VALUE-ADDED TAX

II. Nature, Characteristic, and Purpose of VAT

TOLENTINO V. SECRETARY OF FINANCE [Cary]
FACTS:
Petitioners (Tolentino, Kilosbayan, Inc., Philippine
Airlines, Roco, and Chamber of Real Estate and Builders
Association) seek reconsideration of the Courts previous ruling
dismissing the petitions filed for the declaration of
unconstitutionality of R.A. No. 7716, the Expanded Value-Added
Tax Law. Petitioners contend that the R.A. did not originate
exclusively in the HoR as required by Article 6, Section 24 of the
Constitution. The Senate allegedly did not pass it on second and
third readings, instead passing its own version. Petitioners
contend that it should have amended the House bill by striking
out the text of the bill and substituting it with the text of its own
bill, so as to conform with the Constitution.
ISSUE: Whether the R.A. is unconstitutional for having
originated from the Senate, and not the HoR.
HELD:
Petition is unmeritorious. The enactment of the Senate
bill has not been the first instance where the Senate, in the
exercise of its power to propose amendments to bills (required to
originate in the House), passed its own version. An amendment
by substitution (striking out the text and substituting it), as urged
by petitioners, concerns a mere matter of form, and considering
the petitioner has not shown what substantial difference it would

make if Senate applied such substitution in the case, it cannot be

applied to the case at bar.
While the aforementioned
Constitutional provision states that bills must originate
exclusively in the HoR, it also adds, but the Senate may
propose or concur with amendments. The Senate may then
propose an entirely new bill as a substitute measure. Petitioners
erred in assuming the Senate version to be an independent and
distinct bill. Without the House bill, Senate could not have
enacted the Senate bill, as the latter was a mere amendment of the
former. As such, it did not have to pass the Senate on second and
third readings.
Petitioners question the signing of the President on both
bills, to support their contention that such are separate and
distinct. The President certified the bills separately only because
the certification had to be made of the version of the same
revenue bill which AT THE MOMENT was being considered.
Petitioners question the power of the Conference
Committee to insert new provisions. The jurisdiction of the
conference committee is not limited to resolving differences
between the Senate and the House. It may propose an entirely
new provision, given that such are germane to the subject of the
conference, and that the respective houses of Congress
subsequently approve its report.
Petitioner PAL contends that the amendment of its franchise by
the withdrawal of its exemption from VAT is not expressed in
the title of the law, thereby violating the Constitution. The Court
believes that the title of the R.A. satisfies the Constitutional
Requirement.

Petitioners claim that the R.A. violates their press

freedom and religious liberty, having removed them from the
exemption to pay VAT. Suffice it to say that since the law granted
the press a privilege, the law could take back the privilege anytime
without offense to the Constitution. By granting exemptions, the
State does not forever waive the exercise of its sovereign
prerogative.
Lastly, petitioners contend that the R.A. violates due
process, equal protection and contract clauses and the rule on
taxation. Petitioners fail to take into consideration the fact that
the VAT was already provided for in E.O. No. 273 long before
the R.A. was enacted. The latter merely EXPANDS the base of
the tax. Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class be taxed at the
same rate, the taxing power having authority to make reasonable
and natural classifications for purposes of taxation. It is enough
that the statute applies equally to all persons, forms and
corporations placed in s similar situation.

Specific provision: 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: PROVIDED that the input
tax inclusive of input VAT carried over from
the previous quarter that may be credited in
every quarter shall not exceed 70% of the
output VAT: PROVIDED, HOWEVER, THAT
any input tax attributable to zero-rated sales by a
VAT-registered person may at his option be
refunded or credited against other internal revenue
taxes. . .

ABAKADA GURO PARTYLIST V. ERMITA

Several actions were filed by different petitioners assailing the

validity of R.A. No. 9337 (increasing VAT to 12%) for being
unconstitutional, as it violates Art 6, Section 28, w/c provides
that The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
In particular, SHELL, etc. assailed Section 8, amending Section
110 (B) of the NIRC, imposing a 70% limit on the amount
of input tax to be credited against the output tax, making
it REGRESSIVE and unconstitutional.

I: W/n RA 9337 is unconstitutional for violating

uniformity, equitability and progressiveness of
taxation No, it is VALID.
TAX IS UNIFORM.
Uniformity in taxation means that all taxable articles
or kinds of property of the same class shall be taxed
at the same rate.
The rule of uniform taxation does not deprive
Congress of the power to classify subjects of taxation,
and only demands uniformity within the particular
class.
In this case, the tax law is uniform because:
o 1) it provides a standard rate of 0% or
10% (or 12%) on all goods and services;
o ) it does not make any distinction as to the
type of industry or trade that will bear the
70% limitation on the creditable input tax,

5-year amortization of input tax paid on

purchase of capital goods or the 5% final
withholding tax by the government.
TAX IS EQUITABLE. (Taxes should equally
burden all individuals or entities in similar economic
circumstances.)
The law is equipped with a threshold margin. The VAT rate
of 0% or 10% (or 12%) does not apply to sales of goods or
services with gross annual sales or receipts not exceeding
P1.5M.
Also, basic marine and agricultural food products in their
original state are still NOT subject to the tax, thus ensuring
that prices at the grassroots level will remain accessible.
Although the law outs a premium on businesses with low
profit margins, and unduly favors those with high profit
margins, Congress equalized the burden the law by likewise
imposing a 3% percentage tax on VAT-exempt persons
under Section 109(v), i.e., transactions with gross annual sales
and/or receipts not exceeding P1.5 Million.
This acts as an equalizer because in effect, bigger businesses
that qualify for VAT coverage and VAT-exempt taxpayers
stand on equal-footing.
Moreover, Congress provided under mitigating measures to
ease, as well as spread out, the burden of taxation, which
would otherwise rest largely on the consumers:
o Excise taxes on petroleum products and natural gas were
reduced. Percentage tax on domestic carriers was
removed. Power producers are now exempt from paying
franchise tax.
o Income tax rates of corporations, in order to distribute
the burden of taxation, were increased

o Domestic, foreign, and non-resident corporations are

now subject to a 35% income tax rate, from a previous
32%.
o Intercorporate dividends of non-resident foreign
corporations are still subject to 15% final withholding tax
but the tax credit allowed on the corporations domicile
was increased to 20%.
o PAGCOR is not exempt from income taxes anymore.
o Even the sale by an artist of his works or services
performed for the production of such works was not
spared.
On the INPUT TAX LIMIT* (ITO ata yung impt)
Petitioner (Shell) assumes that the input tax exceeds 70% of
the output tax, and therefore, the input tax in excess of 70%
remains uncredited. However, to the extent that the input tax
is less than 70% of the output tax, then 100% of such input
tax is still creditable.
More importantly, the excess input tax, if any, is retained in a
businesss books of accounts and remains creditable in the
succeeding quarter/s. This is explicitly allowed by Section
110(B), which provides that if the input tax exceeds the
output tax, the excess shall be carried over to the succeeding
quarter or quarters.
In addition, Section 112(B) allows a VAT-registered person
to apply for the issuance of a tax credit certificate or refund
for any unused input taxes, to the extent that such input taxes
have not been applied against the output taxes. Such unused
input tax may be used in payment of his other internal
revenue taxes.
The non-application of the unutilized input tax in a given
quarter is not ad infinitum, as petitioners exaggeratedly
contend.

On the other hand, it appears that petitioner Garcia failed to

comprehend the operation of the 70% limitation on the input
tax. According to petitioner, the limitation on the creditable
input tax in effect allows VAT-registered establishments to
retain a portion of the taxes they collect, which violates the
principle that tax collection and revenue should be for public
purposes and expenditures.
As earlier stated, the input tax is the tax paid by a person,
passed on to him by the seller, when he buys goods.
Output tax meanwhile is the tax due to the person when
he sells goods. In computing the VAT payable, three
possible scenarios may arise:
o If output tax = input tax = no payment
o If output tax > input tax = person liable for
excess, to be paid to BIR
o If input tax > output tax = excess shall be carried
over to the succeeding quarter or quarters.
o IF input tax results from zero-rated or effectively
zero-rated transactions, any excess over the
output taxes shall be REFUNDED to the
taxpayer / credited against other internal revenue
taxes, at the taxpayers option.
Section 8 of R.A. No. 9337 however, imposed a 70%
limitation on the input tax. Thus, a person can credit his
input tax only up to the extent of 70% of the output tax.
There is no retention of any tax collection because the
taxpayer has already previously paid the input tax to a
seller, and the seller will subsequently remit such input
tax to the BIR. The party directly liable for the payment of
the tax is the seller. What only needs to be done is for the
person/taxpayer to apply or credit these input taxes, as
evidenced by receipts, against his output taxes.
TAX IS REGRESSIVE, BUT IT IS NOT INVALID.

Taxation is PROGRESSIVE when its rate goes up depending

on the resources of the person affected. The Constitution
does not really prohibit the imposition of indirect taxes,
like the VAT. What it simply provides is that Congress
shall "evolve a progressive system of taxation."

*NOTE the distinction made by the court:

VAT - A tax on spending or consumption. It is levied on the
sale, barter, exchange or lease of goods or properties and services.
Being an indirect tax on expenditure, the seller of goods or
services may pass on the amount of tax paid to the buyer, with
the seller acting merely as a tax collector. The burden of VAT is
intended to fall on the immediate buyers and ultimately, the endconsumers.

Direct tax is a tax for which a taxpayer is directly liable on the

transaction or business it engages in, without transferring the
burden to someone else. Examples are individual and corporate
income taxes, transfer taxes, and residence taxes.
ABAKADA v. Ermita (Oct 18, 2005)

This case is about the Resolution of the Motion for

Reconsideration filed by herein petitioners based on the
decision rendered by the court on Sept. 1, 2005, upholding
the constitutionality of RA 9337 or the VAT Reform Act.
Relevant issues are as follows:
1. MR of Escudero, et al.: W/N there was grave abuse of
discretion amounting to lack or excess of jurisdiction on

the part of the Bicameral Committee when the No PassOn Provisions for the sale of petroleum products and
power generation services were deleted.
2. MR of Bataan Governor Garcia, Jr.: W/N the VAT law is
unconstitutional for being arbitrary, oppressive and
inequitable because it burdens the consumers because of
the price increase.
3. MR of Association of Pilipinas Shell Dealers: W/N the
Court erred in upholding the constitutionality of
Section 110(A)(2) and Section 110(B) of the NIRC as
amended by the EVAT Law imposing limitations on
the amount of input VAT that may be claimed as a
credit against the output VAT; Section 114(C) of the
NIRC as amended by the EVAT Law, requiring the
government or any of its instrumentalities to
withhold a 5% final withholding tax on their gross
payments on purchases of goods and services; for
finding that the EVAT Law is not arbitrary, oppressive
and confiscatory as to amount a deprivation of property
without due process of law; that it did not violate the
equal protection clause.
R: MRs are DENIED. TRO is lifted.
Escudero, et al. argues that the bicameral committee should
not have touched on the No Pass-On Provisions since
both the Senate and the House of Representatives were in
agreement that such provision should be passed where no
VAT Burden shall be passed to the end-consumer and
instead will be shouldered by the sellers.
HOWEVER, the deletion of the No Pass-On
Provision made the present VAT law more in
consonance with the very nature of VAT which is a tax
on spending or consumption, thus, the burden thereof is
ultimately borne by the end-consumer.

As to the contention that the right to credit input tax has

already evolved into a vested right, the Court finds that the
right to credit the same is a mere creation of law. Prior to
the enactment of multi-stage sales taxation, the sales taxes
paid at every level of distribution are not recoverable from
the taxes payable. With the advent of EO 273 imposing a
10% multi-stage tax on all sales, it was only then that the
crediting of the input tax paid on purchase or importation of
goods and services by VAT-registered persons against the
output tax was established. This continued with the
Expanded VAT Law (R.A. No. 7716), and The Tax Reform
Act of 1997 (R.A. No. 8424). The right to credit input tax
as against the output tax is clearly a privilege created by
law, a privilege that also the law can limit. It should be
stressed that a person has no vested right in statutory
privileges.
The impact of the 70% limitation on the creditable input tax
will ultimately depend on how one manages and operates its
business. Market forces, strategy and acumen will dictate their
moves. With or without these VAT provisions, an
entrepreneur who does not have the ken to adapt to
economic variables will surely perish in the competition. The
arguments posed are within the realm of business, and the
solution lies also in business.

VAT
III. Persons Liable
CIR V. MAGSAYSAY LINES INC. [Alfie]
FACTS:
1. Pursuant to a government program of privatization, the
National Development Company (NDC) decided to sell

to private enterprises all of its shares in its wholly-owned

subsidiary the National Marine Corporation;
2. Included in this sale were 5 ships which are 3,700 DWT
Tween-Decker Kloeckner type vessels.
ISSUE: Whether the sale of these vessels is subject to VAT.
HELD: NO. NOT SUBJECT TO VAT.
VAT is ultimately a tax on consumption, even though it is
assessed on many levels of transactions on the basis of a fixed
percentage. It is the end user of consumer goods or services
which ultimately shoulders the tax, as liability therefrom is passed
on to end users by the providers of these goods or services who
in turn may credit their own VAT liability or input VAT from the
VAT payments they receive from the final consumer. In this case,
NDC according to its Revised Charter bears no indication that
NDC was created for the primary purpose of selling real
property. The conclusion that the sale was not in the course of
trade or business, which the CIR does not dispute, 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.
MINDANAO II GEOTHERMAL PARTNERSHIP V. CIR
FACTS:
1. Mindanao I and II (Mindanao) are value-added taxpayers, and
Block Power Production Facilities accredited by the Department
of Energy.
2. They had a Build-Operate-Transfer contract with the
Philippine National Oil CorporationEnergyDevelopment
Company (PNOC-EDC), whereby Mindanao converts steam
supplied to it by PNOC-EDC into electricity, and then delivers

the electricity to the National Power Corporation (NPC) in behalf

of PNOC-EDC.
3. The Electric Power Industry Reform Act of 2000 (EPIRA, RA
9136), amended the Tax Reform Act of 1997 (RA 8424), when it
decreed that sales of power by generation companies shall be
subjected to a zero rate of VAT.
4. Pursuant to EPIRA, Mindanao I and II filed their claims for
the issuance of tax credit certificates on unutilized or excess input
taxes from their sales of generated power and delivery of electric
capacity and energy to NPC.
5. The CTA En Banc denied Mindanao IIs claims for refund tax
credit for the first and second quarters of 2003, and Mindanao Is
claims for refund/tax credit for the first, second, third, and
fourth quarters of 2003, for being filed out of time.
ISSUE: Whether the sale of the fully-depreciated Nissan Patrol is
a one-time transaction not incidental to the VAT zero-rated
operation of Mindanao II, thus not VATable?
HELD: NO.
Mindanao II asserts that the sale of a fully depreciated
Nissan Patrol is not an incidental transaction in the course of its
business but an isolated transaction that should not have been
subject to 10% VAT.
It does not follow that an isolated transaction cannot be
an incidental transaction for purposes of VAT liability. Indeed, a
reading of
Section 105 would show that a transaction in the course of trade
or business includes transactions incidental thereto.
In the course of its business, Mindanao II bought and
eventually sold a Nissan Patrol. Prior to the sale, the Nissan
Patrol was part of Mindanao IIs property, plant, and equipment.
Therefore, the sale of the Nissan Patrol is an incidental

transaction made in the course of Mindanao IIs business which

should be liable for VAT.
VAT

III. E.3. Meaning of Sale or Exchange of Services

CIR v. CA and Commonwealth Management and Services

Corporation

Commonwealth Management and Services Corporation

(COMASERCO), is a Phil corp w/c is an affiliate of
PHILAMLIFE organized by the latter to perform collection,
consultative and other technical services, including
functioning as an internal auditor, of Philamlife and its other
affiliates.
BIR issued an assessment to private respondent
COMASERCO for deficiency VAT amounting to P351k+
for taxable year 1988.
COMASERCO filed with the BIR, a letter-protest objecting
to the latter's finding of deficiency VAT, but the CIR sent a
collection letter to COMASERCO demanding payment of
the deficiency VAT.
Thus COMASERCO file with the CTA a petition for review
wherein they 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. Thus, it is not liable to pay VAT.
I: W/n COMASERCO was engaged in the sale of services,
and thus liable to pay VAT thereon

R: YES, COMASERCO is liable to pay VAT (reversing CAs

decision and reinstating the decision of the Tax Appeal in
favor of the Commissioner)
CIR avers that to "engage in business" and to "engage in the
sale of services" are two different things.
SC agreed w/ CIR in saying 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.
Sec 99 of the NIRC provides that 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 VAT
imposed in Sections 100 to 102 of this Code."
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."
HOWEVER, the EVAT Law 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" incorporated in the 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.
Section 108 of the NIRC 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."
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.

CIR v SM Primeholdings Inc.

SM Prime and First Asia are both engaged in the business of

operating cinema houses, among others.
BIR sent them both preliminary assessment notices for VAT
deficiency on cinema ticket sales.
Both protested, but BIR denied their protests, arguing that
the list of enumerated services under Sec. 108 of the
NIRC is not exhaustive because it covers all sales of

services. Also, the deficiency assessments were based on

Revenue Memorandum Circular No. 28-2001.
CTA ruled that the activity of showing cinematographic films
was NOT subject to VAT, and should instead be subject to
an amusement tax.
CTA en banc affirmed this, saying that section 108 of the
NIRC actually sets forth an exhaustive enumeration of what
services are intended to be subject to VAT, w/c does NOT
include the showing films and motion pictures.
I: W/n the gross receipts derived from admission tickets by
cinema/theater operators or proprietors are subject to VAT
R: NO, it is not subject to VAT.
The enumeration of services subject to VAT under Sec. 108
of the NIRC is not exhaustive. It is up to the court to
determine if showing of films and motion pictures fall under
the phrase similar services of Sec. 108 by ascertaining the
intent of the legislature.
Based on various amendments to the VAT coverage, none
pertain to cinema/theater operators or proprietors. In fact,
the activity of showing films and motion pictures has always
been considered as a form of entertainment subject to
amusement tax.
At present, only lessors or distributors of
cinematographic films are subject to VAT, while persons
subject to amusement tax are exempt from the coverage
of VAT.
It is therefore clear that the legislature never intended to
subject this kind of activity to VAT. To hold otherwise
would
impose
an
unreasonable
burden
on
cinema/theater houses operators or proprietors, who
would be paying an additional 10% VAT on top of the
30% amusement tax imposed by Sec. 140 of the Local
Govt. Code, or a total of 40% tax.

Such imposition would result in injustice, as persons taxed

under the NIRC of 1997 would be in a better position than
those taxed under the LGC of 1991.
The repeal of the Local Tax Code by the LGC of 1991 is not
a legal basis for the imposition of VAT on the gross receipts
of cinema/theater operators or proprietors derived from
admission tickets. The removal of the prohibition under the
Local Tax Code did not grant nor restore to the national
government the power to impose amusement tax on
cinema/theater operators or proprietors.
Neither did it expand the coverage of VAT. Since the
imposition of a tax is a burden on the taxpayer, it cannot be
presumed nor can it be extended by implication. As it is, the
power to impose amusement tax on cinema/theater operators
or proprietors remains with the local government.
Considering that there is no provision of law imposing VAT
on the gross receipts of cinema/theater operators or
proprietors derived from admission tickets, RMC No. 282001 which imposes VAT on the gross receipts from
admission to cinema houses is therefore invalid.
The rule on tax exemptions should be construed strictly
against the taxpayer does not apply in this case. SM
Primeholdings and First Asia need not prove that they are
exempted from the coverage of VAT. Such rule presupposes
that the taxpayer is clearly subject to the tax being levied
against him.
The reason is obvious: it is both illogical and impractical to
determine who are exempted without first determining who
are covered by the provision. Thus, unless a statute imposes a
tax clearly, expressly and unambiguously, what applies is the
equally well-settled rule that the imposition of a tax cannot
be presumed. In fact, in case of doubt, tax laws must be

construed strictly against the government and in favor of the

taxpayer.
DIAZ AND TIMBOL V. CIR [Jongko]
FACTS:
Petitioners Diaz and Timbol filed a petition for
declaratory relief assailing the validity of the imposition of
VAT by BIR on the collections of the tollway operators. They
claim that VAT would result in increased toll fees. That the
Congress in enacting the Tax Code, did intend to not include toll
fees within the meaning of sale of services that are
subject to VAT; that toll fee is a users tax, not a sale of
services; that to impose VAT on toll fees would amount to a
tax on public service. The OSG, on the other hand, stated
that the Tax Code imposes VAT on all kinds of
services of franchise grantees, including tollway operations,
except where the law provides otherwise.
ISSUE: ARE TOLLWAY OPERATORS COVERED BY VAT? Ruling:
YES, BECAUSE THEY RENDER SERVICES FOR AFEE. THEY
ARE JUST LIKE LESSORS, WAREHOUSEOPERATORS , AND
OTHER GROUPS EXPRESSLYMENTIONED IN THE LAW.
ISSUE:
Now, do tollway operators render services for a fee?
Presidential Decree (P.D.) 1112 or the Toll Operation Decree
establishes the legal basis for the services that tollway operators
render. Essentially, tollway operators construct, maintain, and
operate expressways, also called tollways, at the operators
expense. Tollways serve as alternatives to regular public highways
that meander through populated areas and branch out to local
roads. Traffic in the regular public highways is for this reason
slow-moving. In consideration for constructing tollways at their

expense, the operators are allowed to collect governmentapproved fees from motorists using the tollways until such
operators could fully recover their expenses and earn reasonable
returns from their investments. When a tollway operator takes a
toll fee from a motorist, the fee is in effect for the latters use of
the tollway facilities over which the operator enjoys private
proprietary rights that its contract and the law recognize. In this
sense, the tollway operator is no different from the following
service providers under Section108 who allow others to use their
properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels,rest
houses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods
or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers by
land relative to their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transp
ort of passengers, goods or cargoes from one place in the
Philippines to another place in the Philippines.
It does not help petitioners cause that Section 108
subjects to VAT all kinds of services rendered for a fee
regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties. This
means that services to be subject to VAT need not fall under
the traditional concept of services, the personal or professional
kinds that require the use of human knowledge and skills.
COMMISSIONER OF INTERNAL REVENUE vs.
PLACER DOME TECHNICAL SERVICES (PHILS.),

INC.
FACTS: At the San Antonio Mines in Marinduque owned by
Marcopper Mining Corporation (Marcopper), mine tailings from
the Taipan Pit started to escape through the Makulapnit Tunnel
and Boac Rivers, causing the cessation of mining and milling
operations, and causing potential environmental damage. To
contain the damage and prevent the further spread of the tailing
leak, Placer Dome, Inc. (PDI), the owner of 39.9% of
Marcopper, undertook to perform the clean-up and rehabilitation
of the Makalupnit and Boac Rivers, through a subsidiary. To
accomplish this, PDI engaged Placer Dome Technical Services
Limited (PDTSL), a non-resident foreign corporation with office
in Canada, to carry out the project. In turn, PDTSL engaged the
services of Placer Dome Technical Services (Philippines), Inc.
(respondent), a domestic corporation and registered Value-Added
Tax (VAT) entity, to implement the project in the Philippines.
PDTSL and respondent thus entered into an Implementation
Agreement. Due to the urgency and potentially significant
damage to the environment, respondent had agreed to
immediately implement the project, and the Implementation
Agreement stipulated that all implementation services rendered
by respondent even prior to the agreements signing shall be
deemed to have been provided pursuant to the said Agreement.
The Agreement further stipulated that PDTSL was to pay
respondent "an amount of money, in U.S. funds, equal to all
Costs incurred for Implementation Services as well as a fee
agreed to one percent (1%) of such Costs."

Respondent amended its quarterly VAT returns. In the amended

returns, respondent declared a total input VAT payment of
P43,015,461.98 for the said quarters, and P42,837,933.60 as its
total excess input VAT for the same period. Then respondent
filed an administrative claim for the refund of its reported total
input VAT payments in relation to the project it had contracted
from PDTSL, amounting to P43,015,461.98. Respondent argued
that the revenues it derived from services rendered to PDTSL,
pursuant to the Agreement, qualified as zero-rated sales under
Section 102(b)(2) of the then Tax Code, since it was paid in
foreign currency inwardly remitted to the Philippines. When the
CIR did not act on this claim, respondent duly filed a Petition for
Review with the CTA, praying for the refund. CIR merely
invoked the presumption that taxes are collected in accordance
with law, and that claims for refund of taxes are construed strictly
against claimants.
CTA ruled in favor of respondent but only the resulting input
VAT of P17,178,373.12 could be refunded.
The rulings of the CTA were elevated by petitioner to the CA on
Petition for Review. CA affirmed the CTA ruling.
ISSUE: Whether Placer is entitled to the refund as the revenues
qualified as zero-rated sales
HELD: Yes
Section 102. Value-Added Tax on Sale of Services and Use or Lease of
Properties.

(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].
It is Section 102(b)(2) which finds special relevance to this case.
The VAT is a tax on consumption "expressed as a percentage of
the value added to goods or services" purchased by the producer
or taxpayer. As an indirect tax on services, its main object is the
transaction itself or, more concretely, the performance of all
kinds of services conducted in the course of trade or business in
the Philippines. These services must be regularly conducted in
this country; undertaken in "pursuit of a commercial or an
economic activity;" for a valuable consideration; and not exempt
under the Tax Code, other special laws, or any international
agreement.
Yet even as services may be subject to VAT, our tax laws extend

the benefit of zero-rating the VAT due on certain services.

The law is very clear. Under the last paragraph [of Section
102(b)], 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.
Petitioner presently invokes the "destination principle," citing
that [r]espondents services, while rendered to a non-resident
foreign corporation, are not destined to be consumed abroad.
Hence, the onus of taxation of the revenue arising therefrom, for
VAT purposes, is also within the Philippines. Yet the Court in
American Express debunked this argument:
As a general rule, the VAT system uses the destination principle
as a basis for the jurisdictional reach of the tax. Goods 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. The consumption contemplated by law,
contrary to petitioner's administrative interpretation, 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." 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" 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" when
determining the service "location or position x x x for legal
purposes."
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]." x x x x
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. 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.
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
jurisdiction to impose the VAT. Performed in the Philippines,
such service is necessarily subject to its jurisdiction, for the State
necessarily has to have "a substantial connection" to it, in order
to enforce a zero rate. The place of payment is immaterial; much
less is the place where the output of the service will be further or
ultimately used.
ACCENTURE V. CIR
FACTS:
Accenture is a VAT-registered taxpayer engaged in the
business of providing management consulting, business strategies
development, and selling and/or licensing of software. For the
taxable year 2002, Accentures monthly and quarterly VAT
returns show that, notwithstanding its application of the input
VAT credits earned from its zero-rated transactions against its
output VAT liabilities, it still had excess or unutilized input VAT
credits.
Thus, on 1 July 2004, Accenture filed with DOF an
administrative claim for the refund or the issuance of a Tax
Credit Certificate (TCC). There was no action from DOF. On 31
August 2004, Accenture filed a Petition for Review CTA Division
praying for the issuance of a TCC in its favor in the amount of
35,178,844.21.
The CTA Division ruled that Accenture had failed to
present evidence to prove that the foreign clients to which the
former rendered services did business outside the Philippines,
thus not zero-ratable.

Accenture appealed to the CTA En Banc. It argued that

prior to the amendment introduced by Republic Act No. (R.A.)
9337, 25 there was no requirement that the services must be
rendered to a person engaged in business conducted outside the
Philippines to qualify for zero-rating. The CTA En Banc however
found that as Section 108(B)(2) of the 1997 Tax Code was a mere
reenactment of Section 102(b)(2) of the 1977 Tax Code, the
requirement of proof that the services must be rendered to a
person engaged in business conducted outside the Philippines
was still applicable. The CTA En Banc concluded that Accenture
failed to discharge the burden of proving the latters allegation
that its clients were foreign-based.
ISSUE:
WON the recipient/s of the services must be doing business
outside the Philippines, for the transaction to be zero-rated
under Section 108(B)(2) of the 1997 Tax Code?
HELD: YES
After briefly tracing the history of the related NIRC
provisions and revisions, E.O.s, and IRRs, the SC ruled that the
recipient of the service must be doing business outside the
Philippines for the transaction to qualify for zero-rating under
Section 108(B) of the Tax Code. The SC accepted the CTA En
Bancs position: because Section 108(B) of the 1997 Tax Code is
a verbatim copy of Section 102(b) of the 1977 Tax Code, any
interpretation of the latter holds true for the former.
The SC corrected Accentures interpretation of the Amex
case. Said the SC: We ruled in Amex that Section 102 of the
1977 Tax Code does not require that the services be consumed
abroad to be zero-rated. However, nowhere in that case did this
Court discuss the necessary qualification of the recipient of the
service, as this matter was never put in question. In fact, the
recipient of the service in Amex is a nonresident foreign client.

The SC emphasized that Congress had already clarified

the intent behind Sections 102(b)(2) of the 1977 Tax Code and
108(B)(2) of the 1997 Tax Code amending the earlier provision.
R.A. 9337 added the following phrase:
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 SC found that the evidence presented by Accenture
may have established that its clients are foreign. This fact does
not automatically mean, however, that these clients were doing
business outside the Philippines.
WHEREFORE, the instant Petition is DENIED. The CTA En
Banc decision and resolution dismissing the Petition for the
refund of the excess or unutilized input VAT credits of
Accenture are AFFIRMED.
ATLAS CONSOLIDATED V. CIR
FACTS:
1. Petitioner is engaged in the business of mining, production and
sale of various mineral products, consisting principally of copper
concentrates and gold and duly registered with the BIR [Bureau
of Internal Revenue] as a VAT [Value Added Tax] enterprise per
its Registration No. 32-A-6-002224. Respondent [BIR] duly
approved petitioners application for VAT zero-rating of the
following sales:
a. Gold to the Central Bank (CB) [now referred to as the
Bangko Sentral ng Pilipinas;]
b. Copper concentrates to the Philippines Smelting and
Refining Corp. (PASAR); and

c. Pyrite [concentrated] to Philippine Phosphates, Inc.

(Philphos).
The BIRs approval of sales to CB and PASAR was dated
April 21, 1988 while zero-rating of sales to PHILPHOS was
approved effective June 1, 1988.
2. PASAR and Philphos are both Board of Investments (BOI)
and Export Processing Zone Authority (EPZA) registered
export-oriented enterprises located in an EPZA zone.
3. On April 20, 1990, petitioner filed a VAT return with the BIR
for the first quarter of 1990 whereby it declared its sales
described in par. 3 hereof, i.e., to the CB, PASAR and Philphos,
as zero-rated sales and therefore not subject to any output VAT .
4. On or about July 24, 1990, petitioner filed a claim with
respondent for refund/credit of VAT input taxes on its purchase
of goods and services for the first quarter of 1990 in the total
amount of P40,078,267.81.
5. On or about September 2, 1992, petitioner filed an Amended
Application for tax credit/refund in the amount of
P35,522,056.58.
6. On September 9, 1992, respondent resolved petitioners claim
for VAT refund/credit by allowing only P2,518,122.32 as
refundable/creditable while disallowing P33,003,934.26.
7. A supplemental report of investigation was submitted by the
BIR examiners on October 15, 1992 recommending the increase
in allowable input tax credit from P 2,518,122.32 to
P12,101,569.11 or an increment of P9,583,446.79 due to
petitioners submission of BOI certifications on the sales to
PASAR which brought down the deduction of P12,404,150.65 to
P2,518,122.32.
8. The parties further stipulated that the issues to be resolved is
the applicability of Revenue Regulation 2-88 in that it requires the
purchaser to export more than 70% of its total sales for the
supplier, such as petitioner to be 100% zero-rated.

9. On November 8, 1993, the [Court of Tax Appeals] rendered a

decision . . . The petitioner moved for reconsideration of the
decision, which motion the respondent court denied.
10. The CA ruled that the parties were bound by the abovequoted Joint Stipulation of Facts which it was powerless to
modify, the Court of Appeals held:" [I]t is beyond cavil that the
petitioner is registered with the BIR as a VAT enterprise effective
August 15, 1990." It upheld VAT Ruling No. 008-92 regarding
the schedule of taxes to be imposed on VAT-registered entities,
explaining that the "zero-percent rating" of BOI-registered
enterprises shall be set in proportion to the amount of its actual
exports; and that EPZA and BOI registrations were by
themselves not enough for zero-rating to apply.
11. On August 24, 1998, the present Petition was filed.
ISSUE: Whether or not the court a quo erred in not holding that
the totality of sales to EPZA-registered enterprises should be
zero-rated, not merely the proportion which such sales have to
the actual exports of the enterprise.
RULING: The Petition is partly meritorious.
On VAT Exemption of Sales to Export-Oriented Enterprises
Petitioner criticizes the respondent commissioner, as its
sales to PASAR and Philphos both registered with the BOI
(Board of Investments) and EPZA (Export Processing Zone
Authority) as export-oriented entities were zero-rated only in
proportion to the actual exports made by the two, and not to the
entirety of petitioners sales to them.
Respondent, on the other hand, maintains that before
zero-rating can be applied, petitioner must first show that the
entities to which the raw materials have been sold are exportoriented, and that their export sales exceed 70 percent of their
total annual production. Should these conditions be met, zero-

rating would apply, but only in proportion to the exports actually

made.
The Joint Stipulation of Facts expressly states that
petitioners sales of raw materials have been approved for zerorating. Verily, the commissioner has already conceded that
PASAR and Philphos qualify as export-oriented enterprises
whose export sales exceed 70 percent of their total annual
production, and that petitioners sales to them thus qualify for
zero-rating.
Finding that the respondent commissioner had indeed
already approved the zero-rating of petitioners past sales to
PASAR and Philphos, the CA ruled:
"Indeed, the BIR has already recognized
and admitted that said transactions are
zero-rated. Said stance is demonstrated in
the following acts of the BIR:
a. the grant of petitioners
applications for zero-rating of sales to
PASAR AND PHILPHOS;
b. Revenue Regulation No. 2-88,
wherein it recognized sales to BOIregistered enterprises which export over
70% of its sales as zero-rated, subject to
certain;
c. VAT Ruling No. 271-88 (dated
June 24, 1988), wherein it was recognized
that sales to PHILPHOS are zero-rated;
d. Letter dated April 18, 1988,
whereby it recognized that sales of copper
concentrates to PASAR are zero-rated;
and
e. VAT Ruling No. 008-92, which
states that the sale of raw materials to

BOI-registered enterprises can qualify for

zero-rating.
Finally, an examination of Section 4.100.2 of Revenue
Regulation 7-95 14 in relation to Section 102 (b) of the Tax Code
shows that sales to an export-oriented enterprise whose export
sales exceed 70 percent of its annual production are to be zerorated, provided the seller complies with other requirements, like
registration with the BOI and the EPZA. The said Regulation
does not even hint, much less expressly mention, that only a
percentage of the sales would be zero-rated. The internal revenue
commissioner cannot, by administrative fiat, amend the law by
making compliance therewith more burdensome.
VAT
III.F. Exempt Transactions
CIR V. CEBU TOYO
Facts:
Cebu Toyo Corp. (Cebu) is a domestic subsidiary of Toyo
Lens Corporation Japan, engaged in the manufacture of
lenses and various optical components used in TV set,
cameras, CDs, etc.
Its principal office is located at the Mactan Export
Processing Zone (MEPZ) as a zone export enterprise
registered with the PEZA.
It is also registered with the BIR as a VAT taxpayer.
Cebu sells 80% of its products to its mother corporation,
pursuant to an Agreement of Offsetting.
The rest are sold to various enterprises doing business in
the MEPZ.

On March 30, 1998, it filed an application for tax

credit/refund of VAT paid for the period April 1996 to
December 1997 amounting to about P4.4 million
representing excess VAT input payments.
Cebu argues 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 refund.
The BIR opposed this on the following grounds: It failed
to show that the tax was erroneously or illegally collected;
the taxes paid and collected are presumed to have been
made in accordance with law; and that claims for refund
are strictly construed against the claimant.
The CTA ruled that not the entire amount claimed for
refund by Toyo were actually offset against its related
accounts.
It determined that the refund/credit amounted only to
P2.1M. The same was affirmed by the CA.
ISSUE:
Whether the CA erred in affirming the CTA granting a refund
representing unutilized input VAT on goods and services.
HELD: The petition is denied.
Cebu is entitled to the P2.1M tax refund/credit.
Petitioners contention that respondent is not entitled to
refund for being exempt form VAT is untenable.
This argument turns a blind eye to the fiscal incentives
given to PEZA registered enterprises under RA 7916.
Under this statute, Cebu has two options with
respect to its tax burden.

o It could avail of an income tax holiday pursuant to

EO 226, thus exempting it from income taxes for
a number of years (in this case, 4 years) but not
from other internal revenue taxes such as VAT;
o Or it could avail of the tax exemption on all taxes,
including VAT under PD 66 and pay only the
preferential rate of 5% under RA 7916.
Thus, availing of the first option, respondent is not
exempt from VAT and it correctly registered itself as
a VAT taxpayer.
In fine, it is engaged in a taxable rather than exempt
transactions.
In taxable transactions, the seller (Cebu) shall be entitled
to tax credit for the VAT paid on purchases and leases of
goods properties or services.
Under the VAT system, a zero-rate sale by a VATregistered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax.
However, input tax on his purchase of goods, properties
or services related to such zero-related sale shall be
available as a tax credit or refund.
While a zero rating and 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 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 output 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.
Since Cebu did not have any output tax against which said input
tax may be offset, it had the option to file a claim for tax
refund/credit of its unutilized input taxes.
TOSHIBA INFORMATION EQUIPMENT (PHILS.),
INC. V. CIR
FACTS
In this Petition for Review on Certiorari under Rule 45 of
the Rules of Court, petitioner Toshiba Information Equipment
(Philippines), Inc. (Toshiba) seeks the reversal and setting aside
of (1) the Decision dated August 29, 2002 of the Court of
Appeals in CA-G.R. SP No. 63047, which found that Toshiba
was not entitled to the credit/refund of its unutilized input
Value-Added Tax (VAT) payments attributable to its export sales,
because it was a tax-exempt entity and its export sales were VATexempt transactions; and (2) the Resolution dated February 19,
2003 of the appellate court in the same case, which denied the
Motion for Reconsideration of Toshiba. The herein assailed
judgment of the Court of Appeals reversed and set aside the
Decision dated October 16, 2000 of the Court of Tax Appeals
(CTA) in CTA Case No. 5762 granting the claim for
credit/refund of Toshiba in the amount of P1,385,282.08.
Toshiba is a domestic corporation principally engaged in
the business of manufacturing and exporting of electric
machinery, equipment systems, accessories, parts, components,
materials and goods of all kinds, including those relating to office
automation and information technology and all types of
computer hardware and software, such as but not limited to
HDD-CD-ROM and personal computer printed circuit board. It
is registered with the Philippine Economic Zone Authority

(PEZA) as an Economic Zone (ECOZONE) export enterprise

in the Laguna Technopark, Inc. In its VAT returns for the first
and second quarters of 1997, filed on April 14, 1997 and July 21,
1997, respectively, Toshiba declared input VAT payments on its
domestic purchases of taxable goods and services in the aggregate
sum of P3,875,139.65, with no zero-rated sales. Toshiba
subsequently submitted to the BIR on July 23, 1997 its amended
VAT returns for the first and second quarters of 1997, reporting
the same amount of input VAT payments but, this time, with
zero-rated sales totalingP7,494,677,000.00
The CIR contended that under Section 24 of Republic
Act No. 7916, a special law, all businesses and establishments
within the ECOZONE were to remit to the government five
percent (5%) of their gross income earned within the zone, in lieu
of all taxes, including VAT. This placed Toshiba within the ambit
of Section 103(q) of the Tax Code of 1977, as amended, which
exempted from VAT the transactions that were exempted under
special laws. Following Section 4.103-1(A) of Revenue
Regulations No. 7-95, the VAT-exemption of Toshiba meant that
its sale of goods was not subject to output VAT and Toshiba as
seller was not allowed any tax credit on the input VAT it had
previously paid. Toshiba filed a Motion for Reconsideration of
the aforementioned Decision, anchored on the following
arguments: (a) the CIR never raised as an issue before the CTA
that Toshiba was tax-exempt under Section 24 of Republic Act
No. 7916; (b) Section 24 of Republic Act No. 7916, subjecting
the gross income earned by a PEZA-registered enterprise within
the ECOZONE to a preferential rate of five percent (5%), in lieu
of all taxes, did not apply to Toshiba, which availed itself of the
income tax holiday under Section 23 of the same statute; (c) the
conclusion of the CTA that the export sales of Toshiba were
zero-rated was supported by substantial evidence, other than the
admission of the CIR in the Joint Stipulation of Facts and Issues;
and (d) the judgment of the CTA granting the refund of the input

VAT payments was supported by substantial evidence and should

not have been set aside by the Court of Appeals. In a Resolution
dated February 19, 2003, the Court of Appeals denied the Motion
for Reconsideration of Toshiba since the arguments presented
therein were mere reiterations of those already passed upon and
found to be without merit by the appellate court in its earlier
Decision. The Court of Appeals, however, mentioned that it was
incorrect for Toshiba to say that the issue of the applicability of
Section 24 of Republic Act No. 7916 was only raised for the first
time on appeal before the appellate court. The said issue was
adequately raised by the CIR in his Motion for Reconsideration
before the CTA and was even ruled upon by the tax court.
In the case at bar, the CIR, in the Joint Stipulation of
Facts and Issues, admitted that Toshiba was a registered VAT
entity and that it was subject to 0% VAT on its export sales.
Later, in his Motion for Reconsideration of the adverse Court of
Tax Appeals decision, the CIR would argue that Toshiba was not
entitled to its claim for tax refund/credit because it was VATexempt and its export sales were VAT-exempt transactions (CIR
argued this way because if the export sales were VAT exempt,
then it would be entitled to claim any credit from input tax)
HELD:
The Supreme Court ruled that Toshiba was a registered
VAT entity and its export sales were subject to 0% VAT.
Court of Tax Appeals; issues not raised.
Failure by the Commissioner of Internal Revenue (CIR)
to timely plead and prove before the CTA the defenses that
Toshiba was VAT-exempt under Republic Act No. 7916 and that
its export sales were VAT-exempt under the Tax Code is deemed
a waiver of such defenses.
CTA; judicial admissions.

An admission made in a stipulation of facts at pre-trial by

the parties is considered a judicial admission and, under the Rules
of Court, requires no proof. Such admission may be controverted
only by a showing that it was made through a palpable mistake or
that no such admission was made.
Value-added tax (VAT); exemption.
Prior to the issuance by the BIR of Revenue
Memorandum Circular No. 74-99, whether a PEZA-registered
enterprise was exempt from VAT or subject to VAT depended
on the type of fiscal incentive availed of by said enterprise. If the
enterprise availed itself of 5% gross income taxation under
Republic Act No. 7916, it was exempt from VAT. If it availed
itself of income tax holiday under the Omnibus Investments
Code, it was subject to VAT.
Value-added tax (VAT); exemption.
Prior to the issuance by the BIR of Revenue
Memorandum Circular No. 74-99, whether a PEZA-registered
enterprise was exempt from VAT or subject to VAT depended
on the type of fiscal incentive availed of by said enterprise. If the
enterprise availed itself of 5% gross income taxation under
Republic Act No. 7916, it was exempt from VAT. If it availed
itself of income tax holiday under the Omnibus Investments
Code, it was subject to VAT.
VAT; zero-rating.
Upon issuance of RMC 74-99, the rule was clearly
established that following the cross-border doctrine, based on the
fiction that ecozones are foreign territory, a sale by a supplier in
the customs territory to a PEZA-registered enterprise is
considered an export sale and therefore subject to zero VAT.

MISAMIS ORIENTAL ASSOC. OF COCO TRADERS V.

DOF SEC. ET AL.
Tax Exemptions: In interpreting 103(a) and (b) of the NIRC, the
Commissioner of Internal Revenue gave it a strict construction consistent with
the rule that tax exemptions must be strictly construed against the taxpayer
and liberally in favor of the state.
FACTS:
Petitioner Misamis Oriental Association of Coco Traders,
Inc. is a domestic corporation whose members, individually or
collectively, are engaged in the buying and selling of copra in
Misamis Oriental. The petitioner alleges that prior to the issuance
of Revenue Memorandum Circular 47-91 on June 11, 1991,
which implemented VAT Ruling 190-90, copra was classified as
agricultural food product under $ 103(b) of the National Internal
Revenue Code and, therefore, exempt from VAT at all stages of
production or distribution.
Respondent Commissioner of Internal Revenue issued
the circular in question, classifying copra as an agricultural nonfood product and declaring it "exempt from VAT only if the sale
is made by the primary producer pursuant to Section 103(a) of
the Tax Code, as amended."
The reclassification had the effect of denying to the
petitioner the exemption it previously enjoyed when copra was
classified as an agricultural food product under 103(b) of the
NIRC. Petitioner challenges RMC No. 47-91 on various grounds.
ISSUES:
1. Whether or not the Bureau of Food and Drug of the
Department of Health (BFAD), and not the BIR, is the
competent government agency to determine the proper
classification of food products.

Whether or not Petitioner was denied due process because it

was not heard before the ruling was made.
3. Whether or not RMC No. 47-91 is discriminatory and
violative of the equal protection clause of the Constitution
because while coconut farmers and copra producers are
exempt, traders and dealers are not, although both sell copra
in its original state.
4. Whether or not RMC No. 47-91 is counterproductive because
traders and dealers would be forced to buy copra from
coconut farmers who are exempt from the VAT and that to
the extent that prices are reduced the government would lose
revenues as the 10% tax base is correspondingly diminished.
2.

HELD:
1. NO, the BIR, and not BFAD, is the competent government
agency to determine the proper classification of food
products. In interpreting 103(a) and (b) of the NIRC, the
Commissioner of Internal Revenue gave it a strict
construction consistent with the rule that tax exemptions
must be strictly construed against the taxpayer and liberally in
favor of the state. Moreover, 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.
Indeed, the ruling was made by the Commissioner of Internal
Revenue in the exercise of his power under 245 of the
NIRC to "make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws,
including rulings on the classification of articles for sales tax
and similar purposes."
2. NO, petitioner was not denied due process because the
circular in question is a mere interpretative rule, which are
designed to provide guidelines to the law which the

administrative agency is in charge of enforcing. In the case of

an interpretative rule, the inquiry is not into the validity but
into the correctness or propriety of the rule. As a matter of
power a court, when confronted with an interpretative rule, is
free to (i) give the force of law to the rule; (ii) go to the
opposite extreme and substitute its judgment; or (iii) give
some intermediate degree of authoritative weight to the
interpretative rule. In the case at bar, the court found no
reason for holding that respondent Commissioner erred in
not considering copra as an "agricultural food product" within
the meaning of 103(b) of the NIRC.
3. NO, RMC No. 47-91 is not discriminatory and violative of
the equal protection clause of the Constitution. There is a
material or substantial difference between coconut farmers
and copra producers, on the one hand, and copra traders and
dealers, on the other. The former produce and sell copra, the
latter merely sell copra. The Constitution does not forbid the
differential treatment of persons so long as there is a
reasonable basis for classifying them differently.
4. No, RMC No. 47-91 is not counterproductive. The sale of
agricultural non-food products is exempt from VAT only
when made by the primary producer or owner of the land
from which the same is produced, but in the case of
agricultural food products their sale in their original state is
exempt at all stages of production or distribution. At any rate,
the argument that the classification of copra as agricultural
non-food product is counterproductive is a question of
wisdom or policy which should be addressed to respondent
officials and to Congress.

WHEREFORE, the reclassification is valid because copra is

found as a non-food product for purposes of the provision of the
NIRC. The petition was DISMISSED.
Hermano (San Miguel) Febres Cordero Medical
Foundation, Inc. v. CIR
FACTS:
Hermano is seeking the cancellation of Final Assessment
Notice (FAN) issued by the BIR for VAT deficiency amounting
to P2,607,933.07, arising from its sale of pharmacy items to its inpatients, in line with its rendering of hospital services.
Hermanos grounds are: (1) The FAN is void for they
merely showed a mathematical computation of petitioner's tax
liability without stating the factual and legal bases of the same; (2)
CIR failed to take into consideration that its sales of pharmacy
items to its in-patients are exempt from VAT pursuant to Section
109(L).
ISSUE: Whether the FAN is void.
HELD:
The FAN is not void based in the first ground.
Section 228 provides that in the assessment, The
taxpayers shall be informed in writing of the law and the facts on
which the assessment is made; otherwise, the assessment shall be
void to ensure that taxpayers are duly apprised of the basis of
the tax assessments against them.

Here, in the "Details of Discrepancies", attached to the

assessment, the details contained therein showed that the factual
basis for assessing petitioner for deficiency VAT was the
discrepancy from RELIEF and Third-Party Matching. In a long
line of cases, the SC has ruled that the requirement of the law to
inform the taxpayer of the basis of the assessment does not
necessarily mean that it be a full narration of the facts and laws
on which the assessment is based. Here, Hermano was able to
intelligently make its protest by stating that its sales of
pharmaceutical items in favor of its in-patients are exempt from
VAT. This circumstance proves that petitioner was sufficiently
informed of the facts and the law as to why the assessment has
been issued against it.
However, the assessment of VAT deficiency was
incorrect. As held in Perpetual Succour Hospital vs. CIR and St.
Luke's Medical Center v. CTA & CIR, hospital services includes
not only the services of the doctors, nurses and allied medical
personnel, but also the necessary laboratory services, and making
available the medicines, drugs and pharmaceutical items that are
necessary in the diagnosis, treatment and care of patients. Sale of
drugs or pharmaceutical items to inpatients of the hospital are,
therefore, considered part of the hospital services covered by
Section 109 (l) of the NIRC of 1997, as amended.
CIR V. PHIL HEALTH CARE PROVIDERS, INC.

The Philippine Health Care Providers (PHCPI), a health care

organization for sick and disabled persons enrolled in a health
care plan, wrote BIR inquiring whether the services it
provides are exempt from the payment of the VAT.
BIR issued a ruling, confirmed by the BIR Regional Director,

stating that PHCPI was exempt from the VAT coverage.

BIR then sent PHCPI 2 notices for deficiency in its payment
of the VAT and documentary stamp taxes (DST) f P224M+
for taxable years 1996 and 1997.
PHCPI protested, but BIR did not take any action, so PHCPI
filed with the CTA a petition for review.
CTA ordered PHCPI to pay a reduced deficiency VAT and
declared the BIR ruling void, saying that PHCPI is a service
contractor subject to VAT since it does not actually render
medical service but merely acts as a conduit between the
members and petitioner's accredited and recognized hospitals
and clinics.
However, after a careful review of the facts of the case, the
CTA resolved to grant petitioner's "Motion for Partial
Reconsideration relying on Sec.246 of the 1977 Tax code
which provides that in the absence of showing of bad faith,
the retroactive revocation of the BIR Ruling will be
prejudicial to PHCPI. Accordingly, the VAT assessment
issued against PHCPI for the taxable years 1996 and 1997
was WITHDRAWN and SET ASIDE.
I: 1. W/n PHCPI's services are subject to VAT
R: YES. HOWEVER, because of the VAT ruling exempting
PHCPI from VAT, it cannot be retroactively revoked and
therefore, PHCPI is still exempt.
1) Section 102 of the NIRC as amended provides that there
shall be levied a VAT equivalent to 12% of gross receipts
derived from the sale or exchange of services The
phrase "sale or exchange of service" means the performance
of all kinds of services in the Philippines for consideration.
Section 103 of the same Code specifies the exempt
transactions from the provision, which includes medical,
dental, hospital and veterinary services except those rendered
by professionals.

It can be seen from PHCPIs letter to BIR that its services

that it is not actually rendering medical service but
merely acting as a conduit between the members and
their accredited and recognized hospitals and clinics.
Thus, it does NOT fall under VAT-exempt transactions.
2) Section 246 of the 1997 Tax Code, as amended, provides
that rulings, circulars, rules and regulations promulgated by
the CIR have no retroactive application if to apply them
would prejudice the taxpayer.
The exceptions to this rule are:
o (1) where the taxpayer deliberately misstates or
omits material facts from his return or in any
document required of him by the BIR
o (2) where the facts subsequently gathered by the
BIR are materially different from the facts on
which the ruling is based, or
o (3) where the taxpayer acted in bad faith.
PHCPI did not fall under any of these exceptions.
PHCPI's failure to refer to itself as a health maintenance
organization is not an indication of bad faith or a deliberate
attempt to make false representations.
The term "health maintenance organization" was first
recorded in the Philippine statute books only upon the
passage of "The National Health Insurance Act of 1995"
which defines a "health maintenance org" as one of the
classes of a "health care provider."
Thus, the VAT Ruling was issued in PHCPI's favor, and the
term "health maintenance organization" was yet unknown or
had no significance for taxation purposes. PHCPI therefore,
believed in good faith that it was VAT exempt for the taxable
years 1996 and 1997 on the basis of the VAT Ruling.
CIR is precluded from adopting a position contrary to one
previously taken where injustice would result to the taxpayer.