when quarterly income tax was paid, as literal application of Section 229 "may lead to absurdity and inconvenience." Citing Commissioner of Internal Revenue vs. Univation Motor Philippines, Inc., the Court reiterated that "the two-year prescriptive period to claim a refund actually commences to run, at the earliest, on the date of the filing of the adjusted final tax return." In both interpretations, the Court did not require actual remittance by the suppliers. The Court further applied Philippine Airlines, Inc. vs. Commissioner of Internal Revenue by analogy, holding that requiring Melco to prove actual remittance by its 400 suppliers would be "absurd, inconvenient, unfair, and unreasonable," and that "substantial justice, equity, and fair play outweigh the administrative infeasibility and impracticality espoused by the tax court."

• Erroneous or Illegal Tax — An "erroneous or illegal tax" is one levied without statutory authority, or upon property not subject to taxation, or by some officer having no authority to levy the tax, or one which in some other similar respect is illegal. An erroneous payment of tax occurs when the taxpayer pays under a mistake of fact, as when the taxpayer is not aware of an existing exemption in his or her favor at the time the payment was made. In this case, the Court applied this doctrine to find that Melco's payment of passed-on input VAT was not erroneous or illegal because it formed part of the purchase price paid to its suppliers.

• Reckoning of Prescriptive Period under Section 229 — The two-year prescriptive period under Section 229 of the Tax Code is reckoned from the actual payment of tax or penalty sought to be refunded, regardless of the existence of any supervening cause after payment, or from the date of the filing of the adjusted final tax return. The Court applied this doctrine to rule that the CTA En Banc erred in reckoning the period from the suppliers' actual remittance of VAT, as neither interpretation of "payment of taxes" requires actual remittance by suppliers.

• Distinction between Section 112 and Section 229 Refunds — Section 112(A) pertains to the refund of unutilized input VAT attributable to zero-rated or effectively zero-rated sales, while Section 229 refers to the recovery of erroneously or illegally collected tax payments. Under Section 112, only the administrative claim must be filed within two years from the close of the taxable quarter when the relevant sales were made. Under Section 229, both the administrative and judicial claims must be filed within two years from the actual payment of tax or penalty sought to be refunded. The Court applied this distinction to determine that Section 229 was the applicable provision for Melco's claim.

• Exempt Transaction vs. Zero-Rated Sale — Effectively zero-rated transactions refer to the sale of goods and services to persons exempted under special law, where the entity enjoying incentives under the special law is the buyer, not the seller. Where the sales of services are by the exempt entity, not to it, the sales are exempt from VAT pursuant to Section 109 of the Tax Code, and not zero-rated. This distinction determines the extent of relief available, such as the ability to claim passed-on VAT as a tax credit or refund. The Court applied this doctrine to affirm that Melco's sale of services was exempt from VAT, not zero-rated, and thus input VAT attributable to exempt transactions is neither creditable nor refundable.

• "The phrase 'payment of taxes' under Section 204 (C) in relation to Section 229 of the Tax Code has been interpreted in jurisprudence to mean: (1) the actual payment of tax or penalty sought to be refunded, regardless of the existence of any supervening cause after payment; as well as (2) the date of the filing of the adjusted final tax return." — This passage articulates the Court's interpretation of the reckoning point for the two-year prescriptive period under Section 229, which is central to the Court's ruling that the CTA En Banc erred in requiring proof of suppliers' actual remittance.

• "Substantial justice, equity, and fair play are on the side of Melco and outweigh the gross infeasibility and impracticality espoused by the tax court." — This passage states the equitable principle applied by the Court in ruling that Melco timely filed its claims, notwithstanding the administrative difficulty of proving suppliers' remittance.

• "In requiring that it prove actual remittance, the court a quo and the Commissioner effectively put the burden on the payee to prove that both government and the banks complied with their legal obligation. It would have been near impossible for the taxpayer to demand to see the records of the payor bank or the ledgers of the government." — This passage, quoted from Philippine Airlines, Inc. v. Commissioner of Internal Revenue, articulates the equitable rationale for not requiring proof of actual remittance, which the Court applied by analogy to Melco's case.

• "The two-year prescriptive period to claim a refund actually commences to run, at the earliest, on the date of the filing of the adjusted final tax return because this is where the figures of the gross receipts and deductions have been audited and adjusted, reflective of the results of the operations of a business enterprise." — This passage, quoted from Commissioner of Internal Revenue v. Univation Motor Philippines, Inc., establishes the alternative reckoning point for the prescriptive period under Section 229.

• Manila Peninsula Hotel, Inc. vs. Commissioner of Internal Revenue, G.R. No. 229338, April 17, 2024 — Controlling precedent cited for the distinction between Sections 112 and 229 of the Tax Code, and for the rule that both administrative and judicial claims must be filed within the two-year period counted from the payment of the tax.

• Commissioner of Internal Revenue vs. San Roque Power Corporation, 703 Phil. 310 (2013) — Cited to clarify that Section 229 contemplates "a wrongful payment because what is paid, or part of it, is not legally due," and that incurring excess input tax does not necessarily mean it was wrongfully or erroneously paid.

• Commissioner of Internal Revenue vs. Acesite (Philippines) Hotel Corporation, 545 Phil. 1 (2007) — Cited as an example of erroneous payment of tax where the taxpayer paid by mistake VAT on transactions with PAGCOR, a tax-exempt entity, and was not aware of the zero-rated nature of the transactions at the time of payment.

• Commissioner of Internal Revenue vs. TMX Sales, Inc., 282 Phil. 199 (1992) — Cited for the rule that the two-year prescriptive period under Section 229 commences from the date of filing of the Final Adjustment Return, not when quarterly income tax was paid, as literal application may lead to absurdity and inconvenience.

• Commissioner of Internal Revenue vs. Univation Motor Philippines, Inc., 851 Phil. 1078 (2019) — Cited for the settled interpretation that the phrase "payment of taxes" under Section 229 means the date of the filing of the adjusted final tax return.

• Philippine Airlines, Inc. vs. Commissioner of Internal Revenue, 823 Phil. 1043 (2018) — Applied by analogy to hold that remittance of VAT by suppliers does not need to be proven by the taxpayer claiming a refund, as requiring such proof would be unreasonable and oppressive.

• Section 112, National Internal Revenue Code of 1997, as amended — Pertains to the refund of unutilized input VAT attributable to zero-rated or effectively zero-rated sales. The Court applied this provision to affirm that Melco's claim under Section 112 failed because Melco was not engaged in zero-rated or effectively zero-rated sales.

• Section 204(C), National Internal Revenue Code of 1997, as amended — Grants the Commissioner the authority to credit or refund taxes erroneously or illegally received, subject to the requirement that the taxpayer files a written claim within two years after payment of the tax or penalty. The Court applied this provision in determining the prescriptive period for Melco's claim.

• Section 229, National Internal Revenue Code of 1997, as amended — Provides for the recovery of tax erroneously or illegally collected, requiring that both administrative and judicial claims be filed within two years from the payment of the tax or penalty sought to be refunded. The Court applied this provision to determine the applicable prescriptive period for Melco's claim.

• Section 108(B)(3), National Internal Revenue Code of 1997, as amended — Pertains to services rendered to persons or entities exempted by special law as effectively zero-rated transactions. The Court applied this provision to distinguish between sales of services to exempt entities versus sales by exempt entities.

• Section 109, National Internal Revenue Code of 1997, as amended — Provides for exemptions from VAT. The Court applied this provision to rule that Melco's sale of services was exempt from VAT, not zero-rated.

• Presidential Decree No. 1869 — Grants tax exemptions to PAGCOR for its gaming operations. The Court acknowledged that this exemption extended to Melco as a corporation with whom PAGCOR has a contractual relationship, but held that this did not entitle Melco to a refund of passed-on input VAT.

Gesmundo, C.J. (Chairperson), Zalameda, Rosario, and Marquez, JJ., concurred in the decision.

N/A — No dissenting opinions were noted in the provided case text.