tax 2 case digests part 3 value-added tax.pdf

Taxation II Case Digests based on Atty. Bobby Lock’s Course Outline Part III- VALUE-ADDED TAX

1 | M s . N o l a i d a A g u i r r e

PRELIMINARY MATTERS

Commissioner of Internal Revenue vs. Magsaysay lines, Inc., 497 SCRA 63(2006) TINGA, J.

Taxation; Value Added Tax (VAT); Value Added Tax (VAT) is ultimately a tax on consumption, even

though it is assessed on many levels of transactions on the basis of a fixed percentage.—A brief

reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even

though it is assessed on many levels of transactions on the basis of a fixed percentage. It is the end user of

consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the

end users by the providers of these goods or services who in turn may credit their own VAT liability (or

input VAT) from the VAT payments they receive from the final consumer (or output VAT).

Value Added Tax (VAT); The tax is levied only on the sale, barter or exchange of goods or services by

persons who engage in such activities in the course of trade or business.—VAT is not a singular-minded

tax on every transactional level. Its assessment bears direct relevance to the taxpayer’s role or link in the

production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations, the

tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such

activities, in the course of trade or business. These transactions outside the course of trade or business may

invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the

sales of goods or services do not occur within the course of trade or business, the providers of such goods

or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against

their own accumulated VAT collections since the accumulation of output VAT arises in the first place only

through the ordinary course of trade or business.

Same; Any sale, barter or exchange of goods or services not in the course of trade or business is not

subject to Value Added Tax (VAT).—The conclusion that the sale was not in the course of trade or

business, which the CIR does not dispute before this Court, should have definitively settled the matter. Any

sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT.

Facts: Pursuant to a government program of privatization, The NDC decided to sell in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels. The vessels were constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC. The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on the value of the vessels." On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines,



purportedly for a new company still to be formed composed of itself and was approved by the Committee on Privatization, and a Notice of Award dated 1 July 1988 was issued to Magsaysay Lines who in turn was assessed of VAT through VAT Ruling No. 568-88 dated 14 December 1988 from the BIR, holding that the sale of the vessels was subject to the 10% VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and thus its "transactions incident to its normal VAT registered activity of leasing out personal propertyincluding sale of its own assets that are movable, tangible objects which are appropriable or transferable are subject to the 10% [VAT]. CTA ruled that the sale of a vessel was an "isolated transaction," not done in the ordinary course of NDC’s business, and was thus notsubject to VAT, which under Section 99 of the Tax Code, was applied only to sales in the course of trade or business. The CTA further held that the sale of the vessels could not be "deemed sale," and thus subject to VAT, as the transaction did not fall under the enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt should be resolved in favor of private respondents since Section 99 of the Tax Code which implemented VAT is not an exemption provision, but a classification provision which warranted the resolution of doubts in favor of the taxpayer. Hence CIR appealed the CTA Decision.

Issue: Whether the sale by the National Development Company (NDC) of five (5) of its vessels to the private respondents is subject to value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax Code) then prevailing at the time of the sale. The facts are culled primarily from the ruling of the CTA. Held: NOT SUBJECT TO VAT. VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the basis of a fixed percentage. It is the end user of consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the end users by the providers of these goods or services who in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the final consumer (or output VAT). The final purchase by the end consumer represents the final link in a production chain that itself involves several transactions and several acts of consumption. The VAT system assures fiscal adequacy through the collection of taxes on every level of consumption, yet assuages the manufacturers or providers of goods and services by enabling them to pass on their respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire tax liability. Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayer’s role or link in the production chain. Hence, as affirmed by Section 99 of the TaxCode and its subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or



business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business. That the sale of the vessels was not in the ordinary course of tradeor business of NDC was appreciated by both the CTA and the Court of Appeals, the latter doing so even in its first decision which it eventually reconsidered. We cite with approval the CTA’s explanation on this point: In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the term "carrying on business" does not mean the performance of a single disconnected act, but means conducting, prosecuting and continuing business by performing progressively all the acts normally incident thereof; while "doing business" conveys the idea of business being done, not from time to time, but all the time."Course of business" is what is usually done in the management of trade or business Court explained that "course of business" or "doing business" connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property. This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was created for the primary purpose of selling real property. The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this Court, should have definitively settled the matter. Any sale, barter or exchange of goods or services not in the courseof trade or business is not subject to VAT. Accordingly, the Court rules that given the undisputed finding that the transaction in question was not made in the course of trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of the Tax Code, no matter how the said sale may hew to those transactions deemed sale as defined under Section 100. Petition Denied.

Commissioner of Internal Revenue vs. Seagate Technology (Philippines), 451 SCRA 132(2005) PANGANIBAN, J.

Taxation; Tax Exemption; Value Added Tax (VAT); Petitioner is not subject to internal revenue laws

and regulations and is even entitled to tax credits.—From the above-cited laws, it is immediately clear

that petitioner enjoys preferential tax treatment. 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, however, is entitled to their credits.

Same; Same; Same; The VAT is an indirect tax that may be shifted or passed on to the buyer, transferee

or lessee of the goods, properties or services.—Viewed broadly, the VAT is a uniform tax ranging, at

present, from 0 percent to 10 percent levied on every importation of goods, whether or not in the course of

trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each



rendition of services in the course of trade or business as they pass along the production and distribution

chain, the tax being limited only to the value added to such goods, properties or services by the seller,

transferor or lessor. It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of

the goods, properties or services. As such, it should be understood not in the context of the person or entity

that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on

consumption. In either case, though, the same conclusion is arrived at.

Same; Same; Same; Zero-rated transactions generally refer to the export sale of goods and supply of

services.—Zero-rated transactions generally refer to the export sale of goods and supply of services. The

tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against

the purchaser. The seller of such transactions charges no output tax, but can claim a refund of or a tax

credit certificate for the VAT previously charged by suppliers.

Same; Same; Same; Respondent as an exempt entity, can neither be directly charged for the VAT on its

sales nor indirectly made to bear as added cost to such sales, the equivalent VAT on its purchases.—

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

revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the

very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but

the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly

charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent

VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not

distinguish, we ought not to distinguish.

Same; Same; Same; Tax Refunds; Claimants of tax refunds bear the burden of proving the factual basis

of their claims; and of showing, by words too plain to be mistaken, that the legislature intended to

exempt them.—Tax refunds are in the nature of such exemptions. Accordingly, the claimants of those

refunds bear the burden of proving the factual basis of their claims; and of showing, by words too plain to

be mistaken, that the legislature intended to exempt them. In the present case, all the cited legal provisions

are teeming with life with respect to the grant of tax exemptions too vivid to pass unnoticed. In addition,

respondent easily meets the challenge.

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.

Facts:



[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;

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

Certification No. 97-083-000600-V issued on 2 April 1997; VAT returns for the period 1 April 1998 to 30

June 1999 have been filed by [respondent];

An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting

documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for Review), was filed

on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu; No final action has been received

by [respondent] from [petitioner] on [respondent’s] claim for VAT refund.

The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the

[petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of

Petition for Review in order to toll the running of the two-year prescriptive period.

Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA) registered

Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of Republic Act No.

([RA]) 7916 in relation to Section 103 of the Tax Code, as amended. As [respondent’s] business is not

subject to VAT, the capital goods and services it alleged to have purchased are considered not used in VAT

taxable business. As such, [respondent] is not entitled to refund of input taxes on such capital goods

pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services

pursuant to Section 4.103 of said regulations.

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit

certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66.

The appellate court reasoned that respondent had availed itself only of the fiscal incentives under Executive

Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of those under both

Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was, therefore,

considered exempt only from the payment of income tax when it opted for the income tax holiday in lieu of

the 5 percent preferential tax on gross income earned. As a VAT-registered entity, though, it was still

subject to the payment of other national internal revenue taxes, like the VAT.

Issue:

Whether or not Seagate, a VAT-Registered PEZA Enterprise is entitled to the refund.

Held:

YES. 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.



It is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on

capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although the

transactions involving such tax are not exempt, petitioner as a VAT-registered person,[28] however, is

entitled to their credits.

Nature of the VAT and the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every

importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter,

exchange or lease of goods or properties or on each rendition of services in the course of trade or

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] It is an indirect tax that

may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. [32] As

such, it should be understood not in the context of the person or entity that is primarily, directly and legally

liable for its payment, but in terms of its nature as a tax on consumption.[33] In either case, though, the

same conclusion is arrived at.

Under the present method that relies on invoices, an entity can credit against or subtract from the VAT

charged on its sales or outputs the VAT paid on its purchases, inputs and imports.[37]

If at the end of a taxable quarter the output 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 when the output taxes exceed the input

taxes that the excess has to be paid.[41] If, however, the input taxes exceed the output taxes, the excess shall

be carried over to the succeeding quarter or quarters.[42] Should the input taxes result from zero-rated or

effectively zero-rated transactions or from the acquisition of capital goods,[43] any excess over the output

taxes shall instead be refunded[44] to the taxpayer or credited[45] against other internal revenue taxes.[46]

Zero-Rated vs. Effectively Zero-Rated Transactions (in effect – similar ; As to source – different)

As to source

Zero-rated transactions

export sale of goods and

supply of services.[47] The tax

rate is set at zero.[48]

Effectively Zero-rated transactions

sale of goods[50] or supply of services[51] to persons or

entities whose exemption under special laws or

international agreements to which the Philippines is a

signatory effectively subjects such transactions to a zero

rate

In effect results in no tax chargeable against the purchaser. The seller of such transactions

charges no output tax,[49] but can claim a refund of or a tax credit certificate for the

VAT previously charged by suppliers.

Zero Rating and Exemption (In terms of the VAT computation – same; the extent of relief – different)

http://sc.judiciary.gov.ph/jurisprudence/2005/feb2005/153866.htm#_ftn28























Automatic Zero-rating

intended to be enjoyed by the seller who is

directly and legally liable for the VAT,

making such seller internationally

competitive by allowing the refund or

credit of input taxes that are attributable

to export sales

Effective zero rating

intended to benefit the purchaser

who, not being directly and legally

liable for the payment of the VAT,

will ultimately bear the burden of

the tax shifted by the suppliers.

In exemption there is

only partial relief

because the

purchaser is not

allowed any tax

refund of or credit

for input taxes

paid.[58]

In both, there is total relief for the purchaser from the burden of the tax

Exempt Transaction vs. Exempt Party

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

transaction.[59]

exempt transaction

involves goods or services which are 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

exempt party

person or entity granted VAT exemption under the

Tax Code, a special law or an international

agreement

such transaction is not subject to the VAT, but

the seller is not allowed any tax refund of or credit

for any input taxes paid.

Such party is also not subject to the VAT, but may

be allowed a tax refund of or credit for input taxes

paid, depending on its registration as a VAT or non-

VAT taxpayer.

Tax Refund as Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juris[102] against the taxpayer[103] and

liberally in favor of the taxing authority.[104]

Tax refunds are in the nature of such exemptions.

VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law.[131] Petitioner alleges that respondent did

register for VAT purposes with the appropriate Revenue District Office. However, it is now too late in the

day for petitioner to challenge the VAT-registered status of respondent, given the latter’s prior

representation before the lower courts and the mode of appeal taken by petitioner before this Court.

Tax Refund or Credit in Order









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

credit is in order.

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT

refund or credit.[150]

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in

which this Court held that the petitioner therein was registered as a non-VAT taxpayer.[151] Hence, for being

merely VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and

have not been offset against any output taxes.

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishments registered

and operating within an ecozone, which by law is considered as a separate customs territory. As such,

respondent is exempt from all internal revenue taxes, including the VAT, and regulations pertaining

thereto. It has opted for the income tax holiday regime, instead of the 5 percent preferential tax regime. As

a matter of law and procedure, its registration status entitling it to such tax holiday can no longer be

questioned. Its sales transactions intended for export may not be exempt, but like its purchase transactions,

they are zero-rated. No prior application for the effective zero rating of its transactions is necessary. Being

VAT-registered and having satisfactorily complied with all the requisites for claiming a tax refund of or

credit for the input VAT paid on capital goods purchased, respondent is entitled to such VAT refund or

credit.

Contex Corporation vs. Commissioner of Internal Revenue, 433 SCRA 376(2004) QUISUMBING, J.

Taxation; Exemptions; Value Added Tax (VAT); VAT as an Indirect Tax; The amount of tax paid on

the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller,

transferor or lessor to the buyer, transferee or lessee.—At this juncture, it must be stressed that the VAT

is an indirect tax. As such, the amount of tax paid on the goods, properties or services bought, transferred,

or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee.

Unlike a direct tax, such as the income tax, which primarily taxes an individual’s ability to pay based on his

income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or

certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer

expenditures.

Same; Same; Same; Same; A seller who is directly and legally liable for payment of an indirect tax, such

as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the





same tax; It is the final purchaser or consumer of such goods or services who although not directly and

legally liable for the payment thereof, ultimately bears the burden of the tax.—The amount of tax paid

may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the

liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller

remains the person primarily and legally liable for the payment of the tax. What is shifted only to the

intermediate buyer and ultimately to the final purchaser is the burden of the tax. Stated differently, a seller

who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is

not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or

consumer of such goods or services who, although not directly and legally liable for the payment thereof,

ultimately bears the burden of the tax.

Same; Same; Same; Petitioner’s claim for exemption from VAT for its purchases of supplies and raw

materials is incongruous with its claim that it is VAT-Exempt for only VAT-Registered entities can claim

Input VAT Credit/Refund.—Petitioner rightly claims that it is indeed VAT-Exempt and this fact is not

controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of

Registration issued by the BIR. As such, it is exempt from VAT on all its sales and importations of goods

and services. Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw

materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim

Input VAT Credit/Refund.

Same; Same; Same; Petitioner is not the proper party to claim such VAT refund.—The point of

contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously passed

on to it by its suppliers. While it is true that the petitioner should not have been liable for the VAT

inadvertently passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the

petitioner is not the proper party to claim such VAT refund.

Facts:

Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and

garments and other hospital supplies for export. Petitioner’s place of business is at the Subic Bay Freeport

Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay

Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227.[4] As an SBMA-registered firm,

petitioner is exempt from all local and national internal revenue taxes except for the preferential tax

provided for in Section 12 (c)[5] of Rep. Act No. 7227. Petitioner also registered with the Bureau of

Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180-

000133.

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary

in the conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10%

VAT on the purchased items, which led the petitioner to pay input taxes in the amounts

of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.[6]

http://sc.judiciary.gov.ph/jurisprudence/2004/jul2004/151135.htm#_ftn4





Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep.

Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr.

Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application letter, dated

December 29, 1998.

Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time

directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The second letter

sought a refund or issuance of a tax credit certificate in the amount of P1,108,307.72, representing

erroneously paid input VAT for the period January 1, 1997 to November 30, 1998.

Issue:

1. Whether or not the exemption from all local and national internal revenue taxes provided in R.A.

7227 covers the VAT paid by the petitioner, a Subic Bay Freeport enterprise on its purchases of

supplies and materials.

2. Whether or not the CTA correctly held that petitioner is entitled to the tax credit for refund of the

VAT paid on its purchases of supplies and raw materials for the years 1997 and 1998.

Held:

1. NO. SBFZ locators are not relieved from the indirect taxes that may be shifted to them by a VAT-

registered seller.

It must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods,

properties or services bought, transferred, or leased may be shifted or passed on by the seller,

transferor, or lessor to the buyer, transferee or lessee.[17] Unlike a direct tax, such as the income

tax, which primarily taxes an individual’s ability to pay based on his income or net wealth, an

indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions

involving the same. The VAT, thus, forms a substantial portion of consumer expenditures.

Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the

burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by

the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the

tax burden. In adding or including the VAT due to the selling price, the seller remains the person

primarily and legally liable for the payment of the tax. What is shifted only to the intermediate

buyer and ultimately to the final purchaser is the burden of the tax.[18]Stated differently, a seller

who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or

services is not necessarily the person who ultimately bears the burden of the same tax. It is the

final purchaser or consumer of such goods or services who, although not directly and legally

liable for the payment thereof, ultimately bears the burden of the tax.





The petitioner’s claim to VAT exemption in the instant case for its purchases of supplies and raw

materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically

exempts them from all national and local internal revenue taxes, including VAT and Section 4

(A)(a) of BIR Revenue Regulations No. 1-95.[24]

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not

controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per

Certificate of Registration[25] issued by the BIR. As such, it is exempt from VAT on all its sales

and importations of goods and services.

Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw

materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities

can claim Input VAT Credit/Refund.

The point of contention here is whether or not the petitioner may claim a refund on the Input VAT

erroneously passed on to it by its suppliers.

While it is true that the petitioner should not have been liable for the VAT inadvertently passed on

to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not

the proper party to claim such VAT refund.

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.

2. 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.

Commissioner of Internal Revenue vs. Court of Appeals, 329 SCRA 237(2000) PARDO, J.

Taxation; Value Added Tax 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.—Contrary to COMASERCO’s contention the above provision

clarifies that even a non-stock, nonprofit, 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.

Same; Even a nonstock, nonprofit organization or government entity is liable to pay Value Added Tax

for the sale of goods and services.—The definition of the term “in the course of trade or business”

incorporated in the present law applies to all transactions even to those made prior to its enactment.

Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters or

exchanges goods and services, was already liable to pay VAT. The present law merely stresses that even a

nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and

services.

Same; Definition of the phrase “sale of services.”—Section 108 of the National Internal Revenue Code 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.”

Same; Even if such corporation was organized without any intention of realizing pro fit, any income or

profit generated by the entity in the conduct of its activities was subject to income tax.—On February 5,

1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 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 of realizing profit, any income or profit generated by the entity in the conduct of its activities

was subject to income tax.

Same; As long as the entity provides service for a fee, remuneration or consideration, then the service

rendered is subject to Value Added 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.

Same; Any exemption from the payment of a tax must be clearly stated in the language of the law.—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.

In the case of VAT, Section 109, Republic Act 8424 clearly enumerates the transactions exempted from

VAT. The services rendered by COMASERCO do not fall within the exemptions.

Same; Opinion of the Commissioner of Internal Revenue entitled to great weight in the absence of any

showing that it is plainly wrong.—Both the Commissioner of Internal Revenue and the Court of Tax

Appeals correctly ruled that the services rendered by COMASERCO to Philamlife and its affiliates are



subject to VAT. As pointed out by the Commissioner, the performance of all kinds of services for others

for a fee, remuneration or consideration is considered as sale of services subject to VAT. As the

government agency charged with the enforcement of the law, the opinion of the Commissioner of Internal

Revenue, in the absence of any showing that it is plainly wrong, is entitled to great weight.

Facts:

Commonwealth Management and Services Corporation (COMASERCO) is a corporation duly organized

and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co.

(Philamlife), organized by the letter to perform collection, consultative and other technical services,

including functioning as an internal auditor, of Philamlife and its other affiliates.

BIR issued an assessment to COMASERCO for deficiency VAT amounting to P351,851.01 for taxable

year 1988. COMASERCO’s annual corporate income tax return ending December 31, 1988 indicated a net

loss in its operations in the amount of P6,077.

COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to collections,

consultative and other technical assistance, including functioning as an internal auditor, were on a "no-

profit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing

services to Philamlife and its affiliates. It was established to ensure operational orderliness and

administrative efficiency of Philamlife and its affiliates, and not in the sale of services. It was not profit-

motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable

year 1988. COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.

CIR avers that to "engage in business" and to "engage in the sale of services" are two different things.

Petitioner maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for a fee

or consideration, are subject to VAT. VAT is a tax on the value added by the performance of the service. It

is immaterial whether profit is derived from rendering the service.

The CTA rules in favour of CIR. The CA reversed.

Issue:

Whether or not COMASERCO was engaged in the sale of services and must be liable to pay for VAT.

Held:

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 Commissioner of Internal Revenue issued BIR Ruling No. 010-98 emphasizing that a domestic

corporation that provided technical, research, management and technical assistance to its affiliated

companies and received payments on a reimbursement-of-cost basis, without any intention of realizing



profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without

any intention realizing profit, any income or profit generated by the entity in the conduct of its activities

was subject to income tax.

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for

services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for

purposes of determining liability for VAT on services rendered. As long as the entity provides service for a

fee, remuneration or consideration, then the service rendered is subject to VAT.

At any rate, since taxes are the lifeblood of the nation, statutes that allow exemptions are construed against

the grantee and liberally in favour of the government. Any exemption from the payment of a tax must be

clearly stated in the language of the law; it cannot be merely implied therefrom. In the case of VAT,

Section 109, Republic Act 8424 clearly enumerates the transactions exempted from VAT. The services

rendered by COMASERCO do not fall within the exemptions.

Compared with the Sony Philippines case as emphasized by Atty. Lock

It is evident under Section 110 of the 1997 Tax Code that an advertising expense duly

covered by a Value Added Tax (VAT) invoice is a legitimate business expense.—The

Court is not persuaded. As aptly found by the CTA- First Division and later affirmed by

the CTA-EB, Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance

of the input VAT credits that should have been realized from the advertising expense of

the latter. It is evident under Section 110 of the 1997 Tax Code that an advertising

expense duly covered by a VAT invoice is a legitimate business expense. This is

confirmed by no less than CIR’s own witness, Revenue Officer Antonio Aluquin. There is

also no denying that Sony incurred advertising expense. Aluquin testified that advertising

companies issued invoices in the name of Sony and the latter paid for the same.

Indubitably, Sony incurred and paid for advertising expense/services. Where the money

came from is another matter alltogether but will definitely not change said fact.

Value Added Tax (VAT); Services rendered for a fee even on reimbursement-on-cost

basis only and without realizing profit are also subject to Value Added Tax (VAT).—In

the case of CIR v. Court of Appeals (CA), 329 SCRA 237 (2000), the Court had the

occasion to rule that services rendered for a fee even on reimbursement-on-cost basis only

and without realizing profit are also subject to VAT. The case, however, is not applicable

to the present case. In that case, COMASERCO rendered service to its affiliates and, in

turn, the affiliates paid the former reimbursement-on-cost which means that it was paid

the cost or expense that it incurred although without profit. This is not true in the present

case. Sony did not render any service to SIS at all. The services rendered by the

advertising companies, paid for by Sony using SIS dole-out, were for Sony and not SIS.

SIS just gave assistance to Sony in the amount equivalent to the latter’s advertising

expense but never received any goods, properties or service from Sony.



Mindanao II Geothermal Partnership vs. Commissioner of Internal Revenue, 693 SCRA 49(2013) CARPIO, J.

Taxation; Value-Added Tax; Tax Credits; Tax Refunds; Any VAT-registered person, whose sales are

zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when

the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax

due or paid attributable to such sales.—In determining whether the administrative claims of Mindanao I

and Mindanao II for 2003 have prescribed, we see no need to rely on either Atlas or Mirant. Section 112(A)

of the 1997 Tax Code is clear: “[A]ny VAT-registered person, whose sales are zero-rated or effectively

zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply

for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such

sales x x x.”

Same; Same; Same; Same; In case of full or partial denial of the claim for tax refund or tax credit, or

the failure on the part of the Commissioner to act on the application within the period prescribed above,

the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or

after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with

the Court of Tax Appeals.—In determining whether the claims for the second, third and fourth quarters of

2003 have been properly appealed, we still see no need to refer to either Atlas or Mirant, or even to Section

229 of the 1997 Tax Code. The second paragraph of Section 112(C) of the 1997 Tax Code is clear: “In case

of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the

Commissioner to act on the application within the period prescribed above, the taxpayer affected may,

within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one

hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.”

Same; Court of Tax Appeals; The taxpayer cannot simply file a petition with the Court of Tax Appeals

without waiting for the Commissioner’s decision within the 120-day mandatory and jurisdictional

period.—In the consolidated cases of San Roque, the Court En Banc examined and ruled on the different

claims for tax refund or credit of three different companies. In San Roque, we reiterated that “[f]ollowing

the verba legis doctrine, [Section 112(C)] must be applied exactly as worded since it is clear, plain, and

unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting for the

Commissioner’s decision within the 120-day mandatory and jurisdictional period. The CTA will have no

jurisdiction because there will be no ‘decision’ or ‘deemed a denial decision’ of the Commissioner for the

CTA to review.”

Same; Summary of the Rules on the Determination of the Prescriptive Period for Filing a Tax Refund

or Credit of Unutilized Input Value Added Tax (VAT) as Provided in Section 112 of the 1997 Tax

Code.—We summarize the rules on the determination of the prescriptive period for filing a tax refund or

credit of unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as follows: (1) An

administrative claim must be filed with the CIR within two years after the close of the taxable quarter when



the zero-rated or effectively zero-rated sales were made. (2) The CIR has 120 days from the date of

submission of complete documents in support of the administrative claim within which to decide whether

to grant a refund or issue a tax credit certificate. The 120-day period may extend beyond the two-year

period from the filing of the administrative claim if the claim is filed in the later part of the two-year

period. If the 120-day period expires without any decision from the CIR, then the administrative claim may

be considered to be denied by inaction. (3) A judicial claim must be filed with the CTA within 30 days

from the receipt of the CIR’s decision denying the administrative claim or from the expiration of the 120-

day period without any action from the CIR. (4) All taxpayers, however, can rely on BIR Ruling No. DA-

489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6

October 2010, as an exception to the mandatory and jurisdictional 120+30 day periods.

Same; A reading of Section 105 of the 1997 Tax Code would show that a transaction “in the course of

trade or business” includes “transactions incidental thereto.”—Mindanao II’s sale of the Nissan Patrol is

said to be an isolated transaction. However, it does not follow that an isolated transaction cannot be an

incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the 1997 Tax Code

would show that a transaction “in the course of trade or business” includes “transactions incidental

thereto.” Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity and to

deliver the electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a

Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and equipment.

Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao II’s

business which should be liable for VAT.

Facts:

Both Mindanao I and II are partnerships registered with the Securities and Exchange Commission, value added taxpayers registered with the Bureau of Internal Revenue (BIR), and Block Power Production Facilities accredited by the Department of Energy. Republic Act No. 9136, or the Electric Power Industry Reform Act of 2000 (EPIRA), effectively amended Republic Act No. 8424, or the Tax Reform Act of 1997 (1997 Tax Code),9 when it decreed that sales of power by generation companies shall be subjected to a zero rate of VAT.10 Pursuant to EPIRA, Mindanao I and II filed with the CIR claims for refund or tax credit of accumulated unutilized and/or excess input taxes due to VAT zero-rated sales in 2003. Mindanao I and II filed their claims in 2005.

CTA Case No.

Period Covered by VAT Sales

in 2003

Close of quarter

when sales were made

Last day for filing application

of tax refund / tax credit

certificate with the CIR

Actual date of filing

application for tax

refund / credit (admin

claim)

Last day for filing case with CTA

Actual Date of filing case

with CTA (judicial claim)

MINDANAO II

7227 1st Quarter 31 March 2003 31 March 2005 13 April 2005 12 Sept 2005 22 April 2005

http://www.lawphil.net/judjuris/juri2013/mar2013/gr_193301_2013.html#fnt9

http://www.lawphil.net/judjuris/juri2013/mar2013/gr_193301_2013.html#fnt10



7287 2nd Quarter 30 June 2003 30 June 2005 13 April 2005 12 Sept 2005 7 July 2005

7317 3rd and 4th Quarters

30 Sept 2003 30 Sept 2005 13 April 2005 12 Sept 2005 9 Sept 2005

31 Dec. 2003 2 Jan. 2006 (31 Dec. 2005 being a

Saturday)

MINDANAO I

7228

1st Quarter 31 March 2003 31 March 2005 4 April 2005 1 Sept 2005 22 April 2005

7286 2nd Quarter 30 June 2003 30 June 2005 4 April 2005 1 Sept 2005 7 July 2005

7318 3rd and 4th Quarters

30 Sept 2003 30 Sept 2005 4 April 2005 1 Sept 2005 9 Sept 2005

31 Dec. 2003 2 January 2006 (31 Dec. 2005

being a Saturday)

CTA (En Banc):

Mindanao II’s judicial claims were filed beyond the period allowed in Sec. 112(A), by which the reckoning of the two-year prescriptive period for filing the application for refund or credit of input VAT attributable to zero-rated sales or effectively zero-rated sales shall be counted from the close of the taxable quarter when the sales were made (regardless of whether the tax was actually paid), according to CIR v. Mirant Pagbilao Corporation (Mirant). Also, the sale of the fully-depreciated Nissan Patrol is incidental to Mindanao II’s VAT zero-rated transactions and is VATable pursuant to Sec. 105.

Mindanao I’s claims for the first, second, third and fourth quarters of 2003 were filed out of time. Section 229 is inapplicable in light of Mirant. Moreover, the procedure prescribed under Section 112(C) should be followed first before the CTA En Banc can act on Mindanao I’s claim.

Mindanao I and II went up to the Supreme Court arguing that their claims were timely filed pursuant to the case of Atlas, which was then the controlling ruling at the time of the filing. The Mirant case, which uses the close of the taxable quarter when the sales were made as the reckoning date in counting the two-year prescriptive period, cannot be applied retroactively to their prejudice.

[1] ISSUE: Whether the reckoning date for counting the two-year prescriptive period in Section 112 should be counted from the end of the taxable quarter when the sales were made (Mirant) or the date of filing the return (Atlas)?

HELD: Neither Atlas nor Mirant applies, because when Mindanao II and Mindanao I filed their respective administrative and judicial claims in 2005, neither case had been promulgated. Atlas was promulgated on 8 June 2007, Mirant on 12 September 2008. Besides, Atlas merely stated that the two-year prescriptive period should be counted from the date of payment of the output VAT, not from the close of the taxable



quarter when the sales involving the input VAT were made. The Atlas doctrine did not interpret, expressly or impliedly, the 120+30 day periods.

Prescriptive Period for the Filing of Administrative Claims

Section 112(A) of the 1997 Tax Code was the applicable law at the time of filing of the claims in issue, therefore the claims needed to have been filed within two (2) years after the close of the taxable quarter when the sales were made. Mindanao I and II’s administrative claims for the first quarter of 2003 had prescribed, but their claims for the second, third and fourth quarters of 2003 were filed on time.

Prescriptive Period for the Filing of Judicial Claims

In determining whether the claims for the second, third and fourth quarters of 2003 had been properly appealed, there is still see no need to refer to either Atlas or Mirant, or even to Sec. 229. The second paragraph of Sect. 112(C) is clear that the taxpayer can appeal to the CTA “within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period.”

The 120+30 day periods are mandatory and jurisdictional. The taxpayer cannot simply file a petition with the CTA without waiting for the Commissioner’s decision within the 120-day period, because otherwise there would be no “decision” or “deemed a denial” decision for the CTA to review. Moreover, Sec. 112(C) expressly grants a 30-day period to appeal to the CTA, and this period need not necessarily fall within the two-year prescriptive period, as long as the administrative claim is filed within such time. The said prescriptive period does not refer to the filing of the judicial claim with the CTA, but to the administrative claim with the Commissioner.

San Roque: Recognition of BIR Ruling No. DA-489-03

BIR Ruling No. DA-489-03 provided that the “taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA.” In the consolidated cases of CIR v. San Roque, however, the Supreme Court En Banc held that the taxpayer cannot simply file a petition with the CTA without waiting for the Commissioner’s decision within the 120-day jurisdictional period. Notwithstanding, the Court also held in San Roque that BIR Ruling No. DA-489-03 constitutes equitable estoppel in favor of taxpayers. Being a general interpretative rule, it can be relied on by all taxpayers from the time of its issuance on 10 December 2003 up to its reversal by the Court in Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi) on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional.”

Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003 on 13 April 2005. Counting 120 days after filing of the administrative claim (11 August 2005) and 30 days after the CIR’s denial by inaction, the last day for filing a judicial claim with the CTA for the second, third, and fourth quarters of 2003 was on 12 September 2005. However, the judicial claim could not be filed earlier than 11 August 2005, which was the expiration of the 120-day period for the Commissioner to act.



Mindanao II filed its judicial claim for the second quarter before the expiration of the 120-day period; it was thus prematurely filed. However, pursuant to San Roque, the claim qualifies under the exception to the strict application of the 120+30 day periods. Its judicial claims for the third quarter and fourth quarter of 2003 were filed on time.

Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003 on 4 April 2005. Counting 120 days after filing of the administrative claim with the CIR (2 August 2005) and 30 days after the CIR’s denial by inaction, the last day for filing a judicial claim was on 1 September 2005. However, the judicial claim cannot be filed earlier than 2 August 2005, which is the expiration of the 120-day period for the Commissioner to act on the claim. Mindanao I prematurely filed its judicial claim for the second quarter of 2003 but claim qualifies under the exception in San Roque. Its judicial claims for the third and fourth quarters of 2003, however, were filed after the prescriptive period.

Summary of Administrative and Judicial Claims

G.R. No. 193301 Mindanao II v. CIR

Administrative Claim

Judicial Claim Action on Claim

1st Quarter, 2003 Filed late -- Deny, pursuant to Section 112(A) of the

1997 Tax Code

2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to BIR Ruling No. DA-489-03

3rd Quarter, 2003 Filed on time Filed on time Grant, pursuant to Section 112(C) of the

1997 Tax Code

4th Quarter, 2003 Filed on time Filed on time Grant, pursuant to Section 112(C) of the

1997 Tax Code

G.R. No. 194637

Mindanao I v. CIR

Administrative Claim

Judicial Claim Action on Claim

1st Quarter, 2003 Filed late -- Deny, pursuant to Section 112(A) of the

1997 Tax Code

2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to BIR Ruling No. DA-489-03



3rd Quarter, 2003 Filed on time Filed late Grant, pursuant to Section 112(C) of the

1997 Tax Code

4th Quarter, 2003 Filed on time Filed late Grant, pursuant to Section 112(C) of the

1997 Tax Code

Summary of Rules on Prescriptive Periods Involving VAT

We summarize the rules on the determination of the prescriptive period for filing a tax refund or credit of unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as follows:

(1) An administrative claim must be filed with the CIR within two years after the close of the taxable quarter when the zero-rated or effectively zero-rated sales were made.

(2) The CIR has 120 days from the date of submission of complete documents in support of the administrative claim within which to decide whether to grant a refund or issue a tax credit certificate. The 120-day period may extend beyond the two-year period from the filing of the administrative claim if the claim is filed in the later part of the two-year period. If the 120-day period expires without any decision from the CIR, then the administrative claim may be considered to be denied by inaction.

(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR’s decision denying the administrative claim or from the expiration of the 120-day period without any action from the CIR.

(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, as an exception to the mandatory and jurisdictional 120+30 day periods

[2] ISSUE: Whether the sale of the fully-depreciated Nissan Patrol is a one-time transaction not incidental to the VAT zero-rated operation of Mindanao II, thus not VATable?

Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in the course of its business but an isolated transaction that should not have been subject to 10% VAT. It does not follow that an isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 would show that a transaction “in the course of trade or business” includes “transactions incidental thereto.” In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao II’s business which should be liable for VAT.



VAT ON GOODS AND SERVICES

Commissioner of Internal Revenue vs. Philippine Health Care Providers, Inc., 522 SCRA 131(2007) SANDOVAL-GUTIERREZ, J.

Taxation; Value-Added Tax; Health Maintenance Organizations (HMOs); The import of Section 103,

now Section 109 (1), of the National Internal Revenue Code is plain—it contemplates the exemption

from VAT of taxpayers engaged in the performance of medical, dental, hospital, and veterinary services.—

Section 103 of the same Code specifies the exempt transactions from the provision of Section 102, thus:

SEC. 103. Exempt Transactions.—The following shall be exempt from the value-added tax: x x x (1)

Medical, dental, hospital and veterinary services except those rendered by professionals x x x The import

of the above provision is plain. It requires no interpretation. It contemplates the exemption from VAT of

taxpayers engaged in the performance of medical, dental, hospital, and veterinary services. In

Commissioner of International Revenue v. Seagate Technology (Philippines), 451 SCRA 132 (2005), we

defined an exempt transaction as one involving 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 of the

party in the transaction. In Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.)

Inc., 466 SCRA 211 (2005), we reiterated this definition.

Same; Same; Same; Court of Tax Appeals; Where an entity does not actually provide medical and/or

hospital services, as provided under Section 103 on exempt transactions, but merely arranges for the

same, its services are not VAT-exempt; Findings of fact of the CTA, a special court exercising particular

expertise on the subject of tax, are generally regarded as final, binding, and conclusive upon this Court,

more so when these do not conflict with the findings of the Court of Appeals.—We note that these factual

findings of the CTA were neither modified nor reversed by the Court of Appeals. It is a doctrine that

findings of fact of the CTA, a special court exercising particular expertise on the subject of tax, are

generally regarded as final, binding, and conclusive upon this Court, more so where these do not conflict

with the findings of the Court of Appeals.—Perforce, as respondent does not actually provide medical

and/or hospital services, as provided under Section 103 on exempt transactions, but merely arranges for the

same, its services are not VAT-exempt.

Same; Same; Same; Administrative Law; Rulings, circulars, rules and regulations promulgated by the

Commissioner of Internal Revenue have no retroactive application if to apply them would prejudice the

taxpayer; Exceptions. —Relative to the second issue, Section 246 of the 1997 Tax Code, as amended,

provides that rulings, circulars, rules and regulations promulgated by the Commissioner of Internal

Revenue have no retroactive application if to apply them would prejudice the taxpayer. The exceptions to

this rule are: (1) where the taxpayer deliberately misstates or omits material facts from his return or in any

document required of him by the Bureau of Internal Revenue; (2) where the facts subsequently gathered by

the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (3)

where the taxpayer acted in bad faith.



Same; Same; Same; Same; National Health Insurance Act of 1995 (R.A. No. 7875); Words and

Phrases; The failure of a taxpayer to describe itself as a “health maintenance organization,” which is

subject to VAT, is not tantamount to bad faith at a time when the term “health maintenance

organization” did not as yet have any particular significance for tax purposes—the term “health

maintenance organization” was first recorded in the Philippine statute books only upon the passage of R.A.

No. 7875, which law considered a health maintenance organization as one of the classes of a “health care

provider”; Good faith is that state of mind denoting honesty of intention and freedom from knowledge of

circumstances which ought to put the holder upon inquiry, an honest intention to abstain from taking any

unconscientious advantage of another, even through technicalities of law, together with absence of all

information, notice, or benefit or belief of facts which render transaction unconscientious.—We agree with

both the Tax Court and the Court of Appeals that respondent acted in good faith. In Civil Service

Commission v. Maala, 467 SCRA 390 (2005), we described good faith as “that state of mind denoting

honesty of intention and freedom from knowledge of circumstances which ought to put the holder upon

inquiry; an honest intention to abstain from taking any unconscientious advantage of another, even through

technicalities of law, together with absence of all information, notice, or benefit or belief of facts which

render transaction unconscientious.” According to the Court of Appeals, respondent’s failure to describe

itself as a “health maintenance organization,” which is subject to VAT, is not tantamount to bad faith. We

note that the term “health maintenance organization” was first recorded in the Philippine statute books only

upon the passage of “The National Health Insurance Act of 1995” (Republic Act No. 7875). Section 4 (o)

(3) thereof defines a health maintenance organization as “an entity that provides, offers, or arranges for

coverage of designated health services needed by plan members for a fixed prepaid premium.” Under this

law, a health maintenance organization is one of the classes of a “health care provider.” It is thus apparent

that when VAT Ruling No. 231-88 was issued in respondent’s favor, the term “health maintenance

organization” was yet unknown or had no significance for taxation purposes. Respondent, therefore,

believed in good faith that it was VAT exempt for the taxable years 1996 and 1997 on the basis of VAT

Ruling No. 231-88.

Same; Same; Same; Same; The Commissioner of Internal Revenue is precluded from adopting a

position contrary to one previously taken where injustice would result to the taxpayer; The rule is that

the BIR rulings have no retroactive effect where a grossly unfair deal would result to the prejudice of

the taxpayer.—In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, 108 SCRA 142 (1981), this

Court held that under Section 246 of the 1997 Tax Code, the Commissioner of Internal Revenue is

precluded from adopting a position contrary to one previously taken where injustice would result to the

taxpayer. Hence, where an assessment for deficiency withholding income taxes was made, three years after

a new BIR Circular reversed a previous one upon which the taxpayer had relied upon, such an assessment

was prejudicial to the taxpayer. To rule otherwise, opined the Court, would be contrary to the tenets of

good faith, equity, and fair play. This Court has consistently reaffirmed its ruling in ABS-CBN

Broadcasting Corp. in the later cases of Commissioner of Internal Revenue v. Borroughs, Ltd., 142 SCRA

324 (1986), Commissioner of Internal Revenue v. Mega Gen. Mdsg. Corp., 166 SCRA 166 (1988),

Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.), Inc., 249 SCRA 401 (1995), and

Commissioner of Internal Revenue v. Court of Appeals, 267 SCRA 557 (1997). The rule is that the BIR



rulings have no retroactive effect where a grossly unfair deal would result to the prejudice of the taxpayer,

as in this case.

Facts: The Philippine Health Care Providers, Inc., is a corporation organized to establish, maintain,

conduct and operate a prepaid group practice health care delivery system or a health maintenance

organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for

the administrative, legal, and financial responsibilities of the organization. On July 25, 1987, E.O. No. 273,

imposing VAT was issued. Prior to effectively thereof, Healthcare wrote the CIR inquiring whether the

services it provides to the participants in its health care program are exempt from the payment of the VAT.

On June 8, 1988, CIR, through the VAT Review Committee of the Bureau of Internal Revenue (BIR),

issued VAT Ruling No. 231-88 stating that as a provider of medical services, it is exempt from the VAT

coverage. This Ruling was subsequently confirmed by Regional Director Osmundo G. Umali of Revenue

Region No. 8 in a letter dated April 22, 1994. 21

On January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT or E-VAT Law) took effect

substantially adopting the provisions of EO 273 on VAT and RA 7716 on E-VAT. On October 1, 1999, the

BIR sent Preliminary Assessment Notice to Healthcare for deficiency VAT and DST for the years

1996/1997. It was protested by healthcare. CIR then sent a demand letter with attached four assessments

for the same taxes which were also protested by Healthcare.

Issues:

(1) Are the services subject to VAT?

(2) Does VAT Ruling No. 231-88 providing exemption from VAT have retroactive application?

Held:

(1). Section 103 of the NIRC specifies the exempt transactions from the provision of Section 102, thus:

Medical, dental, hospital and veterinary services except those rendered by professionals The import of the

above provision is plain. It requires no interpretation. It contemplates the exemption from VAT of

taxpayers engaged in the performance of medical, dental, hospital, and veterinary services. Under the

prepaid group practice health care delivery system adopted by Health Care, individuals enrolled in Health

Care's health care program are entitled to preventive, diagnostic, and corrective medical services to be

dispensed by Health Care's duly licensed physicians, specialists, and other professional technical staff

participating in said group practice health care delivery system established and operated by Health Care.

Such medical services will be dispensed in a hospital or clinic owned, operated, or accredited by Health

Care. To be entitled to receive such medical services from Health Care, an individual must enroll in Health

Care's health care program and pay an annual fee. Enrollment in Health Care's health care program is on a

year-to-year basis and enrollees are issued identification cards. We note that these factual findings of the

CTA were neither modified nor reversed by the Court of Appeals. It is a doctrine that findings of fact of the



CTA, a special court exercising particular expertise on the subject of tax, are generally regarded as final,

binding, and conclusive upon this Court, more so where these do not conflict with the findings of the Court

of Appeals. Perforce, as respondent does not actually provide medical and/or hospital services, as

provided under Section 103 on exempt transactions, but merely arranges for the same, its services

are not VAT-exempt.

(2). Section 246 of the 1997 Tax Code, as amended, provides that rulings, circulars, rules and regulations

promulgated by the Commissioner of Internal Revenue have no retroactive application if to apply them

would prejudice the taxpayer. The exceptions to this rule are: (1) where the taxpayer deliberately misstates

or omits material facts from his return or in any document required of him by the Bureau of Internal

Revenue; (2) where the facts subsequently gathered by the Bureau of Internal Revenue are materially

different from the facts on which the ruling is based, or (3) where the taxpayer acted in bad faith. There is

no showing that respondent "deliberately committed mistakes or omitted material facts" when it obtained

VAT Ruling No. 231-88 from the BIR. The CTA held that respondent's letter which served as the basis for

the VAT ruling "sufficiently described" its business and "there is no way the BIR could be misled by the

said representation as to the real nature" of said business. It is thus apparent that when VAT Ruling No.

231-88 was issued in respondent's favor, the term "health maintenance organization" was yet unknown or

had no significance for taxation purposes. Respondent, therefore, believed in good faith that it was VAT

exempt for the taxable years 1996 and 1997 on the basis of VAT Ruling No. 231-88.

Commissioner of Internal Revenue vs. SM Prime Holdings, Inc., 613 SCRA 774(2010) DEL CASTILLO, J.

Taxation; Value-Added Tax (VAT); Statutory Construction; A cursory reading of Section 108 of the

National Internal Revenue Code of 1997 clearly shows that the enumeration of the “sale or exchange of

services” subject to Value-Added Tax (VAT) is not exhaustive—the words, “including,” “similar

services,” and “shall likewise include,” indicate that the enumeration is by way of example only.—Section

108 of the NIRC of the 1997 reads: x x x A cursory reading of the foregoing provision clearly shows that

the enumeration of the “sale or exchange of services” subject to VAT is not exhaustive. The words,

“including,” “similar services,” and “shall likewise include,” indicate that the enumeration is by way of

example only. Among those included in the enumeration is the “lease of motion picture films, films, tapes

and discs.” This, however, is not the same as the showing or exhibition of motion pictures or films. As

pointed out by the CTA En Banc: “Exhibition” in Black’s Law Dictionary is defined as “To show or

display. x x x To produce anything in public so that it may be taken into possession” (6th ed., p. 573).

While the word “lease” is defined as “a contract by which one owning such property grants to another the

right to possess, use and enjoy it on specified period of time in exchange for periodic payment of a

stipulated price, referred to as rent (Black’s Law Dictionary, 6th ed., p. 889). x x x Since the activity of

showing motion pictures, films or movies by cinema/ theater operators or proprietors is not included in the

enumeration, it is incumbent upon the court to the determine whether such activity falls under the phrase

“similar services.” The intent of the legislature must therefore be ascertained.



Same; Same; Cinema Houses; Several amendments were made to expand the coverage of Value Added

Tax but none pertain to cinema/theater operators or proprietors—at present, only lessors or distributors

of cinematographic films are subject to Value-Added Tax (VAT).—In 1994, RA 7716 restructured the

VAT system by widening its tax base and enhancing its administration. Three years later, RA 7716 was

amended by RA 8241. Shortly thereafter, the NIRC of 1997 was signed into law. Several amendments were

made to expand the coverage of VAT. However, none pertain to cinema/theater operators or proprietors. At

present, only lessors or distributors of cinematographic films are subject to VAT. While persons subject to

amusement tax under the NIRC of 1997 are exempt from the coverage of VAT.

Same; Same; Same; Legal Research; Historically, the activity of showing motion pictures, films or

movies by cinema/theater operators or proprietors has always been considered as a form of

entertainment subject to amusement tax; Only lessors or distributors of cinematographic films are

included in the coverage of Value-Added Tax (VAT).—Based on the foregoing, the following facts can be

established: (1) Historically, the activity of showing motion pictures, films or movies by cinema/theater

operators or proprietors has always been considered as a form of entertainment subject to amusement tax.

(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national government. (3)

When the Local Tax Code was enacted, amusement tax on admission tickets from theaters,

cinematographs, concert halls, circuses and other places of amusements were transferred to the local

government. (4) Under the NIRC of 1977, the national government imposed amusement tax only on

proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks. (5) The VAT law

was enacted to replace the tax on original and subsequent sales tax and percentage tax on certain services.

(6) When the VAT law was implemented, it exempted persons subject to amusement tax under the NIRC

from the coverage of VAT. (7) When the Local Tax Code was repealed by the LGC of 1991, the local

government continued to impose amusement tax on admission tickets from theaters, cinematographs,

concert halls, circuses and other places of amusements. (8) Amendments to the VAT law have been

consistent in exempting persons subject to amusement tax under the NIRC from the coverage of VAT. (9)

Only lessors or distributors of cinematographic films are included in the coverage of VAT. These reveal the

legislative intent not to impose VAT on persons already covered by the amusement tax. This holds true

even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law

was intended to replace the percentage tax on certain services. The mere fact that they are taxed by the

local government unit and not by the national government is immaterial. The Local Tax Code, in

transferring the power to tax gross receipts derived by cinema/theater operators or proprietor from

admission tickets to the local government, did not intend to treat cinema/theater houses as a separate class.

No distinction must, therefore, be made between the places of amusement taxed by the national

government and those taxed by the local government.

Same; Same; Same; 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.”—To

hold otherwise would impose an unreasonable burden on cinema/theater houses operators or proprietors,

who would be paying an additional 10% VAT on top of the 30% amusement tax imposed by Section 140 of

the LGC of 1991, or a total of 40% tax. Such imposition would result in injustice, as persons taxed under



the NIRC of 1997 would be in a better position than those taxed under the LGC of 1991. We need not

belabor that a literal application of a law must be rejected if it will operate unjustly or lead to absurd

results. Thus, we are convinced that the legislature never intended to include cinema/theater operators or

proprietors in the coverage of VAT. On this point, it is apropos to quote the case of Roxas v. Court of Tax

Appeals, 23 SCRA 276 (168) to wit: 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.

Same; Same; Same; Local Government Code; Statutory Construction; The repeal of the Local Tax Code

by the Local Government Code (LGC) of 1991 is not a legal basis for the imposition of Value-Added Tax

(VAT) on the gross receipts of cinema/theater operators or proprietors derived from admission tickets; A

law will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously; The

power to impose amusement tax on cinema/theater operators or proprietors remains with the local

government.—The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition

of VAT on the gross receipts of cinema/theater operators or proprietors derived from admission tickets.

The removal of the prohibition under the Local Tax Code did not grant nor restore to the national

government the power to impose amusement tax on cinema/theater operators or proprietors. Neither did it

expand the coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be

presumed nor can it be extended by implication. A law will not be construed as imposing a tax unless it

does so clearly, expressly, and unambiguously. As it is, the power to impose amusement tax on

cinema/theater operators or proprietors remains with the local government.

Same; Administrative Law; Revenue Memorandum Circulars (RMCs); Revenue Memorandum

Circulars (RMCs) must not override, supplant, or modify the law, but must remain consistent and in

harmony with, the law they seek to apply and implement.—Considering that there is no provision of law

imposing VAT on the gross receipts of cinema/theater operators or proprietors derived from admission

tickets, RMC No. 28-2001 which imposes VAT on the gross receipts from admission to cinema houses

must be struck down. We cannot overemphasize that RMCs must not override, supplant, or modify the law,

but must remain consistent and in harmony with, the law they seek to apply and implement.

Same; The rule that tax exemptions should be construed strictly against the taxpayer presupposes that

the taxpayer is clearly subject to the tax being levied against him—unless a statute imposes a tax clearly,

expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a tax

cannot be presumed.—Contrary to the view of petitioner, respondents need not prove their entitlement to

an exemption from the coverage of VAT. The rule that tax exemptions should be construed strictly against

the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against him. The reason

is obvious: it is both illogical and impractical to determine who are exempted without first determining

who are covered by the provision. Thus, unless a statute imposes a tax clearly, expressly and

unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be



presumed. In fact, in case of doubt, tax laws must be construed strictly against the government and in favor

of the taxpayer.

Facts:

The BIR sent SM Prime Preliminary Assessment Notices for VAT deficiency tax on the sales of cinema

tickets for the taxable years 1999, 2000, 2002 and 2003. In response, the SM filed letters with the BIR.

The CTA First Division held that the House of Representatives resolved that there should only be one

business tax applicable to theaters and movie houses, which is the 30% amusement tax imposed by cities

and provinces under the LGC of 1991. Further, it held that consistent with the State’s policy to have a

viable, sustainable and competitive theater and film industry, the national government should be precluded

from imposing its own business tax in addition to that already imposed and collected by local government

units. The CTA First Division likewise found that Revenue Memorandum Circular (RMC) No. 28-2001,

which imposes VAT on gross receipts from admission to cinema houses, cannot be given force and effect

because it failed to comply with the procedural due process for tax issuances under RMC No. 20-86.

The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of what services

are intended to be subject to VAT. And since the showing or exhibition of motion pictures, films or movies by cinema

operators or proprietors is not among the enumerated activities contemplated in the phrase “sale or exchange of

services,” then gross receipts derived by cinema/ theater operators or proprietors from admission tickets in showing

motion pictures, film or movie are not subject to VAT. It reiterated that the exhibition or showing of motion pictures,

films, or movies is instead subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-

2001, the CTA En Banc agreed with its First Division that the same cannot be given force and effect for failure to

comply with RMC No. 20-86.

Issue:

Whether the gross receipts derived by operators or proprietors of cinema/theater houses from admission tickets are

subject to VAT.

Held: No.

The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive

A cursory reading of the foregoing provision clearly shows that the enumeration of the “sale or exchange of services”

subject to VAT is not exhaustive. The words, “including,” “similar services,” and “shall likewise include,” indicate

that the enumeration is by way of example only.[39]

Among those included in the enumeration is the “lease of motion picture films, films, tapes and discs.” This,

however, is not the same as the showing or exhibition of motion pictures or films. As pointed out by the CTA En

Banc: “Exhibition” in Black’s Law Dictionary is defined as “To show or display. x x x To produce anything in public so that it may be taken into possession” (6th ed., p. 573). While the word “lease”

http://sc.judiciary.gov.ph/jurisprudence/2010/february2010/183505.htm#_ftn39



is defined as “a contract by which one owning such property grants to another the right to possess, use and enjoy it on specified period of time in exchange for periodic payment of a stipulated price, referred to as rent (Black’s Law Dictionary, 6th ed., p. 889). x x x[40]

Since the activity of showing motion pictures, films or movies by cinema/ theater operators or proprietors is

not included in the enumeration, it is incumbent upon the court to the determine whether such activity falls under the

phrase “similar services.” The intent of the legislature must therefore be ascertained.

The legislature never intended operators or proprietors of cinema/theater houses to be covered by VAT

These facts were established:

(1) Historically, the activity of showing motion pictures, films or movies by

cinema/theater operators or proprietors has always been considered as a form of

entertainment subject to amusement tax.

(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national

government.

(3) When the Local Tax Code was enacted, amusement tax on admission tickets from

theaters, cinematographs, concert halls, circuses and other places of amusements were

transferred to the local government.

(4) Under the NIRC of 1977, the national government imposed amusement tax only on

proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race

tracks.

(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and

percentage tax on certain services.

(6) When the VAT law was implemented, it exempted persons subject to amusement tax

under the NIRC from the coverage of VAT.

(7) When the Local Tax Code was repealed by the LGC of 1991, the local government

continued to impose amusement tax on admission tickets from theaters,

cinematographs, concert halls, circuses and other places of amusements.

(8) Amendments to the VAT law have been consistent in exempting persons subject to

amusement tax under the NIRC from the coverage of VAT.

(9) Only lessors or distributors of cinematographic films are included in the coverage of

VAT.

These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax.

This holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because

the VAT law was intended to replace the percentage tax on certain services. The mere fact that they are

taxed by the local government unit and not by the national government is immaterial. The Local Tax Code,

in transferring the power to tax gross receipts derived by cinema/theater operators or proprietor from




admission tickets to the local government, did not intend to treat cinema/theater houses as a separate

class. No distinction must, therefore, be made between the places of amusement taxed by the national

government and those taxed by the local government.

To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or

proprietors, who would be paying an additional 10%[55] VAT on top of the 30% amusement tax imposed by

Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in injustice, as

persons taxed under the NIRC of 1997 would be in a better position than those taxed under the LGC of

1991. We need not belabor that a literal application of a law must be rejected if it will operate unjustly or

lead to absurd results.[56] Thus, we are convinced that the legislature never intended to include

cinema/theater operators or proprietors in the coverage of VAT.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the

gross receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of

the prohibition under the Local Tax Code did not grant nor restore to the national government the power to

impose amusement tax on cinema/theater operators or proprietors. Neither did it expand the coverage of

VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it be

extended by implication. A law will not be construed as imposing a tax unless it does so clearly, expressly,

and unambiguously.[59] As it is, the power to impose amusement tax on cinema/theater operators or

proprietors remains with the local government.

Revenue Memorandum Circular No. 28-2001 is invalid

Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater

operators or proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on the

gross receipts from admission to cinema houses must be struck down. We cannot overemphasize that

RMCs must not override, supplant, or modify the law, but must remain consistent and in harmony with, the

law they seek to apply and implement.[60]

Rule on tax exemption does not apply

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption

from the coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer

presupposes that the taxpayer is clearly subject to the tax being levied against him. [61] The reason is

obvious: it is both illogical and impractical to determine who are exempted without first determining who

are covered by the provision.[62] Thus, unless a statute imposes a tax clearly, expressly and unambiguously,

what applies is the equally well-settled rule that the imposition of a tax cannot be presumed.[63] In fact, in

case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer. [64]

Diaz vs. Secretary of Finance, 654 SCRA 96(2011) ABAD, J.











Words and Phrases; The law imposes value added tax (VAT) on “all kinds of services” rendered in the

Philippines for a fee, including those specified in the list—every activity that can be imagined as a form

of “service” rendered for a fee should be deemed included unless some provision of law especially

excludes it.—It is plain from the above that the law imposes VAT on “all kinds of services” rendered in the

Philippines for a fee, including those specified in the list. The enumeration of affected services is not

exclusive. By qualifying “services” with the words “all kinds,” Congress has given the term “services” an

all-encompassing meaning. The listing of specific services are intended to illustrate how pervasive and

broad is the VAT’s reach rather than establish concrete limits to its application. Thus, every activity that

can be imagined as a form of “service” rendered for a fee should be deemed included unless some

provision of law especially excludes it.

Same; Same; Same; When a tollway operator takes a toll fee from a motorist, the fee is in effect for the

latter’s use of the tollway facilities over which the operator enjoys private proprietary rights that its

contract and the law recognize.—Now, do tollway operators render services for a fee? Presidential Decree

(P.D.) 1112 or the Toll Operation Decree establishes the legal basis for the services that tollway operators

render. Essentially, tollway operators construct, maintain, and operate expressways, also called tollways, at

the operators’ expense. Tollways serve as alternatives to regular public highways that meander through

populated areas and branch out to local roads. Traffic in the regular public highways is for this reason slow-

moving. In consideration for constructing tollways at their expense, the operators are allowed to collect

government-approved fees from motorists using the tollways until such operators could fully recover their

expenses and earn reasonable returns from their investments. When a tollway operator takes a toll fee from

a motorist, the fee is in effect for the latter’s use of the tollway facilities over which the operator enjoys

private proprietary rights that its contract and the law recognize. In this sense, the tollway operator is no

different from the following service providers under Section 108 who allow others to use their properties or

facilities for a fee: 1. Lessors of property, whether personal or real; 2. Warehousing service operators; 3.

Lessors or distributors of cinematographic films; 4. Proprietors, operators or keepers of hotels, motels,

resthouses, pension houses, inns, resorts; 5. Lending investors (for use of money); 6. Transportation

contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for

hire and other domestic common carriers by land relative to their transport of goods or cargoes; and 7.

Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in

the Philippines to another place in the Philippines.

Same; Same; Same; Franchises; Words and Phrases; Tollway operators are franchise grantees and they

do not belong to exceptions that Section 119 spares from the payment of value added tax (VAT); The

word “franchise” broadly covers government grants of a special right to do an act or series of acts of

public concern.—And not only do tollway operators come under the broad term “all kinds of services,”

they also come under the specific class described in Section 108 as “all other franchise grantees” who are

subject to VAT, “except those under Section 119 of this Code.” Tollway operators are franchise grantees

and they do not belong to exceptions (the low-income radio and/or television broadcasting companies with

gross annual incomes of less than P10 million and gas and water utilities) that Section 119 spares from the

payment of VAT. The word “franchise” broadly covers government grants of a special right to do an act or

series of acts of public concern.



Same; Same; Same; Same; Nothing in Section 108 of the National Internal Revenue Code indicates that

the “franchise grantees” it speaks of are those who hold legislative franchises; The term “franchise”

has been broadly construed as referring, not only to authorizations that Congress directly issues in the

form of a special law, but also to those granted by administrative agencies to which the power to grant

franchises has been delegated by Congress.—Petitioners of course contend that tollway operators cannot

be considered “franchise grantees” under Section 108 since they do not hold legislative franchises. But

nothing in Section 108 indicates that the “franchise grantees” it speaks of are those who hold legislative

franchises. Petitioners give no reason, and the Court cannot surmise any, for making a distinction between

franchises granted by Congress and franchises granted by some other government agency. The latter,

properly constituted, may grant franchises. Indeed, franchises conferred or granted by local authorities, as

agents of the state, constitute as much a legislative franchise as though the grant had been made by

Congress itself. The term “franchise” has been broadly construed as referring, not only to authorizations

that Congress directly issues in the form of a special law, but also to those granted by administrative

agencies to which the power to grant franchises has been delegated by Congress.

Same; Same; Same; Statutory Construction; Statements made by individual members of Congress in the

consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not

controlling in the interpretation of law—the congressional will is ultimately determined by the language

of the law that the lawmakers voted on.—Nor can petitioners cite as binding on the Court statements made

by certain lawmakers in the course of congressional deliberations of the would-be law. As the Court said in

South African Airways v. Commissioner of Internal Revenue, 612 SCRA 665 (2010), “statements made by

individual members of Congress in the consideration of a bill do not necessarily reflect the sense of that

body and are, consequently, not controlling in the interpretation of law.” The congressional will is

ultimately determined by the language of the law that the lawmakers voted on. Consequently, the meaning

and intention of the law must first be sought “in the words of the statute itself, read and considered in their

natural, ordinary, commonly accepted and most obvious significations, according to good and approved

usage and without resorting to forced or subtle construction.”

Same; Same; Same; Tollway fees are not taxes.—As can be seen, the discussion in the MIAA case on toll

roads and toll fees was made, not to establish a rule that tollway fees are user’s tax, but to make the point

that airport lands and buildings are properties of public dominion and that the collection of terminal fees for

their use does not make them private properties. Tollway fees are not taxes. Indeed, they are not assessed

and collected by the BIR and do not go to the general coffers of the government. It would of course be

another matter if Congress enacts a law imposing a user’s tax, collectible from motorists, for the

construction and maintenance of certain roadways. The tax in such a case goes directly to the government

for the replenishment of resources it spends for the roadways. This is not the case here. What the

government seeks to tax here are fees collected from tollways that are constructed, maintained, and

operated by private tollway operators at their own expense under the build, operate, and transfer scheme

that the government has adopted for expressways. Except for a fraction given to the government, the toll

fees essentially end up as earnings of the tollway operators.



Same; Same; Same; A tax is imposed under the taxing power of the government principally for the

purpose of raising revenues to fund public expenditures while toll fees are collected by private tollway

operators as reimbursement for the costs and expenses incurred in the construction, maintenance and

operation of the tollways, as well as to assure them a reasonable margin of income.—In sum, fees paid

by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is imposed under

the taxing power of the government principally for the purpose of raising revenues to fund public

expenditures. Toll fees, on the other hand, are collected by private tollway operators as reimbursement for

the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as

to assure them a reasonable margin of income. Although toll fees are charged for the use of public

facilities, therefore, they are not government exactions that can be properly treated as a tax. Taxes may be

imposed only by the government under its sovereign authority, toll fees may be demanded by either the

government or private individuals or entities, as an attribute of ownership.

Same; Same; Same; Value added tax (VAT) on tollway operations cannot be deemed a tax on tax due to

the nature of VAT as an indirect tax; Once shifted, the value added tax (VAT) ceases to be a tax and

simply becomes part of the cost that the buyer must pay in order to purchase the good, property or

service.—Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of

VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax and

burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on

goods, properties or services to the buyer. In such a case, what is transferred is not the selle’s liability but

merely the burden of the VAT. Thus, the seller remains directly and legally liable for payment of the VAT,

but the buyer bears its burden since the amount of VAT paid by the former is added to the selling price.

Once shifted, the VAT ceases to be a tax and simply becomes part of the cost that the buyer must pay in

order to purchase the good, property or service. Consequently, VAT on tollway operations is not really a

tax on the tollway user, but on the tollway operator. Under Section 105 of the Code, VAT is imposed on

any person who, in the course of trade or business, sells or renders services for a fee. In other words, the

seller of services, who in this case is the tollway operator, is the person liable for VAT. The latter merely

shifts the burden of VAT to the tollway user as part of the toll fees.

Same; Same; Same; Parties; Non-Impairment Clause; A person who will neither be prejudiced by nor

be affected by the alleged diminution in return of investments that may result from the value added tax

(VAT) imposition has no personality to invoke the non-impairment of contract clause on behalf of

private investors in the tollway projects.—Petitioner Timbol has no personality to invoke the non-

impairment of contract clause on behalf of private investors in the tollway projects. She will neither be

prejudiced by nor be affected by the alleged diminution in return of investments that may result from the

VAT imposition. She has no interest at all in the profits to be earned under the TOAs. The interest in and

right to recover investments solely belongs to the private tollway investors.

Same; Same; Same; The Court cannot rule on matters that are manifestly conjectural, and neither can

it prohibit the State from exercising its sovereign taxing power based on uncertain, prophetic grounds.—

Besides, her allegation that the private investors’ rate of recovery will be adversely affected by imposing

VAT on tollway operations is purely speculative. Equally presumptuous is her assertion that a stipulation in



the TOAs known as the Material Adverse Grantor Action will be activated if VAT is thus imposed. The

Court cannot rule on matters that are manifestly conjectural. Neither can it prohibit the State from

exercising its sovereign taxing power based on uncertain, prophetic grounds.

Same; Same; Same; Administrative feasibility, one of the canons of a sound tax system, simply means

that the tax system should be capable of being effectively administered and enforced with the least

inconvenience to the taxpayer; Even if the imposition of value added tax (VAT) on tollway operations

may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to

violate any law or the Constitution.—Administrative feasibility is one of the canons of a sound tax system.

It simply means that the tax system should be capable of being effectively administered and enforced with

the least inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax

imposition invalid “except to the extent that specific constitutional or statutory limitations are impaired.”

Thus, even if the imposition of VAT on tollway operations may seem burdensome to implement, it is not

necessarily invalid unless some aspect of it is shown to violate any law or the Constitution. Here, it remains

to be seen how the taxing authority will actually implement the VAT on tollway operations. Any

declaration by the Court that the manner of its implementation is illegal or unconstitutional would be

premature. Although the transcript of the August 12, 2010 Senate hearing provides some clue as to how the

BIR intends to go about it, the facts pertaining to the matter are not sufficiently established for the Court to

pass judgment on. Besides, any concern about how the VAT on tollway operations will be enforced must

first be addressed to the BIR on whom the task of implementing tax laws primarily and exclusively rests.

The Court cannot preempt the BIR’s discretion on the matter, absent any clear violation of law or the

Constitution.

Same; Same; Same; Parties; The right to claim the 2% transitional input value added tax (VAT) belongs

to the tollway operators who have not questioned the Bureau of Internal Revenue Revenue

Memorandum Circular (BIR RMC) 63-2010’s validity.—For the same reason, the Court cannot

prematurely declare as illegal, BIR RMC 63-2010 which directs toll companies to record an accumulated

input VAT of zero balance in their books as of August 16, 2010, the date when the VAT imposition was

supposed to take effect. The issuance allegedly violates Section 111(A) of the Code which grants first time

VAT payers a transitional input VAT of 2% on beginning inventory. In this connection, the BIR explained

that BIR RMC 63-2010 is actually the product of negotiations with tollway operators who have been

assessed VAT as early as 2005, but failed to charge VAT-inclusive toll fees which by now can no longer be

collected. The tollway operators agreed to waive the 2% transitional input VAT, in exchange for

cancellation of their past due VAT liabilities. Notably, the right to claim the 2% transitional input VAT

belongs to the tollway operators who have not questioned the circular’s validity. They are thus the ones

who have a right to challenge the circular in a direct and proper action brought for the purpose.

Same; Same; Same; Statutory Construction; If the legislative intent was to exempt tollway operations

from value added tax (VAT), as petitioners so strongly allege, then it would have been well for the law to

clearly say so.—In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or

expand the VAT law’s coverage when she sought to impose VAT on tollway operations. Section 108(A) of

the Code clearly states that services of all other franchise grantees are subject to VAT, except as may be



provided under Section 119 of the Code. Tollway operators are not among the franchise grantees subject to

franchise tax under the latter provision. Neither are their services among the VAT-exempt transactions

under Section 109 of the Code. If the legislative intent was to exempt tollway operations from VAT, as

petitioners so strongly allege, then it would have been well for the law to clearly say so. Tax exemptions

must be justified by clear statutory grant and based on language in the law too plain to be mistaken. But as

the law is written, no such exemption obtains for tollway operators. The Court is thus duty-bound to simply

apply the law as it is found.

Same; Same; Same; Separation of Powers; The grant of tax exemption is a matter of legislative policy

that is within the exclusive prerogative of Congress.—The grant of tax exemption is a matter of legislative

policy that is within the exclusive prerogative of Congress. The Court’s role is to merely uphold this

legislative policy, as reflected first and foremost in the language of the tax statute. Thus, any unwarranted

burden that may be perceived to result from enforcing such policy must be properly referred to Congress.

The Court has no discretion on the matter but simply applies the law.

Same; Same; Same; Same; The executive exercises exclusive discretion in matters pertaining to the

implementation and execution of tax laws—it is more properly suited to deal with the immediate and

practical consequences of the value added tax (VAT) imposition.—The VAT on franchise grantees has

been in the statute books since 1994 when R.A. 7716 or the Expanded Value-Added Tax law was passed. It

is only now, however, that the executive has earnestly pursued the VAT imposition against tollway

operators. The executive exercises exclusive discretion in matters pertaining to the implementation and

execution of tax laws. Consequently, the executive is more properly suited to deal with the immediate and

practical consequences of the VAT imposition.

Facts:

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief

assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau

of Internal Revenue (BIR) on the collections of tollway operators. Court treated the case as one

of prohibition. Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include

toll fees within the meaning of "sale of services" that are subject to VAT; that a toll fee is a "user's tax," not

a sale of services; that to impose VAT on toll fees would amount to a tax on public service; and that, since

VAT was never factored into the formula for computing toll fees, its imposition would violate the non-

impairment clause of the constitution. The government avers that the NIRC imposes VAT on all kinds of

services of franchise grantees, including toll way operations; that the Court should seek the meaning and

intent of the law from the words used in the statute; and that the imposition of VAT on tollway operations

has been the subject as early as 2003 of several BIR rulings and circulars. The government also argues that

petitioners have no right to invoke the non-impairment of contracts clause since they clearly

have no personal interest in existing toll operating agreements (TOAs) between the government andtollway

operators. At any rate, the non-impairment clause cannot limit the State's sovereign taxing power which is

generally read into contracts.

Issues:



1. Whether or not the government is unlawfully expanding VAT coverage by including

tollway operators and tollway operations in the terms “franchise grantees” and “sale of

services” under Section 108 of the Code; and

2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and

not a tax on services; b) will impair the tollway operators’ right to a reasonable return of

investment under their TOAs; and c) is not administratively feasible and cannot be

implemented.

Held:

One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed, and

collected, according to Section 108, on the gross receipts derived from the sale or exchange of services as

well as from the use or lease of properties.

the law imposes VAT on “all kinds of services” rendered in the Philippines for a fee, including those

specified in the list. The enumeration of affected services is not exclusive.[11] By qualifying “services”

with the words “all kinds,” Congress has given the term “services” an all-encompassing meaning. The

listing of specific services are intended to illustrate how pervasive and broad is the VAT’s reach rather than

establish concrete limits to its application. Thus, every activity that can be imagined as a form of “service”

rendered for a fee should be deemed included unless some provision of law especially excludes it.

Presidential Decree (P.D.) 1112 or the Toll Operation Decree establishes the legal basis for the services

that tollway operators render. Essentially, tollway operators construct, maintain, and operate expressways,

also called tollways, at the operators’ expense. Tollways serve as alternatives to regular public highways

that meander through populated areas and branch out to local roads. Traffic in the regular public highways

is for this reason slow-moving. In consideration for constructing tollways at their expense, the operators

are allowed to collect government-approved fees from motorists using the tollways until such operators

could fully recover their expenses and earn reasonable returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use of the

tollway facilities over which the operator enjoys private proprietary rights[12] that its contract and the law

recognize. In this sense, the tollway operator is no different from the following service providers under

Section 108 who allow others to use their properties or facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, rest houses, pension

houses, inns, resorts;

5. Lending investors (for use of money);

6. Transportation contractors on their transport of goods or cargoes,

including persons who transport goods or cargoes for hire and other

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domestic common carriers by land relative to their transport of goods or

cargoes; and

7. Common carriers by air and sea relative to their transport of passengers,

goods or cargoes from one place in the Philippines to another place in the

Philippines.

It does not help petitioners’ cause that Section 108 subjects to VAT “all kinds of services” rendered for a

fee “regardless of whether or not the performance thereof calls for the exercise or use of the physical or

mental faculties.” This means that “services” to be subject to VAT need not fall under the traditional

concept of services, the personal or professional kinds that require the use of human knowledge and skills.

And not only do tollway operators come under the broad term “all kinds of services,” they also come under

the specific class described in Section 108 as “all other franchise grantees” who are subject to VAT,

“except those under Section 119 of this Code.”

Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio

and/or television broadcasting companies with gross annual incomes of less than P10 million and gas and

water utilities) that Section 119[13] spares from the payment of VAT. The word “franchise” broadly covers

government grants of a special right to do an act or series of acts of public concern.[14]

Tollway operators are, owing to the nature and object of their business, “franchise grantees.” The

construction, operation, and maintenance of toll facilities on public improvements are activities of public

consequence that necessarily require a special grant of authority from the state. Indeed, Congress granted

special franchise for the operation of tollways to the Philippine National Construction Company, the former

tollway concessionaire for the North and South Luzon Expressways. Apart from Congress, tollway

franchises may also be granted by the TRB, pursuant to the exercise of its delegated powers under P.D.

1112.[17] The franchise in this case is evidenced by a “Toll Operation Certificate.”[18]

Section 108 of the Code specifically includes by way of example electric utilities, telephone, telegraph, and

broadcasting companies in its list of VAT-covered businesses, Section 108 opens other companies

rendering public service for a fee to the imposition of VAT. Businesses of a public nature such as public

utilities and the collection of tolls or charges for its use or service is a franchise.[19]

Two. Petitioners argue that a toll fee is a “user’s tax” and to impose VAT on toll fees is tantamount to

taxing a tax.[21] Actually, petitioners base this argument on the following discussion in Manila

International Airport Authority (MIAA) v. Court of Appeals.

Petitioners assume that what the Court said above, equating terminal fees to a “user’s tax” must also pertain

to tollway fees. But the main issue in the MIAA case was whether or not Parañaque City could sell airport

lands and buildings under MIAA administration at public auction to satisfy unpaid real estate taxes. Since

local governments have no power to tax the national government, the Court held that the City could not









proceed with the auction sale. MIAA forms part of the national government although not integrated in the

department framework.”[24] Thus, its airport lands and buildings are properties of public dominion beyond

the commerce of man under Article 420(1)[25] of the Civil Code and could not be sold at public auction.

As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish a rule

that tollway fees are user’s tax, but to make the point that airport lands and buildings are properties of

public dominion and that the collection of terminal fees for their use does not make them private

properties. Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR and do not

go to the general coffers of the government.

It would of course be another matter if Congress enacts a law imposing a user’s tax, collectible from

motorists, for the construction and maintenance of certain roadways. The tax in such a case goes directly to

the government for the replenishment of resources it spends for the roadways. This is not the case

here. What the government seeks to tax here are fees collected from tollways that are constructed,

maintained, and operated by private tollway operators at their own expense under the build, operate, and

transfer scheme that the government has adopted for expressways.[26] Except for a fraction given to the

government, the toll fees essentially end up as earnings of the tollway operators.

In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax

is imposed under the taxing power of the government principally for the purpose of raising revenues to

fund public expenditures.[27] Toll fees, on the other hand, are collected by private tollway operators as

reimbursement for the costs and expenses incurred in the construction, maintenance and operation of

the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for

the use of public facilities, therefore, they are not government exactions that can be properly treated as a

tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be

demanded by either the government or private individuals or entities, as an attribute of ownership. [28]

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as

an indirect tax. In indirect taxation, a distinction is made between the liability for the tax and burden of

the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods,

properties or services to the buyer. In such a case, what is transferred is not the seller’s liability but

merely the burden of the VAT.[29]

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden

since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to

be a tax[30] and simply becomes part of the cost that the buyer must pay in order to purchase the good,

property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway

operator. Under Section 105 of the Code, [31] VAT is imposed on any person who, in the course of trade or

business, sells or renders services for a fee. In other words, the seller of services, who in this case is the











tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway

user as part of the toll fees.

For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a

“user’s tax.” VAT is assessed against the tollway operator’s gross receipts and not necessarily on the toll

fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make the

latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that one has

to pay in order to use the tollways.[32]

Conclusion

In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the VAT

law’s coverage when she sought to impose VAT on tollway operations. Section 108(A) of the Code clearly

states that services of all other franchise grantees are subject to VAT, except as may be provided under

Section 119 of the Code. Tollway operators are not among the franchise grantees subject to franchise tax

under the latter provision. Neither are their services among the VAT-exempt transactions under Section

109 of the Code.

If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege, then

it would have been well for the law to clearly say so. Tax exemptions must be justified by clear statutory

grant and based on language in the law too plain to be mistaken.[37] But as the law is written, no such

exemption obtains for tollway operators. The Court is thus duty-bound to simply apply the law as it is

found.

Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive prerogative of

Congress. The Court’s role is to merely uphold this legislative policy, as reflected first and foremost in the

language of the tax statute. Thus, any unwarranted burden that may be perceived to result from enforcing

such policy must be properly referred to Congress. The Court has no discretion on the matter but simply

applies the law.

The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the Expanded

Value-Added Tax law was passed. It is only now, however, that the executive has earnestly pursued the

VAT imposition against tollway operators. The executive exercises exclusive discretion in matters

pertaining to the implementation and execution of tax laws. Consequently, the executive is more properly

suited to deal with the immediate and practical consequences of the VAT imposition.

Philippine Amusement and Gaming Corporation (PAGCOR) vs. Bureau of Internal Revenue, 645 SCRA

338(2011)

PERALTA, J.





Taxation; Tax Exemptions; As a rule, tax exemptions are construed strongly against the claimant.—

Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming

exemption to prove that it is, in fact, covered by the exemption so claimed. As a rule, tax exemptions are

construed strongly against the claimant. Exemptions must be shown to exist clearly and categorically, and

supported by clear legal provision. In this case, PAGCOR failed to prove that it is still exempt from the

payment of corporate income tax, considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of

the National Internal Revenue Code of 1997 by omitting PAGCOR from the exemption. The legislative

intent, as shown by the discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay

corporate income tax; hence, the omission or removal of PAGCOR from exemption from the payment of

corporate income tax.

Same; Value Added Tax; The provision subjecting Philippine Amusement and Gaming Corporation

(PAGCOR) to 10% Value Added Tax (VAT) is invalid for being contrary to Republic Act (R.A.) No.

9337.—Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to

10% VAT is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that

petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioner’s exemption

from the payment of corporate income tax, which was already addressed above by this Court.

Facts:

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by

Letter of Instruction No. 1430, which was issued in September 1984.

On January 1, 1998, R.A. No. 8424,[8] otherwise known as the National Internal Revenue Code of 1997,

took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations

(GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government Service and

Insurance Corporation, the Social Security System, the Philippine Health Insurance Corporation, and the

Philippine Charity Sweepstakes Office, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The

provisions of existing special general laws to the contrary notwithstanding, all

corporations, agencies or instrumentalities owned and controlled by the

Government, except the Government Service and Insurance Corporation (GSIS), the

Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC),

the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement

and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable

income as are imposed by this Section upon corporations or associations engaged in

similar business, industry, or activity.[9]

With the enactment of R.A. No. 9337[10] on May 24, 2005, certain sections of the National Internal

Revenue Code of 1997 were amended. The particular amendment that is at issue in this case is Section 1 of

R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by excluding

PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income tax.

http://sc.judiciary.gov.ph/jurisprudence/2011/march2011/172087.htm#_ftn9





Respondent BIR issued Revenue Regulations (RR) No. 16-2005,[13] specifically identifying PAGCOR as

one of the franchisees subject to 10% VAT imposed under Section 108 of the National Internal Revenue

Code of 1997, as amended by R.A. No. 9337.

Issue:

Whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment of R.A.

No. 9337.

Held:

PAGCOR is subject to income tax but remains exempt from the imposition of value-added tax.

With the passage of Republic Act No. (RA) 9337, the Philippine Amusement and Gaming Corporation

(PAGCOR) has been excluded from the list of government-owned and –controlled corporations (GOCCs)

that are exempt from tax under Section 27(c) of the Tax Code; PAGCOR is now subject to corporate

income tax. The Supreme Court (SC) held that the omission of PAGCOR from the list of tax-exempt

GOCCs by RA 9337 does not violate the right to equal protection of the laws under Section 1, Article III of

the Constitution, because PAGCOR’s exemption from payment of corporate income tax was not based on

classification showing substantial distinctions; rather, it was granted upon the corporation’s own request to

be exempted from corporate income tax. Legislative records likewise reveal that the legislative intention is

to require PAGCOR to pay corporate income tax.

With regard to the issue that the removal of PAGCOR from the exempted list violates the non-impairment

clause contained in Section 10, Article III of the Constitution — which provides that no law impairing the

obligation of contracts shall be passed — the SC explained that following its previous ruling in the case of

Manila Electric Company v. Province of Laguna 366 Phil. 428 (1999), this does not apply. Franchises such

as that granted to PAGCOR partake of the nature of a grant, and is thus beyond the purview of the non-

impairment clause of the Constitution. As regards the liability of PAGCOR to VAT, the SC finds Section

4.108-3 of Revenue Regulations No. (RR) 16-2005, which subjects PAGCOR and its licensees and

franchisees to VAT, null and void for being contrary to the National Internal Revenue Code (NIRC), as

amended by RA 9337.

According to the SC, RA 9337 does not contain any provision that subjects PAGCOR to VAT. Instead, the

SC finds support to the VAT exemption of PAGCOR under Section 109(k) of the Tax Code, which

provides that transactions exempt under international agreements to which the Philippines is a signatory or

under special laws [except Presidential Decree No. (PD) 529] are exempt from VAT. Considering that

PAGCOR’s charter, i.e., PD 1869 — which grants PAGCOR exemption from taxes — is a special law, it is

exempt from payment of VAT. Accordingly, the SC held that the BIR exceeded its authority in subjecting

PAGCOR to VAT, and thus declared RR 16-05 null and void — insofar as it subjects PAGCOR to VAT —

for being contrary to the NIRC, as amended by RA 9337.




ZERO RATED SALES OF GOODS AND SERVICES AND VAT

EXEMPT SALES

Commissioner of Internal Revenue vs. American Express International, Inc. (Philippine Branch), 462 SCRA 197(2005)

PANGANIBAN, J.

Taxation; Value-Added Tax; Services performed by VAT-registered persons in the Philippines (other

than the processing, manufacturing or repacking of goods for persons doing business outside the

Philippines) when paid in acceptable foreign currency and accounted for in accordance with the rules

and regulations of the BSP, are zero-rated.—Under the last paragraph quoted above, services performed

by VAT-registered persons in the Philippines (other than the processing, manufacturing or repacking of

goods for persons doing business outside the Philippines), when paid in acceptable foreign currency and

accounted for in accordance with the rules and regulations of the BSP, are zero-rated.

Same; Same; Services rendered by respondent in the Philippines is not in the same category as

“processing, manufacturing or repacking of goods” and should be zero-rated.—Respondent is a VAT-

registered person that facilitates the collection and payment of receivables belonging to its non-resident

foreign client, for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in

conformity with BSP rules and regulations. Certainly, the service it renders in the Philippines is not in the

same category as “processing, manufacturing or repacking of goods” and should, therefore, be zero-rated.

In reply to a query of respondent, the BIR opined in VAT Ruling No. 080-89 that the income respondent

earned from its parent company’s regional operating centers (ROCs) was automatically zero-rated effective

January 1, 1988.

Same; Same; The VAT is a tax on consumption “expressed as a percentage of the value added to goods

or services” purchased by the producer or taxpayer.—The VAT is a tax on consumption “expressed as a

percentage of the value added to goods or services” purchased by the producer or taxpayer. As an indirect

tax on services, its main object is the transaction itself or, more concretely, the performance of all kinds of

services conducted in the course of trade or business in the Philippines. These services must be regularly

conducted in this country; undertaken in “pursuit of a commercial or an economic activity;” for a valuable

consideration; and not exempt under the Tax Code, other special laws, or any international agreement.

Same; Same; As a general rule, the VAT system uses the destination principle as a basis for the

jurisdictional reach of the tax.—As a general rule, the VAT system uses the destination principle as a

basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are

consumed. Thus, exports are zero-rated, while imports are taxed.

Same; Same; The law clearly provides for an exception to the destination principle.—The law clearly

provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that



are performed in the Philippines, “paid for in acceptable foreign currency and accounted for in accordance

with the rules and regulations of the [BSP].” Thus, for the supply of service to be zero-rated as an

exception, the law merely requires that first, the service be performed in the Philippines; second, the

service fall under any of the categories in Section 102(b) of the Tax Code; and, third,it be paid in

acceptable foreign currency accounted for in accordance with BSP rules and regulations.

Same; Same; The place where the service is rendered determines the jurisdiction to impose the VAT;

The place of payment is immaterial; much less is the place where the output of the service will be further

or ultimately used.—The law neither makes a qualification nor adds a condition in determining the tax

situs of a zero-rated service. Under this criterion, the place where the service is rendered determines the

jurisdiction to impose the VAT. Performed in the Philippines, such service is necessarily subject to its

jurisdiction, for the State necessarily has to have “a substantial connection” to it, in order to enforce a zero

rate. The place of payment is immaterial; much less is the place where the output of the service will be

further or ultimately used.

Facts: American Express international is a foreign corporation operating in the Philippines, it is a registered taxpayer. On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess input taxes in the amount of P3,751,067.04, which amount was arrived at after deducting from its total input VAT paid of P3,763,060.43 its applied output VAT liabilities only for the third and fourth quarters of 1997 amounting to P5,193.66 and P6,799.43, respectively. The CTA ruled in favor of the herein respondent holding that its services are subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations 5-96. The CA affirmed the decision of the CTA. Issue: Whether or not the company is subject to zero-rate tax pursuant to the Tax Reform Act of 1997. Held: Services performed by VAT-registered persons in the Philippines (other than the processing, manufacturing or repacking of goods for persons doing business outside the Philippines), when paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated. Respondent is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client, for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in conformity with BSP rules and regulations. Certainly, the service it renders in the Philippines is not in the same category as “processing, manufacturing or repacking of goods” and should, therefore, be zero-rated. In reply to a query of respondent, the BIR opined in VAT Ruling No. 080-89 that the income respondent earned from its parent company’s regional operating centers (ROCs) was automatically zero-rated effective January 1, 1988. Service has been defined as “the art of doing something useful for a person or company for a fee” or “useful labor or work rendered or to be rendered by one person to another.” For facilitating in the Philippines the collection and payment of receivables belonging to its



Hong Kong-based foreign client, and getting paid for it in duly accounted acceptable foreign currency, respondent renders service falling under the category of zero rating. Pursuant to the Tax Code, a VAT of zero percent should, therefore, be levied upon the supply of that service. As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed. VAT rate for services that are performed in the Philippines, “paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.” Thus, for the supply of service to be zero-rated as an exception, the law merely requires that first, the service be performed in the Philippines; second, the service fall under any of the However, the law clearly provides for an exception to the destination principle; that is, for a zero percent categories in Section 102(b) of the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in accordance with BSP rules and regulations. Indeed, these three requirements for exemption from the destination principle are met by respondent. Its facilitation service is performed in the Philippines. It falls under the second category found in Section 102(b) of the Tax Code, because it is a service other than “processing, manufacturing or repacking of goods” as mentioned in the provision. Undisputed is the fact that such service meets the statutory condition that it be paid in acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it should be zero-rated. Commissioner of Internal Revenue vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc.,

512 SCRA 124(2007) CARPIO, J.

Taxation; Value-Added Tax (VAT); The Tax Code not only requires that the services be other than

“processing, manufacturing or repacking of goods” and that payment for such services be in acceptable

foreign currency accounted for in accordance with Bangko Sen-tral ng Pilipinas (BSP) rules—another

essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such

services is doing business outside the Philippines.—The Tax Code not only requires that the services be

other than “processing, manufacturing or repacking of goods” and that payment for such services be in

acceptable foreign currency accounted for in accordance with BSP rules. Another essential condition for

qualification to zero-rating under Section 102(b)(2) is that the recipient of such services is doing business

outside the Philippines. While this requirement is not expressly stated in the second paragraph of Section

102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services must be

“for other persons doing business outside the Philippines.” The phrase “for other persons doing business

outside the Philippines” not only refers to the services enumerated in the first paragraph of Section 102(b),

but also pertains to the general term “services” appearing in the second paragraph of Section 102(b). In

short, services other than processing, manufacturing, or repacking of goods must likewise be performed for

persons doing business outside the Philippines.

Same; Same; When Section 102(b)(2) stipulates payment in “acceptable foreign currency” under BSP

rules, the law clearly envisions the payer-recipient of services to be doing business outside the



Philippines—only those not doing business in the Philippines can be required under BSP rules to pay in

acceptable foreign currency for their purchase of goods or services from the Philippines.—When Section

102(b)(2) stipulates payment in “acceptable foreign currency” under BSP rules, the law clearly envisions

the payer-recipient of services to be doing business outside the Philippines. Only those not doing business

in the Philippines can be required under BSP rules to pay in acceptable foreign currency for their purchase

of goods or services from the Philippines. In a domestic transaction, where the provider and recipient of

services are both doing business in the Philippines, the BSP cannot require any party to make payment in

foreign currency. Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the

payer-recipient of services is doing business outside the Philippines. Under BSP rules, the proceeds of

export sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the

provider of services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the

BSP. The same rationale does not apply if the provider and recipient of the services are both doing business

in the Philippines since their transaction is not in the nature of an export sale even if payment is

denominated in foreign currency.

Same; Same; An essential condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that

the recipient of the services is a person doing business outside the Philippines.—Respondent, as

subcontractor of the Consortium, operates and maintains NAPOCOR’s power barges in the Philippines.

NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency outwardly

remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted and accounted

for in accordance with BSP rules. This payment scheme does not entitle respondent to 0% VAT. As the

Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine

Branch), 462 SCRA 197 (2005), the place of payment is immaterial, much less is the place where the

output of the service is ultimately used. An essential condition for entitlement to 0% VAT under Section

102(b)(1) and (2) is that the recipient of the services is a person doing business outside the Philippines. In

this case, the recipient of the services is the Consortium, which is doing business not outside, but within the

Philippines because it has a 15-year contract to operate and maintain NAPOCOR’s two 100-megawatt

power barges in Mindanao.

Same; Same; Destination Principle; While the Court recognizes the rule that the VAT system generally

follows the “destination principle” (exports are zero-rated whereas imports are taxed), an exception to

this rule is the 0% VAT on services enumerated in Section 102 and performed in the Philippines.—The

Court recognizes the rule that the VAT system generally follows the “destination principle” (exports are

zero-rated whereas imports are taxed). However, as the Court stated in American Express, there is an

exception to this rule. This exception refers to the 0% VAT on services enumerated in Section 102 and

performed in the Philippines. For services covered by Section 102(b)(1) and (2), the recipient of the

services must be a person doing business outside the Philippines. Thus, to be exempt from the destination

principle under Section 102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a

person doing business outside the Philippines; and (c) paid in acceptable foreign currency accounted for in

accordance with BSP rules.



Facts:

Burmeister is a domestic corporation. A foreign consortium was formed between BWSC-Denmark, Mitsui

Engineering and Shipbuilding, and Mitsui and Co. It entered into a contract with NAPOCOR for the

operation & maintenance of two power barges. BWSC-Denmark established Burmeister which

subcontracted the actual operation and maintenance of NAPOCOR’s two power barges as well as the

performance of other duties and acts which necessarily have to be done in the Philippines.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and

Peso). The freely convertible non-Peso component is deposited directly to the Consortium’s bank accounts

in Denmark and Japan, while the Peso-denominated component is deposited in a separate and special

designated bank account in the Philippines. On the other hand, the Consortium pays Burmeister in foreign

currency inwardly remitted to the Philippines through the banking system.

In order to ascertain the tax implications of the above transactions, Burmeister sought a ruling from the

BIR. It declared that - if Burmeister chooses to register as a VAT person and the consideration for its

services is paid for in acceptable foreign currency and accounted for in accordance with the rules and

regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate.

Burmeister then chose to register as a VAT Tax payer.

For the year 1996, Burmeister seasonably filed its quarterly Value-Added Tax Returns reflecting, among

others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14.

In 1997 Burmeister availed of the Voluntary Assessment Program (VAP) of the BIR. It allegedly

misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case.

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby

amended to read as follows:

Section 4.102-2(b)(2) – "Services other than processing, manufacturing or repacking for

other persons doing business outside the Philippines for goods which are subsequently

exported, as well as services by a resident to a non-resident foreign client such as project

studies, information services, engineering and architectural designs and other similar

services, the consideration for which is paid for in acceptable foreign currency and

accounted for in accordance with the rules and regulations of the BSP."

In conformity with the aforecited Revenue Regulations, Burmeister subjected its sale of services to the

Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December 1996

sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum of

P43,893,951.07, representing January to March 1996 sales was subjected to zero rate.



In 1999, Burmeister secured a ruling form the VAT committee saying that the services of Burmeister is

really VAT-Free. In short, it affirmed the ruling of BIR.

Burmeister now filed a claim for the issuance of a tax credit certificate with BIR. Burmeister believed that

it erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program

(VAP) of the BIR.

CTA and CA ruled in favor of Burmeister.

Issue:

Whether or not Burmeister is entitled to a tax credit?

Held:

Section 102(b) of the Tax Code, the applicable provision in 1996 when respondent rendered the services

and paid the VAT in question, enumerates which services are zero-rated, thus:

(b) Transactions subject to zero-rate. ― The following services performed in the

Philippines by VAT-registered persons shall be subject to 0%:

(1) Processing, manufacturing or repacking goods for other persons doing business

outside the Philippines which goods are subsequently exported, where the services

are paid for in acceptable foreign currency and accounted for in accordance with

the rules and regulations of the Bangko Sentral ng Pilipinas(BSP);

(2) Services other than those mentioned in the preceding sub-paragraph, the

consideration for which is paid for in acceptable foreign currency and accounted

for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas

(BSP);

(3) Services rendered to persons or entities whose exemption under special laws or

international agreements to which the Philippines is a signatory effectively subjects

the supply of such services to zero rate;

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

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

converting, or manufacturing goods for an enterprise whose export sales exceed

seventy percent (70%) of total annual production

Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of

such services is doing business outside the Philippines. While this requirement is not expressly stated in



the second paragraph of Section 102(b), this is clearly provided in the first paragraph of Section 102(b)

where the listed services must be "for other persons doing business outside the Philippines."

The phrase "for other persons doing business outside the Philippines" not only refers to the services

enumerated in the first paragraph of Section 102(b), but also pertains to the general term "services"

appearing in the second paragraph of Section 102(b). In short, services other than processing,

manufacturing, or repacking of goods must likewise be performed for persons doing business outside the

Philippines.

If the provider and recipient of the "other services" are both doing business in the Philippines, the payment

of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can

avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient

of services.

In this case, the payer-recipient of respondent’s services is the Consortium which is a joint-venture doing

business in the Philippines. While the Consortium’s principal members are non-resident foreign

corporations, the Consortium itself is doing business in the Philippines.

Respondent, as subcontractor of the Consortium, operates and maintains NAPOCOR’s power barges in the

Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency

outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted

and accounted for in accordance with BSP rules. This payment scheme does not entitle respondent to 0%

VAT.

PETITION DENIED. NOT BECAUSE - BURMEISTER IS SUBJECT TO 0% VAT BUT

BECAUSE on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-9517 and

VAT Ruling No. 003-99,18 which held that respondent’s services are subject to 0% VAT and which

respondent invoked in applying for refund of the output VAT.

Commissioner of Internal Revenue vs. Acesite (Philippines) Hotel Corporation, 516 SCRA 93,

2007 VELASCO, JR., J.

Taxation; Tax Exemptions; Philippine Amusement and Gaming Corporation (PAGCOR) is also exempt

from indirect taxes.—A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption

to taxes with no distinction on whether the taxes are direct or indirect. We are one with the CA ruling that

PAGCOR is also exempt from indirect taxes, like VAT.

Same; Same; Acesite is not liable for the payment of the 10% Value Added Tax (VAT) as it is exempt in

this particular transaction by operation of law to pay the indirect tax.—While it was proper for PAGCOR

not to pay the 10% VAT charged by Acesite, the latter is not liable for the payment of it as it is exempt in



this particular transaction by operation of law to pay the indirect tax. Such exemption falls within the

former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424).

Same; Same; The proviso in P.D. No. 1869 extending the exemption to entities or individuals dealing

with Philippine Amusement and Gaming Corporation [PAGCOR] in casino operations is clearly to

proscribe any indirect tax, like Value Added Tax (VAT), that may be shifted to PAGCOR.—The rationale

for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to

entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case of

Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., 148 SCRA 36 (1987), where the

absolute tax exemption of the World Health Organization (WHO) upon an international agreement was

upheld. We held in said case that the exemption of contractee WHO should be implemented to mean that

the entity or person exempt is the contractor itself who constructed the building owned by contractee

WHO, and such does not violate the rule that tax exemptions are personal because the manifest intention of

the agreement is to exempt the contractor so that no contractor’s tax may be shifted to the contractee WHO.

Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR

in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.

Facts:

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

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

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



Thus, taking into consideration the prescribed portion of Petitioner’s claim for refund of P98,743.40, and

considering further the principle of ‘solutio indebiti’ which requires the return of what has been delivered

through mistake, Respondent must refund to the Petitioner the amount of P30,054,148.64.

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

Issue:

Whether PAGCOR’s tax exempton privilege includes indirect tax of VAT to entitle Acesite to zero percent

(0%) VAT rate?

Held:

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the

payment of taxes. Section 13 of P.D. 1869.

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

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

x x x x

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

x x x x

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

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc.,5 where the absolute tax exemption of the World Health Organization (WHO) upon an international agreement was upheld. We held

http://www.lawphil.net/judjuris/juri2007/feb2007/gr_147295_2007.html#fnt5



in said case that the exemption of contractee WHO should be implemented to mean that the entity or person exempt is the contractor itself who constructed the building owned by contractee WHO, and such does not violate the rule that tax exemptions are personal because the manifest intention of the agreement is to exempt the contractor so that no contractor’s tax may be shifted to the contractee WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.

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

Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.), Inc., 466 SCRA 211(2005)

CHICO-NAZARIO, J.

Taxation; Value-Added Tax; Words and Phrases; A VAT-exempt transaction 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 of the party to the transaction; A VAT-exempt party is a person or

entity granted VAT exemption under the Tax Code, a special law or an international agreement to which

the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT;

Section 103(q) of the Tax Code of 1977, as amended, relates to VAT-exempt transactions.—It would

seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-exempt

entities. In the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines), this Court

already made such distinction—An exempt transaction, on the one hand, involves goods or services which,

by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code,

without regard to the tax status—VAT-exempt or not—of the party to the transaction . . . An exempt party,

on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an

international agreement to which the Philippines is a signatory, and by virtue of which its taxable

transactions become exempt from VAT . . . Section 103(q) of the Tax Code of 1977, as amended, relied

upon by petitioner CIR, relates to VAT-exempt transactions. These are transactions exempted from VAT

by special laws or international agreements to which the Philippines is a signatory. Since such transactions

are not subject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods, properties,

or services, and they may not claim tax credit/refund of the input VAT they had paid thereon.

Same; Same; Philippine Economic Zone Authority (PEZA); P.D. No. 66, creating the Export Processing

Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as amended, under which the EPZA

evolved into the PEZA. Consequently, the exception of Presidential Decree No. 66 from Section 103(q)

of the Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as amended.—Section






103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent Toshiba because

although the said section recognizes that transactions covered by special laws may be exempt from VAT,

the very same section provides that those falling under Presidential Decree No. 66 are not. Presidential

Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the precursor of Rep. Act No.

7916, as amended, under which the EPZA evolved into the PEZA. Consequently, the exception of

Presidential Decree No. 66 from Section 103(q) of the Tax Code of 1977, as amended, extends likewise to

Rep. Act No. 7916, as amended.

Same; Same; Same; Special Economic Zones (Ecozones); Words and Phrases; PEZA-registered

enterprises, which would necessarily be located within ECOZONES, are VAT-exempt entities, not

because of Section 24 of Rep. Act No. 7916, as amended, but, rather, because of Section 8 of the same

statute which establishes the fiction that ECOZONES are foreign territory; An ECOZONE refers to

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; Section 8 of Rep. Act No. 7916, as

amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate customs

territory, thus creating the fiction that the ECOZONE is a foreign territory.—This Court agrees,

however, that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are

VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five

percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but,

rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign

territory. It is important to note herein that respondent Toshiba is located within an ECOZONE. An

ECOZONE or a Special Economic Zone has been described as—. . . [S]elected areas with highly

developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational,

commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by

Presidential Proclamations. An ECOZONE may contain any or all of the following: industrial estates (IEs),

export processing zones (EPZs), free trade zones and tourist/recreational centers. The national territory of

the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs

Territory. Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate

the ECOZONES as a separate customs territory; thus, creating the fiction that the ECOZONE is a foreign

territory. As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE

shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from

the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the

Customs Territory.

Same; Same; Same; Same; Cross Border Doctrine; 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.—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.

Same; Same; Same; Same; Same; 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, while 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.—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.

Same; Same; Same; Same; Same; The rule that any sale by a VAT-registered supplier from the Customs

Territory to a PEZA-registered enterprise shall be considered an export sale and subject to zero percent

(0%) VAT was clearly established only on 15 October 1999, upon the issuance of RMC No. 74-99—prior

to the said date, whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of

fiscal incentives availed of by the said enterprise.—The rule that any sale by a VAT-registered supplier

from the Customs Territory to a PEZA-registered enterprise shall be considered an export sale and subject

to zero percent (0%) VAT was clearly established only on 15 October 1999, upon the issuance of RMC No.

74-99. Prior to the said date, however, whether or not a PEZA-registered enterprise was VAT-exempt

depended on the type of fiscal incentives availed of by the said enterprise. This old rule on VAT-exemption

or liability of PEZA-registered enterprises, followed by the BIR, also recognized and affirmed by the CTA,

the Court of Appeals, and even this Court, cannot be lightly disregarded considering the great number of

PEZA-registered enterprises which did rely on it to determine its tax liabilities, as well as, its privileges.

According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered

enterprise the option to choose between two sets of fiscal incentives: (a) The five percent (5%) preferential

tax rate on its gross income under Rep. Act No. 7916, as amended; and (b) the income tax holiday provided

under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, as amended.

The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is in lieu

of all taxes. Except for real property taxes, no other national or local tax may be imposed on a PEZA-

registered enterprise availing of this particular fiscal incentive, not even an indirect tax like VAT.

Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to registered

pioneer and non-pioneer enterprises for six-year and four-year periods, respectively. Those availing of this

incentive are exempt only from income tax, but shall be subject to all other taxes, including the ten percent

(10%) VAT.



Same; Same; Same; Same; Same; The old rule clearly did not take into consideration the Cross Border

Doctrine essential to the VAT system or the fiction of the ECOZONE as a foreign territory.—This old

rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system or the

fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal incentives of the

PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered enterprises was

based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the five percent (5%)

preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as amended,

then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax holiday

under Exec. Order No. 226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction

was abolished by RMC No. 74-99, which categorically declared that all sales of goods, properties, and

services made by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall

be subject to VAT, at zero percent (0%) rate, regardless of the latter’s type or class of PEZA registration;

and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.

Same; Same; Same; It seems irrational and unreasonable for the Commissioner of Internal Revenue to

oppose a PEZA-registered enterprise’s application for tax credit/refund of its input VAT when such

claim had already been determined and approved by the Court of Tax Appeals after due hearing, and

even affirmed by the Court of Appeals, while said CIR could accept, process, and even approve

applications filed by other similarly-situated PEZA-registered enterprises at the administrative level.—

Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed by PEZA-

registered enterprises, availing of the income tax holiday, for input VAT on their purchases made prior to

RMC No. 74-99. Acceptance of applications essentially implies processing and possible approval thereof

depending on whether the given conditions are met. Respondent Toshiba’s claim for tax credit/refund arose

from the very same circumstances recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It therefore

seems irrational and unreasonable for petitioner CIR to oppose respondent Toshiba’s application for tax

credit/refund of its input VAT, when such claim had already been determined and approved by the CTA

after due hearing, and even affirmed by the Court of Appeals; while it could accept, process, and even

approve applications filed by other similarly-situated PEZA-registered enterprises at the administrative

level.

Facts:

Toshiba registered with the Philippine Economic Zone Authority (PEZA) as an ECOZONE Export

Enterprise and it registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer and a

withholding agent

Toshiba filed its VAT returns for the first and second quarters of taxable year 1996, reporting input VAT in

the amount of P13,118,542.007 and P5,128,761.94,8 respectively, or a total of P18,247,303.94. It alleged

that the said input VAT was from its purchases of capital goods and services which remained unutilized

since it had not yet engaged in any business activity or transaction for which it may be liable for any output

VAT.



Toshiba filed with (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.

CTA ordered CIR to refund, or in the alternative, to issue a tax credit certificate to Toshiba in the amount

of P16,188,045.44. CA AFFIRMED.

Issue:

Whether or not Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital

goods and services?

Held:

Yes. 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%).

It would seem that CIR failed to differentiate between VAT-exempt transactions from VAT-exempt

entities.

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…

CIR, bases its argument on VAT-exempt transactions. 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.

This cannot apply to transactions of Toshiba because although the transactions covered by special laws

may be exempt from VAT, those falling under Presidential Decree No. 66 (EPZA) are not.

This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within

ECOZONES, are VAT-exempt entities because ECOZONES are foreign territory. As a result, sales made

by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be treated as an exportation

from the Customs Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in

the Customs Territory shall be considered as an importation into the Customs Territory.

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.



No output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. The VAT

treatment of sales to it, however, varies depending on whether the supplier from the Customs Territory is

VAT-registered or not.

Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an

ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-registered supplier,

they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-registered supplier

shall not pass on any output VAT to the ECOZONE enterprise, and at the same time, shall be entitled to

claim tax credit/refund of its input VAT attributable to such sales. Zero-rating of export sales primarily

intends to benefit the exporter (i.e., the supplier from the Customs Territory), who is directly and legally

liable for the VAT, making it internationally competitive by allowing it to credit/refund the input VAT

attributable to its export sales.

Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be

exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.

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

entity that could not have engaged in a VAT-taxable business, this Court still believes, given the particular

circumstances of the present case, that it is entitled to a credit/refund of its input VAT.

The sale of capital goods by suppliers from the Customs Territory to Toshiba took place way before the

issuance of RMC No. 74-99, and when the old rule was accepted and implemented by no less than the BIR

itself. Since Toshiba opted to avail itself of the income tax holiday under Exec. Order No. 226, as amended,

then it was deemed subject to the ten percent (10%) VAT. It was very likely therefore that suppliers from

the Customs Territory had passed on output VAT to Toshiba, and the latter, thus, incurred input VAT.

Accordingly, this Court gives due respect to and adopts herein the CTA’s findings that the suppliers of

capital goods from the Customs Territory did pass on output VAT to Toshiba and the amount of input VAT

which Toshiba could claim as credit/refund.

Commissioner of Internal Revenue vs. Cebu Toyo Corporation, 451 SCRA 447(2005) QUISUMBING, J.:

Taxation; Value-Added Tax (VAT); Under the fiscal incentives granted to PEZA-registered enterprises

under Sec. 23 of R.A. No. 7916, the taxpayer had two options with respect to its tax burden—it could

avail of an income tax holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes

for a number of years but not from other internal revenue taxes such as VAT, or it could avail of the tax

exemptions on all taxes, including VAT under P.D. No. 66 and pay only the preferential tax rate of 5%

under R.A. No. 7916.—Petitioner’s contention that respondent is not entitled to refund for being exempt

from VAT is untenable. This argument turns a blind eye to the fiscal incentives granted to PEZA-registered

enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute, the respondent had two

options with respect to its tax burden. It could avail of an income tax holiday pursuant to provisions of E.O.



No. 226, thus exempt it from income taxes for a number of years but not from other internal revenue taxes

such as VAT; or it could avail of the tax exemptions on all taxes, including VAT under P.D. No. 66 and

pay only the preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals and the Court

of Tax Appeals found that respondent availed of the income tax holiday for four (4) years starting from

August 7, 1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where

respondent specified that it was availing of the tax relief under E.O. No. 226. Hence, respondent is not

exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is engaged in taxable

rather than exempt transactions.

Same; Same; Words and Phrases; Taxable transactions are those transactions which are subject to

value-added tax either at the rate of 10% or 0%, and 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 (out-put

tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid; 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.—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 of goods, properties or services shall not

bill any output tax to his customers because the said transaction is not subject to VAT. Thus, a VAT-

registered purchaser of goods, properties or services that are VAT-exempt, is not entitled to any input tax

on such purchases despite the issuance of a VAT invoice or receipt.

Same; Same; 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 result in any output tax, but 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.—Now, having determined that respondent is engaged in taxable transactions subject to VAT, let us

then proceed to determine whether it is subject to 10% or zero (0%) rate of VAT. To begin with, it must be

recalled that generally, sale of goods and supply of services performed in the Philippines are taxable at the

rate of 10%. However, export sales, or sales outside the Philippines, shall be subject to value-added tax at

0% if made by a VAT-registered person. 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 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.

Same; Same; 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.—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.

Facts:

Mactan Export Processing Zone (MEPZ) as a zone export enterprise registered with the PEZA. It is also

registered with the BIR as a VAT taxpayer. Cebu sells 80% of its products to its mother corporation,

pursuant to an Agreement of Offsetting. The rest are sold to various enterprises doing business in the

MEPZ.

On March 30, 1998, it filed an application for tax credit/refund of VAT paid for the period April 1996 to

December 1997 amounting to about P4.4 million representing excess VAT input payments. Cebu argues

that as a VAT-registered exporter of goods, it is subject to VAT at the rate of 0% on its export sales that do

not result in any output tax. Hence, the unutilized VAT input taxes on its purchases of goods and services

related to such zero-rated activities are available as tax credits or refund.

The BIR opposed this on the following grounds: It failed to show that the tax was erroneously or illegally

collected; the taxes paid and collected are presumed to have been made in accordance with law; and that

claims for refund are strictly construed against the claimant.

The CTA ruled that not the entire amount claimed for refund by Toyo were actually offset against its

related accounts. It determined that the refund/credit amounted only to P2.1M. The same was affirmed by

the CA.

Issue:

Whether the CA erred in affirming the CTA granting a refund representing unutilized input VAT on goods

and services.

Held:

The petition is denied. Cebu is entitled to the P2.1M tax refund/credit. Petitioner’s contention that

respondent is not entitled to refund for being exempt form VAT is untenable. This argument turns a blind

eye to the fiscal incentives given to PEZA registered enterprises under RA 7916. Under this statute, Cebu

has to options with respect to its tax burden. It could avail of an income tax holiday pursuant to EO 226,

thus exempting it from income taxes for a number of years (in this case, 4 years) but not from other internal

revenue taxes such as VAT; or it could avail of the tax exemption on all taxes, including VAT under PD 66

and pay only the preferential rate of 5% under RA 7916. Thus, availing of the first option, respondent is not

exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is engaged in a taxable

rather than exempt transactions. In taxable transactions, the seller (Cebu) shall be entitled to tax credit for

the VAT paid on purchases and leases of goods properties or services.

tax 2 case digests part 3 value-added tax.pdf

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