Lectures &

News & Views

Law &



Trust Products
& Practice

About the Guru


Email Feedback

Guest Register










Legality versus reality

(Article published in the Jun  17, 2009 issue of Manila Standard Today) 

The narrow bone of contention was whether a particular real estate developer who bought from the government through a transaction which was not subject to the value added tax a parcel of land could on the said developer’s own resale of the land claim as a deduction from the consequent output VAT an amount that is known as a “presumptive input VAT” on its purchase of the land from the government.

 But the more interesting conflict, in my mind, that was played out between the majority opinion and the dissenting opinion in the consolidated cases of Fort Bonifacio Development Corporation (FBDC) v. Commissioner of Internal Revenue, G.R. Nos. 158885 and 170680, decided 02 April 2009, is the struggle between legality and reality.

 There was no disagreement on the facts: FBDC bought from the national government a parcel of land located in Taguig, Metro Manila.  At the time that the purchase was made, real estate sales were not subject to the VAT for two reasons: first, the sale was made by the national government which is exempt from the VAT and second, at the time of the transaction R.A. No. 7716, which for the first time imposed the VAT on the sale of real properties, had not taken effect.   


Thereafter and after the effectivity of R.A. No. 7716, the FBDC, after developing the lot, sold units to its own customers. Naturally, FBDC wanted to reduce its tax liability and, among the things it did, was to claim as a deduction what the law calls the “presumptive input tax” that the law concedes to those who were caught by the shift from being non-VAT covered to being VAT-subject.

The problem was that the BIR had passed regulations saying that the base for the “presumptive input tax” which a real estate developer may avail itself of was not the entire inventory (which includes the real properties bought) as of the shift but only the amount of improvements on the land. 

So, the question is really, should the “presumption” that input vat has been paid on the “goods” in the inventory cover what obviously only that part of the inventory where some transaction tax has been paid, or whether it should also include those which, in fact, really was never subjected to any transaction tax.

 The case for reality was made by Justice Antonio T. Carpio in his dissenting opinion.  Succintly, he says the presumptive input tax “assumes the existence of a law imposing the tax presumed to have been paid.  Otherwise, the presumption will have no basis because if no tax has been imposed by law, there can be no presumption that such tax has been paid.”  In other words, since no tax had really been due, none could be presumed to have been paid.

 Legality, however, had its own principles to uphold.  First is the textual argument: “On its face, there is nothing in Section 105…that prohibits the inclusion of real properties there is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real properties, together with the improvements thereon, in the beginning inventory of goods, materials and supplies, based on which inventory the transitional input tax credit is computed when transactions on real properties were finally made subject to VAT beginning with Rep. Act No. 7716.   No corresponding amendment was adopted as regards Section 105 to provide for a differentiated treatment in the application of the transitional input tax credit with respect to real properties or real estate dealers.”

 Secondly, the “equal protection” argument: The legalistic argued that it is clear  that those regularly engaged in the real estate business are accorded the same treatment as the merchants of other goods or properties available in the market.  In the same way that a milliner considers hats as his goods and a rancher considers cattle as his goods, a real estate dealer holds real property, whether or not it contains improvements, as his goods…”

 Thirdly, the legislative intent principle:  “The amendments introduced by Rep. Act No. 7716, reveal the lack of any legislative intention to make persons or entities in the real estate business subject to a VAT treatment different from those engaged in the sale of other goods or properties or in any other commercial trade or business.  If the plain text of Rep. Act No. 7716 fails to supply any apparent justification for limiting the beginning inventory of real estate dealers only to the improvements on their properties, how then were the CIR and the courts a quo able to justify such a view?

 Fourthly, congressional approval through re-enactment:  “If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the purported causal link between those two would have been nonetheless extinguished long ago.  Yet Congress has reenacted the transitional input tax credit several times; that fact simply belies the absence of any relationship between such tax credit and the long-abolished sales taxes.  Obviously then, the purpose behind the transitional input tax credit is not confined to the transition from sales tax to VAT…

 Fifthly, the argument from logic.  Under Section 105 of the Old NIRC, the rate of the transitional input tax credit is “8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher.  If indeed the transitional input tax credit is premised on the previous payment of VAT, then it does not make sense to afford the taxpayer the benefit of such credit based on “8% of the value of such inventory” should the same prove higher than the actual VAT paid.  This intent that the Court of Tax Appeals alluded to could have been implemented with ease had the legislature shared such intent by providing the actual VAT paid as the sole basis for the rate of the transitional input tax credit.”

Finally, the implausibility argument:  The realist “would have introduced a new requisite to the application of the transitional input tax credit and required the taxpayer to supply proof that it had previously paid taxes on the acquisition of goods, materials and supplies comprising its beginning inventory.”

 None of the legalist’s arguments of course, ring true.  But then, what is legal is not necessarily what is true.  Ever head of the conclusive presumption of legitimacy of one born in wedlock?

 Admittedly, I had in the foregoing abstracted too many relevant items in the FBDC case to even pretend to come up herein with a reasonable presentation of the Supreme Court’s ruling on the Fort Bonifacio case.  But such presentation was not my purpose.

 What I set out to do, and hope to have had some success in, was to simply demonstrate that in the world we live in, real facts sometimes clash with principles of law.  And, in those times when the conflict is played in the arena where law is the life of those who referee the game, reality could, not surprisingly every now and then, take a beating from legality.