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G.R. No.

146984 July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN
GROUP (HK) and NATIONAL DEVELOPMENT COMPANY, respondents.

DECISION

TINGA, J.:

The issue in this present petition is whether the sale by the National Development Company (NDC) of
five (5) of its vessels to the private respondents is subject to value-added tax (VAT) under the National
Internal Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale. The Court of Tax
Appeals (CTA) and the Court of Appeals commonly ruled that the sale is not subject to VAT. We affirm,
though on a more unequivocal rationale than that utilized by the rulings under review. The fact that the
sale was not in the course of the trade or business of NDC is sufficient in itself to declare the sale as
outside the coverage of VAT.

The facts are culled primarily from the ruling of the CTA.

Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its
shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell
in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner"
type vessels.1 The vessels were constructed for the NDC between 1981 and 1984, then initially leased
to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were
transferred and leased, on a bareboat basis, to the NMC.2

The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and
conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on
the value of the vessels."3 On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay
Lines) offered to buy the shares and the vessels for P168,000,000.00. The bid was made by
Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag
Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong (collectively, private
respondents).4 The bid was approved by the Committee on Privatization, and a Notice of Award dated
1 July 1988 was issued to Magsaysay Lines.

On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand,
and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the
contract stipulated that "[v]alue-added tax, if any, shall be for the account of the PURCHASER."5 Per
arrangement, an irrevocable confirmed Letter of Credit previously filed as bidders bond was accepted
by NDC as security for the payment of VAT, if any. By this time, a formal request for a ruling on
whether or not the sale of the vessels was subject to VAT had already been filed with the Bureau of
Internal Revenue (BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan, presumably in behalf
of private respondents. Thus, the parties agreed that should no favorable ruling be received from the
BIR, NDC was authorized to draw on the Letter of Credit upon written demand the amount needed for
the payment of the VAT on the stipulated due date, 20 December 1988.6
In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14
December 1988 from the BIR, holding that the sale of the vessels was subject to the 10% VAT. The
ruling cited the fact that NDC was a VAT-registered enterprise, and thus its "transactions incident to its
normal VAT registered activity of leasing out personal property including sale of its own assets that are
movable, tangible objects which are appropriable or transferable are subject to the 10% [VAT]."7

Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling
No. 395-88 (dated 18 August 1988), which made a similar ruling on the sale of the same vessels in
response to an inquiry from the Chairman of the Senate Blue Ribbon Committee. Their motion was
denied when the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier
VAT rulings. At this point, NDC drew on the Letter of Credit to pay for the VAT, and the amount
of P15,120,000.00 in taxes was paid on 16 March 1989.

On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed
by a Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings
No. 395-88, 568-88 and 007-89, as well as the refund of the VAT payment made amounting
to P15,120,000.00.8 The Commissioner of Internal Revenue (CIR) opposed the petition, first arguing
that private respondents were not the real parties in interest as they were not the transferors or sellers
as contemplated in Sections 99 and 100 of the then Tax Code. The CIR also squarely defended the
VAT rulings holding the sale of the vessels liable for VAT, especially citing Section 3 of Revenue
Regulation No. 5-87 (R.R. No. 5-87), which provided that "[VAT] is imposed on any sale or transactions
‘deemed sale’ of taxable goods (including capital goods, irrespective of the date of acquisition)." The
CIR argued that the sale of the vessels were among those transactions "deemed sale," as enumerated
in Section 4 of R.R. No. 5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the
Regulation, which classified "change of ownership of business" as a circumstance that gave rise to a
transaction "deemed sale."

In a Decision dated 27 April 1992, the CTA rejected the CIR’s arguments and granted the
petition.9 The CTA ruled that the sale of a vessel was an "isolated transaction," not done in the ordinary
course of NDC’s business, and was thus not subject to VAT, which under Section 99 of the Tax Code,
was applied only to sales in the course of trade or business. The CTA further held that the sale of
the vessels could not be "deemed sale," and thus subject to VAT, as the transaction did not fall under
the enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax Code, or
Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt should be resolved in favor of
private respondents since Section 99 of the Tax Code which implemented VAT is not an exemption
provision, but a classification provision which warranted the resolution of doubts in favor of the
taxpayer.

The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11 March 1997, rendered a
Decision reversing the CTA.11 While the appellate court agreed that the sale was an isolated
transaction, not made in the course of NDC’s regular trade or business, it nonetheless found that the
transaction fell within the classification of those "deemed sale" under R.R. No. 5-87, since the sale of
the vessels together with the NMC shares brought about a change of ownership in NMC. The Court of
Appeals also applied the principle governing tax exemptions that such should be strictly construed
against the taxpayer, and liberally in favor of the government.12

However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated
5 February 2001.13 This time, the appellate court ruled that the "change of ownership of business" as
contemplated in R.R. No. 5-87 must be a consequence of the "retirement from or cessation of
business" by the owner of the goods, as provided for in Section 100 of the Tax Code. The Court of
Appeals also agreed with the CTA that the classification of transactions "deemed sale" was a
classification statute, and not an exemption statute, thus warranting the resolution of any doubt in favor
of the taxpayer.14

To the mind of the Court, the arguments raised in the present petition have already been adequately
discussed and refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet
the Court finds that Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT
payments, and the subsequent disquisitions by the lower courts on the applicability of Section 100 of
the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant.

A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on
consumption, even though it is assessed on many levels of transactions on the basis of a fixed
percentage.15 It is the end user of consumer goods or services which ultimately shoulders the tax, as
the liability therefrom is passed on to the end users by the providers of these goods or services16 who
in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the
final consumer (or output VAT).17 The final purchase by the end consumer represents the final link in a
production chain that itself involves several transactions and several acts of consumption. The VAT
system assures fiscal adequacy through the collection of taxes on every level of consumption,18 yet
assuages the manufacturers or providers of goods and services by enabling them to pass on their
respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire
tax liability.

Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct
relevance to the taxpayer’s role or link in the production chain. Hence, as affirmed by Section 99 of the
Tax Code and its subsequent incarnations,19 the tax is levied only on the sale, barter or exchange of
goods or services by persons who engage in such activities, in the course of trade or business.
These transactions outside the course of trade or business may invariably contribute to the production
chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not
occur within the course of trade or business, the providers of such goods or services would hardly, if at
all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT
collections since the accumulation of output VAT arises in the first place only through the ordinary
course of trade or business.

That the sale of the vessels was not in the ordinary course of trade or business of NDC was
appreciated by both the CTA and the Court of Appeals, the latter doing so even in its first decision
which it eventually reconsidered.20 We cite with approval the CTA’s explanation on this point:

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil.
992), the term "carrying on business" does not mean the performance of a single disconnected
act, but means conducting, prosecuting and continuing business by performing progressively all
the acts normally incident thereof; while "doing business" conveys the idea of business being
done, not from time to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL
REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course of business" is what is
usually done in the management of trade or business. [Idmi v. Weeks & Russel, 99 So. 761,
764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or
"doing business" connotes regularity of activity. In the instant case, the sale was an isolated
transaction. The sale which was involuntary and made pursuant to the declared policy of
Government for privatization could no longer be repeated or carried on with regularity. It should
be emphasized that the normal VAT-registered activity of NDC is leasing personal property.21

This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that the NDC
was created for the primary purpose of selling real property.23

The conclusion that the sale was not in the course of trade or business, which the CIR does not
dispute before this Court,24 should have definitively settled the matter. Any sale, barter or exchange of
goods or services not in the course of trade or business is not subject to VAT.

Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied
upon by the CIR, is captioned "Value-added tax on sale of goods," and it expressly states that "[t]here
shall be levied, assessed and collected on every sale, barter or exchange of goods, a value added tax
x x x." Section 100 should be read in light of Section 99, which lays down the general rule on which
persons are liable for VAT in the first place and on what transaction if at all. It may even be noted that
Section 99 is the very first provision in Title IV of the Tax Code, the Title that covers VAT in the law.
Before any portion of Section 100, or the rest of the law for that matter, may be applied in order to
subject a transaction to VAT, it must first be satisfied that the taxpayer and transaction involved is
liable for VAT in the first place under Section 99.

It would have been a different matter if Section 100 purported to define the phrase "in the course of
trade or business" as expressed in Section 99. If that were so, reference to Section 100 would have
been necessary as a means of ascertaining whether the sale of the vessels was "in the course of trade
or business," and thus subject to

VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is
not the meaning of "in the course of trade or business," but instead the identification of the transactions
which may be deemed as sale. It would become necessary to ascertain whether under those two
provisions the transaction may be deemed a sale, only if it is settled that the transaction occurred in
the course of trade or business in the first place. If the transaction transpired outside the course of
trade or business, it would be irrelevant for the purpose of determining VAT liability whether the
transaction may be deemed sale, since it anyway is not subject to VAT.

Accordingly, the Court rules that given the undisputed finding that the transaction in question was not
made in the course of trade or business of the seller, NDC that is, the sale is not subject to VAT
pursuant to Section 99 of the Tax Code, no matter how the said sale may hew to those transactions
deemed sale as defined under Section 100.

In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the
Court finds the discussions offered on this point by the CTA and the Court of Appeals (in its
subsequent Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among
the transactions deemed sale those involving "change of ownership of business." However, Section
4(E) of R.R. No. 5-87, reflecting Section 100 of the Tax Code, clarifies that such "change of ownership"
is only an attending circumstance to "retirement from or cessation of business[, ] with respect to all
goods on hand [as] of the date of such retirement or cessation."25 Indeed, Section 4(E) of R.R. No. 5-
87 expressly characterizes the "change of ownership of business" as only a "circumstance" that
attends those transactions "deemed sale," which are otherwise stated in the same section.26

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.

G.R. No. 153866 February 11, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.

DECISION

PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like
herein respondent -- are entities exempt from all internal revenue taxes and the implementing rules
relevant thereto, including the value-added taxes or VAT. Although export sales are not deemed
exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the distinction
between exempt entities and exempt transactions has little significance, because the net result is that
the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has complied with all
requisites for claiming a tax refund of or credit for the input VAT it paid on capital goods it purchased.
Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it is entitled to such
refund or credit.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the May
27, 2002 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the
Decision reads as follows:

"WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit."3

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:

"As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:

1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange
Commission to do business in the Philippines, with principal office address at the new Cebu Township
One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;

2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform
the duties of his office, including, among others, the duty to act and approve claims for refund or tax
credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued
PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the
manufacture of recording components primarily used in computers for export. Such registration was
made on 6 June 1997;

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration


Certification No. 97-083-000600-V issued on 2 April 1997;

5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];

6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;

7. No final action has been received by [respondent] from [petitioner] on [respondent’s] claim for VAT
refund.

"The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the
[petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of
Petition for Review in order to toll the running of the two-year prescriptive period.

"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

1. [Respondent’s] alleged claim for tax refund/credit is subject to administrative routinary


investigation/examination by [petitioner’s] Bureau;

2. Since ‘taxes are presumed to have been collected in accordance with laws and regulations,’ the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or illegally
collected x x x;

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:

"A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/refund."

4. Claims for tax refund/tax credit are construed in ‘strictissimi juris’ against the taxpayer. This is due to
the fact that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is
incumbent upon the [respondent] to prove that it is indeed entitled to the refund/credit sought. Failure
on the part of the [respondent] to prove the same is fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the clearest grant of organic or statutory law. An
exemption from the common burden cannot be permitted to exist upon vague implications;

5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA)
registered Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of
Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as amended. As
[respondent’s] business is not subject to VAT, the capital goods and services it alleged to have
purchased are considered not used in VAT taxable business. As such, [respondent] is not entitled to
refund of input taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations No.
([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997 Tax
Code on filing of a written claim for refund within two (2) years from the date of payment of tax.’

"On July 19, 2001, the Tax Court rendered a decision granting the claim for refund."4

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit
certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum
represented the unutilized but substantiated input VAT paid on capital goods purchased for the period
covering April 1, 1998 to June 30, 1999.

The appellate court reasoned that respondent had availed itself only of the fiscal incentives under
Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of
those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916.
Respondent was, therefore, considered exempt only from the payment of income tax when it opted for
the income tax holiday in lieu of the 5 percent preferential tax on gross income earned. As a VAT-
registered entity, though, it was still subject to the payment of other national internal revenue taxes, like
the VAT.

Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of
RR 7-95 were applicable. Having paid the input VAT on the capital goods it purchased, respondent
correctly filed the administrative and judicial claims for its refund within the two-year prescriptive period.
Such payments were -- to the extent of the refundable value -- duly supported by VAT invoices or
official receipts, and were not yet offset against any output VAT liability.

Hence this Petition.5

Sole Issue

Petitioner submits this sole issue for our consideration:

"Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount
of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the
period April 1, 1998 to June 30, 1999."6

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT

No doubt, as a PEZA-registered enterprise within a special economic zone,7 respondent is entitled to


the fiscal incentives and benefits8 provided for in either PD 669 or EO 226.10 It shall, moreover, enjoy all
privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 722711 and 7844.12

Preferential Tax Treatment Under Special Laws


If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall
not be subject to internal revenue laws and regulations for raw materials, supplies, articles, equipment,
machineries, spare parts and wares, except those prohibited by law, brought into the zone to be
stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed,
manipulated, manufactured, mixed or used directly or indirectly in such activities.13 Even so,
respondent would enjoy a net-operating loss carry over; accelerated depreciation; foreign exchange
and financial assistance; and exemption from export taxes, local taxes and licenses.14

Comparatively, the same exemption from internal revenue laws and regulations applies if EO 22615 is
chosen. Under this law, respondent shall further be entitled to an income tax holiday; additional
deduction for labor expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals
employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw materials;
and exemption from contractors’ taxes, wharfage dues, taxes and duties on imported capital
equipment and spare parts, export taxes, duties, imposts and fees,16 local taxes and licenses, and real
property taxes.17

A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of
raw materials, capital and equipment18 -- is, ipso facto, also accorded to the zone19 under RA 7916.
Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the contrary -
- extends20 to that zone the provision stating that no local or national taxes shall be imposed
therein.21 No exchange control policy shall be applied; and free markets for foreign exchange, gold,
securities and future shall be allowed and maintained.22 Banking and finance shall also be liberalized
under minimum Bangko Sentral regulation with the establishment of foreign currency depository units
of local commercial banks and offshore banking units of foreign banks.23

In the same vein, respondent benefits under RA 7844 from negotiable tax credits24 for locally-produced
materials used as inputs. Aside from the other incentives possibly already granted to it by the Board of
Investments, it also enjoys preferential credit facilities25 and exemption from PD 1853.26

From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment.27 It is
not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on
capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as a VAT-registered person,28 however,
is entitled to their credits.

Nature of the VAT and the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on
every importation of goods, whether or not in the course of trade or business, or imposed on each sale,
barter, exchange or lease of goods or properties or on each rendition of services in the course of trade
or business29 as they pass along the production and distribution chain, the tax being limited only to the
value added30 to such goods, properties or services by the seller, transferor or lessor.31 It is an indirect
tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services.32 As such, it should be understood not in the context of the person or entity that is primarily,
directly and legally liable for its payment, but in terms of its nature as a tax on consumption.33 In either
case, though, the same conclusion is arrived at.
The law34 that originally imposed the VAT in the country, as well as the subsequent amendments of
that law, has been drawn from the tax credit method.35 Such method adopted the mechanics and self-
enforcement features of the VAT as first implemented and practiced in Europe and subsequently
adopted in New Zealand and Canada.36 Under the present method that relies on invoices, an entity can
credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases,
inputs and imports.37

If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input
taxes40 passed on by the suppliers, no payment is required. It is when the output taxes exceed the
input taxes that the excess has to be paid.41 If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters.42 Should the input taxes result from
zero-rated or effectively zero-rated transactions or from the acquisition of capital goods,43 any excess
over the output taxes shall instead be refunded44 to the taxpayer or credited45 against other internal
revenue taxes.46

Zero-Rated and Effectively Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated
transactions as to their source.

Zero-rated transactions generally refer to the export sale of goods and supply of services.47 The tax
rate is set at zero.48 When applied to the tax base, such rate obviously results in no tax chargeable
against the purchaser. The seller of such transactions charges no output tax,49 but can claim a refund
of or a tax credit certificate for the VAT previously charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of services51 to
persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects such transactions to a zero rate.52 Again, as applied to the
tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges
zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT
previously charged by suppliers.

Zero Rating and Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that
results from either one of them is not.

Applying the destination principle53 to the exportation of goods, automatic zero rating54 is primarily
intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller
internationally competitive by allowing the refund or credit of input taxes that are attributable to export
sales.55 Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being
directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted
by the suppliers.

In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.56 But in
an exemption there is only partial relief,57 because the purchaser is not allowed any tax refund of or
credit for input taxes paid.58

Exempt Transaction >and Exempt Party


The object of exemption from the VAT may either be the transaction itself or any of the parties to the
transaction.59

An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the
tax status -- VAT-exempt or not -- of the party to the transaction.60 Indeed, such transaction is not
subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code,
a special law or an international agreement to which the Philippines is a signatory, and by virtue of
which its taxable transactions become exempt from the VAT.61 Such party is also not subject to the
VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as
a VAT or non-VAT taxpayer.

As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed
on by the seller to the purchaser of the goods, properties or services.62 While the liability is imposed on
one person, the burden may be passed on to another. Therefore, if a special law merely exempts a
party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a
purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase
transaction is not exempt. Applying this principle to the case at bar, the purchase transactions entered
into by respondent are not VAT-exempt.

Special laws may certainly exempt transactions from the VAT.63 However, the Tax Code provides that
those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which
respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt.
These are subject to the VAT; respondent is required to register.

Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10
percent,64 depending again on the application of the destination principle.65

If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for
use or consumption outside the Philippines, these shall be subject to 0 percent.66 If entered into with a
purchaser for use or consumption in the Philippines, then these shall be subject to 10 percent,67 unless
the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated.

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its
exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero
rate,68 because the ecozone within which it is registered is managed and operated by the PEZA as
a separate customs territory.69 This means that in such zone is created the legal fiction of foreign
territory.70 Under the cross-border principle71 of the VAT system being enforced by the Bureau of
Internal Revenue (BIR),72 no VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority. If exports of goods and services
from the Philippines to a foreign country are free of the VAT,73 then the same rule holds for such
exports from the national territory -- except specifically declared areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country.74 An ecozone --
indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign
soil.75 This legal fiction is necessary to give meaningful effect to the policies of the special law creating
the zone.76 If respondent is located in an export processing zone77 within that ecozone, sales to the
export processing zone, even without being actually exported, shall in fact be viewed as constructively
exported under EO 226.78 Considered as export sales,79 such purchase transactions by respondent
would indeed be subject to a zero rate.80

Tax Exemptions Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal
revenue laws and regulations.

This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a
tax on consumption, for which the direct liability is imposed on one person but the indirect burden is
passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on
its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its
purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish,
we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the following reasons:

First, RA 7916 states that "no taxes, local and national, shall be imposed on business establishments
operating within the ecozone."81 Since this law does not exclude the VAT from the prohibition, it is
deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in
cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview
of the general rule.

Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be
passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law.
That no VAT shall be imposed directly upon business establishments operating within the ecozone
under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid
prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also
prohibited indirectly.

Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real
property taxes that presently are imposed on land owned by developers.82 This similar and repeated
prohibition is an unambiguous ratification of the law’s intent in not imposing local or national taxes on
business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject to
x x x internal revenue laws and regulations" under PD 6683 -- the original charter of PEZA (then EPZA)
that was later amended by RA 7916.84 No provisions in the latter law modify such exemption.

Although this exemption puts the government at an initial disadvantage, the reduced tax collection
ultimately redounds to the benefit of the national economy by enticing more business investments and
creating more employment opportunities.85

Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those
prohibited by law -- "shall not be subject to x x x internal revenue laws and regulations x x x"86 if
brought to the ecozone’s restricted area87 for manufacturing by registered export enterprises,88 of which
respondent is one. These rules also apply to all enterprises registered with the EPZA prior to the
effectivity of such rules.89

Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) under EO
226 patently enjoy exemption from national internal revenue taxes on imported capital equipment
reasonably needed and exclusively used for the manufacture of their products;91 on required supplies
and spare part for consigned equipment;92 and on foreign and domestic merchandise, raw materials,
equipment and the like -- except those prohibited by law -- brought into the zone for manufacturing.93 In
addition, they are given credits for the value of the national internal revenue taxes imposed on
domestic capital equipment also reasonably needed and exclusively used for the manufacture of their
products,94 as well as for the value of such taxes imposed on domestic raw materials and supplies that
are used in the manufacture of their export products and that form part thereof.95

Sixth, the exemption from local and national taxes granted under RA 722796 are ipso facto accorded to
ecozones.97In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in
favor of the ecozone.98

And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the
production of export goods,99 and for locally produced raw materials, capital equipment and spare parts
used by exporters of non-traditional products100 -- shall also be continuously enjoyed by similar
exporters within the ecozone.101 Indeed, the latter exporters are likewise entitled to such tax
exemptions and credits.

Tax Refund as Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juris102 against the
taxpayer103 and liberally in favor of the taxing authority.104

Tax refunds are in the nature of such exemptions.105 Accordingly, the claimants of those refunds bear
the burden of proving the factual basis of their claims;106 and of showing, by words too plain to be
mistaken, that the legislature intended to exempt them.107 In the present case, all the cited legal
provisions are teeming with life with respect to the grant of tax exemptions too vivid to pass unnoticed.
In addition, respondent easily meets the challenge.

Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The
end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are
otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an
entity, not upon the transactions themselves.108 Nonetheless, its exemption as an entity and the non-
exemption of its transactions lead to the same result for the following considerations:

First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to
execute or administer such laws109 will have to be adopted. Their prior tax issuances have held
inconsistent positions brought about by their probable failure to comprehend and fully appreciate the
nature of the VAT as a tax on consumption and the application of the destination principle.110 Revenue
Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-
registered supplier’s sale of goods, property or services from the customs territory to any registered
enterprise operating in the ecozone -- regardless of the class or type of the latter’s PEZA registration --
is legally entitled to a zero rate.111

Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very
soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of
export processing zones, seeks "to encourage and promote foreign commerce as a means of x x x
strengthening our export trade and foreign exchange position, of hastening industrialization, of
reducing domestic unemployment, and of accelerating the development of the country."112

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special
economic zones, "the government shall actively encourage, promote, induce and accelerate a sound
and balanced industrial, economic and social development of the country x x x through the
establishment, among others, of special economic zones x x x that shall effectively attract legitimate
and productive foreign investments."113

Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shall x x x
meet the tests of international competitiveness[,] accelerate development of less developed regions of
the country[,] and result in increased volume and value of exports for the economy."114 Fiscal incentives
that are cost-efficient and simple to administer shall be devised and extended to significant projects "to
compensate for market imperfections, to reward performance contributing to economic
development,"115 and "to stimulate the establishment and assist initial operations of the enterprise."116

Wisely accorded to ecozones created under RA 7916117 was the government’s policy -- spelled out
earlier in RA 7227 -- of converting into alternative productive uses118 the former military reservations
and their extensions,119 as well as of providing them incentives120 to enhance the benefits that would be
derived from them121 in promoting economic and social development.122

Finally, under RA 7844, the State declares the need "to evolve export development into a national
effort"123 in order to win international markets. By providing many export and tax incentives,124 the State
is able to drive home the point that exporting is indeed "the key to national survival and the means
through which the economic goals of increased employment and enhanced incomes can most
expeditiously be achieved."125

The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase economic
activity; and x x x create a robust environment for business to enable firms to compete better in the
regional as well as the global market."126 After all, international competitiveness requires economic and
tax incentives to lower the cost of goods produced for export. State actions that affect global
competition need to be specific and selective in the pricing of particular goods or services.127

All these statutory policies are congruent to the constitutional mandates of providing incentives to
needed investments,128 as well as of promoting the preferential use of domestic materials and locally
produced goods and adopting measures to help make these competitive.129 Tax credits for domestic
inputs strengthen backward linkages. Rightly so, "the rule of law and the existence of credible and
efficient public institutions are essential prerequisites for sustainable economic development."130

VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law.131 Petitioner alleges that respondent
did register for VAT purposes with the appropriate Revenue District Office. However, it is now too late
in the day for petitioner to challenge the VAT-registered status of respondent, given the latter’s prior
representation before the lower courts and the mode of appeal taken by petitioner before this Court.

The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal
revenue laws and regulations the equipment -- including capital goods -- that registered enterprises will
use, directly or indirectly, in manufacturing.132 EO 226 even reiterates this privilege among the
incentives it gives to such enterprises.133Petitioner merely asserts that by virtue of the PEZA
registration alone of respondent, the latter is not subject to the VAT. Consequently, the capital goods
and services respondent has purchased are not considered used in the VAT business, and no VAT
refund or credit is due.134 This is a non sequitur. By the VAT’s very nature as a tax on consumption, the
capital goods and services respondent has purchased are subject to the VAT, although at zero rate.
Registration does not determine taxability under the VAT law.

Moreover, the facts have already been determined by the lower courts. Having failed to present
evidence to support its contentions against the income tax holiday privilege of respondent,135 petitioner
is deemed to have conceded. It is a cardinal rule that "issues and arguments not adequately and
seriously brought below cannot be raised for the first time on appeal."136 This is a "matter of
procedure"137 and a "question of fairness."138 Failure to assert "within a reasonable time warrants a
presumption that the party entitled to assert it either has abandoned or declined to assert it."139

The BIR regulations additionally requiring an approved prior application for effective zero
rating140 cannot prevail over the clear VAT nature of respondent’s transactions. The scope of such
regulations is not "within the statutory authority x x x granted by the legislature.141

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot
purport to do any more than interpret the latter.142 The courts will not countenance one that overrides
the statute it seeks to apply and implement.143

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no
provision under our VAT law requires an additional application to be made for such taxpayer’s
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and
cannot become exempt simply because an application therefor was not made or, if made, was denied.
To allow the additional requirement is to give unfettered discretion to those officials or agents who,
without fluid consideration, are bent on denying a valid application. Moreover, the State can never be
estopped by the omissions, mistakes or errors of its officials or agents.144

Second, grantia argumenti that such an application is required by law, there is still the presumption of
regularity in the performance of official duty.145 Respondent’s registration carries with it the presumption
that, in the absence of contradictory evidence, an application for effective zero rating was also filed and
approval thereof given. Besides, it is also presumed that the law has been obeyed146 by both the
administrative officials and the applicant.

Third, even though such an application was not made, all the special laws we have tackled exempt
respondent not only from internal revenue laws but also from the regulations issued pursuant thereto.
Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur economic
growth in the country and attain global competitiveness as envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing requirements,147 is sufficient for the
effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can
easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied
documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to apply
for their effective zero rating. Otherwise, their VAT exemption would be determined, not by their nature,
but by the taxpayer’s negligence -- a result not at all contemplated. Administrative convenience cannot
thwart legislative mandate.

Tax Refund or Credit in Order

Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the tax
refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO
226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5
percent preferential tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,148 for EO
226149 also has provisions to contend with. These two regimes are in fact incompatible and cannot be
availed of simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the
PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of
income tax for a certain number of years, depending on its registration as a pioneer or a non-pioneer
enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu of local
and national taxes imposable upon business establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then
be refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916,
Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision
merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity is exempt, the transactions it enters
into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may
certainly be refunded or credited.

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT
refund or credit.150

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from
Contex, in which this Court held that the petitioner therein was registered as a non-VAT
taxpayer.151 Hence, for being merely VAT-exempt, the petitioner in that case cannot claim any VAT
refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices
and have not been offset against any output taxes. Although enterprises registered with the BOI after
December 31, 1994 would no longer enjoy the tax credit incentives on domestic capital equipment -- as
provided for under Article 39(d), Title III, Book I of EO 226152 -- starting January 1, 1996, respondent
would still have the same benefit under a general and express exemption contained in both Article
77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by
RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones
from national and local taxes, but also to grant them tax credits. This fact was revealed by the
sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:

"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local
taxes; x x x tax credit for locally-sourced inputs x x x."

xxxxxxxxx

"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment
conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x
x x tax credits for locally sourced inputs x x x."153

And third, no question as to either the filing of such claims within the prescriptive period or the validity
of the VAT returns has been raised. Even if such a question were raised, the tax exemption under all
the special laws cited above is broad enough to cover even the enforcement of internal revenue laws,
including prescription.154

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishments
registered and operating within an ecozone, which by law is considered as a separate customs
territory. As such, respondent is exempt from all internal revenue taxes, including the VAT, and
regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5
percent preferential tax regime. As a matter of law and procedure, its registration status entitling it to
such tax holiday can no longer be questioned. Its sales transactions intended for export may not be
exempt, but like its purchase transactions, they are zero-rated. No prior application for the effective
zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied
with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods
purchased, respondent is entitled to such VAT refund or credit.

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to costs.

SO ORDERED.

G.R. No. 151135 July 2, 2004

CONTEX CORPORATION, petitioner,


vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION

QUISUMBING, J.:

For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No.
62823, which reversed and set aside the decision2 dated October 13, 2000, of the Court of Tax
Appeals (CTA). The CTA had ordered the Commissioner of Internal Revenue (CIR) to refund the sum
of P683,061.90 to petitioner as erroneously paid input value-added tax (VAT) or in the alternative, to
issue a tax credit certificate for said amount. Petitioner also assails the appellate court’s
Resolution,3 dated December 19, 2001, denying the motion for reconsideration.

Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and
garments and other hospital supplies for export. Petitioner’s place of business is at the Subic Bay
Freeport Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a
Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227.4 As an SBMA-
registered firm, petitioner is exempt from all local and national internal revenue taxes except for the
preferential tax provided for in Section 12 (c)5 of Rep. Act No. 7227. Petitioner also registered with the
Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO
Control No. 95-180-000133.

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials
necessary in the conduct of its manufacturing business. The suppliers of these goods shifted unto
petitioner the 10% VAT on the purchased items, which led the petitioner to pay input taxes in the
amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.6

Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to
Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr.
Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application letter, dated
December 29, 1998.

Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this
time directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The
second letter sought a refund or issuance of a tax credit certificate in the amount of P1,108,307.72,
representing erroneously paid input VAT for the period January 1, 1997 to November 30, 1998.

When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter
to the Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895. Petitioner
stressed that Section 112(A)7 if read in relation to Section 106(A)(2)(a)8 of the National Internal
Revenue Code, as amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was
not liable in any way for any value-added tax.

In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims
for refund are strictly construed against the taxpayer. Since petitioner failed to establish both its right to
a tax refund or tax credit and its compliance with the rules on tax refund as provided for in Sections
20410 and 22911 of the Tax Code, its claim should be denied, according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:

WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY
GRANTED. Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE A TAX
CREDIT CERTIFICATE in favor of Petitioner the sum of P683,061.90, representing erroneously
paid input VAT.

SO ORDERED.12

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of
the Tax Code. The tax court stressed that these provisions apply only to those entities registered as
VAT taxpayers whose sales are zero-rated. Petitioner does not fall under this category, since it is a
non-VAT taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-000133
issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is
exempt from VAT, pursuant to Rep. Act No. 7227, said the CTA.

Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its
purchases of supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227 and
the Implementing Rules and Regulations of the Bases Conversion and Development Act of 1992, all
that petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax.

The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being
barred by the two-year prescriptive period under Section 229 of the Tax Code. The tax court also
limited the refund only to the input VAT paid by the petitioner on the supplies and materials directly
used by the petitioner in the manufacture of its goods. It struck down all claims for input VAT paid on
maintenance, office supplies, freight charges, and all materials and supplies shipped or delivered to
the petitioner’s Makati and Pasay City offices.

Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA
decision by the Court of Appeals. Respondent maintained that the exemption of Contex Corp. under
Rep. Act No. 7227 was limited only to direct taxes and not to indirect taxes such as the input
component of the VAT. The Commissioner pointed out that from its very nature, the value-added tax is
a burden passed on by a VAT registered person to the end users; hence, the direct liability for the tax
lies with the suppliers and not Contex.

Finding merit in the CIR’s arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor,
thus:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET
ASIDE. Contex’s claim for refund of erroneously paid taxes is DENIED accordingly.

SO ORDERED.13

In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the
importation of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act
No. 7227 and its implementing rules covers only "the VAT imposable under Section 107 of the [Tax
Code], which is a direct liability of the importer, and in no way includes the value-added tax of the
seller-exporter the burden of which was passed on to the importer as an additional costs of the
goods."14 This was because the exemption granted by Rep. Act No. 7227 relates to the act of
importation and Section 10715 of the Tax Code specifically imposes the VAT on importations. The
appellate court applied the principle that tax exemptions are strictly construed against the taxpayer.
The Court of Appeals pointed out that under the implementing rules of Rep. Act No. 7227, the
exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as pertaining only to
those for which they may be directly liable. It then stated that apparently, the legislative intent behind
Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered enterprise may
be liable for and only in connection with their importation of raw materials, capital, and equipment as
well as the sale of their goods and services.

Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was
denied.

Hence, the instant petition raising as issues for our resolution the following:

A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL
REVENUE TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED
TAX PAID BY PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS PURCHASES
OF SUPPLIES AND MATERIALS.

B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT


PETITIONER IS ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID ON ITS
PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS 1997 AND 1998.16

Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the
Court of Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner
as a purchaser; and (2) the entitlement of the petitioner to a tax refund on its purchases of supplies
and raw materials for 1997 and 1998.

On the first issue, petitioner argues that the appellate court’s restrictive interpretation of petitioner’s
VAT exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid of
legal basis. It contends that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate
that no local and national taxes shall be imposed upon SBFZ-registered firms and hence, said law
should govern the case. Petitioner calls our attention to regulations issued by both the SBMA and BIR
clearly and categorically providing that the tax exemption provided for by Rep. Act No. 7227 includes
exemption from the imposition of VAT on purchases of supplies and materials.

The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax
exemptions, such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-
registered business may be directly liable. Hence, SBFZ locators are not relieved from the indirect
taxes that may be shifted to them by a VAT-registered seller.

At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on
the goods, properties or services bought, transferred, or leased may be shifted or passed on by the
seller, transferor, or lessor to the buyer, transferee or lessee.17 Unlike a direct tax, such as the income
tax, which primarily taxes an individual’s ability to pay based on his income or net wealth, an indirect
tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the
same. The VAT, thus, forms a substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the
burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the
seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax
burden. In adding or including the VAT due to the selling price, the seller remains the person primarily
and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the tax.18 Stated differently, a seller who is directly and
legally liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily
the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of
such goods or services who, although not directly and legally liable for the payment thereof, ultimately
bears the burden of the tax.19

Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT,
the transaction can have preferential treatment in the following ways:

(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services
and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed
any tax credit on VAT (input tax) previously paid.20 This is a case wherein the VAT is removed
at the exempt stage (i.e., at the point of the sale, barter or exchange of the goods or properties).

The person making the exempt sale of goods, properties or services shall not bill any output tax
to his customers because the said transaction is not subject to VAT. On the other hand, a VAT-
registered purchaser of VAT-exempt goods/properties or services which are exempt from VAT
is not entitled to any input tax on such purchase despite the issuance of a VAT invoice or
receipt.21

(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate,
meaning the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-
registered person, which is a taxable transaction for VAT purposes, shall not result in any
output tax. However, the input tax on his purchases of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund in accordance with these
regulations.22

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast,
exemption only removes the VAT at the exempt stage, and it will actually increase, rather than reduce
the total taxes paid by the exempt firm’s business or non-retail customers. It is for this reason that a
sharp distinction must be made between zero-rating and exemption in designating a value-added tax.23

Apropos, the petitioner’s claim to VAT exemption in the instant case for its purchases of supplies and
raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically
exempts them from all national and local internal revenue taxes, including VAT and Section 4 (A)(a) of
BIR Revenue Regulations No. 1-95.24

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by
the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of
Registration25 issued by the BIR. As such, it is exempt from VAT on all its sales and importations of
goods and services.
Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw materials is
incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT
Credit/Refund.

The point of contention here is whether or not the petitioner may claim a refund on the Input VAT
erroneously passed on to it by its suppliers.

While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it
by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper
party to claim such VAT refund.

Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the "Consolidated Value-Added
Tax Regulations" provide:

Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a


taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax
on his purchases of goods, properties or services related to such zero-rated sale shall be
available as tax credit or refund in accordance with these regulations.

The following sales by VAT-registered persons shall be subject to 0%:

(a) Export Sales

"Export Sales" shall mean

...

(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987, and other special laws,
e.g. Republic Act No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992.

...

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly
registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark
Development Authority (CDA), R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or
international agreements, e.g. Asian Development Bank (ADB), International Rice Research
Institute (IRRI), etc. to which the Philippines is a signatory effectively subject such sales to zero-
rate."

Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT credit
with no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the
petitioner.

On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-
VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax
credit on VAT (input tax) previously paid. In fine, even if we are to assume that exemption from the
burden of VAT on petitioner’s purchases did exist, petitioner is still not entitled to any tax credit or
refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.

Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly
refund the petitioner of the VAT erroneously passed on to the latter.

Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that
petitioner’s VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable
as a seller and hence, it cannot claim any refund or exemption for any input VAT it paid, if any, on its
purchases of raw materials and supplies.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the
Court of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are
AFFIRMED. No pronouncement as to costs.

SO ORDERED.

G.R. No. 125355 March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, respondents.

PARDO, J.:

What is before the Court is a petition for review on certiorari of the decision of the Court of
Appeals,1 reversing that of the Court of Tax Appeals,2 which affirmed with modification the decision of
the Commissioner of Internal Revenue ruling that Commonwealth Management and Services
Corporation, is liable for value added tax for services to clients during taxable year 1988.

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation


duly organized and existing under the laws of the Philippines. It is an affiliate of Philippine American
Life Insurance Co. (Philamlife), organized by the letter to perform collection, consultative and other
technical services, including functioning as an internal auditor, of Philamlife and its other
affiliates.1âwphi1.nêt

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private
respondent COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable
year 1988, computed as follows:

P1,679,155.00
Taxable sale/receipt ===========
=

10% tax due thereon 167,915.50


25% surcharge 41,978.88

20% interest per annum 125,936.63

Compromise penalty for late payment 16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01


3

============

COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in
its operations in the amount of P6,077.00.

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding
of deficiency VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter
to COMASERCO demanding payment of the deficiency VAT.

On September 29, 1992, COMASERCO filed with the Court of Tax Appeals4 a petition for review
contesting the Commissioner's assessment. COMASERCO asserted that the services it rendered to
Philamlife and its affiliates, relating to collections, consultative and other technical assistance, including
functioning as an internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It averred
that it was not engaged in the business of providing services to Philamlife and its affiliates.
COMASERCO was established to ensure operational orderliness and administrative efficiency of
Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it was not
profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss
in taxable year 1988. COMASERCO averred that since it was not engaged in business, it was not
liable to pay VAT.

On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal
Revenue, the dispositive portion of which reads:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner


deficiency value-added tax for the taxable year 1988 is AFFIRMED with slight modifications.
Accordingly, petitioner is ordered to pay respondent Commissioner of Internal Revenue the
amount of P335,831.01 inclusive of the 25% surcharge and interest plus 20% interest from
January 24, 1992 until fully paid pursuant to Section 248 and 249 of the Tax Code.

The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter
shall not be included in the payment as there was no compromise agreement entered into
between petitioner and respondent with respect to the value-added tax deficiency.5

On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of the
Court of Appeals.

After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the
Court of Tax Appeals, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and
SETTING ASIDE the questioned Decision promulgated on 22 June 1995. The assessment for
deficiency value-added tax for the taxable year 1988 inclusive of surcharge, interest and penalty
charges are ordered CANCELLED for lack of legal and factual basis. 6

The Court of Appeals anchored its decision on the ratiocination in another tax case involving the same
parties,7where it was held that COMASERCO was not liable to pay fixed and contractor's tax for
services rendered to Philamlife and its affiliates. The Court of Appeals, in that case, reasoned that
COMASERCO was not engaged in business of providing services to Philamlife and its affiliates. In the
same manner, the Court of Appeals held that COMASERCO was not liable to pay VAT for it was not
engaged in the business of selling services.

On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for review
on certiorariassailing the decision of the Court of Appeals.

On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and on
September 26, 1996, COMASERCO complied with the resolution.8

We give due course to the petition.

At issue in this case is whether COMASERCO was engaged in the sale of services, and thus liable to
pay VAT thereon.

Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different
things. Petitioner maintains that the services rendered by COMASERCO to Philamlife and its affiliates,
for a fee or consideration, are subject to VAT. VAT is a tax on the value added by the performance of
the service. It is immaterial whether profit is derived from rendering the service.

We agree with the Commissioner.

Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No.
273 in 1988, provides that:

Sec. 99. Persons liable. — Any person who, in the course of trade or business, sells, barters or
exchanges goods, renders services, or engages in similar transactions and any person who,
imports goods shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of
this Code. 9

COMASERCO contends that the term "in the course of trade or business" requires that the "business"
is carried on with a view to profit or livelihood. It avers that the activities of the entity must be profit-
oriented. COMASERCO submits that it is not motivated by profit, as defined by its primary purpose in
the articles of incorporation, stating that it is operating "only on reimbursement-of-cost basis, without
any profit." Private respondent argues that profit motive is material in ascertaining who to tax for
purposes of determining liability for VAT.

We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT),
amending among other sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act 8424,
the National Internal Revenue Code of 1997, took effect. The amended law provides that:

Sec. 105. Persons Liable. — Any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders services, and any person who imports goods
shall be subject to the value-added tax (VAT) imposed in Sections 106 and 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to
existing sale or lease of goods, properties or services at the time of the effectivity of Republic
Act No. 7716.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a nonstock, nonprofit organization
(irrespective of the disposition of its net income and whether or not it sells exclusively to
members of their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered
in the Philippines by nonresident foreign persons shall be considered as being rendered in the
course of trade or business.

Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit,
organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax
on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of
goods or property, and on the performance of services, even in the absence of profit attributable
thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a
commercial or an economic activity regardless of whether or not the entity is profit-oriented.

The definition of the term "in the course of trade or business" present law applies to all transactions
even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the
course of trade or business, sells, barters or exchanges goods and services, was already liable to pay
VAT. The present law merely stresses that even a nonstock, nonprofit organization or government
entity is liable to pay VAT for the sale of goods and services.

Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the
"performance of all kinds of services for others for a fee, remuneration or consideration." It includes
"the supply of technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking or project." 11

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-
98 12 emphasizing that a domestic corporation that provided technical, research, management and
technical assistance to its affiliated companies and received payments on a reimbursement-of-cost
basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if
such corporation was organized without any intention realizing profit, any income or profit generated by
the entity in the conduct of its activities was subject to income tax.
Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives
payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing
profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides
service for a fee, remuneration or consideration, then the service rendered is subject to VAT.1awp++i1

At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions
are construed strictly against the grantee and liberally in favor of the government. Otherwise stated,
any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be
merely implied therefrom. 13 In the case of VAT, Section 109, Republic Act 8424 clearly enumerates
the transactions exempted from VAT. The services rendered by COMASERCO do not fall within the
exemptions.

Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the
services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out
by the Commissioner, the performance of all kinds of services for others for a fee, remuneration or
consideration is considered as sale of services subject to VAT. As the government agency charged
with the enforcement of the law, the opinion of the Commissioner of Internal Revenue, in the absence
of any showing that it is plainly wrong, is entitled to great weight. 14 Also, it has been the long standing
policy and practice of this Court to respect the conclusions of quasi-judicial agencies, such as the
Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the study and
consideration of tax cases and has necessarily developed an expertise on the subject, unless there
has been an abuse or improvident exercise of its authority. 15

There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R. No. 34042,
declaring the COMASERCO as not engaged in business and not liable for the payment of fixed and
percentage taxes, binds petitioner. The issue in CA-G.R. No. 34042 is different from the present case,
which involves COMASERCO's liability for VAT. As heretofore stated, every person who sells, barters,
or exchanges goods and services, in the course of trade or business, as defined by law, is subject to
VAT.

WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of Appeals
in CA-G.R. SP No. 37930. The Court hereby REINSTATES the decision of the Court of Tax Appeals in
C. T. A. Case No. 4853.

No costs.

SO ORDERED.1âwphi1.nêt

G.R. No. 152609 June 29, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), Respondent.

DECISION

PANGANIBAN, J.:
As a general rule, the value-added tax (VAT) system uses the destination principle. However, our VAT
law itself provides for a clear exception, under which the supply of service shall be zero-rated when the
following requirements are met: (1) the service is performed in the Philippines; (2) the service falls
under any of the categories provided in Section 102(b) of the Tax Code; and (3) it is paid for in
acceptable foreign currency that is accounted for in accordance with the regulations of the Bangko
Sentral ng Pilipinas. Since respondent’s services meet these requirements, they are zero-rated.
Petitioner’s Revenue Regulations that alter or revoke the above requirements are ultra vires and
invalid.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28,
2002 Decision2of the Court of Appeals (CA) in CA-GR SP No. 62727. The assailed Decision disposed
as follows:

"WHEREFORE, premises considered, the petition is hereby DISMISSED for lack of merit. The assailed
decision of the Court of Tax Appeals (CTA) is AFFIRMED in toto."3

The Facts

Quoting the CTA, the CA narrated the undisputed facts as follows:

"[Respondent] is a Philippine branch of American Express International, Inc., a corporation duly


organized and existing under and by virtue of the laws of the State of Delaware, U.S.A., with office in
the Philippines at the Ground Floor, ACE Building, corner Rada and de la Rosa Streets, Legaspi
Village, Makati City. It is a servicing unit of American Express International, Inc. - Hongkong Branch
(Amex-HK) and is engaged primarily to facilitate the collections of Amex-HK receivables from card
members situated in the Philippines and payment to service establishments in the Philippines.

"Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue District Office
No. 47 (East Makati) as a value-added tax (VAT) taxpayer effective March 1988 and was issued VAT
Registration Certificate No. 088445 bearing VAT Registration No. 32A-3-004868. For the period
January 1, 1997 to December 31, 1997, [respondent] filed with the BIR its quarterly VAT returns as
follows:

Exhibit Period Covered Date Filed

D 1997 1st Qtr. April 18, 1997

F 2nd Qtr. July 21, 1997

G 3rd Qtr. October 2, 1997

H 4th Qtr. January 20, 1998

"On March 23, 1999, however, [respondent] amended the aforesaid returns and declared the following:
Exh Taxable Output Zero-rated Domestic Input
1997 Sales VAT Sales Purchases VAT

I 1st
₱59,597.20 ₱5,959.72 ₱17,513,801.11 ₱6,778,182.30 ₱677,818.23
qtr

J 2nd
67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
qtr

K 3rd
51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70
qtr

L 4th
67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21
qtr

Total ₱247,045.30 ₱24,704.53 ₱80,309,633.20 ₱37,630,604.30 ₱3,763,060.43

"On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess
input taxes in the amount of ₱3,751,067.04, which amount was arrived at after deducting from its total
input VAT paid of ₱3,763,060.43 its applied output VAT liabilities only for the third and fourth quarters
of 1997 amounting to ₱5,193.66 and ₱6,799.43, respectively. [Respondent] cites as basis therefor,
Section 110 (B) of the 1997 Tax Code, to state:

‘Section 110. Tax Credits. -

xxxxxxxxx

‘(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the input
tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable to the
purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.’

"There being no immediate action on the part of the [petitioner], [respondent’s] petition was filed on
April 15, 1999.

"In support of its Petition for Review, the following arguments were raised by [respondent]:

A. Export sales by a VAT-registered person, the consideration for which is paid for in acceptable
foreign currency inwardly remitted to the Philippines and accounted for in accordance with existing
regulations of the Bangko Sentral ng Pilipinas, are subject to [VAT] at zero percent (0%). According to
[respondent], being a VAT-registered entity, it is subject to the VAT imposed under Title IV of the Tax
Code, to wit:
‘Section 102.(sic) Value-added tax on sale of services.- (a) Rate and base of tax. - There shall be
levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived
by any person engaged in the sale of services. The phrase "sale of services" means the performance
of all kinds of services for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors: stock, real estate, commercial, customs and
immigration brokers; lessors of personal property; lessors or distributors of cinematographic films;
persons engaged in milling, processing, manufacturing or repacking goods for others; and similar
services regardless of whether o[r] not the performance thereof calls for the exercise or use of the
physical or mental faculties: Provided That the following services performed in the Philippines by VAT-
registered persons shall be subject to 0%:

(1) x x x

(2) Services other than those mentioned in the preceding subparagraph, the consideration is
paid for in acceptable foreign currency which is remitted inwardly to the Philippines and
accounted for in accordance with the rules and regulations of the BSP. x x x.’

In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989, the pertinent portion of
which reads as follows:

‘In Reply, please be informed that, as a VAT registered entity whose service is paid for in acceptable
foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the
rules and regulations of the Central [B]ank of the Philippines, your service income is automatically zero
rated effective January 1, 1998. [Section 102(a)(2) of the Tax Code as amended].4 For this, there is no
need to file an application for zero-rate.’

B. Input taxes on domestic purchases of taxable goods and services related to zero-rated revenues
are available as tax refund in accordance with Section 106 (now Section 112) of the [Tax Code] and
Section 8(a) of [Revenue] Regulations [(RR)] No. 5-87, to state:

‘Section 106. Refunds or tax credits of input tax. -

(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except those covered by
paragraph (a) above, whose sales are zero-rated or are effectively zero-rated, may, within two (2)
years after the close of the taxable quarter when such sales were made, apply for the issuance of tax
credit certificate or refund of the input taxes due or attributable to such sales, to the extent that such
input tax has not been applied against output tax. x x x. [Section 106(a) of the Tax Code]’5

‘Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for value-added
tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero rate shall not
result in any output tax. The input tax on his purchases of goods or services related to such zero-rated
sale shall be available as tax credit or refundable in accordance with Section 16 of these Regulations.
x x x.’ [Section 8(a), [RR] 5-87].’6

"[Petitioner], in his Answer filed on May 6, 1999, claimed by way of Special and Affirmative Defenses
that:

7. The claim for refund is subject to investigation by the Bureau of Internal Revenue;
8. Taxes paid and collected are presumed to have been made in accordance with laws and
regulations, hence, not refundable. Claims for tax refund are construed strictly against the claimant as
they partake of the nature of tax exemption from tax and it is incumbent upon the [respondent] to prove
that it is entitled thereto under the law and he who claims exemption must be able to justify his claim by
the clearest grant of organic or statu[t]e law. An exemption from the common burden [cannot] be
permitted to exist upon vague implications;

9. Moreover, [respondent] must prove that it has complied with the governing rules with reference to
tax recovery or refund, which are found in Sections 204(c) and 229 of the Tax Code, as amended,
which are quoted as follows:

‘Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. - The
Commissioner may - x x x.

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority,
refund the value of internal revenue stamps when they are returned in good condition by the
purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for
use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two
(2) years after payment of the tax or penalty: Provided, however, That a return filed with an
overpayment shall be considered a written claim for credit or refund.’

‘Section 229. Recovery of tax erroneously or illegally collected.- No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty or sum has been paid under protest
or duress.

In any case, no such suit or proceeding shall be begun (sic) after the expiration of two (2) years from
the date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even without written claim therefor, refund
or credit any tax, where on the face of the return upon which payment was made, such payment
appears clearly to have been erroneously paid.’

"From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a decision7 in
favor of the herein respondent holding that its services are subject to zero-rate pursuant to Section
108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations 5-96, the
decretal portion of which reads as follows:

‘WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in accordance
with law. Accordingly, [petitioner] is hereby ORDERED to REFUND to [respondent] the amount of
₱3,352,406.59 representing the latter’s excess input VAT paid for the year 1997.’"8

Ruling of the Court of Appeals

In affirming the CTA, the CA held that respondent’s services fell under the first type enumerated in
Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More particularly, its "services were not of
the same class or of the same nature as project studies, information, or engineering and architectural
designs" for non-resident foreign clients; rather, they were "services other than the processing,
manufacturing or repacking of goods for persons doing business outside the Philippines." The
consideration in both types of service, however, was paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas.

Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was unwarranted. By requiring
that respondent’s services be consumed abroad in order to be zero-rated, petitioner went beyond the
sphere of interpretation and into that of legislation. Even granting that it is valid, the ruling cannot be
given retroactive effect, for it will be harsh and oppressive to respondent, which has already relied
upon VAT Ruling No. 080-89 for zero rating.

Hence, this Petition.9

The Issue

Petitioner raises this sole issue for our consideration:

"Whether or not the Court of Appeals committed reversible error in holding that respondent is entitled
to the refund of the amount of ₱3,352,406.59 allegedly representing excess input VAT for the year
1997."10

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement to Tax Refund

Section 102 of the Tax Code11 provides:

"Sec. 102. Value-added tax on sale of services and use or lease of properties. -- (a) Rate and base of
tax. -- There shall be levied, assessed and collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange of services x x x.

"The phrase 'sale or exchange of services' means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered
by x x x persons engaged in milling, processing, manufacturing or repacking goods for others; x x x
services of banks, non-bank financial intermediaries and finance companies; x x x and similar services
regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties. The phrase 'sale or exchange of services' shall likewise include:

xxxxxxxxx

‘(3) The supply of x x x commercial knowledge or information;


‘(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of x x x any such knowledge or information as is mentioned in
subparagraph (3);

xxxxxxxxx

‘(6) The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any x x x commercial undertaking, venture, project or scheme;

xxxxxxxxx

"The term 'gross receipts’ means the total amount of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty, including the amount charged for materials supplied
with the services and deposits and advanced payments actually or constructively received during the
taxable quarter for the services performed or to be performed for another person, excluding value-
added tax.

"(b) Transactions subject to zero percent (0%) rate. -- The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate[:]

‘(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);

‘(2) Services other than those mentioned in the preceding subparagraph, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations
of the [BSP];’"

xxxxxxxxx

Zero Rating of "Other" Services

The law is very clear. Under the last paragraph quoted above, services performed by VAT-registered
persons in the Philippines (other than the processing, manufacturing or repacking of goods for persons
doing business outside the Philippines), when paid in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP, are zero-rated.

Respondent is a VAT-registered person that facilitates the collection and payment of receivables
belonging to its non-resident foreign client, for which it gets paid in acceptable foreign currency
inwardly remitted and accounted for in conformity with BSP rules and regulations. Certainly, the service
it renders in the Philippines is not in the same category as "processing, manufacturing or repacking of
goods" and should, therefore, be zero-rated. In reply to a query of respondent, the BIR opined in VAT
Ruling No. 080-89 that the income respondent earned from its parent company’s regional operating
centers (ROCs) was automatically zero-rated effective January 1, 1988.12

Service has been defined as "the art of doing something useful for a person or company for a fee"13 or
"useful labor or work rendered or to be rendered by one person to another."14 For facilitating in the
Philippines the collection and payment of receivables belonging to its Hong Kong-based foreign client,
and getting paid for it in duly accounted acceptable foreign currency, respondent renders service falling
under the category of zero rating. Pursuant to the Tax Code, a VAT of zero percent should, therefore,
be levied upon the supply of that service.15

The Credit Card System and Its Components

For sure, the ancillary business of facilitating the said collection is different from the main business of
issuing credit cards.16 Under the credit card system, the credit card company extends credit
accommodations to its card holders for the purchase of goods and services from its member
establishments, to be reimbursed by them later on upon proper billing. Given the complexities of
present-day business transactions, the components of this system can certainly function as separate
billable services.

Under RA 8484,17 the credit card that is issued by banks18 in general, or by non-banks in particular,
refers to "any card x x x or other credit device existing for the purpose of obtaining x x x goods x x x or
services x x x on credit;"19and is being used "usually on a revolving basis."20 This means that the
consumer-credit arrangement that exists between the issuer and the holder of the credit card enables
the latter to procure goods or services "on a continuing basis as long as the outstanding balance does
not exceed a specified limit."21 The card holder is, therefore, given "the power to obtain present control
of goods or service on a promise to pay for them in the future."22

Business establishments may extend credit sales through the use of the credit card facilities of a non-
bank credit card company to avoid the risk of uncollectible accounts from their customers. Under this
system, the establishments do not deposit in their bank accounts the credit card drafts23 that arise from
the credit sales. Instead, they merely record their receivables from the credit card company and
periodically send the drafts evidencing those receivables to the latter.

The credit card company, in turn, sends checks as payment to these business establishments, but it
does not redeem the drafts at full price. The agreement between them usually provides for discounts to
be taken by the company upon its redemption of the drafts.24 At the end of each month, it then bills its
credit card holders for their respective drafts redeemed during the previous month. If the holders fail to
pay the amounts owed, the company sustains the loss.25

In the present case, respondent’s role in the consumer credit26 process described above primarily
consists of gathering the bills and credit card drafts of different service establishments located in the
Philippines and forwarding them to the ROCs outside the country. Servicing the bill is not the same as
billing. For the former type of service alone, respondent already gets paid.

The parent company -- to which the ROCs and respondent belong -- takes charge not only of
redeeming the drafts from the ROCs and sending the checks to the service establishments, but also of
billing the credit card holders for their respective drafts that it has redeemed. While it usually imposes
finance charges27 upon the holders, none may be exacted by respondent upon either the ROCs or the
card holders.

Branch and Home Office

By designation alone, respondent and the ROCs are operated as branches. This means that each of
them is a unit, "an offshoot, lateral extension, or division"28 located at some distance from the home
office29 of the parent company; carrying separate inventories; incurring their own expenses; and
generating their respective incomes. Each may conduct sales operations in any locality as an
extension of the principal office.30

The extent of accounting activity at any of these branches depends upon company policy,31 but the
financial reports of the entire business enterprise -- the credit card company to which they all belong --
must always show its financial position, results of operation, and changes in its financial position as a
single unit.32 Reciprocal accounts are reconciled or eliminated, because they lose all significance when
the branches and home office are viewed as a single entity.33 In like manner, intra-company profits or
losses must be offset against each other for accounting purposes.

Contrary to petitioner’s assertion,34 respondent can sell its services to another branch of the same
parent company.35 In fact, the business concept of a transfer price allows goods and services to be
sold between and among intra-company units at cost or above cost.36 A branch may be operated as a
revenue center, cost center, profit center or investment center, depending upon the policies and
accounting system of its parent company.37Furthermore, the latter may choose not to make any sale
itself, but merely to function as a control center, where most or all of its expenses are allocated to any
of its branches.38

Gratia argumenti that the sending of drafts and bills by service establishments to respondent is
equivalent to the act of sending them directly to its parent company abroad, and that the parent
company’s subsequent redemption of these drafts and billings of credit card holders is also attributable
to respondent, then with greater reason should the service rendered by respondent be zero-rated
under our VAT system. The service partakes of the nature of export sales as applied to
goods,39 especially when rendered in the Philippines by a VAT-registered person40 that gets paid in
acceptable foreign currency accounted for in accordance with BSP rules and regulations.

VAT Requirements for the Supply of Service

The VAT is a tax on consumption41 "expressed as a percentage of the value added to goods or
services"42purchased by the producer or taxpayer.43 As an indirect tax44 on services,45 its main object is
the transaction46itself or, more concretely, the performance of all kinds of services47 conducted in the
course of trade or business in the Philippines.48 These services must be regularly conducted in this
country; undertaken in "pursuit of a commercial or an economic activity;"49 for a valuable consideration;
and not exempt under the Tax Code, other special laws, or any international agreement.50

Without doubt, the transactions respondent entered into with its Hong Kong-based client meet all these
requirements.

First, respondent regularly renders in the Philippines the service of facilitating the collection and
payment of receivables belonging to a foreign company that is a clearly separate and distinct
entity.

Second, such service is commercial in nature; carried on over a sustained period of time; on a
significant scale; with a reasonable degree of frequency; and not at random, fortuitous or
attenuated.

Third, for this service, respondent definitely receives consideration in foreign currency that is
accounted for in conformity with law.
Finally, respondent is not an entity exempt under any of our laws or international agreements.

Services Subject to Zero VAT

As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach
of the tax.51Goods and services are taxed only in the country where they are consumed. Thus, exports
are zero-rated, while imports are taxed.

Confusion in zero rating arises because petitioner equates the performance of a particular type of
service with the consumption of its output abroad. In the present case, the facilitation of the
collection of receivables is different from the utilization or consumption of the outcome of such service.
While the facilitation is done in the Philippines, the consumption is not. Respondent renders assistance
to its foreign clients -- the ROCs outside the country -- by receiving the bills of service establishments
located here in the country and forwarding them to the ROCs abroad. The consumption contemplated
by law, contrary to petitioner’s administrative interpretation,52 does not imply that the service be done
abroad in order to be zero-rated.

Consumption is "the use of a thing in a way that thereby exhausts it."53 Applied to services, the term
means the performance or "successful completion of a contractual duty, usually resulting in the
performer’s release from any past or future liability x x x."54 The services rendered by respondent are
performed or successfully completed upon its sending to its foreign client the drafts and bills it has
gathered from service establishments here. Its services, having been performed in the Philippines, are
therefore also consumed in the Philippines.

Unlike goods, services cannot be physically used in or bound for a specific place when their
destination is determined. Instead, there can only be a "predetermined end of a course"55 when
determining the service "location or position x x x for legal purposes."56 Respondent’s facilitation
service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in
the Philippines. Under the destination principle, as petitioner asserts, such service is subject to VAT at
the rate of 10 percent.

Respondent’s Services Exempt from the Destination Principle

However, the law clearly provides for an exception to the destination principle; that is, for a zero
percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the [BSP]."57 Thus, for the
supply of service to be zero-rated as an exception, the law merely requires that first, the service be
performed in the Philippines; second, the service fall under any of the categories in Section 102(b) of
the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in accordance with
BSP rules and regulations.

Indeed, these three requirements for exemption from the destination principle are met by respondent.
Its facilitation service is performed in the Philippines. It falls under the second category found in
Section 102(b) of the Tax Code, because it is a service other than "processing, manufacturing or
repacking of goods" as mentioned in the provision. Undisputed is the fact that such service meets the
statutory condition that it be paid in acceptable foreign currency duly accounted for in accordance with
BSP rules. Thus, it should be zero-rated.

Performance of Service versus Product Arising from Performance


Again, contrary to petitioner’s stand, for the cost of respondent’s service to be zero-rated, it need not
be tacked in as part of the cost of goods exported.58 The law neither imposes such requirement nor
associates services with exported goods. It simply states that the services performed by VAT-
registered persons in the Philippines -- services other than the processing, manufacturing or repacking
of goods for persons doing business outside this country -- if paid in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP, are zero-rated. The service
rendered by respondent is clearly different from the product that arises from the rendition of such
service. The activity that creates the income must not be confused with the main business in the
course of which that income is realized.59

Tax Situs of a Zero-Rated Service

The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated
service. Under this criterion, the place where the service is rendered determines the jurisdiction60 to
impose the VAT.61 Performed in the Philippines, such service is necessarily subject to its
jurisdiction,62 for the State necessarily has to have "a substantial connection"63 to it, in order to enforce
a zero rate.64 The place of payment is immaterial;65 much less is the place where the output of the
service will be further or ultimately used.

Statutory Construction or Interpretation Unnecessary

As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear. Therefore, no statutory
construction or interpretation is needed. Neither can conditions or limitations be introduced where none
is provided for. Rewriting the law is a forbidden ground that only Congress may tread upon.

The Court may not construe a statute that is free from doubt.66 "[W]here the law speaks in clear and
categorical language, there is no room for interpretation. There is only room for application."67 The
Court has no choice but to "see to it that its mandate is obeyed."68

No Qualifications Under RR 5-87

In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the zero rating of services
other than the processing, manufacturing or repacking of goods -- in general and without qualifications
-- when paid for by the person to whom such services are rendered in acceptable foreign currency
inwardly remitted and duly accounted for in accordance with the BSP (then Central Bank) regulations.
Section 8 of RR 5-87 states:

"SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a taxable transaction for value-added
tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero rate shall not
result in any output tax. The input tax on his purchases of goods or services related to such zero-rated
sale shall be available as tax credit or refundable in accordance with Section 16 of these Regulations.

xxxxxxxxx

" (c) Zero-rated sales of services. -- The following services rendered by VAT-registered persons are
zero-rated:

‘(1) Services in connection with the processing, manufacturing or repacking of goods for persons doing
business outside the Philippines, where such goods are actually shipped out of the Philippines to said
persons or their assignees and the services are paid for in acceptable foreign currency inwardly
remitted and duly accounted for under the regulations of the Central Bank of the Philippines.

xxxxxxxxx

‘(3) Services performed in the Philippines other than those mentioned in subparagraph (1) above which
are paid for by the person or entity to whom the service is rendered in acceptable foreign currency
inwardly remitted and duly accounted for in accordance with Central Bank regulations. Where the
contract involves payment in both foreign and local currency, only the service corresponding to that
paid in foreign currency shall enjoy zero-rating. The portion paid for in local currency shall be subject to
VAT at the rate of 10%.’"

RR 7-95 Broad Enough

RR 7-95, otherwise known as the "Consolidated VAT Regulations,"69 reiterates the above-quoted
provision and further presents as examples only the services performed in the Philippines by VAT-
registered hotels and other service establishments. Again, the condition remains that these services
must be paid in acceptable foreign currency inwardly remitted and accounted for in accordance with
the rules and regulations of the BSP. The term "other service establishments" is obviously broad
enough to cover respondent’s facilitation service. Section 4.102-2 of RR 7-95 provides thus:

"SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by a VAT registered person,
which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input
tax on his purchases of goods, properties or services related to such zero-rated sale shall be available
as tax credit or refund in accordance with these regulations.

"(b) Transaction subject to zero-rate. -- The following services performed in the Philippines by VAT-
registered persons shall be subject to 0%:

‘(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of
the BSP;

‘(2) Services other than those mentioned in the preceding subparagraph, e.g. those rendered by
hotels and other service establishments, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP;’"

xxxxxxxxx

Meaning of "as well as" in RR 5-96

Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by RR 5-96 to read as follows:

"Section 4.102-2(b)(2) -- ‘Services other than processing, manufacturing or repacking for other persons
doing business outside the Philippines for goods which are subsequently exported, as well as services
by a resident to a non-resident foreign client such as project studies, information services, engineering
and architectural designs and other similar services, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
BSP.’"

Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 7-95, the
amendment introduced by RR 5-96 further enumerates specific services entitled to zero rating.
Although superfluous, these sample services are meant to be merely illustrative. In this provision, the
use of the term "as well as" is not restrictive. As a prepositional phrase with an adverbial relation to
some other word, it simply means "in addition to, besides, also or too."70

Neither the law nor any of the implementing revenue regulations aforequoted categorically defines or
limits the services that may be sold or exchanged for a fee, remuneration or consideration. Rather,
both merely enumerate the items of service that fall under the term "sale or exchange of services."71

Ejusdem Generis
Inapplicable

The canon of statutory construction known as ejusdem generis or "of the same kind or specie" does
not apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96.

First, although the regulatory provision contains an enumeration of particular or specific words,
followed by the general phrase "and other similar services," such words do not constitute a
readily discernible class and are patently not of the same kind.72 Project studies involve
investments or marketing; information services focus on data technology; engineering and
architectural designs require creativity. Aside from calling for the exercise or use of mental
faculties or perhaps producing written technical outputs, no common denominator to the
exclusion of all others characterizes these three services. Nothing sets them apart from other
and similar general services that may involve advertising, computers, consultancy, health care,
management, messengerial work -- to name only a few.

Second, there is the regulatory intent to give the general phrase "and other similar services" a
broader meaning.73 Clearly, the preceding phrase "as well as" is not meant to limit the effect of
"and other similar services."

Third, and most important, the statutory provision upon which this regulation is based is by itself
not restrictive. The scope of the word "services" in Section 102(b)(2) of the Tax Code is broad; it
is not susceptible of narrow interpretation.741avvphi1.zw+

VAT Ruling Nos. 040-98 and 080-89

VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the administrative
level,75rendered by the BIR commissioner upon request of a taxpayer to clarify certain provisions of the
VAT law. As correctly held by the CA, when this ruling states that the service must be "destined for
consumption outside of the Philippines"76 in order to qualify for zero rating, it contravenes both the law
and the regulations issued pursuant to it.77 This portion of VAT Ruling No. 040-98 is clearly ultra
vires and invalid.78

Although "[i]t is widely accepted that the interpretation placed upon a statute by the executive officers,
whose duty is to enforce it, is entitled to great respect by the courts,"79 this interpretation is not
conclusive and will have to be "ignored if judicially found to be erroneous"80 and "clearly absurd x x x or
improper."81 An administrative issuance that overrides the law it merely seeks to interpret, instead of
remaining consistent and in harmony with it, will not be countenanced by this Court.82

In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly recognizes its
zero rating. Changing this status will certainly deprive respondent of a refund of the substantial amount
of excess input taxes to which it is entitled.

Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No. 080-89, such
revocation could not be given retroactive effect if the application of the latter ruling would only be
prejudicial to respondent.83 Section 246 of the Tax Code categorically declares that "[a]ny revocation x
x x of x x x any of the rulings x x x promulgated by the Commissioner shall not be given retroactive
application if the revocation x x x will be prejudicial to the taxpayers."84

It is also basic in law that "no x x x rule x x x shall be given retrospective effect85 unless explicitly
stated."86 No indication of such retroactive application to respondent does the Court find in VAT Ruling
No. 040-98. Neither do the exceptions enumerated in Section 24687 of the Tax Code apply.

Though vested with the power to interpret the provisions of the Tax Code88 and not bound by
predecessors’ acts or rulings, the BIR commissioner may render a different construction to a
statute89 only if the new interpretation is in congruence with the law. Otherwise, no amount of
interpretation can ever revoke, repeal or modify what the law says.

"Consumed Abroad" Not Required by Legislature

Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part of the
legislators not to impose the condition of being "consumed abroad" in order for services performed in
the Philippines by a VAT-registered person to be zero-rated. We quote the relevant portions of the
proceedings:

"Senator Maceda: Going back to Section 102 just for the moment. Will the Gentleman kindly explain to
me - I am referring to the lower part of the first paragraph with the ‘Provided’. Section
102. ‘Provided that the following services performed in the Philippines by VAT registered persons shall
be subject to zero percent.’ There are three here. What is the difference between the three here which
is subject to zero percent and Section 103 which is exempt transactions, to being with?

"Senator Herrera: Mr. President, in the case of processing and manufacturing or repacking goods for
persons doing business outside the Philippines which are subsequently exported, and where the
services are paid for in acceptable foreign currencies inwardly remitted, this is considered as subject to
0%. But if these conditions are not complied with, they are subject to the VAT.

"In the case of No. 2, again, as the Gentleman pointed out, these three are zero-rated and the other
one that he indicated are exempted from the very beginning. These three enumerations under Section
102 are zero-rated provided that these conditions indicated in these three paragraphs are also
complied with. If they are not complied with, then they are not entitled to the zero ratings. Just like in
the export of minerals, if these are not exported, then they cannot qualify under this provision of zero
rating.

"Senator Maceda: Mr. President, just one small item so we can leave this. Under the proviso, it is
required that the following services be performed in the Philippines.
"Under No. 2, services other than those mentioned above includes, let us say, manufacturing
computers and computer chips or repacking goods for persons doing business outside the Philippines.
Meaning to say, we ship the goods to them in Chicago or Washington and they send the payment
inwardly to the Philippines in foreign currency, and that is, of course, zero-rated.lawphil.net

"Now, when we say ‘services other than those mentioned in the preceding subsection[,’] may I have
some examples of these?

"Senator Herrera: Which portion is the Gentleman referring to?

"Senator Maceda: I am referring to the second paragraph, in the same Section 102. The first
paragraph is when one manufactures or packages something here and he sends it abroad and they
pay him, that is covered. That is clear to me. The second paragraph says ‘Services other than those
mentioned in the preceding subparagraph, the consideration of which is paid for in acceptable foreign
currency…’

"One example I could immediately think of -- I do not know why this comes to my mind tonight -- is for
tourism or escort services. For example, the services of the tour operator or tour escort -- just a good
name for all kinds of activities -- is made here at the Midtown Ramada Hotel or at the Philippine Plaza,
but the payment is made from outside and remitted into the country.

"Senator Herrera: What is important here is that these services are paid in acceptable foreign
currency remitted inwardly to the Philippines.

"Senator Maceda: Yes, Mr. President. Like those Japanese tours which include $50 for the services of
a woman or a tourist guide, it is zero-rated when it is remitted here.

"Senator Herrera: I guess it can be interpreted that way, although this tourist guide should also be
considered as among the professionals. If they earn more than ₱200,000, they should be covered.

xxxxxxxxx

Senator Maceda: So, the services by Filipino citizens outside the Philippines are subject to VAT, and I
am talking of all services. Do big contractual engineers in Saudi Arabia pay VAT?

"Senator Herrera: This provision applies to a VAT-registered person. When he performs services in
the Philippines, that is zero-rated.

"Senator Maceda: That is right."90

Legislative Approval By Reenactment

Finally, upon the enactment of RA 8424, which substantially carries over the particular provisions on
zero rating of services under Section 102(b) of the Tax Code, the principle of legislative approval of
administrative interpretation by reenactment clearly obtains. This principle means that "the
reenactment of a statute substantially unchanged is persuasive indication of the adoption by Congress
of a prior executive construction."91
The legislature is presumed to have reenacted the law with full knowledge of the contents of the
revenue regulations then in force regarding the VAT, and to have approved or confirmed them
because they would carry out the legislative purpose. The particular provisions of the regulations we
have mentioned earlier are, therefore, re-enforced. "When a statute is susceptible of the meaning
placed upon it by a ruling of the government agency charged with its enforcement and the [l]egislature
thereafter [reenacts] the provisions [without] substantial change, such action is to some extent
confirmatory that the ruling carries out the legislative purpose."92

In sum, having resolved that transactions of respondent are zero-rated, the Court upholds the former’s
entitlement to the refund as determined by the appellate court. Moreover, there is no conflict between
the decisions of the CTA and CA. This Court respects the findings and conclusions of a specialized
court like the CTA "which, by the nature of its functions, is dedicated exclusively to the study and
consideration of tax cases and has necessarily developed an expertise on the subject."93

Furthermore, under a zero-rating scheme, the sale or exchange of a particular service is completely
freed from the VAT, because the seller is entitled to recover, by way of a refund or as an input tax
credit, the tax that is included in the cost of purchases attributable to the sale or exchange.94 "[T]he tax
paid or withheld is not deducted from the tax base."95 Having been applied for within the reglementary
period,96 respondent’s refund is in order.

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

G.R. No. 153205 January 22, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent.

DECISION

CARPIO, J.:

The Case

This petition for review1 seeks to set aside the 16 April 2002 Decision2 of the Court of Appeals in CA-
G.R. SP No. 66341 affirming the 8 August 2001 Decision3 of the Court of Tax Appeals (CTA). The CTA
ordered the Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate
for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor Mindanao, Inc.
(respondent).

The Antecedents

The CTA summarized the facts, which the Court of Appeals adopted, as follows:
[Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws of
the Philippines with principal address located at Daruma Building, Jose P. Laurel Avenue, Lanang,
Davao City.

It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian Contractor
A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into
a contract with the National Power Corporation (NAPOCOR) for the operation and maintenance of
[NAPOCOR’s] two power barges. The Consortium appointed BWSC-Denmark as its coordination
manager.

BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance
of NAPOCOR’s two power barges as well as the performance of other duties and acts which
necessarily have to be done in the Philippines.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen,
and Peso). The freely convertible non-Peso component is deposited directly to the Consortium’s bank
accounts in Denmark and Japan, while the Peso-denominated component is deposited in a separate
and special designated bank account in the Philippines. On the other hand, the Consortium pays
[respondent] in foreign currency inwardly remitted to the Philippines through the banking system.

In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from
the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if
[respondent] chooses to register as a VAT person and the consideration for its services is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate.

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration
bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue District
Office No. 113 of Davao City.

For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting,
among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14,
detailed as follows:

Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax

1st E 04-18-96 P 33,019,651.07 P608,953.48

2nd F 07-16-96 37,108,863.33 756,802.66

3rd G 10-14-96 34,196,372.35 930,279.14

4th H 01-20-97 42,992,302.87 1,065,138.86


Totals P147,317,189.62 P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR.
It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to
its case. Revenue Regulations No. 5-96 provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to
read as follows:

Section 4.102-2(b)(2) – "Services other than processing, manufacturing or repacking for other persons
doing business outside the Philippines for goods which are subsequently exported, as well as services
by a resident to a non-resident foreign client such as project studies, information services, engineering
and architectural designs and other similar services, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
BSP."

x x x x x x x x x x.

In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to
the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to
December 1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996.
The sum of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate.
Consequently, [respondent] filed its 1996 amended VAT return consolidating therein the VAT output
and input taxes for the four calendar quarters of 1996. It paid the amount of P6,994,659.67 through
BIR’s collecting agent, PCIBank, as its output tax liability for the year 1996, computed as follows:

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%

VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

VAT Output Tax Payable P 6,994,659.67

On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review
Committee which reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%)."

On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the
issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed that
it erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program
(VAP) of the BIR.4
On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running of
the two-year prescriptive period under the Tax Code.

The Ruling of the Court of Tax Appeals

In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate
for P6,994,659.67 in favor of respondent. The CTA’s ruling stated:

[Respondent’s] sale of services to the Consortium [was] paid for in acceptable foreign currency
inwardly remitted to the Philippines and accounted for in accordance with the rules and regulations of
Bangko Sentral ng Pilipinas. These were established by various BPI Credit Memos showing
remittances in Danish Kroner (DKK) and US dollars (US$) as payments for the specific invoices billed
by [respondent] to the consortium. These remittances were further certified by the Branch Manager x x
x of BPI-Davao Lanang Branch to represent payments for sub-contract fees that came from Den
Danske Aktieselskab Bank-Denmark for the account of [respondent]. Clearly, [respondent’s] sale of
services to the Consortium is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.

xxxx

The zero-rating of [respondent’s] sale of services to the Consortium was even confirmed by the
[petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-99
dated January 7,1999, x x x.

Since it is apparent that the payments for the services rendered by [respondent] were indeed subject to
VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment Program by
paying output tax for its sale of services. x x x

x x x Considering the principle of solutio indebiti which requires the return of what has been delivered
by mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x x
x5

Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for lack of
merit and affirmed the CTA decision.6

Hence, this petition.

The Court of Appeals’ Ruling

In affirming the CTA, the Court of Appeals rejected petitioner’s view that since respondent’s services
are not destined for consumption abroad, they are not of the same nature as project studies,
information services, engineering and architectural designs, and other similar services mentioned in
Section 4.102-2(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT. Thus, according to
petitioner, respondent’s services cannot legally qualify for 0% VAT but are subject to the regular 10%
VAT.8

The Court of Appeals found untenable petitioner’s contention that under VAT Ruling No. 040-98,
respondent’s services should be destined for consumption abroad to enjoy zero-rating. Contrary to
petitioner’s interpretation, there are two kinds of transactions or services subject to zero percent VAT
under VAT Ruling No. 040-98. These are (a) services other than repacking goods for other persons
doing business outside the Philippines which goods are subsequently exported; and (b) services by a
resident to a non-resident foreign client, such as project studies, information services, engineering and
architectural designs and other similar services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP).9

The Court of Appeals stated that "only the first classification is required by the provision to be
consumed abroad in order to be taxed at zero rate. In x x x the absence of such express or implied
stipulation in the statute, the second classification need not be consumed abroad."10

The Court of Appeals further held that assuming petitioner’s interpretation of Section 4.102-2(b)(2) of
Revenue Regulations No. 5-96 is correct, such administrative provision is void being an amendment to
the Tax Code. Petitioner went beyond merely providing the implementing details by adding another
requirement to zero-rating. "This is indicated by the additional phrase ‘as well as services by a resident
to a non-resident foreign client, such as project studies, information services and engineering and
architectural designs and other similar services.’ In effect, this phrase adds not just one but two
requisites: (a) services must be rendered by a resident to a non-resident; and (b) these must be in the
nature of project studies, information services, etc."11

The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,12 for services which
were performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to
wit: (1) payment in acceptable foreign currency and (2) accounted for in accordance with the rules of
the BSP. Section 108(b)(2) of the Tax Code does not provide that services must be "destined for
consumption abroad" in order to be VAT zero-rated.13

The Court of Appeals disagreed with petitioner’s argument that our VAT law generally follows the
destination principle (i.e., exports exempt, imports taxable).14 The Court of Appeals stated that "if
indeed the ‘destination principle’ underlies and is the basis of the VAT laws, then petitioner’s proper
remedy would be to recommend an amendment of Section 108(b)(2) to Congress. Without such
amendment, however, petitioner should apply the terms of the basic law. Petitioner could not resort to
administrative legislation, as what [he] had done in this case."15

The Issue

The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as
erroneously paid output VAT for the year 1996.16

The Ruling of the Court

We deny the petition.

At the outset, the Court declares that the denial of the instant petition is not on the ground that
respondent’s services are subject to 0% VAT. Rather, it is based on the non-retroactivity of the
prejudicial revocation of BIR Ruling No. 023-9517 and VAT Ruling No. 003-99,18 which held that
respondent’s services are subject to 0% VAT and which respondent invoked in applying for refund of
the output VAT.

Section 102(b) of the Tax Code,19 the applicable provision in 1996 when respondent rendered the
services and paid the VAT in question, enumerates which services are zero-rated, thus:
(b) Transactions subject to zero-rate. ― The following services performed in the Philippines by VAT-
registered persons shall be subject to 0%:

(1) Processing, manufacturing or repacking goods for other persons doing business outside
the Philippines which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas(BSP);

(2) Services other than those mentioned in the preceding sub-paragraph, the
consideration for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply
of such services to zero rate;

(4) Services rendered to vessels engaged exclusively in international shipping; and

(5) Services performed by subcontractors and/or contractors in processing, converting, or


manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of
total annual production. (Emphasis supplied)

In insisting that its services should be zero-rated, respondent claims that it complied with the
requirements of the Tax Code for zero rating under the second paragraph of Section 102(b).
Respondent asserts that (1) the payment of its service fees was in acceptable foreign currency, (2)
there was inward remittance of the foreign currency into the Philippines, and (3) accounting of such
remittance was in accordance with BSP rules. Moreover, respondent contends that its services which
"constitute the actual operation and management of two (2) power barges in Mindanao" are not "even
remotely similar to project studies, information services and engineering and architectural designs
under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96." As such, respondent’s services need
not be "destined to be consumed abroad in order to be VAT zero-rated."

Respondent is mistaken.

The Tax Code not only requires that the services be other than "processing, manufacturing or
repacking of goods" and that payment for such services be in acceptable foreign currency accounted
for in accordance with BSP rules. Another essential condition for qualification to zero-rating under
Section 102(b)(2) is that the recipient of such services is doing business outside the Philippines. While
this requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly
provided in the first paragraph of Section 102(b) where the listed services must be "for other persons
doing business outside the Philippines." The phrase "for other persons doing business outside the
Philippines" not only refers to the services enumerated in the first paragraph of Section 102(b), but also
pertains to the general term "services" appearing in the second paragraph of Section 102(b). In short,
services other than processing, manufacturing, or repacking of goods must likewise be performed for
persons doing business outside the Philippines.

This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the
"other services" are both doing business in the Philippines, the payment of foreign currency is
irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can avoid paying the VAT
by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To
interpret Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is
to make the payment of the regular VAT under Section 102(a) dependent on the generosity of the
taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating payment
in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section
102(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a
mandatory exaction, not a voluntary contribution.

When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law
clearly envisions the payer-recipient of services to be doing business outside the Philippines. Only
those not doing business in the Philippines can be required under BSP rules20 to pay in acceptable
foreign currency for their purchase of goods or services from the Philippines. In a domestic transaction,
where the provider and recipient of services are both doing business in the Philippines, the BSP
cannot require any party to make payment in foreign currency.

Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payer-
recipient of services is doing business outside the Philippines. Under BSP rules,21 the proceeds of
export sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the
provider of services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to
the BSP. The same rationale does not apply if the provider and recipient of the services are both doing
business in the Philippines since their transaction is not in the nature of an export sale even if payment
is denominated in foreign currency.

Further, when the provider and recipient of services are both doing business in the Philippines, their
transaction falls squarely under Section 102(a) governing domestic sale or exchange of services.
Indeed, this is a purely local sale or exchange of services subject to the regular VAT, unless of course
the transaction falls under the other provisions of Section 102(b).

Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the preceding
subparagraph," the legislative intent is that only the services are different between subparagraphs 1
and 2. The requirements for zero-rating, including the essential condition that the recipient of services
is doing business outside the Philippines, remain the same under both subparagraphs.

Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the present Tax Code
clarifies this legislative intent. Expressly included among the transactions subject to 0% VAT are
"[s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered to a person
engaged in business conducted outside the Philippines or to a nonresident person not engaged in
business who is outside the Philippines when the services are performed, the consideration for which
is paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP."

In this case, the payer-recipient of respondent’s services is the Consortium which is a joint-venture
doing business in the Philippines. While the Consortium’s principal members are non-resident foreign
corporations, the Consortium itself is doing business in the Philippines. This is shown clearly in BIR
Ruling No. 023-95 which states that the contract between the Consortium and NAPOCOR is for a 15-
year term, thus:
This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of
a contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S
("BWSC"), Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all
referred to hereinafter as the "Consortium", and the National Power Corporation ("NAPOCOR") for the
operation and maintenance of two 100-Megawatt power barges ("Power Barges") acquired by
NAPOCOR for a 15-year term.23 (Emphasis supplied)

Considering this length of time, the Consortium’s operation and maintenance of NAPOCOR’s power
barges cannot be classified as a single or isolated transaction. The Consortium does not fall under
Section 102(b)(2) which requires that the recipient of the services must be a person doing business
outside the Philippines. Therefore, respondent’s services to the Consortium, not being supplied to a
person doing business outside the Philippines, cannot legally qualify for 0% VAT.

Respondent, as subcontractor of the Consortium, operates and maintains NAPOCOR’s power barges
in the Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign
currency outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly
remitted and accounted for in accordance with BSP rules. This payment scheme does not entitle
respondent to 0% VAT. As the Court held in Commissioner of Internal Revenue v. American Express
International, Inc. (Philippine Branch),24 the place of payment is immaterial, much less is the place
where the output of the service is ultimately used. An essential condition for entitlement to 0% VAT
under Section 102(b)(1) and (2) is that the recipient of the services is a person doing business outside
the Philippines. In this case, the recipient of the services is the Consortium, which is doing business
not outside, but within the Philippines because it has a 15-year contract to operate and maintain
NAPOCOR’s two 100-megawatt power barges in Mindanao.

The Court recognizes the rule that the VAT system generally follows the "destination principle" (exports
are zero-rated whereas imports are taxed). However, as the Court stated in American Express, there is
an exception to this rule.25 This exception refers to the 0% VAT on services enumerated in Section 102
and performed in the Philippines. For services covered by Section 102(b)(1) and (2), the recipient of
the services must be a person doing business outside the Philippines. Thus, to be exempt from the
destination principle under Section 102(b)(1) and (2), the services must be (a) performed in the
Philippines; (b) for a person doing business outside the Philippines; and (c) paid in acceptable foreign
currency accounted for in accordance with BSP rules.

Respondent’s reliance on the ruling in American Express26 is misplaced. That case involved a recipient
of services, specifically American Express International, Inc. (Hongkong Branch), doing business
outside the Philippines. There, the Court stated:

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that
facilitates the collection and payment of receivables belonging to its non-resident foreign client
[American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign
currency inwardly remitted and accounted for in accordance with BSP rules and regulations. x x x
x27 (Emphasis supplied)

In contrast, this case involves a recipient of services – the Consortium – which is doing business in the
Philippines. Hence, American Express’ services were subject to 0% VAT, while respondent’s services
should be subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-
99,28 which reconfirmed BIR Ruling No. 023-9529 "insofar as it held that the services being rendered by
BWSCMI is subject to VAT at zero percent (0%)." Respondent’s reliance on these BIR rulings binds
petitioner.

Petitioner’s filing of his Answer before the CTA challenging respondent’s claim for refund effectively
serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such
revocation cannot be given retroactive effect since it will prejudice respondent. Changing respondent’s
status will deprive respondent of a refund of a substantial amount representing excess output
tax.30 Section 246 of the Tax Code provides that any revocation of a ruling by the Commissioner of
Internal Revenue shall not be given retroactive application if the revocation will prejudice the taxpayer.
Further, there is no showing of the existence of any of the exceptions enumerated in Section 246 of the
Tax Code for the retroactive application of such revocation.

However, upon the filing of petitioner’s Answer dated 2 March 2000 before the CTA contesting
respondent’s claim for refund, respondent’s services shall be subject to the regular 10% VAT.31 Such
filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.

WHEREFORE, the Court DENIES the petition.

SO ORDERED.

G.R. No. 147295 February 16, 2007

THE COMMISIONER OF INTERNAL REVENUE, Petitioner,


vs.
ACESITE (PHILIPPINES) HOTEL CORPORATION, Respondent.

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, assailing the
November 17, 2000 Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 56816, which affirmed
the January 3, 2000 Decision3 of the Court of Tax Appeals (CTA) in CTA Case No. 5645 entitled
Acesite (Philippines) Hotel Corporation v. The Commissioner of Internal Revenue for Refund of VAT
Payments.

The Facts

The facts as found by the appellate court are undisputed, thus:

Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along United Nations
Avenue in Manila. It leases 6,768.53 square meters of the hotel’s premises to the Philippine
Amusement and Gaming Corporation [hereafter, PAGCOR] for casino operations. It also caters food
and beverages to PAGCOR’s casino patrons through the hotel’s restaurant outlets. For the period
January (sic) 96 to April 1997, Acesite incurred VAT amounting to P30,152,892.02 from its rental
income and sale of food and beverages to PAGCOR during said period. Acesite tried to shift the said
taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR but the latter refused to pay
the taxes on account of its tax exempt status.1awphi1.net

Thus, PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT while the latter paid
the VAT to the Commissioner of Internal Revenue [hereafter, CIR] as it feared the legal consequences
of non-payment of the tax. However, Acesite belatedly arrived at the conclusion that its transaction with
PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. On 21 May 1998, Acesite
filed an administrative claim for refund with the CIR but the latter failed to resolve the same. Thus on
29 May 1998, Acesite filed a petition with the Court of Tax Appeals [hereafter, CTA] which was decided
in this wise:

As earlier stated, Petitioner is subject to zero percent tax pursuant to Section 102 (b)(3) [now
106(A)(C)] insofar as its gross income from rentals and sales to PAGCOR, a tax exempt entity by
virtue of a special law. Accordingly, the amounts of P21,413,026.78 and P8,739,865.24, representing
the 10% EVAT on its sales of food and services and gross rentals, respectively from PAGCOR shall,
as a matter of course, be refunded to the petitioner for having been inadvertently remitted to the
respondent.

Thus, taking into consideration the prescribed portion of Petitioner’s claim for refund of P98,743.40,
and considering further the principle of ‘solutio indebiti’ which requires the return of what has been
delivered through mistake, Respondent must refund to the Petitioner the amount of P30,054,148.64
computed as follows:

Total amount per claim 30,152,892.02

Less Prescribed amount (Exhs A, X, & X-20)

January 1996 P 2,199.94

February 1996 26,205.04

March 1996 70,338.42 98,743.40

P30,054,148.64
vvvvvvvvvvvvvv

WHEREFORE, in view of all the foregoing, the instant Petition for Review is partially GRANTED. The
Respondent is hereby ORDERED to REFUND to the petitioner the amount of THIRTY MILLION FIFTY
FOUR THOUSAND ONE HUNDRED FORTY EIGHT PESOS AND SIXTY FOUR CENTAVOS
(P30,054,148.64) immediately.

SO ORDERED.4

The Ruling of the Court of Appeals


Upon appeal by petitioner, the CA affirmed in toto the decision of the CTA holding that PAGCOR was
not only exempt from direct taxes but was also exempt from indirect taxes like the VAT and
consequently, the transactions between respondent Acesite and PAGCOR were "effectively zero-
rated" because they involved the rendition of services to an entity exempt from indirect taxes. Thus, the
CA affirmed the CTA’s determination by ruling that respondent Acesite was entitled to a refund of PhP
30,054,148.64 from petitioner.

The Issues

Hence, we have the instant petition with the following issues: (1) whether PAGCOR’s tax exemption
privilege includes the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate; and (2)
whether the zero percent (0%) VAT rate under then Section 102 (b)(3) of the Tax Code (now Section
108 (B)(3) of the Tax Code of 1997) legally applies to Acesite.

The petition is devoid of merit.

In resolving the first issue on whether PAGCOR’s tax exemption privilege includes the indirect tax of
VAT to entitle Acesite to zero percent (0%) VAT rate, we answer in the affirmative. We will however
discuss both issues together.

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the
payment of taxes. Section 13 of P.D. 1869 pertinently provides:

Sec. 13. Exemptions. –

xxxx

(2) Income and other taxes. – (a) Franchise Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges or levies of whatever nature, whether National or Local,
shall be assessed and collected under this Franchise from the Corporation; nor shall any form
of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of
five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation under
this Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in
lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied,
established or collected by any municipal, provincial, or national government authority.

xxxx

(b) Others: The exemptions herein granted for earnings derived from the operations conducted
under the franchise specifically from the payment of any tax, income or otherwise, as well as
any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with whom the Corporation or operator has any
contractual relationship in connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation or other remuneration from the
Corporation or operator as a result of essential facilities furnished and/or technical services rendered to
the Corporation or operator. (Emphasis supplied.)
Petitioner contends that the above tax exemption refers only to PAGCOR’s direct tax liability and not to
indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no
distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is
also exempt from indirect taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers
to PAGCOR. Although the law does not specifically mention PAGCOR’s exemption from indirect
taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes
persons or entities contracting with PAGCOR in casino operations. Although, differently worded,
the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by
granting tax exempt status to persons dealing with PAGCOR in casino operations. The
unmistakable conclusion is that PAGCOR is not liable for the P30,152,892.02 VAT and neither is
Acesite as the latter is effectively subject to zero percent rate under Sec. 108 B (3). R.A. 8424.
(Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature
clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in
the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties,
or services subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with
PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax

It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or
leased, in which case it is computed as 1/11 of such value, or charged as an additional 10% to the
value. Verily, the seller or lessor has the option to follow either way in charging its clients and
customer. In the instant case, Acesite followed the latter method, that is, charging an additional 10% of
the gross sales and rentals. Be that as it may, the use of either method, and in particular, the first
method, does not denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.

VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not
liable for the payment of it as it is exempt in this particular transaction by operation of law to pay the
indirect tax. Such exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as
amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services – (a) Rate and base of tax – There shall be levied,
assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any person
engaged in the sale of services x x x; Provided, that the following services performed in the Philippines
by VAT-registered persons shall be subject to 0%.

xxxx

(b) Transactions subject to zero percent (0%) rated.—


xxxx

(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to
zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such
exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated
from the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc.,5 where the
absolute tax exemption of the World Health Organization (WHO) upon an international agreement was
upheld. We held in said case that the exemption of contractee WHO should be implemented to mean
that the entity or person exempt is the contractor itself who constructed the building owned by
contractee WHO, and such does not violate the rule that tax exemptions are personal because
the manifest intention of the agreement is to exempt the contractor so that no contractor’s tax
may be shifted to the contractee WHO. Thus, the proviso in P.D. 1869, extending the exemption to
entities or individuals dealing with PAGCOR in casino operations, is clearly to proscribe any indirect
tax, like VAT, that may be shifted to PAGCOR.

Acesite paid VAT by mistake

Considering the foregoing discussion, there are undoubtedly erroneous payments of the VAT
pertaining to the effectively zero-rate transactions between Acesite and PAGCOR. Verily, Acesite has
clearly shown that it paid the subject taxes under a mistake of fact, that is, when it was not aware that
the transactions it had with PAGCOR were zero-rated at the time it made the payments. In UST
Cooperative Store v. City of Manila,6 we explained that "there is erroneous payment of taxes when a
taxpayer pays under a mistake of fact, as for the instance in a case where he is not aware of an
existing exemption in his favor at the time the payment was made."7 Such payment is held to be not
voluntary and, therefore, can be recovered or refunded.8

Moreover, it must be noted that aside from not raising the issue of Acesite’s compliance with pertinent
Revenue Regulations on exemptions during the proceedings in the CTA, it cannot be gainsaid that
Acesite should have done so as it paid the VAT under a mistake of fact. Hence, petitioner’s argument
on this point is utterly tenuous.

Solutio indebiti applies to the Government

Tax refunds are based on the principle of quasi-contract or solutio indebiti and the pertinent laws
governing this principle are found in Arts. 2142 and 2154 of the Civil Code, which provide, thus:

Art. 2142. Certain lawful, voluntary, and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense of another.

Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises.

When money is paid to another under the influence of a mistake of fact, that is to say, on the mistaken
supposition of the existence of a specific fact, where it would not have been known that the fact was
otherwise, it may be recovered. The ground upon which the right of recovery rests is that money paid
through misapprehension of facts belongs in equity and in good conscience to the person who paid it.9
The Government comes within the scope of solutio indebiti principle as elucidated in Commissioner of
Internal Revenue v. Fireman’s Fund Insurance Company, where we held that: "Enshrined in the basic
legal principles is the time-honored doctrine that no person shall unjustly enrich himself at the expense
of another. It goes without saying that the Government is not exempted from the application of this
doctrine."10

Action for refund strictly construed; Acesite discharged the burden of proof

Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed
unless granted in the most explicit and categorical language, it is strictly construed against the claimant
who must discharge such burden convincingly.11 In the instant case, respondent Acesite had
discharged this burden as found by the CTA and the CA. Indeed, the records show that Acesite proved
its actual VAT payments subject to refund, as attested to by an independent Certified Public
Accountant who was duly commissioned by the CTA. On the other hand, petitioner never disputed nor
contested respondent’s testimonial and documentary evidence. In fact, petitioner never presented any
evidence on its behalf.

One final word. The BIR must release the refund to respondent without any unreasonable delay.
Indeed, fair dealing is expected by our taxpayers from the BIR and this duty demands that the BIR
should refund without any unreasonable delay what it has erroneously collected.12

WHEREFORE, the petition is DENIED for lack of merit and the November 17, 2000 Decision of the CA
is hereby AFFIRMED. No costs.

SO ORDERED.

G.R. No. 150154. August 9, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners,


vs.
TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., Respondent.

DECISION

CHICO-NAZARIO, J.:

In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal
Revenue (CIR) prays for the reversal of the decision of the Court of Appeals in CA-G.R. SP No.
59106,1 affirming the order of the Court of Tax Appeals (CTA) in CTA Case No. 5593,2 which ordered
said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba
Information Equipment (Phils.), Inc. (Toshiba), in the amount of ₱16,188,045.44, representing
unutilized input value-added tax (VAT) payments for the first and second quarters of 1996.

There is hardly any dispute as to the facts giving rise to the present Petition.

Respondent Toshiba was organized and established as a domestic corporation, duly-registered with
the Securities and Exchange Commission on 07 July 1995,3 with the primary purpose of engaging in
the business of manufacturing and exporting of electrical and mechanical machinery, equipment,
systems, accessories, parts, components, materials and goods of all kinds, including, without limitation,
to those relating to office automation and information technology, and all types of computer hardware
and software, such as HDD, CD-ROM and personal computer printed circuit boards.4

On 27 September 1995, respondent Toshiba also registered with the Philippine Economic Zone
Authority (PEZA) as an ECOZONE Export Enterprise, with principal office in Laguna Technopark,
Biñan, Laguna.5 Finally, on 29 December 1995, it registered with the Bureau of Internal Revenue (BIR)
as a VAT taxpayer and a withholding agent.6

Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996,
reporting input VAT in the amount of ₱13,118,542.007 and ₱5,128,761.94,8 respectively, or a total of
₱18,247,303.94. It alleged that the said input VAT was from its purchases of capital goods and
services which remained unutilized since it had not yet engaged in any business activity or transaction
for which it may be liable for any output VAT.9 Consequently, on 27 March 1998, respondent Toshiba
filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of
Finance (DOF) applications for tax credit/refund of its unutilized input VAT for 01 January to 31 March
1996 in the amount of ₱14,176,601.28,10 and for 01 April to 30 June 1996 in the amount of
₱5,161,820.79,11for a total of ₱19,338,422.07. To toll the running of the two-year prescriptive period
for judicially claiming a tax credit/refund, respondent Toshiba, on 31 March 1998, filed with the CTA a
Petition for Review. It would subsequently file an Amended Petition for Review on 10 November 1998
so as to conform to the evidence presented before the CTA during the hearings.

In his Answer to the Amended Petition for Review before the CTA, petitioner CIR raised several
Special and Affirmative Defenses, to wit –

5. Assuming without admitting that petitioner filed a claim for refund/tax credit, the same is subject to
investigation by the Bureau of Internal Revenue.

6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must prove
that the taxes sought to be refunded were erroneously or illegally collected.

7. Petitioner must prove the allegations supporting its entitlement to a refund.

8. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the 1997
Tax Code on the filing of a written claim for refund within two (2) years from the date of payment of the
tax.

9. Claims for refund of taxes are construed strictly against claimants, the same being in the nature of
an exemption from taxation.12

After evaluating the evidence submitted by respondent Toshiba,13 the CTA, in its Decision dated 10
March 2000, ordered petitioner CIR to refund, or in the alternative, to issue a tax credit certificate to
respondent Toshiba in the amount of ₱16,188,045.44.14

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIR’s Motion for Reconsideration for
lack of merit.15

The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIR’s Petition for
Review and affirmed the CTA Decision dated 10 March 2000.
Comes now petitioner CIR before this Court assailing the above-mentioned Decision of the Court of
Appeals based on the following grounds –

1. The Court of Appeals erred in holding that petitioner’s failure to raise in the Tax Court the arguments
relied upon by him in the petition, is fatal to his cause.

2. The Court of Appeals erred in not holding that respondent being registered with the Philippine
Economic Zone Authority (PEZA) as an Ecozone Export Enterprise, its business is not subject to VAT
pursuant to Section 24 of Republic Act No. 7916 in relation to Section 103 (now 109) of the Tax Code.

3. The Court of Appeals erred in not holding that since respondent’s business is not subject to VAT,
the capital goods and services it purchased are considered not used in VAT taxable business, and,
therefore, it is not entitled to refund of input taxes on such capital goods pursuant to Section 4.106-1 of
Revenue Regulations No. 7-95 and of input taxes on services pursuant to Section 4.103-1 of said
Regulations.

4. The Court of Appeals erred in holding that respondent is entitled to a refund or tax credit of input
taxes it paid on zero-rated transactions.16

Ultimately, however, the issue still to be resolved herein shall be whether respondent Toshiba is
entitled to the tax credit/refund of its input VAT on its purchases of capital goods and services, to which
this Court answers in the affirmative.

An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons
from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%).

Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the Tax Code of 1977,
as amended, which reads:

SEC. 106. Refunds or tax credits of creditable input tax. –

(b) Capital goods. – A VAT-registered person may apply for the issuance of a tax credit certificate or
refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input
taxes have not been applied against output taxes. The application may be made only within two (2)
years after the close of the taxable quarter when the importation or purchase was made.17

Petitioner CIR, on the other hand, opposes such claim on account of Section 4.106-1(b) of Revenue
Regulations (RR) No. 7-95, otherwise known as the VAT Regulations, as amended, which provides as
follows –

Sec. 4.106-1. Refunds or tax credits of input tax. –

...
(b) Capital Goods. -- Only a VAT-registered person may apply for issuance of a tax credit certificate or
refund of input taxes paid on capital goods imported or locally purchased. The refund shall be allowed
to the extent that such input taxes have not been applied against output taxes. The application should
be made within two (2) years after the close of the taxable quarter when the importation or purchase
was made.

Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are
used in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall
only be the ratable portion corresponding to the taxable operations.

"Capital goods or properties" refer to goods or properties with estimated useful life greater than one
year and which are treated as depreciable assets under Section 29(f), used directly or indirectly in the
production or sale of taxable goods or services. (Underscoring ours.)

Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer, it is not
engaged in a VAT-taxable business. According to petitioner CIR, respondent Toshiba is actually VAT-
exempt, invoking the following provision of the Tax Code of 1977, as amended –

SEC. 103. Exempt transactions. – The following shall be exempt from value-added tax.

(q) Transactions which are exempt under special laws, except those granted under Presidential Decree
No. 66, 529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No. 6938, or
international agreements to which the Philippines is a signatory.18

Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five percent (5%)
preferential tax rate imposed under Chapter III, Section 24 of Republic Act No. 7916, otherwise known
as The Special Economic Zone Act of 1995, as amended. According to the said section, "[e]xcept for
real property taxes on land owned by developers, no taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross
income earned by all business enterprises within the ECOZONE shall be paid…" The five percent (5%)
preferential tax rate imposed on the gross income of a PEZA-registered enterprise shall be in lieu of all
national taxes, including VAT. Thus, petitioner CIR contends that respondent Toshiba is VAT-exempt
by virtue of a special law, Rep. Act No. 7916, as amended.

It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-
exempt entities. In the case of Commissioner of Internal Revenue v. Seagate Technology
(Philippines),19 this Court already made such distinction –

An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the
tax status – VAT-exempt or not – of the party to the transaction…

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code,
a special law or an international agreement to which the Philippines is a signatory, and by virtue of
which its taxable transactions become exempt from VAT…
Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-
exempt transactions. These are transactions exempted from VAT by special laws or international
agreements to which the Philippines is a signatory. Since such transactions are not subject to VAT, the
sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and they
may not claim tax credit/refund of the input VAT they had paid thereon.

Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent
Toshiba because although the said section recognizes that transactions covered by special laws may
be exempt from VAT, the very same section provides that those falling under Presidential Decree No.
66 are not. Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the
precursor of Rep. Act No. 7916, as amended,20 under which the EPZA evolved into the PEZA.
Consequently, the exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code of
1977, as amended, extends likewise to Rep. Act No. 7916, as amended.

This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located
within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as
amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-
registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which
establishes the fiction that ECOZONES are foreign territory.

It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or
a Special Economic Zone has been described as –

. . . [S]elected areas with highly developed or which have the potential to be developed into agro-
industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose
metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain
any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones
and tourist/recreational centers.21

The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory.22

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the
ECOZONES as a separate customs territory;23 thus, creating the fiction that the ECOZONE is a foreign
territory.24 As a result, sales made by a supplier in the Customs Territory to a purchaser in the
ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a
supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an
importation into the Customs Territory.

Given the preceding discussion, what would be the VAT implication of sales made by a supplier from
the Customs Territory to an ECOZONE enterprise?

The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined for consumption outside of the territorial border of
the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign
country must be free of VAT; while, those destined for use or consumption within the Philippines shall
be imposed with ten percent (10%) VAT.25
Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES,26 the
BIR issued Revenue Memorandum Circular (RMC) No. 74-99, on 15 October 1999. Of particular
interest to the present Petition is Section 3 thereof, which reads –

SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The Customs
Territory, To a PEZA Registered Enterprise. –

(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of
all taxes, except real property tax, pursuant to R.A. No. 7916, as amended:

(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence, considered
subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No.
7916, in relation to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of service. – This shall be treated subject to zero percent (0%) VAT under the "cross border
doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime,
hence, subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes under
the NIRC rather than the 5% special tax regime:

(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence, considered
subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No.
7916 in relation to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of Service. – This shall be treated subject to zero percent (0%) VAT under the "cross border
doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier
from the Customs Territory to any registered enterprise operating in the ecozone, regardless of the
class or type of the latter’s PEZA registration, is actually qualified and thus legally entitled to the zero
percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT
registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec.
106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of
services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be
treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the
provisions of R.A. No. 7916 and the "Cross Border Doctrine" of the VAT system.

This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to
the benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises
and shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by
Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular.

Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt


entity. The VAT treatment of sales to it, however, varies depending on whether the supplier from the
Customs Territory is VAT-registered or not.

Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-registered
supplier, they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-
registered supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the same
time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. Zero-rating of
export sales primarily intends to benefit the exporter (i.e., the supplier from the Customs Territory), who
is directly and legally liable for the VAT, making it internationally competitive by allowing it to
credit/refund the input VAT attributable to its export sales.

Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only
be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.

Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-exempt


entity that could not have engaged in a VAT-taxable business, this Court still believes, given the
particular circumstances of the present case, that it is entitled to a credit/refund of its input VAT.

II

Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income tax holiday
under Executive Order No. 226, as amended, were deemed subject to VAT.

In his Petition, petitioner CIR opposed the grant of tax credit/refund to respondent Toshiba, reasoning
thus –

In the first place, respondent could not have paid input taxes on its purchases of goods and services
from VAT-registered suppliers because such purchases being zero-rated, that is, no output tax was
paid by the suppliers, no input tax was shifted or passed on to respondent. The VAT is an indirect tax
and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services (Section 105, 1997 Tax Code).

Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:

"SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax. However, the input tax on his
purchases of goods, properties or services related to such zero-rated sale shall be available as tax
credit or refund in accordance with these regulations."

From the foregoing, the VAT-registered person who can avail as tax credit or refund of the input tax on
his purchases of goods, services or properties is the seller whose sale is zero-rated. Applying the
foregoing provision to the case at bench, the VAT-registered supplier, whose sale of goods and
services to respondent is zero-rated, can avail as tax credit or refund the input taxes on its (supplier)
own purchases of goods and services related to its zero-rated sale of goods and services to
respondent. On the other hand, respondent, as the buyer in such zero-rated sale of goods and
services, could not have paid input taxes for which it can claim as tax credit or refund.27

Before anything else, this Court wishes to point out that petitioner CIR is working on the erroneous
premise that respondent Toshiba is claiming tax credit or refund of input VAT based on Section 4.100-
2,28 in relation to Section 4.106-1(a),29 of RR No. 7-95, as amended, which allows the tax credit/refund
of input VAT on zero-rated sales of goods, properties or services. Instead, respondent Toshiba is
basing its claim for tax credit or refund on Sec. 4.106-1(b) of the same regulations, which allows a
VAT-registered person to apply for tax credit/refund of the input VAT on its capital goods. While in the
former, the seller of the goods, properties or services is the one entitled to the tax credit/refund; in the
latter, it is the purchaser of the capital goods.

Nevertheless, regardless of his mistake as to the basis for respondent Toshiba’s application for tax
credit/refund, petitioner CIR validly raised the question of whether any output VAT was actually passed
on to respondent Toshiba which it could claim as input VAT subject to credit/refund. If the VAT-
registered supplier from the Customs Territory did not charge any output VAT to respondent Toshiba
believing that it is exempt from VAT or it is subject to zero-rated VAT, then respondent Toshiba did not
pay any input VAT on its purchase of capital goods and it could not claim any tax credit/refund thereof.

The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered
enterprise shall be considered an export sale and subject to zero percent (0%) VAT was clearly
established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to the said date,
however, whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of fiscal
incentives availed of by the said enterprise. This old rule on VAT-exemption or liability of PEZA-
registered enterprises, followed by the BIR, also recognized and affirmed by the CTA, the Court of
Appeals, and even this Court,30 cannot be lightly disregarded considering the great number of PEZA-
registered enterprises which did rely on it to determine its tax liabilities, as well as, its privileges.

According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered
enterprise the option to choose between two sets of fiscal incentives: (a) The five percent (5%)
preferential tax rate on its gross income under Rep. Act No. 7916, as amended; and (b) the income tax
holiday provided under Executive Order No. 226, otherwise known as the Omnibus Investment Code of
1987, as amended.31

The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is
in lieu of all taxes. Except for real property taxes, no other national or local tax may be imposed on a
PEZA-registered enterprise availing of this particular fiscal incentive, not even an indirect tax like VAT.

Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to registered
pioneer and non-pioneer enterprises for six-year and four-year periods, respectively.32 Those availing
of this incentive are exempt only from income tax, but shall be subject to all other taxes, including the
ten percent (10%) VAT.

This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT
system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal
incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-
registered enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered
enterprise chose the five percent (5%) preferential tax on its gross income, in lieu of all taxes, as
provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered
enterprise availed of the income tax holiday under Exec. Order No. 226, as amended, it shall be
subject to VAT at ten percent (10%). Such distinction was abolished by RMC No. 74-99, which
categorically declared that all sales of goods, properties, and services made by a VAT-registered
supplier from the Customs Territory to an ECOZONE enterprise shall be subject to VAT, at zero
percent (0%) rate, regardless of the latter’s type or class of PEZA registration; and, thus, affirming the
nature of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.
The sale of capital goods by suppliers from the Customs Territory to respondent Toshiba in the present
Petition took place during the first and second quarters of 1996, way before the issuance of RMC No.
74-99, and when the old rule was accepted and implemented by no less than the BIR itself. Since
respondent Toshiba opted to avail itself of the income tax holiday under Exec. Order No. 226, as
amended, then it was deemed subject to the ten percent (10%) VAT. It was very likely therefore that
suppliers from the Customs Territory had passed on output VAT to respondent Toshiba, and the latter,
thus, incurred input VAT. It bears emphasis that the CTA, with the help of SGV & Co., the independent
accountant it commissioned to make a report, already thoroughly reviewed the evidence submitted by
respondent Toshiba consisting of receipts, invoices, and vouchers, from its suppliers from the Customs
Territory. Accordingly, this Court gives due respect to and adopts herein the CTA’s findings that the
suppliers of capital goods from the Customs Territory did pass on output VAT to respondent Toshiba
and the amount of input VAT which respondent Toshiba could claim as credit/refund.

Moreover, in another circular, Revenue Memorandum Circular (RMC) No. 42-2003, issued on 15 July
2003, the BIR answered the following question –

Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered firms
automatically qualify as zero-rated without seeking prior approval from the BIR effective October 1999.

1) Will the OSS-DOF Center still accept applications from PEZA-registered claimants who were
allegedly billed VAT by their suppliers before and during the effectivity of the RMC by issuing VAT
invoices/receipts?

A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all other taxes, the
said PEZA-registered taxpayer cannot claim TCC or refund for the VAT paid on purchases. However, if
the taxpayer is availing of the income tax holiday, it can claim VAT credit provided:

a. The taxpayer-claimant is VAT-registered;

b. Purchases are evidenced by VAT invoices or receipts, whichever is applicable, with shifted VAT to
the purchaser prior to the implementation of RMC No. 74-99; and

c. The supplier issues a sworn statement under penalties of perjury that it shifted the VAT and
declared the sales to the PEZA-registered purchaser as taxable sales in its VAT returns.

For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for input VAT by PEZA-
registered companies, regardless of the type or class of PEZA registration, should be denied.

Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed by PEZA-
registered enterprises, availing of the income tax holiday, for input VAT on their purchases made prior
to RMC No. 74-99. Acceptance of applications essentially implies processing and possible approval
thereof depending on whether the given conditions are met. Respondent Toshiba’s claim for tax
credit/refund arose from the very same circumstances recognized by Q-5(1) and A-5(1) of RMC No.
42-2003. It therefore seems irrational and unreasonable for petitioner CIR to oppose respondent
Toshiba’s application for tax credit/refund of its input VAT, when such claim had already been
determined and approved by the CTA after due hearing, and even affirmed by the Court of Appeals;
while it could accept, process, and even approve applications filed by other similarly-situated PEZA-
registered enterprises at the administrative level.

III

Findings of fact by the CTA are respected and adopted by this Court.

Finally, petitioner CIR, in a last desperate attempt to block respondent Toshiba’s claim for tax
credit/refund, challenges the allegation of said respondent that it availed of the income tax holiday
under Exec. Order No. 226, as amended, rather than the five percent (5%) preferential tax rate under
Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that should have been raised
and threshed out in the lower courts. Giving it credence would belie petitioner CIR’s assertion that it is
raising only issues of law in its Petition that may be resolved without need for reception of additional
evidences. Once more, this Court respects and adopts the finding of the CTA, affirmed by the Court of
Appeals, that respondent Toshiba had indeed availed of the income tax holiday under Exec. Order No.
226, as amended.

WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of Appeals in
CA-G.R. SP. No. 59106, and the order of the CTA in CTA Case No. 5593, ordering said petitioner CIR
to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba, in the amount of
₱16,188,045.44, representing unutilized input VAT for the first and second quarters of 1996.

SO ORDERED.

G.R. No. 149073 February 16, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
CEBU TOYO CORPORATION, respondent.

DECISION

QUISUMBING, J.:

In its Decision1 dated July 6, 2001, the Court of Appeals, in CA-G.R. SP No. 60304, affirmed
the Resolutionsdated May 31, 20002 and August 2, 2000,3 of the Court of Tax Appeals (CTA) ordering
the Commissioner of Internal Revenue (CIR) to allow a partial refund or, alternatively, to issue a tax
credit certificate in favor of Cebu Toyo Corporation in the sum of ₱2,158,714.46, representing the
unutilized input value-added tax (VAT) payments.

The facts, as culled from the records, are as follows:

Respondent Cebu Toyo Corporation is a domestic corporation engaged in the manufacture of lenses
and various optical components used in television sets, cameras, compact discs and other similar
devices. Its principal office is located at the Mactan Export Processing Zone (MEPZ) in Lapu-Lapu City,
Cebu. It is a subsidiary of Toyo Lens Corporation, a non-resident corporation organized under the laws
of Japan. Respondent is a zone export enterprise registered with the Philippine Economic Zone
Authority (PEZA), pursuant to the provisions of Presidential Decree No. 66.4 It is also registered with
the Bureau of Internal Revenue (BIR) as a VAT taxpayer.5
As an export enterprise, respondent sells 80% of its products to its mother corporation, the Japan-
based Toyo Lens Corporation, pursuant to an Agreement of Offsetting. The rest are sold to various
enterprises doing business in the MEPZ. Inasmuch as both sales are considered export sales subject
to Value-Added Tax (VAT) at 0% rate under Section 106(A)(2)(a)6 of the National Internal Revenue
Code, as amended, respondent filed its quarterly VAT returns from April 1, 1996 to December 31, 1997
showing a total input VAT of ₱4,462,412.63.

On March 30, 1998, respondent filed with the Tax and Revenue Group of the One-Stop Inter-Agency
Tax Credit and Duty Drawback Center of the Department of Finance, an application for tax
credit/refund of VAT paid for the period April 1, 1996 to December 31, 1997 amounting to
₱4,439,827.21 representing excess VAT input payments.

Respondent, however, did not bother to wait for the Resolution of its claim by the CIR. Instead, on
June 26, 1998, it filed a Petition for Review with the CTA to toll the running of the two-year prescriptive
period pursuant to Section 2307 of the Tax Code.

Before the CTA, the respondent posits that as a VAT-registered exporter of goods, it is subject to VAT
at the rate of 0% on its export sales that do not result in any output tax. Hence, the unutilized VAT
input taxes on its purchases of goods and services related to such zero-rated activities are available as
tax credits or refunds.

The petitioner’s position is that respondent was not entitled to a refund or tax credit since: (1) it failed to
show that the tax was erroneously or illegally collected; (2) the taxes paid and collected are presumed
to have been made in accordance with law; and (3) claims for refund are strictly construed against the
claimant as these partake of the nature of tax exemption.

Initially, the CTA denied the petition for insufficiency of evidence.8 The tax court sustained respondent’s
argument that it was a VAT-registered entity. It also found that the petition was timely, as it was filed
within the prescription period. The CTA also ruled that the respondent’s sales to Toyo Lens
Corporation and to certain establishments in the Mactan Export Processing Zone were export sales
subject to VAT at 0% rate. It found that the input VAT covered by respondent’s claim was not applied
against any output VAT. However, the tax court decreed that the petition should nonetheless be denied
because of the respondent’s failure to present documentary evidence to show that there were foreign
currency exchange proceeds from its export sales. The CTA also observed that respondent failed to
submit the approval by Bangko Sentral ng Pilipinas (BSP) of its Agreement of Offsetting with Toyo
Lens Corporation and the certification of constructive inward remittance.

Undaunted, respondent filed on February 21, 2000, a Motion for Reconsideration arguing that: (1)
proof of its inward remittance was not required by law; (2) BSP and BIR regulations do not require BSP
approval on its Agreement of Offsetting nor do they require certification on the amount constructively
remitted; (3) it was not legally required to prove foreign currency payments on the remaining sales to
MEPZ enterprises; and (4) it had complied with the substantiation requirements under Section
106(A)(2)(a) of the Tax Code. Hence, it was entitled to a refund of unutilized VAT input tax.

On May 31, 2000, the tax court partly granted the motion for reconsideration in a Resolution, to wit:
WHEREFORE, finding the motion of petitioner to be meritorious, the same is hereby partially granted.
Accordingly, the Court hereby MODIFIES its decision in the above-entitled case, the dispositive portion
of which shall now read as follows:

WHEREFORE, finding the petition for review partially meritorious, respondent is hereby ORDERED to
REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of Petitioner in the
amount of ₱2,158,714.46 representing unutilized input tax payments.

SO ORDERED.9

In granting partial reconsideration, the tax court found that there was no need for BSP approval of the
Agreement of Offsetting since the same may be categorized as an inter-company open account offset
arrangement. Hence, the respondent need not present proof of foreign currency exchange proceeds
from its sales to MEPZ enterprises pursuant to Section 106(A)(2)(a)10 of the Tax Code. However, the
CTA stressed that respondent must still prove that there was an actual offsetting of accounts to prove
that constructive foreign currency exchange proceeds were inwardly remitted as required under
Section 106(A)(2)(a).

The CTA found that only the amount of Y274,043,858.00 covering respondent’s sales to Toyo Lens
Corporation and purchases from said mother company for the period August 7, 1996 to August 26,
1997 were actually offset against respondent’s related accounts receivable and accounts payable as
shown by the Agreement for Offsetting dated August 30, 1997. Resort to the respondent’s Accounts
Receivable and Accounts Payable subsidiary ledgers corroborated the amount. The tax court also
found that out of the total export sales for the period April 1, 1996 to December 31, 1997 amounting
to Y700,654,606.15, respondent’s sales to MEPZ enterprises amounted only to Y136,473,908.05 of
said total. Thus, allocating the input taxes supported by receipts to the export sales, the CTA
determined that the refund/credit amounted to only ₱2,158,714.46,11 computed as follows:

Total Input Taxes Claimed by respondent ₱4,439,827.21

Less: Exceptions made by SGV

a.) 1996 ₱651,256.17

b.) 1997 104,129.13 755,385.30

Validly Supported Input Taxes ₱3,684,441.91

Allocation:

Verified Zero-Rated Sales

a.) Toyo Lens Corporation Y274,043,858.00

b.) MEPZ Enterprises 136,473,908.05 Y410,517,766.05


Divided by Total Zero-Rated Sales Y700,654,606.15

Quotient 0.5859

Multiply by Allowable Input Tax ₱3,684,441.91

Amount Refundable ₱2,158,714.[52]12

On June 21, 2000, petitioner Commissioner filed a Motion for Reconsideration arguing that
respondent was not entitled to a refund because as a PEZA-registered enterprise, it was not subject to
VAT pursuant to Section 2413 of Republic Act No. 7916,14 as amended by Rep. Act No. 8748.15 Thus,
since respondent was not subject to VAT, the Commissioner contended that the capital goods it
purchased must be deemed not used in VAT taxable business and therefore it was not entitled to
refund of input taxes on such capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-
95.16

Petitioner filed a Motion for Reconsideration on June 21, 2000 based on the following theories: (1)
that respondent being registered with the PEZA as an ecozone enterprise is not subject to VAT
pursuant to Sec. 24 of Rep. Act No. 7916; and (2) since respondent’s business is not subject to VAT,
the capital goods it purchased are considered not used in a VAT taxable business and therefore is not
entitled to a refund of input taxes.17

The respondent opposed the Commissioner’s Motion for Reconsideration and prayed that the CTA
resolution be modified so as to grant it the entire amount of tax refund or credit it was seeking.

On August 2, 2000, the Court of Tax Appeals denied the petitioner’s motion for reconsideration. It held
that the grounds relied upon were only raised for the first time and that Section 24 of Rep. Act No.
7916 was not applicable since respondent has availed of the income tax holiday incentive under
Executive Order No. 226 or the Omnibus Investment Code of 1987 pursuant to Section 2318 of Rep.
Act No. 7916. The tax court pointed out that E.O. No. 226 granted PEZA-registered enterprises an
exemption from payment of income taxes for 4 or 6 years depending on whether the registration was
as a pioneer or as a non-pioneer enterprise, but subject to other national taxes including VAT.

The petitioner then filed a Petition for Review with the Court of Appeals (CA), docketed as CA-G.R.
SP No. 60304, praying for the reversal of the CTA Resolutions dated May 31, 2000 and August 2,
2000, and reiterating its claim that respondent is not entitled to a refund of input taxes since it is VAT-
exempt.

On July 6, 2001, the appellate court decided CA-G.R. SP No. 60304 in respondent’s favor, thus:

WHEREFORE, finding no merit in the petition, this Court DISMISSES it and AFFIRMS the Resolutions
dated May 31, 2000 and August 2, 2000 . . . of the Court of Tax Appeals.

SO ORDERED.19

The Court of Appeals found no reason to set aside the conclusions of the Court of Tax Appeals. The
appellate court held as untenable herein petitioner’s argument that respondent is not entitled to a
refund because it is VAT-exempt since the evidence showed that it is a VAT-registered enterprise
subject to VAT at the rate of 0%. It agreed with the ruling of the tax court that respondent had two
options under Section 23 of Rep. Act No. 7916, namely: (1) to avail of an income tax holiday under
E.O. No. 226 and be subject to VAT at the rate of 0%; or (2) to avail of the 5% preferential tax under
P.D. No. 66 and enjoy VAT exemption. Since respondent availed of the incentives under E.O. No. 226,
then the 0% VAT rate would be applicable to it and any unutilized input VAT should be refunded to
respondent upon proper application with and substantiation by the BIR.1awphi1.nét

Hence, the instant petition for review now before us, with herein petitioner alleging that:

I. RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE AUTHORITY


(PEZA) AS AN ECOZONE EXPORT ENTERPRISE, ITS BUSINESS IS NOT SUBJECT TO VAT
PURSUANT TO SECTION 24 OF REPUBLIC ACT NO. 7916 IN RELATION TO SECTION 103 OF
THE TAX CODE, AS AMENDED BY RA NO. 7716.

II. SINCE RESPONDENT’S BUSINESS IS NOT SUBJECT TO VAT, IT IS NOT ENTITLED TO


REFUND OF INPUT TAXES PURSUANT TO SECTION 4.103-1 OF REVENUE REGULATIONS NO.
7-95.20

In our view, the main issue for our resolution is whether the Court of Appeals erred in affirming the
Court of Tax Appeals resolution granting a refund in the amount of ₱2,158,714.46 representing
unutilized input VAT on goods and services for the period April 1, 1996 to December 31, 1997.

Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that
respondent Cebu Toyo Corporation, as a PEZA-registered enterprise, is exempt from national and
local taxes, including VAT, under Section 24 of Rep. Act No. 7916 and Section 10921 of the NIRC.
Thus, they contend that respondent Cebu Toyo Corporation is not entitled to any refund or credit on
input taxes it previously paid as provided under Section 4.103-122 of Revenue Regulations No. 7-95,
notwithstanding its registration as a VAT taxpayer. For petitioner claims that said registration was
erroneous and did not confer upon the respondent any right to claim recognition of the input tax credit.

The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four years
from August 7, 1995 making it exempt from income tax but not from other taxes such as VAT. Hence,
according to respondent, its export sales are not exempt from VAT, contrary to petitioner’s claim, but
its export sales is subject to 0% VAT. Moreover, it argues that it was able to establish through a report
certified by an independent Certified Public Accountant that the input taxes it incurred from April 1,
1996 to December 31, 1997 were directly attributable to its export sales. Since it did not have any
output tax against which said input taxes may be offset, it had the option to file a claim for refund/tax
credit of its unutilized input taxes.

Considering the submission of the parties and the evidence on record, we find the petition bereft of
merit.

Petitioner’s contention that respondent is not entitled to refund for being exempt from VAT is
untenable. This argument turns a blind eye to the fiscal incentives granted to PEZA-registered
enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute, the respondent had
two options with respect to its tax burden. It could avail of an income tax holiday pursuant to provisions
of E.O. No. 226, thus exempt it from income taxes for a number of years but not from other internal
revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes, including VAT under
P.D. No. 66 and pay only the preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of
Appeals and the Court of Tax Appeals found that respondent availed of the income tax holiday for four
(4) years starting from August 7, 1995, as clearly reflected in its 1996 and 1997 Annual Corporate
Income Tax Returns, where respondent specified that it was availing of the tax relief under E.O. No.
226. Hence, respondent is not exempt from VAT and it correctly registered itself as a VAT taxpayer. In
fine, it is engaged in taxable rather than exempt transactions.

Taxable transactions are those transactions which are subject to value-added tax either at the rate of
ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax credit
for the value-added tax paid on purchases and leases of goods, properties or services.23

An exemption means that the sale of goods, properties or services and the use or lease of properties is
not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously
paid. The person making the exempt sale of goods, properties or services shall not bill any output tax
to his customers because the said transaction is not subject to VAT. Thus, a VAT-registered purchaser
of goods, properties or services that are VAT-exempt, is not entitled to any input tax on such
purchases despite the issuance of a VAT invoice or receipt.24

Now, having determined that respondent is engaged in taxable transactions subject to VAT, let us then
proceed to determine whether it is subject to 10% or zero (0%) rate of VAT. To begin with, it must be
recalled that generally, sale of goods and supply of services performed in the Philippines are taxable at
the rate of 10%. However, export sales, or sales outside the Philippines, shall be subject to value-
added tax at 0% if made by a VAT-registered person.25Under the value-added tax system, a zero-rated
sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in
any output tax. However, the input tax on his purchase of goods, properties or services related to such
zero-rated sale shall be available as tax credit or refund.26 1awphi1.nét

In principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is to exempt the
transaction completely from VAT previously collected on inputs. It is thus the only true way to ensure
that goods are provided free of VAT. While the zero rating and the exemption are computationally the
same, they actually differ in several aspects, to wit:

(a) A zero-rated sale is a taxable transaction but does not result in an output tax while an
exempted transaction is not subject to the output tax;

(b) The input VAT on the purchases of a VAT-registered person with zero-rated sales may be
allowed as tax credits or refunded while the seller in an exempt transaction is not entitled to any
input tax on his purchases despite the issuance of a VAT invoice or receipt.

(c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to
register while registration is optional for VAT-exempt persons.

In this case, it is undisputed that respondent is engaged in the export business and is registered as a
VAT taxpayer per Certificate of Registration of the BIR.27 Further, the records show that the respondent
is subject to VAT as it availed of the income tax holiday under E.O. No. 226. Perforce, respondent is
subject to VAT at 0% rate and is entitled to a refund or credit of the unutilized input taxes, which the
Court of Tax Appeals computed at ₱2,158,714.46, but which we find—after recomputation—should be
₱2,158,714.52.

The Supreme Court will not set aside lightly the conclusions reached by the Court of Tax Appeals
which, by the very nature of its functions, is dedicated exclusively to the resolution of tax problems and
has accordingly developed an expertise on the subject, unless there has been an abuse or improvident
exercise of authority.28 In this case, we find no cogent reason to deviate from this well-entrenched
principle. Thus, we are persuaded that indeed the Court of Appeals committed no reversible error in
affirming the assailed ruling of the Court of Tax Appeals.

WHEREFORE, the petition is DENIED for lack of merit.l^vvphi1.net The assailed Decision dated July
6, 2001 of the Court of Appeals, in CA-G.R. SP No. 60304 is AFFIRMED with very slight modification.
Petitioner is hereby ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT
CERTIFICATE in favor of respondent in the amount of ₱2,158,714.52 representing unutilized input tax
payments. No pronouncement as to costs.

SO ORDERED.