Supreme Court Clarifies Tax Refund Rules for VAT-Exempt Entities: A Closer Look at Melco Resorts v. CIR (G.R. No. 271261, April 2, 2025)
- Yasser Aureada
- Jun 20
- 3 min read
The Supreme Court recently issued a pivotal ruling in Melco Resorts Leisure (PHP) Corporation v. Commissioner of Internal Revenue, G.R. No. 271261, that directly affects VAT-exempt businesses, especially those operating under special tax privileges such as Philippine Amusement and Gaming Corporation (PAGCOR) licensees. The decision offers crucial guidance on VAT refund claims and reiterates key principles in tax administration.
Background of the Case
Melco Resorts Leisure (PHP) Corporation (“Melco”) is a PAGCOR licensee and a VAT-registered entity engaged in gaming operations and the development of tourism-related facilities, including the City of Dreams Manila. Under Presidential Decree No. 1869, gaming operations conducted under a PAGCOR license are tax-exempt.
In 2016, Melco paid approximately ₱81.1 million in input VAT on various purchases related to its gaming operations. Believing that these payments were erroneously passed on by its suppliers despite its VAT-exempt status, Melco filed both administrative and judicial claims for a refund.
The Lower Court’s Ruling
The Court of Tax Appeals (CTA) denied Melco’s refund claim on two key grounds:
Lack of entitlement – The CTA held that Melco’s gaming operations are VAT-exempt, not zero-rated. Therefore, input VAT on purchases related to such exempt operations cannot be refunded.
Prescription – The CTA ruled that Melco failed to establish timely filing of its refund claim because it did not prove when its suppliers actually remitted the VAT to the BIR, which the CTA treated as the reckoning point of the 2-year prescriptive period under Section 229 of the Tax Code.
Melco challenged the ruling and brought the case before the Supreme Court.
Key Issues Before the Supreme Court
Is a VAT-exempt PAGCOR licensee like Melco entitled to a refund of passed-on input VAT?
What is the proper reckoning point for the 2-year prescriptive period for tax refund claims under Section 229 of the Tax Code?
The Supreme Court’s Ruling
In a partially favorable decision, the Supreme Court upheld the denial of Melco’s refund but reversed the CTA’s interpretation on the prescriptive period.
1. On Refund Entitlement:
The Court ruled that VAT-exempt entities like Melco cannot claim refunds of input VAT paid on purchases related to their exempt operations. Input VAT in such cases is not creditable and simply forms part of the purchase cost.
“The payment of the said amount was not erroneous nor illegal; hence, not refundable.”
The Court distinguished between zero-rated and VAT-exempt sales:
• Zero-rated sales allow refund of input VAT.
• VAT-exempt sales do not, even if suppliers mistakenly charge VAT.
2. On the 2-Year Prescriptive Period:
The Supreme Court reversed the CTA En Banc’s interpretation that the 2-year period should be counted from the supplier’s remittance to the BIR.
Instead, the Court held that the prescriptive period begins from:
• The date the taxpayer files its own VAT return, or
• The date of final tax adjustment return (whichever is applicable).
“Requiring taxpayers to track the remittance of hundreds of suppliers is administratively infeasible, impractical, and inequitable.”
The Court emphasized that such an approach would lead to absurdity and inefficiency, especially for companies dealing with hundreds of vendors.
Implications for VAT-Exempt and PAGCOR-Accredited Entities
This ruling provides clear guidance to entities with special tax exemptions:
• Know the distinction between zero-rated and VAT-exempt transactions.
• Refunds of input VAT are available only for zero-rated activities.
• For refund claims under Section 229, the filing date of your own return is what matters—not the supplier’s tax remittance.
For companies like Melco, this ruling clarifies that erroneous input VAT passed on by suppliers cannot be recovered, even if the company itself is tax-exempt. However, businesses are relieved from t
he impractical burden of tracking supplier remittances to prove timeliness.
Practical Takeaways
Review supplier billings carefully. Ensure that VAT is not mistakenly passed on to exempt transactions.
Educate your vendors. Clarify your tax-exempt status to prevent incorrect VAT charges.
File timely. For refund claims under Section 229, use your own VAT return filing date as the starting point of the 2-year period.
Seek legal advice. Tax exemption cases are nuanced—consulting a CPA-lawyer or tax expert can help avoid costly errors.
Final Thoughts
The Melco Resorts ruling strikes a balance between legal technicalities and administrative practicality. While denying the refund, the Supreme Court importantly relieved taxpayers from the impractical burden of proving supplier remittances. It is a reminder that tax exemption is not the same as being zero-rated—and that understanding this distinction is critical for proper tax compliance and refund strategy.
If your business operates under a special tax regime or is facing refund-related disputes with the BIR, our team at Aureada Law Firm is here to guide you. Contact us for a consult.
Download the Full Supreme Court Decision
For your reference, you may download the official Supreme Court decision below:
Disclaimer: Originally published by the Supreme Court Public Information Office. This document is shared unaltered and for non-commercial use, with proper attribution to the SC PIO.
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