1-TAX II (01).
joycgc
G.R. No. 81311 June 30, 1988
KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC., HERMINIGILDO C.
DUMLAO, GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA, petitioners,
vs.
HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent.
G.R. No. 81820 June 30, 1988
KILUSANG MAYO UNO LABOR CENTER (KMU), its officers and affiliated labor federations and alliances,
petitioners,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE, and
SECRETARY OF BUDGET, respondents.
G.R. No. 81921 June 30, 1988
INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and JESUS B. BANAL, petitioners,
vs.
The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE, respondent.
G.R. No. 82152 June 30, 1988
RICARDO C. VALMONTE, petitioner,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, COMMISSIONER OF INTERNAL REVENUE and
SECRETARY OF BUDGET, respondent.
PADILLA, J.:
 These are four consolidated petitions which seek to nullify EO 273, issued by the
President of the Philippines on 25 July 1987, to take effect on 1 January 1988, and
which amended certain sections of the NIRC and adopted the VAT, for being
unconstitutional in that its enactment is not allegedly within the powers of the
President; that the VAT is oppressive, discriminatory, regressive, and violates the
due process and equal protection clauses and other provisions of the 1987
Constitution.
 The SG prays for the dismissal of the petitions on the ground:
 that the P have failed to show justification for the exercise of its judicial powers:
(1) the existence of an appropriate case;
(2) an interest, personal and substantial, of the party raising the
constitutional questions;
(3) the constitutional question should be raised at the earliest opportunity; and
(4) the question of constitutionality is directly and necessarily involved in a
justiciable controversy and its resolution is essential to the protection of the
rights of the parties.
 SG: only the third requisite has been complied with. He also questions the legal
standing of the petitioners who, are merely asking for an advisory opinion from the
Court, there being no justiciable controversy for resolution.
 Objections to taxpayers' suit for lack of sufficient personality standing, or interest
are, however, in the main procedural matters. Considering the importance to the
public of the cases at bar, and in keeping with the Court's duty, under the 1987
Constitution, to determine whether or not the other branches of government have
kept themselves within the limits of the Constitution and the laws and that they
have not abused the discretion given to them, the Court has brushed aside
technicalities of procedure and has taken cognizance of these petitions.
 VAT - a tax levied on a wide range of goods and services.
-
tax on the value, added by every seller, with aggregate gross annual sales
of articles and/or services, exceeding P200,00.00, to his purchase of goods
and services, unless exempt.
-
computed at the rate of 0% or 10% of the gross selling price of goods or
gross receipts realized from the sale of services.
-
eliminated privilege taxes, multiple rated sales tax on manufacturers and
producers, advance sales tax, and compensating tax on importations. The
framers of EO 273 that it is principally aimed to rationalize the system of
taxing goods and services; simplify tax administration; and make the tax
system more equitable, to enable the country to attain economic recovery.
 SG: the Philippine sales tax system, prior to the issuance of EO 273, was essentially a
single stage VAT system computed under the "cost subtraction method" or "cost
deduction method" and was imposed only on original sale, barter or exchange of
articles by manufacturers, producers, or importers. Subsequent sales of such articles
were not subject to sales tax. However, with the issuance of PD 1991 on 31 October
1985, a 3% tax was imposed on a second sale, which was reduced to 1.5% upon the
issuance of PD 2006 on 31 December 1985, to take effect 1 January 1986. Reduced
sales taxes were imposed not only on the second sale, but on every subsequent
sale, as well. EO 273 merely increased the VAT on every sale to 10%, unless zero-
rated or exempt.
ISSUE: WON EO 273 is unconstitutional. NO.
WON EO 273 is in violation of Art. VI, Sec. 28(1). NO.
 P’s contentions: that EO 273 is unconstitutional - that the President had no authority
to issue EO 273 on 25 July 1987. NO MERIT
 It should be recalled that under Proclamation No. 3, which decreed a Provisional
Constitution, sole legislative authority was vested upon the President. Art. II, sec. 1
of the Provisional Constitution states:
Sec. 1. Until a legislature is elected and convened under a new Constitution, the
President shall continue to exercise legislative powers.
 2-TAX II (01).joycgc
 15 October 1986, the Constitutional Commission of 1986 adopted a new
Constitution which was ratified in a plebiscite. Article XVIII, sec. 6 of said
Constitution, hereafter referred to as the 1987 Constitution, provides:
Sec. 6. The incumbent President shall continue to exercise legislative powers until
the first Congress is convened.
 Both the Provisional and the 1987 Constitutions, the President is vested with
legislative powers until a legislature under a new Constitution is convened. The
enactment of EO 273 on 25 July 1987, two (2) days before Congress convened on 27
July 1987, was within the President's constitutional power and authority to legislate.
 To uphold the submission of P-Valmonte defeat the purpose of the framers of the
1987 Constitutional and render meaningless some other provisions of said
Constitution. The 1987 Constitution mentions a specific date when the President
loses her power to legislate. If the framers of said Constitution had intended to
terminate the exercise of legislative powers by the President at the beginning of the
term of office of the members of Congress, they should have so stated (but did not)
in clear and unequivocal terms. The Court has no power to re-write the Constitution
and give it a meaning different from that intended.
 P claim that EO 273 was issued by the President in grave abuse of discretion
amounting to lack or excess of jurisdiction. NO MERIT.
 Grave abuse of discretion implies such capricious and whimsical exercise of
judgment as is equivalent to lack of jurisdiction or, in other words, where the power
is exercised in an arbitrary or despotic manner by reason of passion or personal
hostility, and it must be so patent and gross as to amount to an evasion of positive
duty or to a virtual refusal to perform the duty enjoined or to act at all in
contemplation of law.
 P have failed to show that EO 273 was issued capriciously and whimsically or in an
arbitrary or despotic manner by reason of passion or personal hostility. It appears
that a comprehensive study of the VAT had been extensively discussed by this
framers and other government agencies involved in its implementation, even under
the past administration. As the Solicitor General correctly stated, "The signing of
E.O. 273 was merely the last stage in the exercise of her legislative powers. The
legislative process started long before the signing when the data were gathered,
proposals were weighed and the final wordings of the measure were drafted,
revised and finalized. Certainly, it cannot be said that the President made a jump, so
to speak, on the Congress, two days before it convened."
 P claim that EO 273 is oppressive, discriminatory, unjust and regressive, in violation
of the provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which states:
Sec. 28 (1) The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
 P’s assertions - not supported by facts and circumstances to warrant their
conclusions.
-
failed to adequately show that the VAT is oppressive, discriminatory or
unjust.
-
merely rely upon newspaper articles which are actually hearsay and have
evidentiary value.
 Court stated that EO 273 satisfies all the requirements of a valid tax. It is uniform.
The court, in City of Baguio vs. De Leon said:
... In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, speaking for the
Court, stated: "A tax is considered uniform when it operates with the same force and
effect in every place where the subject may be found."
 There was no occasion in that case to consider the possible effect on such a
constitutional requirement where there is a classification. The opportunity came in
Eastern Theatrical Co. v. Alfonso. Thus: "Equality and uniformity in taxation means
that all taxable articles or kinds of property of the same class shall 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 then, all that is needed as held in another case decided
two years later, (Uy Matias v. City of Cebu, 93 Phil. 300) is that the statute or
ordinance in question "applies equally to all persons, firms and corporations placed
in similar situation." This Court is on record as accepting the view in a leading
American case (Carmichael v. Southern Coal and Coke Co., 301 US 495) that
"inequalities which result from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation." (Lutz v. Araneta, 98 Phil. 148, 153).
 The sales tax adopted in EO 273 - applied similarly on all goods and services sold to
the public, which are not exempt, at the constant rate of 0% or 10%.
-
is also equitable.
-
imposed only on sales of goods or services by persons engage in business
with an aggregate gross annual sales exceeding P200,000.00. Small corner
sari-sari stores are consequently exempt from its application.
-
exempt from the tax are sales of farm and marine products, spared as they
are from the incidence of the VAT, are expected to be relatively lower and
within the reach of the general public.
 The Court likewise finds no merit in the contention of the P-Integrated Customs
Brokers Association of the Philippines that EO 273, more particularly the new Sec.
 3-TAX II (01).joycgc

103 (r) of the NIRC, unduly discriminates against customs brokers. The contested
provision states:
Sec. 103. Exempt transactions. — The following shall be exempt from the value-
added tax:
(r) Service performed in the exercise of profession or calling (except customs
brokers) subject to the occupation tax under the Local Tax Code, and professional
services performed by registered general professional partnerships;
 The phrase "except customs brokers" is not meant to discriminate against customs
brokers. It was inserted in Sec. 103(r) to complement the provisions of Sec. 102 of
the Code, which makes the services of customs brokers subject to the payment of
the VAT and to distinguish customs brokers from other professionals who are
subject to the payment of an occupation tax under the Local Tax Code.
and demonstrations against the VAT should by now be evident. The fact that
nothing of the sort has happened shows that the fears and apprehensions of the P
appear to be more imagined than real. It would seem that the VAT is not as bad as
we are made to believe.
 If P believe that the adoption and continued application of the VAT are prejudicial to
the general welfare or the interests of the majority of the people, they should seek
recourse and relief from the political branches of the government.
 The Court, following the doctrine of separation of powers, cannot substitute its
judgment for that of the President as to the wisdom, justice and advisability of the
adoption of the VAT. The Court can only look into and determine whether or not EO
273 was enacted and made effective as law, in the manner required by, and
consistent with, the Constitution, and to make sure that it was not issued in grave
abuse of discretion amounting to lack or excess of jurisdiction; and, in this regard,
the Court finds no reason to impede its application or continued implementation.

Sec. 102. Value-added tax on sale of services. — There shall be levied, assessed and
collected, a value-added tax equivalent to 10% percent of gross receipts derived by
any person engaged in the sale of services. The phrase sale of services" means the
performance of all kinds of services for others for a fee, remuneration or
consideration, including those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and immigration brokers;
lessors of personal property; lessors or distributors of cinematographic films;
persons engaged in milling, processing, manufacturing or repacking goods for
others; and similar services regardless of whether or not the performance thereof
call for the exercise or use of the physical or mental faculties: ...
 With the insertion of the clarificatory phrase "except customs brokers" in Sec. G.R. No. 125704 August 28, 1998
103(r), a potential conflict between the two sections, (Secs. 102 and 103), insofar as PHILEX MINING CORPORATION, petitioner,
customs brokers are concerned, is avoided. vs.
 At any rate, the distinction of the customs brokers from the other professionals who COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF
TAX APPEALS,respondents.
are subject to occupation tax under the Local Tax Code is based upon material
differences, in that the activities of customs brokers (like those of stock, real estate ROMERO, J.:
and immigration brokers) partake more of a business, rather than a profession and
were thus subjected to the percentage tax under Sec. 174 of the NIRC prior to its  P-Philex Mining Corp. assails the decision of the CA affirming the CTA decision
amendment by EO 273. EO 273 abolished the percentage tax and replaced it with ordering it to pay the amount of P110,677,668.52 as excise tax liability for the
the VAT. If the P-Association did not protest the classification of customs brokers period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual
then, the Court sees no reason why it should protest now. interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the
 The Court takes note that EO 273 has been in effect for more than five (5) months Tax Code of 1977.
now, so that the fears expressed by the P that the adoption of the VAT will trigger
skyrocketing of prices of basic commodities and services, as well as mass actions
 4-TAX II (01).joycgc
 August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for
the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in
the total amount of P123,821.982.52 computed as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88
————— ————— —————— ——————
47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
————— ————— —————— ——————
1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88
————— ————— —————— ——————
43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
————— ————— —————— ——————
90,325,895.64 22,581,473.91 10,914,612.97
123,821,982.52 3
========= ========= ========= =========
 Philex protested the demand for payment of the tax liabilities stating that it has
pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to
1991 in the amount of P119,977,037.02 plus interest. Therefore these claims for tax
credit/refund should be applied against the tax liabilities.
 BIR, in a letter - found no merit in Philex's position
- compensation can properly take place. NO MERIT.
pending claims have not yet been established or determined with certainty.
-
it follows that no legal compensation can take place.
- ISSUE: WON Philex shall pay the excise tax liability. YES.
reiterated its demand that Philex settle the amount plus interest within 30
days from the receipt of the letter.
 Philex raised the issue to the CTA on November 6, 1992. 7 In the course of the
proceedings, the BIR issued Tax Credit Certificate in the amount of P13,144,313.88
which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively
lowered the latter's tax obligation to P110,677,688.52.
 Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the
remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
For legal compensation to take place, both obligations must be liquidated
and demandable. "Liquidated" debts are those where the exact amount has
already been determined (PARAS, Civil Code of the Philippines, Annotated,
Vol. IV, Ninth Edition, p. 259). In the instant case, the claims of the P for VAT
refund is still pending litigation, and still has to be determined by this Court. A
fortiori, the liquidated debt of the P to the government cannot, therefore, be
set-off against the unliquidated claim which P conceived to exist in its favour.

CTA ruled - "taxes cannot be subject to set-off on compensation since claim for taxes
is not a debt or contract."
-
P is ordered to pay the R the amount representing excise tax liability for the
period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20%
annual interest from August 6, 1994 until fully paid pursuant to Section 248
and 249 of the Tax Code, as amended.

Philex appealed the case before the CA - affirmed the CTA observation; filed a MR –
denied.

Philex was able to obtain its VAT input credit/refund not only for the taxable year
1989 to 1991 but also for 1992 and 1994, computed as follows: 14
Period Covered Tax Credit Date
By Claims For Certificate of
VAT refund/credit Number Issue Amount
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19
1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95
 In view of the grant of its VAT input credit/refund, Philex now contends that the
same should, ipso jure, off-set its excise tax liabilities since both had already
become "due and demandable, as well as fully liquidated;" hence, legal
WON BIR violated Section 106 (e) of the NIRC 1977 as regards Philex tax
claim for VAT input credit/refund. YES.
 Court have already made the pronouncement that taxes cannot be subject to
compensation for the simple reason that the government and the taxpayer are not
creditors and debtors of each other. 17 There is a material distinction between a tax
and debt.
 Debts are due to the Government in its corporate capacity, while taxes are due to
the Government in its sovereign capacity.
 In Francia v. Intermediate Appellate Court, 19 we categorically held that taxes cannot
be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against
the claims that the taxpayer may have against the government. A person
cannot refuse to pay a tax on the ground that the government owes him an
amount equal to or greater than the tax being collected. The collection of a
tax cannot await the results of a lawsuit against the government.
 5-TAX II (01).joycgc
 The ruling in Francia has been applied to the subsequent case of Caltex Philippines,
Inc. v. Commission on Audit,20 which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have
against the government. Taxes cannot be the subject of compensation
because the government and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.
 Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc
Mines Inc., wherein we ruled that a pending refund may be set off against an
existing tax liability even though the refund has not yet been approved by the
Commissioner, 21 is no longer without any support in statutory law.
 It is important to note, that the premise of our ruling in the aforementioned case
was anchored on Section 51 (d) of the National Revenue Code of 1939. However,
when the NIRC of 1977 was enacted, the same provision upon which the Itogon-
Suyoc pronouncement was based was omitted. 22 Accordingly, the doctrine
enunciated in Itogon-Suyoc cannot be invoked by Philex.
 Philex - that the imposition of surcharge and interest for the non-payment of the
excise taxes within the time prescribed was unjustified.
-
that it had no obligation to pay the excise tax liabilities within the
prescribed period since, after all, it still has pending claims for VAT input
credit/refund with BIR.

Philex's claim is an outright disregard of the basic principle in tax law that taxes are
the lifeblood of the government and so should be collected without unnecessary
hindrance. We cannot allow Philex to refuse the payment of its tax liabilities on the
ground that it has a pending tax claim for refund or credit against the government
which has not yet been granted. It must be noted that a distinguishing feature of a
tax is that it is compulsory rather than a matter of bargain. 25 Hence, a tax does not
depend upon the consent of the taxpayer. 26

If any taxpayer can defer the payment of taxes by raising the defense that it still has
a pending claim for refund or credit, this would adversely affect the government
revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply
because he has a claim against the government or that the collection of the tax is
contingent on the result of the lawsuit it filed against the government. Philex's
theory that would automatically apply its VAT input credit/refund against its tax
liabilities can easily give rise to confusion and abuse, depriving the government of
authority over the manner by which taxpayers credit and offset their tax liabilities.

The fact that Philex has pending claims for VAT input claim/refund with the
government is immaterial for the imposition of charges and penalties prescribed
under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is
mandatory and the BIR is not vested with any authority to waive the collection
thereof. 28 The same cannot be condoned for flimsy reasons, 29 similar to the one
advanced by Philex in justifying its non-payment of its tax liabilities.

Philex asserts that the BIR violated Section 106 (e) 30 of the NIRC 1977, which
requires the refund of input taxes within 60 days, 31 when it took five years for the
latter to grant its tax claim for VAT input credit/refund. TAMA.

We agree with Philex. While there is no dispute that a claimant has the burden of
proof to establish the factual basis of his or her claim for tax credit or
refund, 33 however, once the claimant has submitted all the required documents it is
the function of the BIR to assess these documents with purposeful dispatch. After
all, since taxpayers owe honestly to government it is but just that government
render fair service to the taxpayers. 34

In the instant case, the VAT input taxes were paid between 1989 to 1991 but the
refund of these erroneously paid taxes was only granted in 1996. Obviously, had the
BIR been more diligent and judicious with their duty, it could have granted the
refund earlier. We need not remind the BIR that simple justice requires the speedy
refund of wrongly-held taxes. 35 Fair dealing and nothing less, is expected by the
taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas
v. Court of Tax Appeals: 36
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg" And,
in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously.
 It is a settled rule that in the performance of governmental function, the State is not
bound by the neglect of its agents and officers. Nowhere is this more true than in
the field of taxation. 37 Again, while we understand Philex's predicament, it must be
stressed that the same is not a valid reason for the non-payment of its tax
liabilities.
 First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter
can seek judicial remedy before the CTA in the manner prescribed by
law. 38 Second, if the inaction can be characterized as willful neglect of duty, then
recourse under the Civil Code and the Tax Code can also be availed of.
Art. 27 CC: Any person suffering material or moral loss because a public
servant or employee refuses or neglects, without just cause, to perform his official
duty may file an action for damages and other relief against the latter, without
prejudice to any disciplinary action that may be taken.
Sec. 269 (c) of the National Internal Revenue Act of 1997 states:
 6-TAX II (01).joycgc

(c) Wilfully neglecting to give receipts, as by law required for any sum
collected in the performance of duty or wilfully neglecting to perform, any other
duties enjoyed by law.

 Both provisions dislike official inaction, willful neglect and unreasonable delay in the
performance of official duties. 39 In no uncertain terms must we stress that every
public employee or servant must strive to render service to the people with utmost
diligence and efficiency. Insolence and delay have no place in government service.
 The BIR, being the government collecting arm, must and should do no less. It simply
cannot be apathetic and laggard in rendering service to the taxpayer if it wishes to
remain true to its mission of hastening the country's development. We take judicial
notice of the taxpayer's generally negative perception towards the BIR; hence, it is
up to the latter to prove its detractors wrong.

 Court can never condone the BIR's apparent callousness in performing its duties,
still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no
one should take the law into his own hands" should have guided Philex's action.

G.R. No. 125355 March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

PARDO, J.:

 COMASERCO - a corporation duly organized and existing under the laws of the
Philippines
-
an affiliate of PhilamLife, organized by the letter to perform collection,
consultative and other technical services, including functioning as an
internal auditor, of Philamlife and its other affiliates.
 7-TAX II (01).joycgc

 January 24, 1992, the BIR issued an assessment to PR-COMASERCO for deficiency -
reasoned that COMASERCO was not engaged in business of providing
VAT amounting to P351,851.01, for taxable year 1988, computed as follows: services to Philamlife and its affiliates
-
that COMASERCO was not liable to pay VAT for it was not engaged in the
Taxable sale/receipt P1,679,155.00
business of selling services.
============
 July 16, 1996, the CIR filed with this Court a petition for review on certiorari
10% tax due thereon 167,915.50
25% surcharge 41,978.88 assailing the decision of the CA.
20% interest per annum 125,936.63
Compromise penalty for late payment 16,000.00 ISSUE: WON COMASERCO was engaged in the sale of services, and thus liable to
TOTAL AMOUNT DUE AND COLLECTIBLE pay VAT thereon.
P351,831.01
============ 3  P avers that to "engage in business" and to "engage in the sale of services" are two
 COMASERCO's annual corporate income tax return ending December 31, 1988 different things. P maintains that the services rendered by COMASERCO to
indicated a net loss in its operations in the amount of P6,077.00. Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax
 February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the
on the value added by the performance of the service. It is immaterial whether
latter's finding of deficiency VAT.
profit is derived from rendering the service. --- We agree with the Commissioner.
 August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to
 Sec. 99 of the NIRC of 1986, as amended by Executive Order (E. O.) No. 273 in 1988,
COMASERCO demanding payment of the deficiency VAT.
provides that:
 September 29, 1992, COMASERCO - filed with the CTA a petition for review
contesting the Commissioner's assessment. Sec. 99. Persons liable. — Any person who, in the course of trade or business, sells,
-
that the services it rendered to Philamlife and its affiliates, relating to barters or exchanges goods, renders services, or engages in similar transactions and
collections, consultative and other technical assistance, including any person who, imports goods shall be subject to the value-added tax (VAT)
functioning as an internal auditor, were on a "no-profit, reimbursement-of- imposed in Sections 100 to 102 of this Code.
cost-only" basis.
-
that it was not engaged in the business of providing services to Philamlife  COMASERCO contends - that the term "in the course of trade or business" requires
and its affiliates. that the "business" is carried on with a view to profit or livelihood.
-
established to ensure operational orderliness and administrative efficiency -
that the activities of the entity must be profit-oriented.
of Philamlife and its affiliates, and not in the sale of services. -
it is not motivated by profit, as defined by its primary purpose in the
-
it was not profit-motivated, thus not engaged in business. articles of incorporation, stating that it is operating "only on
-
did not generate profit but suffered a net loss in taxable year 1988. reimbursement-of-cost basis, without any profit."
-
that since it was not engaged in business, it was not liable to pay VAT. -
that profit motive is material in ascertaining who to tax for purposes of
 June 22, 1995, CTA - in favor of the CIR
- determining liability for VAT. ---DISAGREE
assessing COMASERCO deficiency VAT for the taxable year 1988
-  May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law
COMASERCO is ordered to pay CIR.
 July 26, 1995, R - filed with the CA a petition for review - reversed that of the CTA; (EVAT), amending among other sections, Section 99 of the Tax Code. On January 1,
-
The assessment for deficiency VAT for the taxable year 1988 inclusive of 1998, Republic Act 8424, the NIRC of 1997, took effect. The amended law provides
surcharge, interest and penalty charges are ordered CANCELLED for lack of that:
legal and factual basis.
-
CA anchored its decision on the ratiocination in another tax case involving Sec. 105. Persons Liable. — Any person who, in the course of trade or business, sells,
the same parties, where it was held that COMASERCO was not liable to pay barters, exchanges, leases goods or properties, renders services, and any person
fixed and contractor's tax for services rendered to Philamlife and its who imports goods shall be subject to the value-added tax (VAT) imposed in Sections
affiliates. 106 and 108 of this Code.
 8-TAX II (01).joycgc
 VAT is an indirect tax and the amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. This rule shall
likewise apply to existing sale or lease of goods, properties or services at the time of
the effectivity of Republic Act No. 7716.
 The phrase "in the course of trade or business" means the regular conduct or
pursuit of a commercial or an economic activity, including transactions incidental
thereto, by any person regardless of whether or not the person engaged therein is a
nonstock, nonprofit organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members of their guests), or government
entity.
 The rule of regularity, to the contrary notwithstanding, services as defined in this
Code rendered in the Philippines by nonresident foreign persons shall be considered
as being rendered in the course of trade or business.
 The provision clarifies that even a non-stock, non-profit, organization or government
entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on
transactions, imposed at every stage of the distribution process on the sale, barter,
exchange of goods or property, and on the performance of services, even in the
absence of profit attributable thereto. The term "in the course of trade or business"
requires the regular conduct or pursuit of a commercial or an economic activity
regardless of whether or not the entity is profit-oriented.
 The present law merely stresses that even a nonstock, nonprofit organization or
government entity is liable to pay VAT for the sale of goods and services.
Sec. 108 of the NIRC of 1997 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."
 February 5, 1998, the CIR issued BIR Ruling No. 010-98 12 emphasizing that a
domestic corporation that provided technical, research, management and technical
assistance to its affiliated companies and received payments on a reimbursement-
of-cost basis, without any intention of realizing profit, was subject to VAT on services
rendered. In fact, even if such corporation was organized without any intention
realizing profit, any income or profit generated by the entity in the conduct of its
activities was subject to income tax.
 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.
 It is a rule that because taxes are the lifeblood of the nation, statutes that allow
exemptions are construed strictly against the grantee and liberally in favor of the
government. Otherwise stated, any exemption from the payment of a tax must be
clearly stated in the language of the law; it cannot be merely implied therefrom. The
services rendered by COMASERCO do not fall within the exemptions.
 As pointed out by the Commissioner, the performance of all kinds of services for
others for a fee, remuneration or consideration is considered as sale of services
subject to VAT. It has been the long standing policy and practice of this Court to
respect the conclusions of quasi-judicial agencies, such as the CTA which, by the
nature of its functions, is dedicated exclusively to the study and consideration of tax
cases and has necessarily developed an expertise on the subject, unless there has
been an abuse or improvident exercise of its authority.
 The issue in CA-G.R. No. 34042 is different from the present case, which involves
COMASERCO's liability for VAT. As heretofore stated, every person who sells, barters,
or exchanges goods and services, in the course of trade or business, as defined by
law, is subject to VAT.
G.R. No. 151135 July 2, 2004
CONTEX CORPORATION, petitioner,
vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
QUISUMBING, J.:
 P - a domestic corporation engaged in the business of manufacturing hospital
textiles and garments and other hospital supplies for export.
-
place of business is at the Subic Bay Freeport Zone (SBFZ).
-
duly registered with the Subic Bay Metropolitan Authority (SBMA) as a
Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act
No. 7227.4
-
is exempt from all local and national internal revenue taxes except for the
preferential tax provided for in Section 12 (c)5 of Rep. Act No. 7227.
-
also registered with the BIR as a non-VAT taxpayer
 9-TAX II (01).joycgc
 From January 1, 1997 to December 31, 1998, P purchased various supplies and
materials necessary in the conduct of its manufacturing business. The suppliers of
these goods shifted unto P the 10% VAT on the purchased items, which led the P to
pay input taxes for 1997 and 1998, respectively.
 Acting on the belief that it was exempt from all national and local taxes, including
VAT, pursuant to Rep. Act No. 7227, P filed two applications for tax refund or tax
credit of the VAT it paid. Mr. Edilberto Carlos, revenue district officer of BIR RDO,
denied the first application letter.
 P on May 4, 1999, filed another application for tax refund/credit, this time directly
with Atty. Alberto Pagabao, the regional director of BIR. It sought a refund or
issuance of a tax credit certificate in certain amount, representing erroneously paid
input VAT for the period January 1, 1997 to November 30, 1998.
 NO RESPONSE. P then elevated the matter to the CTA, in a petition for review, it
stressed that Section 112(A)7 if read in relation to Section 106(A)(2)(a)8 of the NIRC,
as amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was
not liable in any way for any value-added tax.
 In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the
rule that claims for refund are strictly construed against the taxpayer. Since P failed
to establish both its right to a tax refund or tax credit and its compliance with the
rules on tax refund as provided for in Sections 20410 and 22911 of the Tax Code, its
claim should be denied, according to the BIR.
 CTA – petition for review is partially granted
-
R is ordered to refund or in the alternative to issue a tax credit certificate in
favor of P representing erroneously paid input VAT.
-
In granting a partial refund, the CTA ruled that P misread Sections 106(A)(2)
(a) and 112(A) of the Tax Code.
-
stressed that these provisions apply only to those entities registered as VAT
taxpayers whose sales are zero-rated. P does not fall under this category,
since it is a non-VAT taxpayer as evidenced by the Certificate of Registration
issued by RDO Rosemarie Ragasa of BIR RDO of the Subic Bay Freeport
Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said
the CTA.
-
that the P is exempt from the imposition of input VAT on its purchases of
supplies and materials. It pointed out that under Section 12(c) of Rep. Act
No. 7227 and the Implementing Rules and Regulations of the Bases
Conversion and Development Act of 1992, all that petitioner is required to
pay as a SBFZ-registered enterprise is a 5% preferential tax.
-
also disallowed all refunds of input VAT paid by the P prior to June 29, 1997
for being barred by the two-year prescriptive period under Section 229 of
the Tax Code.
-
also limited the refund only to the input VAT paid by P on the supplies and
materials directly used by the P in the manufacture of its goods.
 R-CIR - filed a petition for review of the CTA decision by CA.
-
maintained that the exemption of Contex Corp. under Rep. Act No. 7227
was limited only to direct taxes and not to indirect taxes such as the input
component of the VAT.
-
that from its very nature, the value-added tax is a burden passed on by a
VAT registered person to the end users; hence, the direct liability for the tax
lies with the suppliers and not Contex.
 Appellate Court – for CIR; Contex claim for refund is denied.
-
that the exemption from duties and taxes on the importation of raw
materials, capital, and equipment of SBFZ-registered enterprises under
Rep. Act No. 7227 and its implementing rules covers only "the VAT
imposable under Section 107 of the Tax Code, which is a direct liability of
the importer, and in no way includes the value-added tax of the seller-
exporter the burden of which was passed on to the importer as an
additional costs of the goods."
-
the exemption granted by Rep. Act No. 7227 relates to the act of
importation and Section 107 of the Tax Code specifically imposes the VAT
on importations.
-
applied the principle that tax exemptions are strictly construed against the
taxpayer.
-
that under the implementing rules of Rep. Act No. 7227, the exemption of
SBFZ-registered enterprises from internal revenue taxes is qualified as
pertaining only to those for which they may be directly liable.
-
legislative intent behind Rep. Act No. 7227 was to grant exemptions only
to direct taxes, which SBFZ-registered enterprise may be liable for and only
in connection with their importation of raw materials, capital, and
equipment as well as the sale of their goods and services.
 P timely moved for reconsideration of the CA decision - denied.
ISSUES: (1) WON CA is correct that the VAT exemption embodied in Rep. Act No.
7227 does not apply to petitioner as a purchaser. NO.
(2) WON the petitioner is entitled to a tax refund on its purchases of
supplies and raw materials for 1997 and 1998. NO.
 10-TAX II (01).joycgc

 P - argues that the appellate court’s restrictive interpretation of petitioner’s VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously
exemption as limited to those covered by Section 107 of the Tax Code is erroneous paid. This is a case wherein the VAT is removed at the exempt stage (i.e., at the
and devoid of legal basis. point of the sale, barter or exchange of the goods or properties).
-
that the provisions of Rep. Act No. 7227 clearly and unambiguously
mandate that no local and national taxes shall be imposed upon SBFZ- The person making the exempt sale of goods, properties or services shall not bill any
registered firms and hence, said law should govern the case. output tax to his customers because the said transaction is not subject to VAT. On
-
calls our attention to regulations issued by both the SBMA and BIR clearly the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or
and categorically providing that the tax exemption provided for by Rep. Act services which are exempt from VAT is not entitled to any input tax on such
No. 7227 includes exemption from the imposition of VAT on purchases of purchase despite the issuance of a VAT invoice or receipt.
supplies and materials.
 R - that while Rep. Act No. 7227 does grant tax exemptions, such grant is not all- (b) Zero-rated Sales. These are sales by VAT-registered persons which are
encompassing but is limited only to those taxes for which a SBFZ-registered business subject to 0% rate, meaning the tax burden is not passed on to the purchaser. A
may be directly liable. zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT
-
SBFZ locators are not relieved from the indirect taxes that may be shifted to purposes, shall not result in any output tax. However, the input tax on his purchases
them by a VAT-registered seller. of goods, properties or services related to such zero-rated sale shall be available as
 It must be stressed that the VAT is an indirect tax. As such, the amount of tax paid tax credit or refund in accordance with these regulations.
on the goods, properties or services bought, transferred, or leased may be shifted
or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee. Under Zero-rating, all VAT is removed from the zero-rated goods, activity or
Unlike a direct tax, such as the income tax, which primarily taxes an individual’s firm. In contrast, exemption only removes the VAT at the exempt stage, and it will
ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is actually increase, rather than reduce the total taxes paid by the exempt firm’s
a tax on consumption of goods, services, or certain transactions involving the business or non-retail customers. It is for this reason that a sharp distinction must
same. The VAT, thus, forms a substantial portion of consumer expenditures. be made between zero-rating and exemption in designating a value-added tax.23
 In indirect taxation, there is a need to distinguish between the liability for the tax
 P’s claim to VAT exemption for its purchases of supplies and raw materials is
and the burden of the tax. As earlier pointed out, the amount of tax paid may be
founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically
shifted or passed on by the seller to the buyer. What is transferred in such
exempts them from all national and local internal revenue taxes, including VAT and
instances is not the liability for the tax, but the tax burden.
 In adding or including the VAT due to the selling price, the seller remains the person Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.24
 P rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the
primarily and legally liable for the payment of the tax. What is shifted only to the
respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of
intermediate buyer and ultimately to the final purchaser is the burden of the tax.
Registration issued by the BIR. As such, it is exempt from VAT on all its sales and
Stated differently, a seller who is directly and legally liable for payment of an
importations of goods and services.
indirect tax, such as the VAT on goods or services is not necessarily the person who
 P’s claim, however, for exemption from VAT for its purchases of supplies and raw
ultimately bears the burden of the same tax. It is the final purchaser or consumer
materials is inconsistent with its claim that it is VAT-Exempt, for only VAT-Registered
of such goods or services who, although not directly and legally liable for the
entities can claim Input VAT Credit/Refund.
payment thereof, ultimately bears the burden of the tax.
 While it is true that the petitioner should not have been liable for the VAT
 Exemptions from VAT are granted by express provision of the Tax Code or special
inadvertently passed on to it by its supplier since such is a zero-rated sale on the
laws. Under VAT, the transaction can have preferential treatment in the following
part of the supplier, the petitioner is not the proper party to claim such VAT refund.
ways:
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person,
(a) VAT Exemption. An exemption means that the sale of goods or
which is a taxable transaction for VAT purposes, shall not result in any output tax.
properties and/or services and the use or lease of properties is not subject to VAT
 11-TAX II (01).joycgc

However, the input tax on his purchases of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund in accordance with
these regulations.

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

(a) Export Sales

"Export Sales" shall mean

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

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No.
7227 duly registered and accredited enterprises with Subic Bay Metropolitan
Authority (SBMA) and Clark Development Authority (CDA), R. A. No. 7916, Philippine
Economic Zone Authority (PEZA), or international agreements, e.g. Asian
Development Bank (ADB), International Rice Research Institute (IRRI), etc. to which
the Philippines is a signatory effectively subject such sales to zero-rate."
 Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an
Input VAT credit with no corresponding Output VAT liability. Congruently, no Output
VAT may be passed on to the petitioner.
 On the second issue, it may not be amiss to re-emphasize that the petitioner is
registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an exempt VAT
taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. In fine,
even if we are to assume that exemption from the burden of VAT on petitioner’s
purchases did exist, petitioner is still not entitled to any tax credit or refund on the
input tax previously paid as petitioner is an exempt VAT taxpayer.
 Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax
credit and accordingly refund the petitioner of the VAT erroneously passed on to the
latter.
 Accordingly, we find that the CA did not commit any reversible error of law in
holding that petitioner’s VAT exemption under Rep. Act No. 7227 is limited to the
VAT on which it is directly liable as a seller and hence, it cannot claim any refund or
exemption for any input VAT it paid, if any, on its purchases of raw materials and
supplies.
[G.R. No. 153866. February 11, 2005]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY (PHILIPPINES),
respondent.
DECISION
PANGANIBAN, J.:
Business companies registered in and operating from the Special Economic Zone in
Naga, Cebu -- like herein respondent -- are entities exempt from all internal revenue
taxes and the implementing rules relevant thereto, including the value-added taxes
or VAT. Although export sales are not deemed exempt transactions, they are
nonetheless zero-rated. Hence, in the present case, the distinction between exempt
entities and exempt transactions has little significance, because the net result is that
the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has
complied with all requisites for claiming a tax refund of or credit for the input VAT it
paid on capital goods it purchased. Thus, the Court of Tax Appeals and the Court of
Appeals did not err in ruling that it is entitled to such refund or credit.
1. [Respondent] is a resident foreign corporation duly registered with the SEC to do
business in the Philippines, with principal office address at the new Cebu Township
One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and
empowered to perform the duties of his office, including, among others, the duty to
act and approve claims for refund or tax credit;
12-TAX II (01).joycgc
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and
has been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66,
as amended, to engage in the manufacture of recording components primarily used
in computers for export. Such registration was made on 6 June 1997;
4. [Respondent] is VAT-registered entity as evidenced by VAT Registration
Certification;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by
[respondent];
6. An administrative claim for refund of VAT input taxes with supporting documents
was filed on 4 October 1999 with Revenue District Office Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on
[respondents] claim for VAT refund.
The administrative claim for refund by the [respondent] on October 4, 1999 was not
acted upon by the [petitioner] prompting the [respondent] to elevate the case to
[the CTA] by way of Petition for Review in order to toll the running of the two-year
 TAX COURT – granted tax refund
prescriptive period.
 CA- affirmed CTA granting the claim for refund or issuance of a tax credit certificate
P’s defenses:
1. [Respondents] alleged claim for tax refund/credit is subject to administrative
routinary investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and
regulations, the [respondent] has the burden of proof that the taxes sought to be
refunded were erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court
ruled that:
A claimant has the burden of proof to establish the factual basis of his or her claim
for tax credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimi juris against the
taxpayer. This is due to the fact that claims for refund/credit [partake of] the nature
of an exemption from tax. Thus, it is incumbent upon the [respondent] to prove that
it is indeed entitled to the refund/credit sought. Failure on the part of the
[respondent] to prove the same is fatal to its claim for tax credit. He who claims
exemption must be able to justify his claim by the clearest grant of organic or
statutory law. An exemption from the common burden cannot be permitted to exist
upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone
Authority (PEZA) registered Ecozone Enterprise, then its business is not subject to
VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section 103
of the Tax Code, as amended. As [respondents] business is not subject to VAT, the
capital goods and services it alleged to have purchased are considered not used in
VAT taxable business. As such, [respondent] is not entitled to refund of input taxes
on such capital goods pursuant to Section 4.106.1 of Revenue Regulations No.
([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said
regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and
229 of the 1997 Tax Code on filing of a written claim for refund within two (2) years
from the date of payment of tax.
(TCC) in favor of respondent in the reduced amount. This sum represented the
unutilized but substantiated input VAT paid on capital goods purchased for the
period covering April 1, 1998 to June 30, 1999.
-
that respondent had availed itself only of the fiscal incentives under
Executive Order No. (EO) 226 (otherwise known as the Omnibus
Investment Code of 1987), not of those under both Presidential Decree No.
(PD) 66, as amended, and Section 24 of RA 7916.
-
considered exempt only from the payment of income tax when it opted for
the income tax holiday in lieu of the 5 percent preferential tax on gross
income earned.
-
As a VAT-registered entity, though, it was still subject to the payment of
other national internal revenue taxes, like the VAT.
-
that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1
of RR 7-95 were applicable.
-
Having paid the input VAT on the capital goods it purchased, respondent
correctly filed the administrative and judicial claims for its refund within
the two-year prescriptive period. Such payments were -- to the extent of
the refundable value -- duly supported by VAT invoices or official receipts,
and were not yet offset against any output VAT liability.
 13-TAX II (01).joycgc
ISSUE: WON respondent is entitled to the refund or issuance of Tax Credit
Certificate in the amount of P12,122,922.66 representing alleged unutilized input
VAT paid on capital goods purchased for the period April 1, 1998 to June 30, 1999.
YES.
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic zone,[7]
respondent is entitled to the fiscal incentives and benefits[8] provided for in either
PD 66[9] or EO 226.[10] It shall, moreover, enjoy all privileges, benefits, advantages
or exemptions under both Republic Act Nos. (RA) 7227[11] and 7844.[12]
Preferential Tax Treatment
Under Special Laws
 If it avails itself of PD 66, notwithstanding the provisions of other laws to the
contrary, respondent shall not be subject to internal revenue laws and regulations
for raw materials, supplies, articles, equipment, machineries, spare parts and wares,
except those prohibited by law, brought into the zone to be stored, broken up,
repacked, assembled, installed, sorted, cleaned, graded or otherwise processed,
manipulated, manufactured, mixed or used directly or indirectly in such activities.
[13] Even so, respondent would enjoy a net-operating loss carry over; accelerated
depreciation; foreign exchange and financial assistance; and exemption from export
taxes, local taxes and licenses.
 Comparatively, the same exemption from internal revenue laws and regulations
applies if EO 226[15] is chosen. Under this law, respondent shall further be entitled
to:
- an income tax holiday;
- additional deduction for labor expense;
- simplification of customs procedure;
-unrestricted use of consigned equipment; access to a bonded
manufacturing warehouse system;
-privileges for foreign nationals employed;
-tax credits on domestic capital equipment, as well as for taxes and duties
on raw materials; and
- exemption from contractors taxes, wharfage dues, taxes and duties on
imported capital equipment and spare parts, export taxes, duties, imposts and fees,
local taxes and licenses, and real property taxes.
 A privilege available to respondent under the provision in RA 7227 on tax and duty-
free importation of raw materials, capital and equipment[18] -- is, ipso facto, also
accorded to the zone[19] under RA 7916. Furthermore, the latter law --
notwithstanding other existing laws, rules and regulations to the contrary --
extends[20] to that zone the provision stating that no local or national taxes shall be
imposed therein.[21] No exchange control policy shall be applied; and free markets
for foreign exchange, gold, securities and future shall be allowed and maintained.
[22] Banking and finance shall also be liberalized under minimum Bangko Sentral
regulation with the establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign banks.[23]
 In the same vein, respondent benefits under RA 7844 from negotiable tax
credits[24] for locally-produced materials used as inputs. Aside from the other
incentives possibly already granted to it by the Board of Investments, it also enjoys
preferential credit facilities[25] and exemption from PD 1853.[26]
 It is immediately clear that petitioner enjoys preferential tax treatment.[27] It is not
subject to internal revenue laws and regulations and is even entitled to tax credits.
The VAT on capital goods is an internal revenue tax from which petitioner as an
entity is exempt. Although the transactions involving such tax are not exempt,
petitioner as a VAT-registered person,[28] however, is entitled to their credits.
Nature of the VAT and
the Tax Credit Method
 VAT - is a uniform tax ranging from 0 percent to 10 percent levied on every
importation of goods, whether or not in the course of trade or business, or imposed
on each sale, barter, exchange or lease of goods or properties or on each rendition
of services in the course of trade or business[29] as they pass along the production
and distribution chain, the tax being limited only to the value added[30] to such
goods, properties or services by the seller, transferor or lessor.[31]
-
an indirect tax that may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services.---nature as a tax on
consumption.
 Tax credit method - adopted the mechanics and self-enforcement features of the
VAT
-
the present method that relies on invoices, an entity can credit against or
subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports.
 If at the end of a taxable quarter:
 14-TAX II (01).joycgc

OUTPUT TAXES charged by a seller = to the INPUT TAXES passed on by the when the output taxes exceed the input taxes that the excess has to be paid. [41] If,
suppliers -- no payment is required. however, the input taxes exceed the output taxes, the excess shall be carried over to
OUTPUT TAXES exceed the INPUT TAXES that the excess has to be paid. the succeeding quarter or quarters. [42] Should the input taxes result from zero-rated
INPUT TAXES exceed the OUTPUT TAXES, the excess shall be carried over or effectively zero-rated transactions or from the acquisition of capital goods, [43] any
to the succeeding quarter or quarters. excess over the output taxes shall instead be refunded [44] to the taxpayer or
INPUT TAXES result from zero-rated or effectively zero-rated transactions credited[45] against other internal revenue taxes.[46]
or from the acquisition of capital goods, any excess over the OUTPUT TAXES
shall instead be refunded to the taxpayer or credited against other internal revenue Zero-Rated vs. Effectively Zero-Rated Transactions (in effect – similar ; As to source
– different)
taxes.
 Respondent, a VAT-registered enterprise, has complied with all requisites for
claiming a tax refund of or credit for the input VAT it paid on capital goods it
Zero-rated transactions Effectively Zero-rated transactions
purchased.
 It is not subject to internal revenue laws and regulations and is even entitled to tax
As to source export sale of sale of goods[50] or supply of services[51] to
credits. The VAT on capital goods is an internal revenue tax from which petitioner as
goods and supply of persons or entities whose exemption
an entity is exempt. Although the transactions involving such tax are not exempt, services.[47] The tax rate under special laws or international
petitioner as a VAT-registered person,[28] however, is entitled to their credits. is set at zero.[48] agreements to which the Philippines is a
signatory effectively subjects such
“WHEREFORE, foregoing premises considered, the petition for transactions to a zero rate
review is DENIED for lack of merit.”[3]
PEZA-reg. enterprise w/n a special economic zone is entitled to the In effect
results in no tax chargeable against the purchaser. The seller of
fiscal incentives and benefits[8] provided for in either PD 66 or EO 226. It
such transactions charges no output tax,[49] but can claim a refund
shall, moreover, enjoy all privileges, benefits, advantages or exemptions
of or a tax credit certificate for the VAT previously charged by
under both Republic Act Nos. (RA) 7227 [11] and 7844.[12]Respondent
suppliers.
benefits under RA 7844 from negotiable tax credits [24] for locally-
produced materials used as inputs. Aside from the other incentives
possibly already granted to it by the Board of Investments, it also enjoys
preferential credit facilities[25] and exemption from PD 1853.[26]

Nature of the VAT and the Tax Credit Method

VAT is a uniform levied on every importation of goods, whether or not in the Automatic Zero-rating Effective zero rating In exemption
course of trade or business, or imposed on each sale, barter, exchange or lease of there is only
goods or properties or on each rendition of services in the course of trade or intended to be enjoyed by intended to benefit the partial relief
business. the seller who is directly and purchaser who, not being
legally liable for the VAT, directly and legally liable for because the
It is an indirect tax that may be shifted or passed on to the buyer, transferee or
making such seller the payment of the VAT, will purchaser is not
lessee of the goods, properties or services. [32] As such, it should be understood not
internationally competitive ultimately bear the burden of allowed any tax
in the context of the person or entity that is primarily, directly and legally liable for
by allowing the refund or the tax shifted by the refund of or credit
its payment, but in terms of its nature as a tax on consumption. [33] In either case,
credit of input taxes that are suppliers. for input taxes
though, the same conclusion is arrived at.
attributable to export sales paid.[58]
If at the end of a taxable quarter the output taxes [38] charged by a seller[39] are
equal to the input taxes[40] passed on by the suppliers, no payment is required. It is In both, there is total relief for the purchaser from the burden
of the tax
15-TAX II (01).joycgc

Zero Rating and Exemption (In terms of the VAT computation – same; the extent of Compliance with All Requisites for VAT Refund or Credit
relief – different)
As further enunciated by the Tax Court, respondent complied with all the
requisites for claiming a VAT refund or credit.[150]
Exempt Transaction vs. Exempt Party
First, respondent is a VAT-registered entity. This fact alone distinguishes the
The object of exemption from the VAT may either be the transaction itself or present case from Contex, in which this Court held that the petitioner therein was
any of the parties to the transaction.[59] registered as a non-VAT taxpayer. [151] Hence, for being merely VAT-exempt, the
petitioner in that case cannot claim any VAT refund or credit.
exempt transaction exempt party
Second, the input taxes paid on the capital goods of respondent are duly
involves goods or services which are person or entity granted VAT exemption supported by VAT invoices and have not been offset against any output taxes.
expressly exempted from the VAT under under the Tax Code, a special law or an
the Tax Code, without regard to the tax international agreement Summary
status -- VAT-exempt or not -- of the
party to the transaction
To summarize, special laws expressly grant preferential tax treatment to
business establishments registered and operating within an ecozone, which by law is
such transaction is not subject to Such party is also not subject to the considered as a separate customs territory. As such, respondent is exempt from all
the VAT, but the seller is not allowed VAT, but may be allowed a tax refund of internal revenue taxes, including the VAT, and regulations pertaining thereto. It has
any tax refund of or credit for any input or credit for input taxes paid, depending opted for the income tax holiday regime, instead of the 5 percent preferential tax
taxes paid. on its registration as a VAT or non-VAT regime. As a matter of law and procedure, its registration status entitling it to such
taxpayer. tax holiday can no longer be questioned. Its sales transactions intended for export
may not be exempt, but like its purchase transactions, they are zero-rated. No prior
application for the effective zero rating of its transactions is necessary. Being VAT-
Tax Refund as Tax Exemption registered and having satisfactorily complied with all the requisites for claiming a tax
refund of or credit for the input VAT paid on capital goods purchased, respondent is
To be sure, statutes that grant tax exemptions are construed strictissimi juris[102] entitled to such VAT refund or credit.
against the taxpayer[103] and liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions.
[7]
Referred to as ecozone, it is a selected area with highly developed, or which has the potential to be developed
into, agro-industrial, industrial, tourist/recreational, commercial, banking, investment and financial
VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT centers. §4(a), Chapter I of RA 7916, otherwise known as “The Special Economic Zone Act of 1995.”
Refund [28]
A “VAT-registered person” is a taxable person who has registered for VAT purposes under §236 of the Tax
Code. Deoferio and Mamalateo
Registration is an indispensable requirement under our VAT law. [131]
Petitioner
alleges that respondent did register for VAT purposes with the appropriate Revenue [38]
“Output taxes” refer to the VAT due on the sale or lease of taxable goods, properties or services by a VAT-
registered or VAT-registrable person. See last paragraph of §110(A)(3) and §236 of the Tax Code.
District Office. However, it is now too late in the day for petitioner to challenge the
VAT-registered status of respondent, given the latter’s prior representation before [39]
Presumed to be VAT-registered.
the lower courts and the mode of appeal taken by petitioner before this Court. [40]
By “input taxes” is meant the VAT due from or paid by a VAT-registered person in the course of trade or
business on the importation of goods or local purchases of goods or services, including the lease or
use of property from a VAT-registered person. See penultimate paragraph of §110(A)(3) of the Tax
Tax Refund or Credit in Order Code.

Having determined that respondent’s purchase transactions are subject to a [43]

These are goods or properties with estimated useful lives greater than one year and which are treated as
zero VAT rate, the tax refund or credit is in order. depreciable assets under §34(F) [formerly §29(f)] of the Tax Code, used directly or indirectly in the
production or sale of taxable goods or services. 3rd paragraph of §4.106-1(b) of RR 7-95.
16-TAX II (01).joycgc
[53]
Under this principle, goods and services are taxed only in the country where these are consumed. Thus,
exports are zero-rated, but imports are taxed. Id., p. 43.
[54]
In business parlance, “automatic zero rating” refers to the standard zero rating as provided for in the
A “customs territory” means the national territory of the Philippines outside of the proclaimed boundaries of
the ecozones, except those areas specifically declared by other laws and/or presidential
proclamations to have the status of special economic zones and/or free ports. §2.g, Rule 1, Part I of
the “Rules and Regulations to Implement Republic Act No. 7916, otherwise known as ‘The Special
Economic Zone Act of 1995.’”
This circular is an example of an agency statement of general applicability that takes the form of a revenue tax
issuance “bearing on internal revenue tax rules and regulations.” Commissioner of Internal Revenue
v. CA, 329 Phil. 987, 1009, August 29, 1996, per Vitug, J., citing RMC 10-86. See §2(2), Chapter 1,
Book VII of Executive Order No. (EO) 292, otherwise known as the “Administrative Code of 1987”
dated July 25, 1987.
[77]
An “export processing zone” is a specialized industrial estate located physically and/or administratively
outside customs territory, predominantly oriented to export production, and may be contained in an
ecozone. §4(a) and (d), Chapter I of RA 7916.
[87]
A “restricted area” is a specific area within an ecozone that is classified and/or fenced-in as an export
processing zone. §2.h, Rule I, Part I of the “Rules and Regulations to Implement Republic Act No.
7916, otherwise known as ‘The Special Economic Zone Act of 1995.’”
[88]
A “registered export enterprise” is one that is registered with the PEZA, and that engages in manufacturing
activities within the purview of the PEZA law for the exportation of its production. §2.i, Rule I, Part I
of the “Rules and Regulations to Implement Republic Act No. 7916, otherwise known as ‘The Special
Economic Zone Act of 1995.’”
G.R. No. 149073 February 16, 2005
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU TOYO CORPORATION, respondent.
DECISION
QUISUMBING, J.:
 R-Cebu Toyo Corporation - a domestic corporation engaged in the manufacture of
lenses and various optical components used in television sets, cameras, compact
discs and other similar devices.
-
principal office is located at the Mactan Export Processing Zone (MEPZ) in
Lapu-Lapu City, Cebu.
-
a subsidiary of Toyo Lens Corporation, a non-resident corporation
organized under the laws of Japan.
-
is a zone export enterprise registered with the Philippine Economic Zone
Authority (PEZA), pursuant to the provisions of Presidential Decree No.
66.4 It is also registered with the Bureau of Internal Revenue (BIR) as a VAT
taxpayer.
 As an export enterprise, respondent sells 80% of its products to its mother
corporation, the Japan-based Toyo Lens Corporation, pursuant to an Agreement of
Offsetting. The rest are sold to various enterprises doing business in the MEPZ.
Inasmuch as both sales are considered export sales subject to Value-Added Tax
(VAT) at 0% rate under Section 106(A)(2)(a)6 of the NIRC, as amended, respondent
filed its quarterly VAT returns from April 1, 1996 to December 31, 1997 showing a
total input VAT of P4,462,412.63.
 On March 30, 1998, respondent filed with the Tax and Revenue Group of the One-
Stop Inter-Agency Tax Credit and Duty Drawback Center of the Department of
Finance, an application for tax credit/refund of VAT paid for the period April 1, 1996
to December 31, 1997 amounting to P4,439,827.21 representing excess VAT input
payments.
 June 26, 1998, it filed a Petition for Review with the CTA to toll the running of the
two-year prescriptive period pursuant to Section 2307 of the Tax Code.
 Before the CTA, the respondent - 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
 17-TAX II (01).joycgc

tax. Hence, the unutilized VAT input taxes on its purchases of goods and services -
respondent need not present proof of foreign currency exchange proceeds
related to such zero-rated activities are available as tax credits or refunds. from its sales to MEPZ enterprises pursuant to Section 106(A)(2)(a)10 of
 The petitioner’s position - that respondent was not entitled to a refund or tax credit the Tax Code.
since: -
stressed that respondent must still prove that there was an actual
(1) it failed to show that the tax was erroneously or illegally collected; offsetting of accounts to prove that constructive foreign currency exchange
(2) the taxes paid and collected are presumed to have been made in proceeds were inwardly remitted as required under Section 106(A)(2)(a).
accordance with law; and -
only the amount of Y274,043,858.00 covering respondent’s sales to Toyo
(3) claims for refund are strictly construed against the claimant as these Lens Corporation and purchases from said mother company for the period
partake of the nature of tax exemption. August 7, 1996 to August 26, 1997 were actually offset against
 CTA - denied the petition for insufficiency of evidence.
- respondent’s related accounts receivable and accounts payable as shown
sustained respondent’s argument that it was a VAT-registered entity.
- by the Agreement for Offsetting dated August 30, 1997.
also found that the petition was timely, as it was filed within the -
Thus, allocating the input taxes supported by receipts to the export sales,
prescription period.
- the CTA determined that the refund/credit amounted to only
ruled that the respondent’s sales to Toyo Lens Corporation and to certain
P2,158,714.46,11 computed as follows:
establishments in the Mactan Export Processing Zone were export sales
subject to VAT at 0% rate. Total Input Taxes Claimed by respondent
-
the input VAT covered by respondent’s claim was not applied against any P4,439,827.21
output VAT. Less: Exceptions made by SGV
-
decreed that the petition should nonetheless be denied because of the a.) 1996 P651,256.17
b.) 1997 104,129.13 755,385.30
respondent’s failure to present documentary evidence to show that there
Validly Supported Input Taxes
were foreign currency exchange proceeds from its export sales. P3,684,441.91
-
that respondent failed to submit the approval by Bangko Sentral ng Allocation:
Pilipinas (BSP) of its Agreement of Offsetting with Toyo Lens Corporation Verified Zero-Rated Sales
and the certification of constructive inward remittance. a.) Toyo Lens Corporation Y274,043,858.00
 Respondent filed MR arguing that: b.) MEPZ Enterprises 136,473,908.05 Y410,517,766.05
Divided by Total Zero-Rated Sales
(1) proof of its inward remittance was not required by law;
Y700,654,606.15
(2) BSP and BIR regulations do not require BSP approval on its Agreement
Quotient
of Offsetting nor do they require certification on the amount constructively 0.5859
remitted; Multiply by Allowable Input Tax
(3) it was not legally required to prove foreign currency payments on the P3,684,441.91
remaining sales to MEPZ enterprises; and Amount Refundable
P2,158,714.[52]12
(4) it had complied with the substantiation requirements under Section
106(A)(2)(a) of the Tax Code. Hence, it was entitled to a refund of unutilized VAT
 Petitioner Commissioner - filed a MR
input tax. -
arguing that respondent was not entitled to a refund because as a PEZA-
 Tax Court - partly granted the MR in a Resolution - respondent is hereby ORDERED
registered enterprise, it was not subject to VAT pursuant to Section 2413 of
to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of
Republic Act No. 7916,14 as amended by Rep. Act No. 8748.15
Petitioner in the amount of P2,158,714.46 representing unutilized input tax -
since respondent was not subject to VAT, the Commissioner contended that
payments.
- the capital goods it purchased must be deemed not used in VAT taxable
that there was no need for BSP approval of the Agreement of Offsetting
business and therefore it was not entitled to refund of input taxes on such
since the same may be categorized as an inter-company open account
offset arrangement.
 18-TAX II (01).joycgc
capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-
95.16
 Petitioner filed a MR:
(1) that respondent being registered with the PEZA as an ecozone
enterprise is not subject to VAT pursuant to Sec. 24 of Rep. Act No. 7916; and
(2) since respondent’s business is not subject to VAT, the capital goods it
purchased are considered not used in a VAT taxable business and therefore is not
entitled to a refund of input taxes.
 The respondent opposed the Commissioner’s MR and prayed that the CTA
resolution be modified so as to grant it the entire amount of tax refund or credit it
was seeking.
 CTA - denied the petitioner’s MR.
-
that the grounds relied upon were only raised for the first time and that
Section 24 of Rep. Act No. 7916 was not applicable since respondent has
availed of the income tax holiday incentive under Executive Order No. 226
or the Omnibus Investment Code of 1987 pursuant to Section 2318 of Rep.
Act No. 7916.
-
that E.O. No. 226 granted PEZA-registered enterprises an exemption from
payment of income taxes for 4 or 6 years depending on whether the
registration was as a pioneer or as a non-pioneer enterprise, but subject to
other national taxes including VAT.
 The petitioner then filed a Petition for Review with the CA praying for the reversal of
the CTA Resolutions and reiterating its claim that respondent is not entitled to a
refund of input taxes since it is VAT-exempt.
 Appellate court decided in respondent’s favour.
-
no reason to set aside the conclusions of the CTA.
-
as untenable herein petitioner’s argument that respondent is not entitled
to a refund because it is VAT-exempt since the evidence showed that it is a
VAT-registered enterprise subject to VAT at the rate of 0%.
- of goods, properties or services shall not bill any output tax to his customers
that respondent had two options under Section 23 of Rep. Act No. 7916,
namely: (1) to avail of an income tax holiday under E.O. No. 226 and be
subject to VAT at the rate of 0%; or (2) to avail of the 5% preferential tax
under P.D. No. 66 and enjoy VAT exemption. Since respondent availed of
the incentives under E.O. No. 226, then the 0% VAT rate would be
applicable to it and any unutilized input VAT should be refunded to
respondent upon proper application with and substantiation by the BIR.
ISSUE: WON the CA erred in affirming the Court of Tax Appeals resolution granting
a refund in the amount of P2,158,714.46 representing unutilized input VAT on
goods and services for the period April 1, 1996 to December 31, 1997. NO.
 Both CIR and the OSG argue - that respondent Cebu Toyo Corporation, as a PEZA-
registered enterprise, is exempt from national and local taxes, including VAT, under
Section 24 of Rep. Act No. 7916 and Section 10921 of the NIRC.
-
contend that respondent Cebu Toyo Corporation is not entitled to any
refund or credit on input taxes it previously paid as provided under Section
4.103-122 of Revenue Regulations No. 7-95, notwithstanding its
registration as a VAT taxpayer. For petitioner claims that said registration
was erroneous and did not confer upon the respondent any right to claim
recognition of the input tax credit. ---- UNTENABLE
 The respondent counters that it availed of the income tax holiday under E.O. No.
226 for four years from August 7, 1995 making it exempt from income tax but not
from other taxes such as VAT. Hence, according to respondent, its export sales are
not exempt from VAT, contrary to petitioner’s claim, but its export sales is subject to
0% VAT. Moreover, it argues that it was able to establish through a report certified
by an independent CPA that the input taxes it incurred from April 1, 1996 to
December 31, 1997 were directly attributable to its export sales. Since it did not
have any output tax against which said input taxes may be offset, it had the option
to file a claim for refund/tax credit of its unutilized input taxes.
 Taxable transactions are those transactions which are subject to value-added tax
either at the rate of ten percent (10%) or zero percent (0%). In taxable transactions,
the seller shall be entitled to tax credit for the value-added tax paid on purchases
and leases of goods, properties or services.
 An exemption means that the sale of goods, properties or services and the use or
lease of properties is not subject to VAT (output tax) and the seller is not allowed
any tax credit on VAT (input tax) previously paid. The person making the exempt sale
because the said transaction is not subject to VAT. Thus, a VAT-registered purchaser
of goods, properties or services that are VAT-exempt, is not entitled to any input tax
on such purchases despite the issuance of a VAT invoice or receipt.
 Now, having determined that respondent is engaged in taxable transactions subject
to VAT, it must be recalled that generally, sale of goods and supply of services
performed in the Philippines are taxable at the rate of 10%. However, export sales,
or sales outside the Philippines, shall be subject to value-added tax at 0% if made by
a VAT-registered person.25 Under the value-added tax system, a zero-rated sale by a
VAT-registered person, which is a taxable transaction for VAT purposes, shall not
 19-TAX II (01).joycgc
result in any output tax. However, the input tax on his purchase of goods, properties
or services related to such zero-rated sale shall be available as tax credit or refund.
 In principle, the purpose of applying a zero percent (0%) rate on a taxable
transaction is to exempt the transaction completely from VAT previously collected
on inputs. It is thus the only true way to ensure that goods are provided free of VAT.
While the zero rating and the exemption are computationally the same, they
actually differ in several aspects, to wit:
(a) A zero-rated sale is a taxable transaction but does not result in an
output tax while an exempted transaction is not subject to the output tax;
(b) The input VAT on the purchases of a VAT-registered person with zero-
rated sales may be allowed as tax credits or refunded while the seller in an exempt
transaction is not entitled to any input tax on his purchases despite the issuance of a
VAT invoice or receipt.
(c) Persons engaged in transactions which are zero-rated, being subject to
VAT, are required to register while registration is optional for VAT-exempt persons.
 It is undisputed that respondent is engaged in the export business and is registered
as a VAT taxpayer per Certificate of Registration of the BIR. Further, the records
show that the respondent is subject to VAT as it availed of the income tax holiday
under E.O. No. 226. Perforce, respondent is subject to VAT at 0% rate and is entitled
to a refund or credit of the unutilized input taxes, which the Court of Tax Appeals
computed at P2,158,714.46, but which we find—after recomputation—should be
P2,158,714.52.
 The Supreme Court will not set aside lightly the conclusions reached by the Court of
Tax Appeals which, by the very nature of its functions, is dedicated exclusively to the
resolution of tax problems and has accordingly developed an expertise on the
subject, unless there has been an abuse or improvident exercise of authority.28 In
this case, we find no cogent reason to deviate from this well-entrenched principle.
Thus, we are persuaded that indeed the Court of Appeals committed no reversible
error in affirming the assailed ruling of the Court of Tax Appeals.
CIR VS. TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC.,. G.R. NO. 150154.
AUGUST 9, 2005
 Toshiba was organized and established as a domestic corporation, duly-registered
with the SEC
 Its primary purpose is to engage in the business of manufacturing and exporting of
electrical and mechanical machinery, equipment, systems, accessories, parts,
components, materials and goods of all kinds, including, without limitation, to those
relating to office automation and information technology, and all types of computer
hardware and software, such as HDD, CD-ROM and personal computer printed
circuit boards.
 9/27/95: Toshiba registered with PEZA as an ECOZONE Export Enterprise, it
registered with BIR as a VAT taxpayer and a withholding agent.
 Toshiba filed its VAT returns for the 1st & 2nd quarters of 1996
 It alleged that the input VAT was from its purchases of capital goods and services
which remained unutilized since it had not yet engaged in any business activity or
transaction for which it may be liable for any output VAT.
 3/27/98: Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center of the DOF applications for tax credit/refund of its unutilized input
VAT
 To toll the running of the two-year prescriptive period for judicially claiming a tax
credit/refund, Toshiba, filed with the CTA a Petition for Review.
 CIR raised several Special and Affirmative Defenses:
-
Assuming without admitting that petitioner filed a claim for refund/tax
credit, the same is subject to investigation by the Bureau of Internal
Revenue.
-
Taxes are presumed to have been collected in accordance with law. Hence,
petitioner must prove that the taxes sought to be refunded were
erroneously or illegally collected.
-
Petitioner must prove the allegations supporting its entitlement to a
refund.
-
Petitioner must show that it has complied with the provisions of Sections
204(c) and 229 of the 1997 Tax Code on the filing of a written claim for
refund within two (2) years from the date of payment of the tax.
-
Claims for refund of taxes are construed strictly against claimants, the same
being in the nature of an exemption from taxation.
 CTA ordered CIR to refund, or in the alternative, to issue a tax credit certificate to
respondent Toshiba; CA also dismissed petitioner CIR’s Petition for Review and
affirmed the CTA Decision
ISSUE: WON Toshiba is entitled to the tax credit/refund of its input VAT on its
purchases of capital goods and services. YES.
 20-TAX II (01).joycgc
 An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and
services by persons from the Customs Territory to ECOZONE enterprises shall be
subject to VAT at zero percent (0%).
 Toshiba bases its claim for tax credit/refund on Section 106(b) Refunds or tax credits
of creditable input tax, of the Tax Code of 1977:
(b) Capital goods. – A VAT-registered person may apply for the issuance of a
tax credit certificate or refund of input taxes paid on capital goods imported or
locally purchased, to the extent that such input taxes have not been applied against
output taxes. The application may be made only within two (2) years after the close
of the taxable quarter when the importation or purchase was made.
 Refund of input taxes on capital goods shall be allowed only to the extent that such
capital goods are used in VAT taxable business. If it is also used in exempt
operations, the input tax refundable shall only be the ratable portion corresponding
to the taxable operations.
 Since Toshiba is a PEZA-registered enterprise, it is subject to the five percent (5%)
preferential tax rate imposed RA 7916 or The Special Economic Zone Act of 1995
 According to the special law, "[e]xcept for real property taxes on land owned by
developers, no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu thereof, 5% of the gross
income earned by all business enterprises within the ECOZONE shall be paid…" The
five percent (5%) preferential tax rate imposed on the gross income of a PEZA-
registered enterprise shall be in lieu of all national taxes, including VAT.
 CIR FAILED TO DIFFERENTIATE BETWEEN VAT-EXEMPT TRANSACTIONS FROM VAT-
EXEMPT ENTITIES.
 In the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines),
this Court already made such distinction –
An exempt transaction, on the one hand, involves goods or services which,
by their nature, are specifically listed in and expressly exempted from the VAT under
the Tax Code, without regard to the tax status – VAT-exempt or not – of the party to
the transaction.
An exempt party, on the other hand, is a person or entity granted VAT
exemption under the Tax Code, a special law or an international agreement to which
the Philippines is a signatory, and by virtue of which its taxable transactions become
exempt from VAT…
 The tax code provision relied upon by petitioner CIR, relates to VAT-exempt
transactions. These are transactions exempted from VAT by special laws or
international agreements to which the Philippines is a signatory. Since such
transactions are not subject to VAT, the sellers cannot pass on any output VAT to the
purchasers of goods, properties, or services, and they may not claim tax
credit/refund of the input VAT they had paid thereon.
 Such provision cannot apply to transactions of respondent Toshiba because
although the said section recognizes that transactions covered by special laws may
be exempt from VAT, the very same section provides that those falling under PD. 66
are not.
 PD. 66, creating the EPZA is the precursor of Rep. Act No. 7916, which the EPZA
evolved into the PEZA. Thus, the exception of PD 66 extends likewise to RA 7916
 SC agrees that PEZA-registered enterprises, which would necessarily be located
within ECOZONES, are VAT-exempt entities, not because of Rep. Act No. 7916
provision, which imposes the five percent (5%) preferential tax rate on gross income
of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8
of the same statute which establishes the fiction that ECOZONES are foreign
territory.
 Toshiba is located within an ECOZONE.
An ECOZONE or a Special Economic Zone has been described as – selected
areas with highly developed or which have the potential to be developed into agro-
industrial, industrial, tourist, recreational, commercial, banking, investment and
financial centers whose metes and bounds are fixed or delimited by Presidential
Proclamations. An ECOZONE may contain any or all of the following: industrial
estates (IEs), export processing zones (EPZs), free trade zones and
tourist/recreational centers.
The national territory of the Philippines outside of the proclaimed borders
of the ECOZONE shall be referred to as the Customs Territory.
 What would be the VAT implication of sales made by a supplier from the Customs
Territory to an ECOZONE enterprise?
The Philippine VAT system adheres to the CROSS BORDER DOCTRINE,
according to which, no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the taxing authority.
Hence, actual export of goods and services from the Philippines to a foreign country
must be free of VAT; while, those destined for use or consumption within the
Philippines shall be imposed with ten percent (10%) VAT.
Applying said doctrine to the sale of goods, properties, and services to and
from the ECOZONES, the BIR issued RMC No. 74-99. Section 3 thereof reads:
 21-TAX II (01).joycgc
SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The
Customs Territory, To a PEZA Registered Enterprise. –
(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax
regime, in lieu of all taxes, except real property tax, pursuant to R.A. No. 7916, as
amended:
a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export
hence, considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5),
NIRC and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus
Investments Code.
b) Sale of service. – This shall be treated subject to zero percent (0%) VAT
under the "cross border doctrine" of the VAT System, pursuant to VAT Ruling No.
032-98 dated Nov. 5, 1998.
(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special
tax regime, hence, subject to taxes under the NIRC, e.g., Service Establishments
which are subject to taxes under the NIRC rather than the 5% special tax regime:
a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export
hence, considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5),
NIRC and Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus
Investments Code.
b) Sale of Service. – This shall be treated subject to zero percent (0%) VAT
under the "cross border doctrine" of the VAT System, pursuant to VAT Ruling No.
032-98 dated Nov. 5, 1998.
(3) In the final analysis, any sale of goods, property or services made by a VAT
registered supplier from the Customs Territory to any registered enterprise operating
in the ecozone, regardless of the class or type of the latter’s PEZA registration, is
actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly,
all sales of goods or property to such enterprise made by a VAT registered supplier
from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec.
106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code,
while all sales of services to the said enterprises, made by VAT registered suppliers
from the Customs Territory, shall be treated effectively subject to the 0% VAT,
pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916
and the "Cross Border Doctrine" of the VAT system.
 NO OUTPUT VAT MAY BE PASSED ON TO AN ECOZONE ENTERPRISE SINCE IT IS A VAT-
EXEMPT ENTITY. The VAT treatment of sales to it, however, varies depending on
whether the supplier from the Customs Territory is VAT-registered or not.
 SALES OF GOODS, PROPERTIES AND SERVICES BY A VAT-REGISTERED SUPPLIER
FROM THE CUSTOMS TERRITORY TO AN ECOZONE ENTERPRISE SHALL BE TREATED
AS EXPORT SALES. If such sales are made by a VAT-registered supplier, they shall be
subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-registered
supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the
same time, shall be entitled to claim tax credit/refund of its input VAT attributable
to such sales. Zero-rating of export sales primarily intends to benefit the exporter
(i.e., the supplier from the Customs Territory), who is directly and legally liable for
the VAT, making it internationally competitive by allowing it to credit/refund the
input VAT attributable to its export sales.
 Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered
supplier would only be exempt from VAT and the supplier shall not be able to claim
credit/refund of its input VAT.
 Toshiba, as a PEZA-registered enterprise, is a VAT-exempt entity that could not have
engaged in a VAT-taxable business, SC still believes, given the particular
circumstances of the present case, that it is entitled to a credit/refund of its input
VAT.
 Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income
tax holiday under Executive Order No. 226, as amended, were deemed subject to
VAT.
"SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which
is a taxable transaction for VAT purposes, shall not result in any output tax.
However, the input tax on his purchases of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund in accordance with
these regulations."
 VAT-registered person who can avail as tax credit or refund of the input tax on his
purchases of goods, services or properties is the seller whose sale is zero-rated.
 Under RMC No. 42-2003, the DOF would still accept applications for tax
credit/refund filed by PEZA-registered enterprises, availing of the income tax
holiday, for input VAT on their purchases made prior to RMC No. 74-99. Acceptance
of applications essentially implies processing and possible approval thereof
depending on whether the given conditions are met. Respondent Toshiba’s claim for
tax credit/refund arose from the very same circumstances recognized by Q-5(1) and
A-5(1) of RMC No. 42-2003. It therefore seems irrational and unreasonable for
petitioner CIR to oppose respondent Toshiba’s application for tax credit/refund of its
input VAT, when such claim had already been determined and approved by the CTA
after due hearing, and even affirmed by the Court of Appeals; while it could accept,
22-TAX II (01).joycgc

process, and even approve applications filed by other similarly-situated PEZA-

registered enterprises at the administrative level.