CYANAMID V.
CA Petitioner claimed that CIRs assessment representing the 25% surtax on its
DOCTRINE: Section 25 of the NIRC discouraged tax avoidance through
corporate surplus accumulation. When corporations do not declare dividends,
income taxes are not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is essentially a
penalty tax designed to compel corporations to distribute earnings so that the
said earnings by shareholders could, in turn, be taxed. The amendatory
provision of Section 25, which was PD 1739, enumerated the corporations
exempt from the imposition of improperly accumulated tax: (a) banks; (b) non-
bank financial intermediaries; (c) insurance companies; and (d) corporations
organized primarily and authorized by the Central Bank of the Philippines to
hold shares of stocks of banks.
As such, Petitioner does not fall among those exempt classes.
FACTS: Petitioner, Cyanamid Philippines, Inc., a corporation organized under
Philippine laws, is a wholly owned subsidiary of American Cyanamid Co.
based in Maine, USA. It is engaged in the manufacture of pharmaceutical
products and chemicals, a wholesaler of imported finished goods, and an
importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and
demanded the payment of deficiency income tax of one hundred nineteen
thousand eight hundred seventeen (P119,817.00) pesos for taxable year
1981.
On March 4, 1985, petitioner protested the assessments particularly, (1) the
25% Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency Income
Assessment of P119,817.00; and 1981 Deficiency Percentage Assessment of
P8,846.72. Petitioner, through its external accountant, claimed, among others,
that the surtax for the undue accumulation of earnings was not proper because
the said profits were retained to increase petitioners working capital and it
would be used for reasonable business needs of the company. Petitioner
contended that it availed of the tax amnesty under Executive Order No. 41,
hence enjoyed amnesty from civil and criminal prosecution granted by the law.
Afterwards, the CIR sent a letter refusing the cancellation of the notices.
Petitioner appealed to the Court of Tax Appeals. During the pendency of the
case, however, both parties agreed to compromise the 1981 deficiency
income tax assessment of P119,817.00. Petitioner paid a reduced amount --
twenty-six thousand, five hundred seventy-seven pesos (P26,577.00) -- as
compromise settlement. However, the surtax on improperly accumulated
profits remained unresolved.
accumulated earnings for the year 1981 had no legal basis for the following
reasons: (a) petitioner accumulated its earnings and profits for reasonable
business requirements to meet working capital needs and retirement of
indebtedness; (b) petitioner is a wholly owned subsidiary of American
Cyanamid Company, a corporation organized under the laws of the State of
Maine, in the United States of America, whose shares of stock are listed and
traded in New York Stock Exchange. This being the case, no individual
shareholder of petitioner could have evaded or prevented the imposition of
individual income taxes by petitioners accumulation of earnings and profits,
instead of distribution of the same.
CTA: denied the petition and ruled that petitioner is liable for accumulated
earnings tax (AET) for 1981.
Relying on decisions of the American Federal Courts, petitioner stresses that
the accumulated earnings tax does not apply to Cyanamid, a wholly owned
subsidiary of a publicly owned company. Specifically, petitioner cites Golconda
Mining Corp. vs. Commissioner, 507 F.2d 594, whereby the U.S. Ninth Circuit
Court of Appeals had taken the position that the accumulated earnings tax
could only apply to a closely held corporation.
Another point raised by the petitioner in objecting to the assessment, is that
increase of working capital by a corporation justifies accumulating income.
Petitioner asserts that respondent court erred in concluding that Cyanamid
need not infuse additional working capital reserve because it had considerable
liquid funds based on the 2.21:1 ratio of current assets to current liabilities.
Petitioner relies on the so-called "Bardahl" formula, which allowed retention,
as working capital reserve, sufficient amounts of liquid assets to carry the
company through one operating cycle. The "Bardahl" formula was developed
to measure corporate liquidity. The formula requires an examination of whether
the taxpayer has sufficient liquid assets to pay all of its current liabilities and
any extraordinary expenses reasonably anticipated, plus enough to operate
the business during one operating cycle. Operating cycle is the period of time
it takes to convert cash into raw materials, raw materials into inventory, and
inventory into sales, including the time it takes to collect payment for the sales.
ISSUE: W/N Cyanamid is liable for deficiency AET?
RULING: YES.
Section 25 of the NIRC discouraged tax avoidance through corporate surplus
accumulation. When corporations do not declare dividends, income taxes are
not paid on the undeclared dividends received by the shareholders. The tax
on improper accumulation of surplus is essentially a penalty tax designed to
compel corporations to distribute earnings so that the said earnings by
shareholders could, in turn, be taxed. The amendatory provision of Section 25,
which was PD 1739, enumerated the corporations exempt from the imposition
of improperly accumulated tax: (a) banks; (b) non-bank financial
intermediaries; (c) insurance companies; and (d) corporations organized
primarily and authorized by the Central Bank of the Philippines to hold shares
of stocks of banks.
As such, Petitioner does not fall among those exempt classes.
A review of American taxation history on accumulated earnings tax will show
that the application of the accumulated earnings tax to publicly held
corporations has been problematic. Initially, the Tax Court and the Court of
Claims held that the accumulated earnings tax applies to publicly held
corporations. Then, the Ninth Circuit Court of Appeals ruled in Golconda that
the accumulated earnings tax could only apply to closely held corporations.
Despite Golconda, the Internal Revenue Service asserted that the tax could
be imposed on widely held corporations including those not controlled by a few
shareholders or groups of shareholders. The Service indicated it would not
follow the Ninth Circuit regarding publicly held corporations. In 1984, American
legislation nullified the Ninth Circuits Golconda ruling and made it clear that
the accumulated earnings tax is not limited to closely held corporations.
Clearly, Golconda is no longer a reliable precedent.
Besides, the laws granting exemption form tax are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing power. Taxation is the
rule and exemption is the exception. The burden of proof rests upon the party
claiming the exemption to prove that it is, in fact, covered by the exemption so
claimed; a burden which petitioner here has failed to discharge.
Unless rebutted, all presumptions generally are indulged in favor of the
correctness of the CIR’s assessment against the taxpayer. With petitioner’s
failure to prove the CIR incorrect, clearly and conclusively, this court is
constrained to uphold the correctness of tax court’s ruling as affirmed by the
CTA.
(Add’l notes lang) Moreover, the companies where the "Bardahl" formula was
applied, had operating cycles much shorter than that of petitioner. In Atlas Tool
Co., Inc. vs. CIR, the company’s operating cycle was only 3.33 months or
27.75% of the year. In Cataphote Corp. of Mississippi vs. United States, the
corporations operating cycle was only 56.87 days, or 15.58% of the year.
In the case of Cyanamid, the operating cycle was 288.35 days, or 78.55% of
a year, reflecting that petitioner will need sufficient liquid funds, of at least three
quarters of the year, to cover the operating costs of the business. There are
variations in the application of the "Bardahl" formula, such as average
operating cycle or peak operating cycle. In times when there is no recurrence
of a business cycle, the working capital needs cannot be predicted with
accuracy. As stressed by American authorities, although the "Bardahl" formula
is well-established and routinely applied by the courts, it is not a precise rule.
It is used only for administrative convenience. Petitioners application of the
"Bardahl" formula merely creates a false illusion of exactitude.
Other formulas are also used, e.g. the ratio of current assets to current
liabilities and the adoption of the industry standard. The ratio of current assets
to current liabilities is used to determine the sufficiency of working capital.
Ideally, the working capital should equal the current liabilities and there must
be 2 units of current assets for every unit of current liability, hence the so-called
"2 to 1" rule.
As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than
twice its current liabilities. That current ratio of Cyanamid, therefore, projects
adequacy in working capital. Said working capital was expected to increase
further when more funds were generated from the succeeding years sales.
Available income covered expenses or indebtedness for that year, and there
appeared no reason to expect an impending working capital deficit which could
have necessitated an increase in working capital, as rationalized by petitioner.
In the present case, the Tax Court opted to determine the working capital
sufficiency by using the ratio between current assets to current liabilities. The
working capital needs of a business depend upon the nature of the business,
its credit policies, the amount of inventories, the rate of turnover, the amount
of accounts receivable, the collection rate, the availability of credit to the
business, and similar factors. Petitioner, by adhering to the "Bardahl" formula,
failed to impress the tax court with the required definiteness envisioned by the
statute. We agree with the tax court that the burden of proof to establish that
the profits accumulated were not beyond the reasonable needs of the
company, remained on the taxpayer. This Court will not set aside lightly the
conclusion reached by the Court of Tax Appeals which, by the very nature of
its function, is dedicated exclusively to the consideration of tax problems and
has necessarily developed an expertise on the subject, unless there has been
an abuse or improvident exercise of authority. Unless rebutted, all
presumptions generally are indulged in favor of the correctness of the CIRs
assessment against the taxpayer. With petitioners failure to prove the CIR
incorrect, clearly and conclusively, this Court is constrained to uphold the
correctness of tax courts ruling as affirmed by the Court of Appeals.
TOLENTINO V. SEC. OF FINANCE
DOCTRINE: (see Ruling)
FACTS: The value-added tax (VAT) is levied on the sale, barter or exchange
of goods and properties as well as on the sale or exchange of services. RA
7716 seeks to widen the tax base of the existing VAT system and enhance its
administration by amending the National Internal Revenue Code (NIRC).
Petitions filed in these cases for the declaration of unconstitutionality of R.A.
No. 7716, otherwise known as the Expanded Value-Added Tax Law.
The following are the contentions of the petitioners:
1. Some of the petitioners (Tolentino, Kilosbayan, Inc., Philippine Airlines
(PAL), Roco, and Chamber of Real Estate and Builders Association
(CREBA)) reiterate previous claims made by them that R.A. No. 7716
did not "originate exclusively" in the House of Representatives as
required by Art. VI, §24 of the Constitution.
2. S. No. 1630 did not pass 3 readings on separate days as required by
the Constitution because the second and third readings were done on
the same day.
3. PAL maintains that R.A. No. 7716 violates Art. VI, §26 (1) of the
Constitution which provides that "Every bill passed by Congress shall
embrace only one subject which shall be expressed in the title
thereof."
4. PPI that by removing the exemption of the press from the VAT while
maintaining those granted to others, the law discriminates against the
press. At any rate, it is averred, "even nondiscriminatory taxation of
constitutionally guaranteed freedom is unconstitutional."
5. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of
contracts, (2) classifies transactions as covered or exempt without
reasonable basis and (3) violates the rule that taxes should be uniform
and equitable and that Congress shall "evolve a progressive system
of taxation."
6. Cooperative Union of the Philippines (CUP), after briefly surveying the
course of legislation, argues that it was to adopt a definite policy of
granting tax exemption to cooperatives that the present Constitution
embodies provisions on cooperatives. To subject cooperatives to the
VAT would therefore be to infringe a constitutional policy.
ISSUE: W/N EVAT Law is unconstitutional?
RULING: NO.
1. While Art. VI, §24 provides that all appropriation, revenue or tariff bills,
bills authorizing increase of the public debt, bills of local application,
and private bills must "originate exclusively in the House of
Representatives," it also adds, "but the Senate may propose or concur
with amendments." In the exercise of this power, the Senate may
propose an entirely new bill as a substitute measure.
Hence, as in this case, the Senate, in the exercise of its power to propose
amendments to bills required to originate in the House, validly passed its own
version of a House revenue measure.
2. "except when the President certifies to the necessity of its immediate
enactment, etc." in Art. VI, §26 (2) qualifies not only the requirement
that "printed copies [of a bill] in its final form [must be] distributed to
the members three days before its passage" but also the requirement
that before a bill can become a law it must have passed "three
readings on separate days."
Hence, as in this case, SB. No. 1630, having been certified as urgent by the
President need not meet the requirement not only of printing but also of
reading the bill on separate days.
3. By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE
VALUE-ADDED TAX (VAT) SYSTEM [BY] WIDENING ITS TAX BASE
AND ENHANCING ITS ADMINISTRATION, AND FOR THESE
PURPOSES AMENDING AND REPEALING THE RELEVANT
PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED AND FOR OTHER PURPOSES," Congress thereby
clearly expresses its intention to amend any provision of the NIRC
which stands in the way of accomplishing the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the title
of the law by specific reference to P.D. No. 1590. It is unnecessary to do this
in order to comply with the constitutional requirement, since it is already stated
in the title that the law seeks to amend the pertinent provisions of the NIRC,
among which is §103(q), in order to widen the base of the VAT. Actually, it is
the bill which becomes a law that is required to express in its title the subject
of legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically
referred to §103 of the NIRC as among the provisions sought to be amended.
We are satisfied that sufficient notice had been given of the pendency of these
bills in Congress before they were enacted into what is now R.A.
No. 7716.
4. This Court in American Bible Society v. City of Manila, 101 Phil. 386
(1957) which invalidated a city ordinance requiring a business license
fee on those engaged in the sale of general merchandise. It was held
that the tax could not be imposed on the sale of bibles by the American
 Bible Society without restraining the free exercise of its right to
propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the
exercise of a privilege, much less a constitutional right. It is imposed on the
sale, barter, lease or exchange of goods or properties or the sale or exchange
of services and the lease of properties purely for revenue purposes. To subject
the press to its payment is not to burden the exercise of its right any more than
to make the press pay income tax or subject it to general regulation is not to
violate its freedom under the Constitution.
5. A.) With respect to the first contention, it is claimed that the application
of the tax to existing contracts of the sale of real property by installment
or on deferred payment basis would result in substantial increases in
the monthly amortizations to be paid because of the 10% VAT. The
additional amount, it is pointed out, is something that the buyer did not
anticipate at the time he entered into the contract.
The short answer to this is the one given by this Court in an early case:
"Authorities from numerous sources are cited by the plaintiffs, but none of them
show that a lawful tax on a new subject, or an increased tax on an old one,
interferes with a contract or impairs its obligation, within the meaning of the
Constitution. Even though such taxation may affect particular contracts, as it
may increase the debt of one person and lessen the security of another, or
may impose additional burdens upon one class and release the burdens of
another, still the tax must be paid unless prohibited by the Constitution, nor
can it be said that it impairs the obligation of any existing contract in its true
legal sense." Indeed not only existing laws but also "the reservation of the
essential attributes of sovereignty, is . . . read into contracts as a postulate of
the legal order." (Contracts must be understood as having been made in
reference to the possible exercise of the rightful authority of the government
and no obligation of contract can extend to the defeat of that authority.
B.) It is next pointed out that while §4 of R.A. No. 7716 exempts such
transactions as the sale of agricultural products, food items,
petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential. The
sale of real property for socialized and low-cost housing is exempted
from the tax, but CREBA claims that real estate transactions of "the
less poor," i.e., the middle class, who are equally homeless, should
likewise be exempted.
The sale of food items, petroleum, medical and veterinary services, etc., which
are essential goods and services was already exempt under §103, pars. (b)
(d) (1) of the NIRC before the enactment of R.A. No. 7716. Petitioner is in error
in claiming that R.A. No. 7716 granted exemption to these transactions, while
subjecting those of petitioner to the payment of the VAT. Moreover, there is a
difference between the "homeless poor" and the "homeless less poor" in the
example given by petitioner, because the second group or middle class can
afford to rent houses in the meantime that they cannot yet buy their own
homes. The two social classes are thus differently situated in life. "It is inherent
in the power to tax that the State be free to select the subjects of taxation, and
it has been repeatedly held that 'inequalities which result from a singling out of
one particular class for taxation, or exemption infringe no constitutional
limitation.'"
C.) It is contended, for the reasons already noted, that R.A. No. 7716
also violates Art. VI, §28(1) which provides that "The rule of taxation
shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of
property of the same class be taxed at the same rate. The taxing power has
the authority to make reasonable and natural classifications for purposes of
taxation. To satisfy this requirement it is enough that the statute or ordinance
applies equally to all persons, forms and corporations placed in similar
situation.
The Constitution does not really prohibit the imposition of indirect taxes which,
like the VAT, are regressive. What it simply provides is that Congress shall
"evolve a progressive system of taxation." The constitutional provision has
been interpreted to mean simply that "direct taxes are . . . to be preferred [and]
as much as possible, indirect taxes should be minimized."
Resort to indirect taxes should be minimized but not avoided entirely because
it is difficult, if not impossible, to avoid them by imposing such taxes according
to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the
regressive effects of this imposition by providing for zero rating of certain
transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while
granting exemptions to other transactions. (R.A. No. 7716, §4, amending §103
of the NIRC).
6. In the first place, it is not true that P.D. No. 1955 singled out
cooperatives by withdrawing their exemption from income and sales
taxes under P.D. No. 175, §5. What P.D. No. 1955, §1 did was to
withdraw the exemptions and preferential treatments theretofore
granted to private business enterprises in general, in view of the
economic crisis which then beset the nation. It is true that after P.D.
No. 2008, §2 had restored the tax exemptions of cooperatives in 1986,
the exemption was again repealed by E.O. No. 93, §1, but then again
cooperatives were not the only ones whose exemptions were
withdrawn. The withdrawal of tax incentives applied to all, including
 government and private entities. In the second place, the Constitution
does not really require that cooperatives be granted tax exemptions in
order to promote their growth and viability. Hence, there is no basis for
petitioner's assertion that the government's policy toward cooperatives
had been one of vacillation, as far as the grant of tax privileges was
concerned, and that it was to put an end to this indecision that the
constitutional provisions cited were adopted. Perhaps as a matter of
policy cooperatives should be granted tax exemptions, but that is left
to the discretion of Congress. If Congress does not grant exemption
and there is no discrimination to cooperatives, no violation of any
constitutional policy can be charged.

Indeed, petitioner's theory amounts to saying that under the Constitution

cooperatives are exempt from taxation. Such theory is contrary to the
Constitution under which only the following are exempt from taxation:
charitable institutions, churches and parsonages, by reason of Art. VI, §28 (3),
and non-stock, non-profit educational institutions by reason of Art. XIV, §4 (3).
TOSHIBA V. CIR (2010)
DOCTRINE: Under the old rule, whether a PEZA-registered enterprise was
exempt or subject to VAT dependent on the type of fiscal incentives availed of
by the said enterprise. If the PEZA-registered enterprise is paying the 5%
preferential tax in lieu of all other taxes, it cannot claim tax credit/refund for the
VAT paid on purchases. Conversely, if the taxpayer is availing of the income
tax holiday, it can claim VAT credit.
However, upon the issuance by the BIR of RMC No. 74-99 on October 15,
1999, the Cross Border Doctrine was clearly established. In effect, PEZA-
registered enterprises are VAT-exempt and no VAT can be passed on to them.
Thus, any sale by a supplier from the Customs Territory to a PEZA-registered
enterprise as export sale should not be burdened by output VAT; hence, it is
now impossible to claim for a tax credit/refund.
To recall, Toshiba is herein claiming the refund of unutilized input VAT
payments on its local purchases of goods and services attributable to its export
sales for the first and second quarters of 1997. Such export sales took place
before October 15, 1999. The BIR, as late as July 15, 2003, when it issued
RMC No. 42-2003, accepted applications for credit/refund of input VAT on
purchases prior to RMC No. 74-99, filed by PEZA- registered enterprises which
availed themselves of the income tax holiday.
Consequently, the CIR cannot herein insist that all PEZA-registered
enterprises are VAT-exempt in every instance. RMC No. 42-2003 contains an
express acknowledgement by the BIR that prior to RMC No. 74-99, there were
PEZA- registered enterprises liable for VAT and entitled to credit/refund of
input VAT paid under certain conditions.
Ultimately, Toshiba was entitled to the credit/refund of unutilized input VAT
payments attributable to its zero-rated sales in the amounts of P1,158,016.82
and P227,265.26, for the first and second quarters of 1997, respectively, or in
the total amount of P1,385,282.08.
FACTS: 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.5 It is registered with the
Philippine Economic Zone Authority (PEZA) as an Economic Zone
(ECOZONE) export enterprise in the Laguna Technopark, Inc. It is also
registered with BIR-RDO in San Pedro, Laguna, as a VAT-taxpayer.
In its VAT returns for the first and second quarters of 1997,8 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 ₱3,875,139.65,9 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 totaling ₱7,494,677,000.00.
It filed two separate applications for tax credit/refund of its unutilized input VAT
payments. The CIR denied the application. On appeal, the CTA ruled that
Toshiba is entitled to the credit/refund of the input VAT paid on its purchases
of goods and services relative to such zero-rated export sales. The Court of
Appeals reversed the decision of the CTA in the petition for review stating that
Toshiba is a tax exempt entity under R.A. No. 7916 thus not entitled to refund
the VAT payments made in the domestic purchase of goods and services.
Both Toshiba and the CIR sought reconsideration of the foregoing CTA
Decision.
Toshiba asserted in its Motion for Reconsideration that it had presented proper
substantiation for the ₱1,887,545.65 input VAT disallowed by the CTA.
The CIR, on the other hand, argued in his Motion for Reconsideration that
Toshiba was not entitled to the credit/refund of its input VAT payments
because as a PEZA-registered ECOZONE export enterprise, Toshiba was not
subject to VAT. 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.
In effect, the CIR is opposing the claim for credit/refund of input VAT of Toshiba
on two grounds: (1) that Toshiba was a VAT-exempt entity; and (2) that its
export sales were VAT-exempt transactions.
ISSUE: W/N Toshiba is entitled to tax credit/ refund of its unutilized input VAT
on its local purchase of goods and services which are attributable to its export
sales for the first and second quarters of 1997?
RULING: YES.
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 Ultimately, Toshiba was entitled to the credit/refund of unutilized input VAT
the party to the transaction. payments attributable to its zero-rated sales in the amounts of P1,158,016.82
and P227,265.26, for the first and second quarters of 1997, respectively, or in
An exempt party, on the other hand, is a person or entity granted VAT the total amount of P1,385,282.08.
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.

It is now a settled rule that based on the Cross Border Doctrine, PEZA-
registered enterprises, such as Toshiba, are VAT-exempt and no VAT can be
passed on to them.

The rule which considers any sale by a supplier from the Customs Territory to
a PEZA-registered enterprise as export sale, which should not be burdened by
output VAT, was only clearly established on October 15, 1999, upon the
issuance by the BIR of RMC No. 74-99. Prior to October 15, 1999, whether a
PEZA-registered enterprise was exempt or subject to VAT depended on the
type of fiscal incentives availed of by the said enterprise (under RA 7916).

To recall, Toshiba is herein claiming the refund of unutilized input VAT

payments on its local purchases of goods and services attributable to its export
sales for the first and second quarters of 1997. Such export sales took place
before October 15, 1999, when the old rule on the VAT treatment of PEZA-
registered enterprises still applied. Under this old rule, it was not only possible,
but even acceptable, for Toshiba, availing itself of the income tax holiday
option under Section 23 of Republic Act No. 7916, in relation to Section 39 of
the Omnibus Investments Code of 1987, to be subject to VAT, both indirectly
(as purchaser to whom the seller shifts the VAT burden) and directly (as seller
whose sales were subject to VAT, either at ten percent [10%] or zero percent
[0%]).

A VAT-registered seller of goods and/or services who made zero-rated sales

can claim tax credit or refund of the input VAT paid on its purchases of goods,
properties, or services relative to such zero-rated sales, in accordance with
Section 4.102-2 of Revenue Regulations No. 7-95.

The BIR, as late as July 15, 2003, when it issued RMC No. 42-2003, accepted
applications for credit/refund of input VAT on purchases prior to RMC No. 74-
99, filed by PEZA- registered enterprises which availed themselves of the
income tax holiday.

Consequently, the CIR cannot herein insist that all PEZA-registered

enterprises are VAT-exempt in every instance. RMC No. 42-2003 contains an
express acknowledgement by the BIR that prior to RMC No. 74-99, there were
PEZA- registered enterprises liable for VAT and entitled to credit/refund of
input VAT paid under certain conditions.