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VAT

TAXATION 2

ATTY. BERNIE MENDOZA

THIRD DIVISION
G.R. No. 146984

July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP
(HK) and NATIONAL DEVELOPMENT COMPANY, respondents.
DECISION
TINGA, J.:
The issue in this present petition is whether the sale by the National Development Company (NDC) of five (5)
of its vessels to the private respondents is subject to value-added tax (VAT) under the National Internal Revenue
Code of 1986 (Tax Code) then prevailing at the time of the sale. The Court of Tax Appeals (CTA) and the Court
of Appeals commonly ruled that the sale is not subject to VAT. We affirm, though on a more unequivocal
rationale than that utilized by the rulings under review. The fact that the sale was not in the course of the trade
or business of NDC is sufficient in itself to declare the sale as outside the coverage of VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its shares in
its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its
NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels.1 The
vessels were constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring
Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a
bareboat basis, to the NMC.2
The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for
the public auction was that the winning bidder was to pay "a value added tax of 10% on the value of the
vessels."3 On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the
shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new
company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden
Group based in Hongkong (collectively, private respondents).4 The bid was approved by the Committee on
Privatization, and a Notice of Award dated 1 July 1988 was issued to Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand, and
Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the contract
stipulated that "[v]alue-added tax, if any, shall be for the account of the PURCHASER."5 Per arrangement, an
irrevocable confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as security for the
payment of VAT, if any. By this time, a formal request for a ruling on whether or not the sale of the vessels was
subject to VAT had already been filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip
Salazar Hernandez & Gatmaitan, presumably in behalf of private respondents. Thus, the parties agreed that
should no favorable ruling be received from the BIR, NDC was authorized to draw on the Letter of Credit upon
written demand the amount needed for the payment of the VAT on the stipulated due date, 20 December 1988.6
In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14 December
1988 from the BIR, holding that the sale of the vessels was subject to the 10% VAT. The ruling cited the fact
that NDC was a VAT-registered enterprise, and thus its "transactions incident to its normal VAT registered
activity of leasing out personal property including sale of its own assets that are movable, tangible objects
which are appropriable or transferable are subject to the 10% [VAT]."7
Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling No. 39588 (dated 18 August 1988), which made a similar ruling on the sale of the same vessels in response to an inquiry
from the Chairman of the Senate Blue Ribbon Committee. Their motion was denied when the BIR issued VAT
Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier VAT rulings. At this point, NDC drew on the
Letter of Credit to pay for the VAT, and the amount of P15,120,000.00 in taxes was paid on 16 March 1989.

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by a
Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings No. 395-88,
568-88 and 007-89, as well as the refund of the VAT payment made amounting to P15,120,000.00.8 The
Commissioner of Internal Revenue (CIR) opposed the petition, first arguing that private respondents were not
the real parties in interest as they were not the transferors or sellers as contemplated in Sections 99 and 100 of
the then Tax Code. The CIR also squarely defended the VAT rulings holding the sale of the vessels liable for
VAT, especially citing Section 3 of Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that "[VAT]
is imposed on any sale or transactions deemed sale of taxable goods (including capital goods, irrespective of
the date of acquisition)." The CIR argued that the sale of the vessels were among those transactions "deemed
sale," as enumerated in Section 4 of R.R. No. 5-87. It seems that the CIR particularly emphasized Section 4(E)
(i) of the Regulation, which classified "change of ownership of business" as a circumstance that gave rise to a
transaction "deemed sale."
In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and granted the petition.9 The CTA
ruled that the sale of a vessel was an "isolated transaction," not done in the ordinary course of NDCs business,
and was thus not subject to VAT, which under Section 99 of the Tax Code, was applied only to sales in the
course of trade or business. The CTA further held that the sale of the vessels could not be "deemed sale," and
thus subject to VAT, as the transaction did not fall under the enumeration of transactions deemed sale as listed
either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of
doubt should be resolved in favor of private respondents since Section 99 of the Tax Code which implemented
VAT is not an exemption provision, but a classification provision which warranted the resolution of doubts in
favor of the taxpayer.
The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11 March 1997, rendered a Decision
reversing the CTA.11 While the appellate court agreed that the sale was an isolated transaction, not made in the
course of NDCs regular trade or business, it nonetheless found that the transaction fell within the classification
of those "deemed sale" under R.R. No. 5-87, since the sale of the vessels together with the NMC shares brought
about a change of ownership in NMC. The Court of Appeals also applied the principle governing tax
exemptions that such should be strictly construed against the taxpayer, and liberally in favor of the
government.12
However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5
February 2001.13 This time, the appellate court ruled that the "change of ownership of business" as
contemplated in R.R. No. 5-87 must be a consequence of the "retirement from or cessation of business" by the
owner of the goods, as provided for in Section 100 of the Tax Code. The Court of Appeals also agreed with the
CTA that the classification of transactions "deemed sale" was a classification statute, and not an exemption
statute, thus warranting the resolution of any doubt in favor of the taxpayer.14
To the mind of the Court, the arguments raised in the present petition have already been adequately discussed
and refuted in the rulings assailed before us. Evidently, the petition should be denied. Yet the Court finds that
Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT payments, and the subsequent
disquisitions by the lower courts on the applicability of Section 100 of the Tax Code and Section 4 of R.R. No.
5-87 are ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption,
even though it is assessed on many levels of transactions on the basis of a fixed percentage.15 It is the end user
of consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the
end users by the providers of these goods or services16 who in turn may credit their own VAT liability (or input
VAT) from the VAT payments they receive from the final consumer (or output VAT).17 The final purchase by
the end consumer represents the final link in a production chain that itself involves several transactions and
several acts of consumption. The VAT system assures fiscal adequacy through the collection of taxes on every
level of consumption,18 yet assuages the manufacturers or providers of goods and services by enabling them to
pass on their respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the
entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the
taxpayers role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its
subsequent incarnations,19 the tax is levied only on the sale, barter or exchange of goods or services by persons
who engage in such activities, in the course of trade or business. These transactions outside the course of trade
or business may invariably contribute to the production chain, but they do so only as a matter of accident or
incident. As the sales of goods or services do not occur within the course of trade or business, the providers of

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as
against their own accumulated VAT collections since the accumulation of output VAT arises in the first place
only through the ordinary course of trade or business.
That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by both
the CTA and the Court of Appeals, the latter doing so even in its first decision which it eventually
reconsidered.20 We cite with approval the CTAs explanation on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the term
"carrying on business" does not mean the performance of a single disconnected act, but means conducting,
prosecuting and continuing business by performing progressively all the acts normally incident thereof; while
"doing business" conveys the idea of business being done, not from time to time, but all the time. [J. Aranas,
UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course
of business" is what is usually done in the management of trade or business. [Idmi v. Weeks & Russel, 99 So.
761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doing business"
connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale which was
involuntary and made pursuant to the declared policy of Government for privatization could no longer be
repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC
is leasing personal property.21
This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that the NDC was
created for the primary purpose of selling real property.23
The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before
this Court,24 should have definitively settled the matter. Any sale, barter or exchange of goods or services not in
the course of trade or business is not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon by the
CIR, is captioned "Value-added tax on sale of goods," and it expressly states that "[t]here shall be levied,
assessed and collected on every sale, barter or exchange of goods, a value added tax x x x." Section 100 should
be read in light of Section 99, which lays down the general rule on which persons are liable for VAT in the first
place and on what transaction if at all. It may even be noted that Section 99 is the very first provision in Title IV
of the Tax Code, the Title that covers VAT in the law. Before any portion of Section 100, or the rest of the law
for that matter, may be applied in order to subject a transaction to VAT, it must first be satisfied that the taxpayer
and transaction involved is liable for VAT in the first place under Section 99.
It would have been a different matter if Section 100 purported to define the phrase "in the course of trade or
business" as expressed in Section 99. If that were so, reference to Section 100 would have been necessary as a
means of ascertaining whether the sale of the vessels was "in the course of trade or business," and thus subject
to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the
meaning of "in the course of trade or business," but instead the identification of the transactions which may be
deemed as sale. It would become necessary to ascertain whether under those two provisions the transaction may
be deemed a sale, only if it is settled that the transaction occurred in the course of trade or business in the first
place. If the transaction transpired outside the course of trade or business, it would be irrelevant for the purpose
of determining VAT liability whether the transaction may be deemed sale, since it anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding that the transaction in question was not made in
the course of trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of
the Tax Code, no matter how the said sale may hew to those transactions deemed sale as defined under Section
100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the Court
finds the discussions offered on this point by the CTA and the Court of Appeals (in its subsequent Resolution)
essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions deemed sale those
involving "change of ownership of business." However, Section 4(E) of R.R. No. 5-87, reflecting Section 100 of
the Tax Code, clarifies that such "change of ownership" is only an attending circumstance to "retirement from or
cessation of business[, ] with respect to all goods on hand [as] of the date of such retirement or cessation."25

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes the "change of ownership of business" as only a
"circumstance" that attends those transactions "deemed sale," which are otherwise stated in the same section.26
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.

FIRST DIVISION

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
G.R. No. 149073
February 16, 2005
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU TOYO CORPORATION, respondent.
DECISION
QUISUMBING, J.:
In its Decision1 dated July 6, 2001, the Court of Appeals, in CA-G.R. SP No. 60304, affirmed
the Resolutionsdated May 31, 20002 and August 2, 2000,3 of the Court of Tax Appeals (CTA) ordering the
Commissioner of Internal Revenue (CIR) to allow a partial refund or, alternatively, to issue a tax credit
certificate in favor of Cebu Toyo Corporation in the sum of P2,158,714.46, representing the unutilized input
value-added tax (VAT) payments.
The facts, as culled from the records, are as follows:
Respondent Cebu Toyo Corporation is a domestic corporation engaged in the manufacture of lenses and various
optical components used in television sets, cameras, compact discs and other similar devices. Its principal office
is located at the Mactan Export Processing Zone (MEPZ) in Lapu-Lapu City, Cebu. It is a subsidiary of Toyo
Lens Corporation, a non-resident corporation organized under the laws of Japan. Respondent is a zone export
enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to the provisions of
Presidential Decree No. 66.4 It is also registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer.5
As an export enterprise, respondent sells 80% of its products to its mother corporation, the Japan-based Toyo
Lens Corporation, pursuant to an Agreement of Offsetting. The rest are sold to various enterprises doing
business in the MEPZ. Inasmuch as both sales are considered export sales subject to Value-Added Tax (VAT) at
0% rate under Section 106(A)(2)(a)6 of the National Internal Revenue Code, as amended, respondent filed its
quarterly VAT returns from April 1, 1996 to December 31, 1997 showing a total input VAT of P4,462,412.63.
On March 30, 1998, respondent filed with the Tax and Revenue Group of the One-Stop Inter-Agency Tax Credit
and Duty Drawback Center of the Department of Finance, an application for tax credit/refund of VAT paid for
the period April 1, 1996 to December 31, 1997 amounting to P4,439,827.21 representing excess VAT input
payments.
Respondent, however, did not bother to wait for the Resolution of its claim by the CIR. Instead, on June 26,
1998, it filed a Petition for Review with the CTA to toll the running of the two-year prescriptive period pursuant
to Section 2307 of the Tax Code.
Before the CTA, the respondent posits that as a VAT-registered exporter of goods, it is subject to VAT at the rate
of 0% on its export sales that do not result in any output tax. Hence, the unutilized VAT input taxes on its
purchases of goods and services related to such zero-rated activities are available as tax credits or refunds.
The petitioners position is that respondent was not entitled to a refund or tax credit since: (1) it failed to show
that the tax was erroneously or illegally collected; (2) the taxes paid and collected are presumed to have been
made in accordance with law; and (3) claims for refund are strictly construed against the claimant as these
partake of the nature of tax exemption.
Initially, the CTA denied the petition for insufficiency of evidence.8 The tax court sustained respondents
argument that it was a VAT-registered entity. It also found that the petition was timely, as it was filed within the
prescription period. The CTA also ruled that the respondents sales to Toyo Lens Corporation and to certain
establishments in the Mactan Export Processing Zone were export sales subject to VAT at 0% rate. It found that
the input VAT covered by respondents claim was not applied against any output VAT. However, the tax court
decreed that the petition should nonetheless be denied because of the respondents failure to present
documentary evidence to show that there were foreign currency exchange proceeds from its export sales. The
CTA also observed that respondent failed to submit the approval by Bangko Sentral ng Pilipinas (BSP) of its
Agreement of Offsetting with Toyo Lens Corporation and the certification of constructive inward remittance.
Undaunted, respondent filed on February 21, 2000, a Motion for Reconsideration arguing that: (1) proof of its
inward remittance was not required by law; (2) BSP and BIR regulations do not require BSP approval on its
Agreement of Offsetting nor do they require certification on the amount constructively remitted; (3) it was not
legally required to prove foreign currency payments on the remaining sales to MEPZ enterprises; and (4) it had
complied with the substantiation requirements under Section 106(A)(2)(a) of the Tax Code. Hence, it was
entitled to a refund of unutilized VAT input tax.
On May 31, 2000, the tax court partly granted the motion for reconsideration in a Resolution, to wit:
WHEREFORE, finding the motion of petitioner to be meritorious, the same is hereby partially granted.
Accordingly, the Court hereby MODIFIES its decision in the above-entitled case, the dispositive portion of
which shall now read as follows:
WHEREFORE, finding the petition for review partially meritorious, respondent is hereby ORDERED to
REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of Petitioner in the amount
of P2,158,714.46 representing unutilized input tax payments.
SO ORDERED.9

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
In granting partial reconsideration, the tax court found that there was no need for BSP approval of the
Agreement of Offsetting since the same may be categorized as an inter-company open account offset
arrangement. Hence, the respondent need not present proof of foreign currency exchange proceeds from its
sales to MEPZ enterprises pursuant to Section 106(A)(2)(a)10 of the Tax Code. However, the CTA stressed that
respondent must still prove that there was an actual offsetting of accounts to prove that constructive foreign
currency exchange proceeds were inwardly remitted as required under Section 106(A)(2)(a).
The CTA found that only the amount of Y274,043,858.00 covering respondents sales to Toyo Lens Corporation
and purchases from said mother company for the period August 7, 1996 to August 26, 1997 were actually offset
against respondents related accounts receivable and accounts payable as shown by the Agreement for
Offsetting dated August 30, 1997. Resort to the respondents Accounts Receivable and Accounts Payable
subsidiary ledgers corroborated the amount. The tax court also found that out of the total export sales for the
period April 1, 1996 to December 31, 1997 amounting to Y700,654,606.15, respondents sales to MEPZ
enterprises amounted only toY136,473,908.05 of said total. Thus, allocating the input taxes supported by
receipts to the export sales, the CTA determined that the refund/credit amounted to
only P2,158,714.46,11 computed as follows:
Total Input Taxes Claimed by respondent

P4,439,827.21

Less: Exceptions made by SGV


a.) 1996

P651,256.17

b.) 1997

104,129.13

Validly Supported Input Taxes

755,385.30
P3,684,441.91

Allocation:
Verified Zero-Rated Sales
a.) Toyo Lens Corporation

Y274,043,858.00

b.) MEPZ Enterprises

136,473,908.05

Y410,517,766.05

Divided by Total Zero-Rated Sales

Y700,654,606.15

Quotient

0.5859

Multiply by Allowable Input Tax

P3,684,441.91

Amount Refundable

P2,158,714.[52]12

On June 21, 2000, petitioner Commissioner filed a Motion for Reconsideration arguing that respondent was
not entitled to a refund because as a PEZA-registered enterprise, it was not subject to VAT pursuant to Section
2413of Republic Act No. 7916,14 as amended by Rep. Act No. 8748.15 Thus, since respondent was not subject to
VAT, the Commissioner contended that the capital goods it purchased must be deemed not used in VAT taxable
business and therefore it was not entitled to refund of input taxes on such capital goods pursuant to Section
4.106-1 of Revenue Regulations No. 7-95.16
Petitioner filed a Motion for Reconsideration on June 21, 2000 based on the following theories: (1) that
respondent being registered with the PEZA as an ecozone enterprise is not subject to VAT pursuant to Sec. 24 of
Rep. Act No. 7916; and (2) since respondents business is not subject to VAT, the capital goods it purchased are
considered not used in a VAT taxable business and therefore is not entitled to a refund of input taxes.17
The respondent opposed the Commissioners Motion for Reconsideration and prayed that the CTA resolution
be modified so as to grant it the entire amount of tax refund or credit it was seeking.
On August 2, 2000, the Court of Tax Appeals denied the petitioners motion for reconsideration. It held that the
grounds relied upon were only raised for the first time and that Section 24 of Rep. Act No. 7916 was not
applicable since respondent has availed of the income tax holiday incentive under Executive Order No. 226 or
the Omnibus Investment Code of 1987 pursuant to Section 2318 of Rep. Act No. 7916. The tax court pointed out
that E.O. No. 226 granted PEZA-registered enterprises an exemption from payment of income taxes for 4 or 6
years depending on whether the registration was as a pioneer or as a non-pioneer enterprise, but subject to other
national taxes including VAT.
The petitioner then filed a Petition for Review with the Court of Appeals (CA), docketed as CA-G.R. SP No.
60304, praying for the reversal of the CTA Resolutions dated May 31, 2000 and August 2, 2000, and reiterating
its claim that respondent is not entitled to a refund of input taxes since it is VAT-exempt.
On July 6, 2001, the appellate court decided CA-G.R. SP No. 60304 in respondents favor, thus:

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
WHEREFORE, finding no merit in the petition, this Court DISMISSES it and AFFIRMS the Resolutions dated
May 31, 2000 and August 2, 2000 . . . of the Court of Tax Appeals.
SO ORDERED.19
The Court of Appeals found no reason to set aside the conclusions of the Court of Tax Appeals. The appellate
court held as untenable herein petitioners argument that respondent is not entitled to a refund because it is VATexempt since the evidence showed that it is a VAT-registered enterprise subject to VAT at the rate of 0%. It
agreed with the ruling of the tax court that respondent had two options under Section 23 of Rep. Act No. 7916,
namely: (1) to avail of an income tax holiday under E.O. No. 226 and be subject to VAT at the rate of 0%; or (2)
to avail of the 5% preferential tax under P.D. No. 66 and enjoy VAT exemption. Since respondent availed of the
incentives under E.O. No. 226, then the 0% VAT rate would be applicable to it and any unutilized input VAT
should be refunded to respondent upon proper application with and substantiation by the BIR.1awphi1.nt
Hence, the instant petition for review now before us, with herein petitioner alleging that:
I. RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE AUTHORITY
(PEZA) AS AN ECOZONE EXPORT ENTERPRISE, ITS BUSINESS IS NOT SUBJECT TO VAT
PURSUANT TO SECTION 24 OF REPUBLIC ACT NO. 7916 IN RELATION TO SECTION 103 OF THE
TAX CODE, AS AMENDED BY RA NO. 7716.
II. SINCE RESPONDENTS BUSINESS IS NOT SUBJECT TO VAT, IT IS NOT ENTITLED TO REFUND
OF INPUT TAXES PURSUANT TO SECTION 4.103-1 OF REVENUE REGULATIONS NO. 7-95. 20
In our view, the main issue for our resolution is whether the Court of Appeals erred in affirming the Court of
Tax Appeals resolution granting a refund in the amount of P2,158,714.46 representing unutilized input VAT on
goods and services for the period April 1, 1996 to December 31, 1997.
Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that respondent Cebu
Toyo Corporation, as a PEZA-registered enterprise, is exempt from national and local taxes, including VAT,
under Section 24 of Rep. Act No. 7916 and Section 10921 of the NIRC. Thus, they contend that respondent Cebu
Toyo Corporation is not entitled to any refund or credit on input taxes it previously paid as provided under
Section 4.103-122 of Revenue Regulations No. 7-95, notwithstanding its registration as a VAT taxpayer. For
petitioner claims that said registration was erroneous and did not confer upon the respondent any right to claim
recognition of the input tax credit.
The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four years from
August 7, 1995 making it exempt from income tax but not from other taxes such as VAT. Hence, according to
respondent, its export sales are not exempt from VAT, contrary to petitioners claim, but its export sales is
subject to 0% VAT. Moreover, it argues that it was able to establish through a report certified by an independent
Certified Public Accountant that the input taxes it incurred from April 1, 1996 to December 31, 1997 were
directly attributable to its export sales. Since it did not have any output tax against which said input taxes may
be offset, it had the option to file a claim for refund/tax credit of its unutilized input taxes.
Considering the submission of the parties and the evidence on record, we find the petition bereft of merit.
Petitioners contention that respondent is not entitled to refund for being exempt from VAT is untenable. This
argument turns a blind eye to the fiscal incentives granted to PEZA-registered enterprises under Section 23 of
Rep. Act No. 7916. Note that under said statute, the respondent had two options with respect to its tax burden. It
could avail of an income tax holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes
for a number of years but not from other internal revenue taxes such as VAT; or it could avail of the tax
exemptions on all taxes, including VAT under P.D. No. 66 and pay only the preferential tax rate of 5% under
Rep. Act No. 7916. Both the Court of Appeals and the Court of Tax Appeals found that respondent availed of
the income tax holiday for four (4) years starting from August 7, 1995, as clearly reflected in its 1996 and 1997
Annual Corporate Income Tax Returns, where respondent specified that it was availing of the tax relief under
E.O. No. 226. Hence, respondent is not exempt from VAT and it correctly registered itself as a VAT taxpayer. In
fine, it is engaged in taxable rather than exempt transactions.
Taxable transactions are those transactions which are subject to value-added tax either at the rate of ten percent
(10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax credit for the value-added
tax paid on purchases and leases of goods, properties or services.23
An exemption means that the sale of goods, properties or services and the use or lease of properties is not
subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. The
person making the exempt sale of goods, properties or services shall not bill any output tax to his customers
because the said transaction is not subject to VAT. Thus, a VAT-registered purchaser of goods, properties or
services that are VAT-exempt, is not entitled to any input tax on such purchases despite the issuance of a VAT
invoice or receipt.24
Now, having determined that respondent is engaged in taxable transactions subject to VAT, let us then proceed
to determine whether it is subject to 10% or zero (0%) rate of VAT. To begin with, it must be recalled that
generally, sale of goods and supply of services performed in the Philippines are taxable at the rate of 10%.
However, export sales, or sales outside the Philippines, shall be subject to value-added tax at 0% if made by a
VAT-registered person.25 Under the value-added tax system, a zero-rated sale by a VAT-registered person, which

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
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.261awphi1.nt
In principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is to exempt the
transaction completely from VAT previously collected on inputs. It is thus the only true way to ensure that
goods are provided free of VAT. While the zero rating and the exemption are computationally the same, they
actually differ in several aspects, to wit:
(a) A zero-rated sale is a taxable transaction but does not result in an output tax while an exempted transaction is
not subject to the output tax;
(b) The input VAT on the purchases of a VAT-registered person with zero-rated sales may be allowed as tax
credits or refunded while the seller in an exempt transaction is not entitled to any input tax on his purchases
despite the issuance of a VAT invoice or receipt.
(c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register while
registration is optional for VAT-exempt persons.
In this case, it is undisputed that respondent is engaged in the export business and is registered as a VAT
taxpayer per Certificate of Registration of the BIR.27 Further, the records show that the respondent is subject to
VAT as it availed of the income tax holiday under E.O. No. 226. Perforce, respondent is subject to VAT at 0%
rate and is entitled to a refund or credit of the unutilized input taxes, which the Court of Tax Appeals computed
atP2,158,714.46, but which we findafter recomputationshould be P2,158,714.52.
The Supreme Court will not set aside lightly the conclusions reached by the Court of Tax Appeals which, by the
very nature of its functions, is dedicated exclusively to the resolution of tax problems and has accordingly
developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority.28 In
this case, we find no cogent reason to deviate from this well-entrenched principle. Thus, we are persuaded that
indeed the Court of Appeals committed no reversible error in affirming the assailed ruling of the Court of Tax
Appeals.
WHEREFORE, the petition is DENIED for lack of merit.l^vvphi1.net The assailed Decision dated July 6, 2001
of the Court of Appeals, in CA-G.R. SP No. 60304 is AFFIRMED with very slight modification. Petitioner is
hereby ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of
respondent in the amount ofP2,158,714.52 representing unutilized input tax payments. No pronouncement as to
costs.
SO ORDERED.

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
FIRST DIVISION
G.R. No. 125355
March 30, 2000
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES
CORPORATION, respondents.
PARDO, J.:
What is before the Court is a petition for review on certiorari of the decision of the Court of Appeals,1 reversing
that of the Court of Tax Appeals,2 which affirmed with modification the decision of the Commissioner of
Internal Revenue ruling that Commonwealth Management and Services Corporation, is liable for value added
tax for services to clients during taxable year 1988.
Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly
organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance
Co. (Philamlife), organized by the letter to perform collection, consultative and other technical services,
including functioning as an internal auditor, of Philamlife and its other affiliates.1wphi1.nt
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent
COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988,
computed as follows:
P1,679,155.00
Taxable sale/receipt
============
10% tax due thereon

167,915.50

25% surcharge

41,978.88

20% interest per annum

125,936.63

Compromise penalty for late payment

16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE

P351,831.01
============
COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its
operations in the amount of P6,077.00.
On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of
deficiency VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to
COMASERCO demanding payment of the deficiency VAT.
On September 29, 1992, COMASERCO filed with the Court of Tax Appeals4 a petition for review contesting
the Commissioner's assessment. COMASERCO asserted that the services it rendered to Philamlife and its
affiliates, relating to collections, consultative and other technical assistance, including functioning as an internal
auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the
business of providing services to Philamlife and its affiliates. COMASERCO was established to ensure
operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of
services. COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it did
not generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that since it was not
engaged in business, it was not liable to pay VAT.
On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal
Revenue, the dispositive portion of which reads:
WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency valueadded tax for the taxable year 1988 is AFFIRMED with slight modifications. Accordingly, petitioner is ordered
to pay respondent Commissioner of Internal Revenue the amount of P335,831.01 inclusive of the 25%
surcharge and interest plus 20% interest from January 24, 1992 until fully paid pursuant to Section 248 and 249
of the Tax Code.
The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall not be included
in the payment as there was no compromise agreement entered into between petitioner and respondent with
respect to the value-added tax deficiency.5
On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of the Court
of Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the Court of
Tax Appeals, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and SETTING ASIDE the
questioned Decision promulgated on 22 June 1995. The assessment for deficiency value-added tax for the

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
taxable year 1988 inclusive of surcharge, interest and penalty charges are ordered CANCELLED for lack of
legal and factual basis. 6
The Court of Appeals anchored its decision on the ratiocination in another tax case involving the same
parties,7where it was held that COMASERCO was not liable to pay fixed and contractor's tax for services
rendered to Philamlife and its affiliates. The Court of Appeals, in that case, reasoned that COMASERCO was
not engaged in business of providing services to Philamlife and its affiliates. In the same manner, the Court of
Appeals held that COMASERCO was not liable to pay VAT for it was not engaged in the business of selling
services.
On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for review
on certiorariassailing the decision of the Court of Appeals.
On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and on September
26, 1996, COMASERCO complied with the resolution.8
We give due course to the petition.
At issue in this case is whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT
thereon.
Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different things.
Petitioner maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for a fee or
consideration, are subject to VAT. VAT is a tax on the value added by the performance of the service. It is
immaterial whether profit is derived from rendering the service.
We agree with the Commissioner.
Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273 in
1988, provides that:
Sec. 99. Persons liable. Any person who, in the course of trade or business, sells, barters or exchanges
goods, renders services, or engages in similar transactions and any person who, imports goods shall be subject
to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code. 9
COMASERCO contends that the term "in the course of trade or business" requires that the "business" is carried
on with a view to profit or livelihood. It avers that the activities of the entity must be profit-oriented.
COMASERCO submits that it is not motivated by profit, as defined by its primary purpose in the articles of
incorporation, stating that it is operating "only on reimbursement-of-cost basis, without any profit." Private
respondent argues that profit motive is material in ascertaining who to tax for purposes of determining liability
for VAT.
We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among
other sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act 8424, the National Internal
Revenue Code of 1997, took effect. The amended law provides that:
Sec. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases
goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax
(VAT) imposed in Sections 106 and 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties or services. This rule shall likewise apply to existing sale or lease of goods,
properties or services at the time of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto, by any person regardless of whether or not the
person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members of their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or
business.
Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit,
organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on
transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or
property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the
course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity
regardless of whether or not the entity is profit-oriented.
The definition of the term "in the course of trade or business" present law applies to all transactions even to
those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or
business, sells, barters or exchanges goods and services, was already liable to pay VAT. The present law merely
stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of
goods and services.
Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the
"performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
of technical advice, assistance or services rendered in connection with technical management or administration
of any scientific, industrial or commercial undertaking or project." 11
On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 12 emphasizing
that a domestic corporation that provided technical, research, management and technical assistance to its
affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of realizing
profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without any
intention realizing profit, any income or profit generated by the entity in the conduct of its activities was subject
to income tax.
Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for
services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of
determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration
or consideration, then the service rendered is subject to VAT.1awp++i1
At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are
construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption
from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied
therefrom.13 In the case of VAT, Section 109, Republic Act 8424 clearly enumerates the transactions exempted
from VAT. The services rendered by COMASERCO do not fall within the exemptions.
Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the services
rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out by the
Commissioner, the performance of all kinds of services for others for a fee, remuneration or consideration is
considered as sale of services subject to VAT. As the government agency charged with the enforcement of the
law, the opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is plainly
wrong, is entitled to great weight. 14 Also, it has been the long standing policy and practice of this Court to
respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its
functions, is dedicated exclusively to the study and consideration of tax cases and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of its authority. 15
There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R. No. 34042,
declaring the COMASERCO as not engaged in business and not liable for the payment of fixed and percentage
taxes, binds petitioner. The issue in CA-G.R. No. 34042 is different from the present case, which involves
COMASERCO's liability for VAT. As heretofore stated, every person who sells, barters, or exchanges goods and
services, in the course of trade or business, as defined by law, is subject to VAT.
WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of Appeals in CAG.R. SP No. 37930. The Court hereby REINSTATES the decision of the Court of Tax Appeals in C. T. A. Case
No. 4853.
No costs.
SO ORDERED.1wphi1.nt

SECOND DIVISION

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
G.R. No. 178697
November 17, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
SONY PHILIPPINES, INC., Respondent.
DECISION
MENDOZA, J.:
This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5, 2007
Resolution of the Court of Tax Appeals En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming the October 26,
2004 Decision of the CTA-First Division2 which, in turn, partially granted the petition for review of respondent
Sony Philippines, Inc.(Sony). The CTA-First Division decision cancelled the deficiency assessment issued by
petitioner Commissioner of Internal Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the
deficiency assessment for expanded withholding tax (EWT) in the amount of P1,035,879.70 and the penalties
for late remittance of internal revenue taxes in the amount of P1,269, 593.90.3
THE FACTS:
On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing certain
revenue officers to examine Sonys books of accounts and other accounting records regarding revenue taxes
for"the period 1997 and unverified prior years." On December 6, 1999, a preliminary assessment for 1997
deficiency taxes and penalties was issued by the CIR which Sony protested. Thereafter, acting on the protest,
the CIR issued final assessment notices, the formal letter of demand and the details of discrepancies.4 Said
details of the deficiency taxes and penalties for late remittance of internal revenue taxes are as follows:
DEFICIENCY VALUE -ADDED TAX (VAT)
(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due

P 7,958,700.00

Add: Penalties
Interest up to 3-31-2000
Compromise

P 3,157,314.4
1
25,000.00

Deficiency VAT Due

3,182,314.41
P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING


TAX (EWT)
(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due

P 1,416,976.90

Add: Penalties
Interest up to 3-31-2000
Compromise

P 550,485.82
25,000.00

Deficiency EWT Due

575,485.82
P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY


PAYMENTS
(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due

Add: Penalties
Surcharge

P 359,177.80

Interest up to 3-31-2000

87,580.34

Compromise

16,000.00

Penalties Due

462,758.14
P 462,758.14

VAT

TAXATION 2
LATE REMITTANCE OF FINAL
WITHHOLDING TAX

ATTY. BERNIE MENDOZA

(Assessment No. ST-LR2-97-0127-2000)


Basic Tax Due

Add: Penalties
Surcharge

P 1,729,690.7
1

Interest up to 3-31-2000

508,783.07

Compromise

50,000.00

Penalties Due

2,288,473.78
P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS


(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due

Add: Penalties
25 % Surcharge

P 8,865.34

Interest up to 3-31-2000

58.29

Compromise

2,000.00

10,923.60

Penalties Due

P 10,923.60

GRAND TOTAL

P 15,895,632.655

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000. Sony
submitted relevant documents in support of its protest on the 16th of that same month.6
On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said supporting
documents to the CIR, Sony filed a petition for review before the CTA.7
After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized advertising
expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT credit. As regards the
EWT, the CTA-First Division maintained the deficiency EWT assessment on Sonys motor vehicles and on
professional fees paid to general professional partnerships. It also assessed the amounts paid to sales agents as
commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTAFirst Division, however, disallowed the EWT assessment on rental expense since it found that the total rental
deposit of P10,523,821.99 was incurred from January to March 1998 which was again beyond the coverage of
LOA 19734. Except for the compromise penalties, the CTA-First Division also upheld the penalties for the late
payment of VAT on royalties, for late remittance of final withholding tax on royalty as of December 1997 and
for the late remittance of EWT by some of Sonys branches.8 In sum, the CTA-First Division partly granted
Sonys petition by cancelling the deficiency VAT assessment but upheld a modified deficiency EWT assessment
as well as the penalties. Thus, the dispositive portion reads:
WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to
CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of merit. However,
the deficiency assessments for expanded withholding tax and penalties for late remittance of internal revenue
taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax in the
amount of P1,035,879.70 and the following penalties for late remittance of internal revenue taxes in the sum
ofP1,269,593.90:
1. VAT on Royalty
P 429,242.07
2. Withholding Tax on Royalty

831,428.20

VAT

TAXATION 2
3. EWT of Petitioner's Branches

ATTY. BERNIE MENDOZA


8,923.63

Total
P 1,269,593.90
Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3) of the 1997
Tax Code.
SO ORDERED.9
The CIR sought a reconsideration of the above decision and submitted the following grounds in support thereof:
A. The Honorable Court committed reversible error in holding that petitioner is not liable for the deficiency
VAT in the amount of P11,141,014.41;
B. The Honorable court committed reversible error in holding that the commission expense in the amount of
P2,894,797.00 should be subjected to 5% withholding tax instead of the 10% tax rate;
C. The Honorable Court committed a reversible error in holding that the withholding tax assessment with
respect to the 5% withholding tax on rental deposit in the amount of P10,523,821.99 should be cancelled; and
D. The Honorable Court committed reversible error in holding that the remittance of final withholding tax on
royalties covering the period January to March 1998 was filed on time.10
On April 28, 2005, the CTA-First Division denied the motion for reconsideration.1avvphi1 Unfazed, the CIR
filed a petition for review with the CTA-EB raising identical issues:
1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of P11,141,014.41;
2. Whether or not the commission expense in the amount of P2,894,797.00 should be subjected to 10%
withholding tax instead of the 5% tax rate;
3. Whether or not the withholding assessment with respect to the 5% withholding tax on rental deposit in the
amount of P10,523,821.99 is proper; and
4. Whether or not the remittance of final withholding tax on royalties covering the period January to March
1998 was filed outside of time.11
Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed CIRs
petition on May 17, 2007. CIRs motion for reconsideration was denied by the CTA-EB on July 5, 2007.
The CIR is now before this Court via this petition for review relying on the very same grounds it raised before
the CTA-First Division and the CTA-EB. The said grounds are reproduced below:
GROUNDS FOR THE ALLOWANCE OF THE PETITION
I
THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR
DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.
II
AS TO RESPONDENTS DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF
PHP1,992,462.72:
A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE
AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING TAX OF 5%
INSTEAD OF THE 10% TAX RATE.
B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT TO THE
5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT OF PHP10,523,821.99 IS NOT
PROPER.
III
THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES
COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME.12
Upon filing of Sonys comment, the Court ordered the CIR to file its reply thereto. The CIR subsequently filed a
manifestation informing the Court that it would no longer file a reply. Thus, on December 3, 2008, the Court
resolved to give due course to the petition and to decide the case on the basis of the pleadings filed.13
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years," should be
understood to mean the fiscal year ending in March 31, 1998.14 The Court cannot agree.
Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the appropriate
revenue officer assigned to perform assessment functions. It empowers or enables said revenue officer to
examine the books of account and other accounting records of a taxpayer for the purpose of collecting the
correct amount of tax.15 The very provision of the Tax Code that the CIR relies on is unequivocal with regard to
its power to grant authority to examine and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement.
(A)Examination of Returns and Determination of tax Due. After a return has been filed as required under the
provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination
of any taxpayer and the assessment of the correct amount of tax: Provided, however, That failure to file a return

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
shall not prevent the Commissioner from authorizing the examination of any taxpayer. x x x [Emphases
supplied]
Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment.
Equally important is that the revenue officer so authorized must not go beyond the authority given. In the
absence of such an authority, the assessment or examination is a nullity.
As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason, the CIR
acting through its revenue officers went beyond the scope of their authority because the deficiency VAT
assessment they arrived at was based on records from January to March 1998 or using the fiscal year which
ended in March 31, 1998. As pointed out by the CTA-First Division in its April 28, 2005 Resolution, the CIR
knew which period should be covered by the investigation. Thus, if CIR wanted or intended the investigation to
include the year 1998, it should have done so by including it in the LOA or issuing another LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and unverified
prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated September 20, 1990, the
pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing
L/As covering audit of "unverified prior years is hereby prohibited. If the audit of a taxpayer shall include more
than one taxable period, the other periods or years shall be specifically indicated in the L/A.16 [Emphasis
supplied]
On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the CIRs
argument, that Sonys advertising expense could not be considered as an input VAT credit because the same was
eventually reimbursed by Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sonys advertising expense was reimbursed by SIS, the former never incurred any
advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR continues, the said
advertising expense should be for the account of SIS, and not Sony.17
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB,
Sonys deficiency VAT assessment stemmed from the CIRs disallowance of the input VAT credits that should
have been realized from the advertising expense of the latter.18 It is evident under Section 11019 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 CIRs own witness, Revenue Officer Antonio Aluquin.20 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.21 Indubitably, Sony incurred and paid for advertising expense/ services.
Where the money came from is another matter all together but will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus,
taxable. In support of this, the CIR cited a portion of Sonys protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy equivalent
to the latters advertising expenses will not affect the validity of the input taxes from such expenses. Thus, at the
most, this is an additional income of our client subject to income tax. We submit further that our client is not
subject to VAT on the subsidy income as this was not derived from the sale of goods or services.22
Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax, the
Court agrees. However, the Court does not agree that the same subsidy should be subject to the 10% VAT. To
begin with, the said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for
Sonys advertising expense for it was but an assistance or aid in view of Sonys dire or adverse economic
conditions, and was only "equivalent to the latters (Sonys) advertising expenses."
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of
goods or properties, value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in
money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.
Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly,
there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS and
not in payment for goods or properties sold, bartered or exchanged by Sony.
In the case of CIR v. Court of Appeals (CA),23 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 latters advertising expense
but never received any goods, properties or service from Sony.
Regarding the deficiency EWT assessment, more particularly Sonys commission expense, the CIR insists that
said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the five percent (5%) citing

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
24
Revenue Regulation No. 2-98 dated April 17, 1998. The said revenue regulation provides that the 10% rate is
applied when the recipient of the commission income is a natural person. According to the CIR, Sonys
schedule of Selling, General and Administrative expenses shows the commission expense as
"commission/dealer salesman incentive," emphasizing the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on Section
1(g) of Revenue Regulations No. 6-85 which provides:
(g) Amounts paid to certain Brokers and Agents. On gross payments to customs, insurance, real estate and
commercial brokers and agents of professional entertainers five per centum (5%).25
In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division, held:
x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is subject to
5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the commission expense
in the schedule of Selling, General and Administrative expenses submitted by petitioner (SPI) to the BIR is
captioned as "commission/dealer salesman incentive" the same does not justify the automatic imposition of flat
10% rate. As itemized by petitioner, such expense is composed of "Commission Expense" in the amount of
P10,200.00 and Broker Dealer of P2,894,797.00.26
The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the applicable
rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which was the
applicable rule during the subject period of examination and assessment as specified in the LOA. Revenue
Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and, therefore, cannot be applied in the
present case. Besides, the withholding tax on brokers and agents was only increased to 10% much later or by
the end of July 2001 under Revenue Regulations No. 6-2001.27 Until then, the rate was only 5%.
The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency EWT
assessment on the rental deposit. According to their findings, Sony incurred the subject rental deposit in the
amount of P10,523,821.99 only from January to March 1998. As stated earlier, in the absence of the appropriate
LOA specifying the coverage, the CIRs deficiency EWT assessment from January to March 1998, is not valid
and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on royalties (i) as of
December 1997; and (ii) for the period from January to March 1998. Again, the Court agrees with the CTA-First
Division when it upheld the CIR with respect to the royalties for December 1997 but cancelled that from
January to March 1998.
The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and 2.58(A)(2)
(a)29of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on royalties from January
to March of 1998. At the same time, it downplays the relevance of the Manufacturing License Agreement
(MLA) between Sony and Sony-Japan, particularly in the payment of royalties.
The above revenue regulations provide the manner of withholding remittance as well as the payment of final tax
on royalty. Based on the same, Sony is required to deduct and withhold final taxes on royalty payments when
the royalty is paid or is payable. After which, the corresponding return and remittance must be made within 10
days after the end of each month. The question now is when does the royalty become payable?
Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty payments were
agreed upon:
(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the LICENSEE
shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE, showing quantities of the
MODELS sold, leased or otherwise disposed of by the LICENSEE during such respective semi-annual period
and amount of royalty due pursuant this ARTICLE X therefore, and the LICENSEE shall pay the royalty
hereunder to the LICENSOR concurrently with the furnishing of the above statement.30
Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period which ends
in June 30 and December 31. However, the CTA-First Division found that there was accrual of royalty by the
end of December 1997 as well as by the end of June 1998. Given this, the FWTs should have been paid or
remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was correct for the CTA-First
Division and the CTA-EB in ruling that the FWT for the royalty from January to March 1998 was seasonably
filed. Although the royalty from January to March 1998 was well within the semi-annual period ending June 30,
which meant that the royalty may be payable until August 1998 pursuant to the MLA, the FWT for said royalty
had to be paid on or before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.
In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.
WHEREFORE, the petition is DENIED.

VAT

TAXATION 2

ATTY. BERNIE MENDOZA

SECOND DIVISION
G.R. No. 145559
July 14, 2006
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BENGUET CORPORATION, respondent.
DECISION
GARCIA, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue
seeks the reversal and setting aside of the following Resolutions of the Court of Appeals (CA) in CA-G.R. SP
No. 38413, to wit:
1. Resolution dated May 10, 20001 insofar as it ordered petitioner to issue a tax credit to respondent Benguet
Corporation in the amount of P49,749,223.31 representing input VAT/tax attributable to its sales of gold to the
Central Bank (now Bangko Sentral ng Pilipinas or BSP) covering the period from January 1, 1988 to July 31,
1989; and
2. Resolution dated October 16, 20002 denying petitioner's motion for reconsideration.
The facts, as narrated by the CA in its basic Resolution of May 10, 2000, are:
[Respondent] is a domestic corporation engaged in mining business, specifically the exploration, development
and operation of mining properties for purposes of commercial production and the marketing of mine products.
It is a VAT-registered enterprise, with VAT Registration No. 31-0-000027 issued on January 1, 1988. Sometime
in January 1988, [respondent] filed an application for zero-rating of its sales of mine products, which
application was duly approved by the [petitioner] Commissioner of Internal Revenue.
On August 28, 1988, then Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling
No. 378-88 which declared that the sale of gold to the Central Bank is considered an export sale and therefore
subject to VAT at 0% rate. On December 14, 1988, then Deputy Commissioner Santos also issued Revenue
Memorandum Circular (RMC) No. 59-88, again declaring that the sale of gold by a VAT-registered taxpayer to
the Central Bank is subject to the zero-rate VAT. No less than five Rulings were subsequently issued by
[petitioner] from 1988 to 1990 reiterating and confirming its position that the sale of gold by a VAT-registered
taxpayer to the Central Bank is subject to the zero-rate VAT.
As a corollary, and in reliance, of the foregoing issuances, [respondent], during the six (6) taxable quarters in
question covering the period January 1, 1988 to July 31, 1989, sold gold to the Central Bank and treated these
sales as zero-rated that is, subject to the 0% VAT. During the same period, [respondent] thus incurred input
taxes attributable to said sales to the Central Bank. Consequently, [respondent] filed with the Commissioner of
Internal Revenue applications for the issuance of Tax Credit Certificates for input VAT Credits attributable to its
export sales - that is, inclusive of direct export sales and sale of gold to the Central Bank corresponding to the
same taxable periods, to wit:
AMOUNT OF TAX
CREDIT APPLIED
FOR

TAXABLE PERIOD

P34,449,817.71

01Jan88 to 30 Apr88

P30,382,666.86

01May88 to 31Jul88

P13,467,663.41 01

Nov88 to 31Jan89

P7,030,261.29 01

Feb89 to 30Apr89

P18,263,960.28

01May89 to 31Jul89

(CTA Decision dated March 23, 1995; Pages 83-86, rollo)


Meanwhile, on January 23, 1992, then Commissioner Jose U. Ong issued VAT Ruling No. 008-92 declaring and
holding that the sales of gold to the Central Bank are considered domestic sales subject to 10% VAT instead of
0% VAT as previously held in BIR Issuances from 1998 to 1990. Subsequently, VAT Ruling No. 59-92, dated
April 28, 1992, x x x were issued by [petitioner] reiterating the treatment of sales of gold to the Central Bank as
domestic sales, and expressly countenancing the Retroactive application of VAT Ruling No. 008-92 to all such
sales made starting January 1, 1988, ratiocinating, inter alia, that the mining companies will not be unduly
prejudiced by a retroactive application of VAT Ruling 008-92 because their claim for refund of input taxes are
not lost because the same are allowable on its output taxes on the sales of gold to Central Bank; on its output
taxes on other sales; and as deduction to income tax under Section 29 of the Tax Code.
On the basis of the aforequoted BIR Issuances, [petitioner] thus treated [respondent's] sales of gold to the
Central Bank as domestic sales subject to 10% VAT but allowed [respondent] a total tax credit of
onlyP81,991,810.91 which corresponded to VAT input taxes attributable to its direct export sales (CTA Decision

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
dated March 23, 1995; Page 87). Notwithstanding this finding of the [petitioner], [respondent] was not refunded
the said amounts of tax credit claimed. Thus, to suspend the running of the two-year prescriptive period (Sec.
106, NIRC) for claiming refunds or tax credits, [respondent] instituted x x x consolidated Petitions for Review
with the Court of Tax Appeals, praying for the issuance of "Tax Credit Certificates" for the following input VAT
credits attributable to export sales transacted during the taxable quarters or periods in question, to wit:
CTA Case
Amount of Tax
Taxable Period
Number
Credit Applied for
4429

P64,832,374.67

01JAN 88 to 31JUL88

4495

P43,614,437.88

01AUG 88to 31JAN89

4575

P23,294,221.77

01FEB 89 to 31JUL89

P131,741,034.22 = TOTAL
Significantly, the total amount of P131,741,034.22, as hereinabove computed, corresponds to the total input
VAT credits attributable to export sales made by [respondent] during the taxable periods set forth and therefore,
represents a combination of input tax attributable to both (1) direct export sales and (2) sales of gold to the
Central Bank. (Words in brackets added).3
In a decision dated March 23, 1995,4 the Court of Tax Appeals (CTA) dismissed respondent's aforementioned
consolidated Petitions for Review and denied the whole amount of its claim for tax credit of P131,741,034.22.
The tax court held that the alleged prejudice to respondent as a result of the retroactive application of VAT
Ruling No. 008-92 issued on January 23, 1992 to the latter's gold sales to the Central Bank (CB) from January
1, 1988 to July 31, 1989 is merely speculative and not actual and imminent so as to proscribe said Ruling's
retroactivity. The CTA further held that respondent would not be unduly prejudiced considering that VAT Ruling
No. 59-92 which mandates the retroactivity of VAT Ruling No. 008-92 likewise provides for alternative
remedies for the recovery of the input VAT.
Its motion for reconsideration having been denied by the tax court, respondent appealed to the CA whereat its
recourse was docketed as CA-G.R. SP No. 38413.
At first, the CA, in a decision dated May 30, 1996,5 affirmed in toto that of the tax court.
However, upon respondent's motion for reconsideration, the CA, in the herein assailed basic Resolution dated
May 10, 2000, reversed itself by setting aside its earlier decision of May 30, 1996 and ordering herein petitioner
to issue in respondent's favor a tax credit in the amount of P131,741,034.22, to wit:
IN THE LIGHT OF ALL THE FOREGOING, [respondent's] Motion for Reconsideration, x x x as
supplemented, is GRANTED. The Decision of this Court, dated May 30, 1996, affirming the Decision of the
Court of Tax Appeals x x x is SET ASIDE. The [petitioner Commissioner of Internal Revenue] is hereby
ordered to issue [respondent] a TAX CREDIT in the amount of P131,741,034.22.
SO ORDERED.
In its reversal action, the CA ruled that the tax credit in the total amount of P131,741,034.22 consists of
(1)P81,991,810.91, representing input VAT credits attributable to direct export sales subject to 0% VAT, and
(2)P49,749,223.31, representing input VAT attributable to sales of gold to the CB which were subject to 0%
when said sales were made in 1988 and 1989. In effect, the CA rejected the retroactive application of VAT
Ruling No. 008-92 to the subject gold sales of respondent because of the resulting prejudice to the latter despite
the existence of alternative modes for the recovery of the input VAT.
This time, it was petitioner who moved for a reconsideration but his motion was denied by the CA in its
subsequentResolution of October 16, 2000.
Hence, petitioner's present recourse assailing only that portion of the CA Resolution of May 10, 2000 allowing
respondent the amount of P49,749,223.31 as tax credit corresponding to the input VAT attributable to its sales of
gold to the CB for the period January 1, 1988 to July 31, 1989. It is petitioner's sole contention that the CA erred
in rejecting the retroactive application of VAT Ruling No. 008-92, dated January 23, 1992, subjecting sales of
gold to the CB to 10% VAT to respondent's sales of gold during the period from January 1, 1988 to July 31,
1989. Petitioner posits that, contrary to the ruling of the appellate court, the retroactive application of VAT
Ruling No. 008-92 to respondent would not prejudice the latter.
Initially, the Court, in its Resolution of January 24, 2001, 6 denied the Petition for lack of verification and
certification against forum shopping. However, upon petitioner's manifestation and motion for reconsideration,
the Court reinstated the Petition in its subsequent Resolution of March 5, 2001.7
The petition must have to fall.
We start with the well-entrenched rule that rulings and circulars, rules and regulations, promulgated by the
Commissioner of Internal Revenue, would have no retroactive application if to so apply them would be
prejudicial to the taxpayers.8
And this is as it should be, for the Tax Code, specifically Section 246 thereof, is explicit that:
x x x Any revocation, modification, or reversal of any rules and regulations promulgated in accordance with the
preceding section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the
taxpayers except in the following cases: a) 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; b) where the facts
subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the
ruling is based; or c) where the taxpayer acted in bad faith.
There is no question, therefore, as to the prohibition against the retroactive application of the revocation,
modification or reversal, as the case maybe, of previously established Bureau on Internal Revenue (BIR)
Rulings when the taxpayer's interest would be prejudiced thereby. But even if prejudicial to a taxpayer,
retroactive application is still allowed where: (a) a taxpayer deliberately misstates or omits material facts from
his return or any document required by the BIR; (b) where subsequent facts gathered by the BIR are materially
different from which the ruling is based; and (c) where the taxpayer acted in bad faith.
As admittedly, respondent's case does not fall under any of the above exceptions, what is crucial to determine
then is whether the retroactive application of VAT Ruling No. 008-92 would be prejudicial to respondent
Benguet Corporation.
The Court resolves the question in the affirmative.
Input VAT or input tax represents the actual payments, costs and expenses incurred by a VAT-registered taxpayer
in connection with his purchase of goods and services. Thus, "input tax" means the value-added tax paid by a
VAT-registered person/entity in the course of his/its trade or business on the importation of goods or local
purchases of goods or services from a VAT-registered person.9
On the other hand, when that person or entity sells his/its products or services, the VAT-registered taxpayer
generally becomes liable for 10% of the selling price as output VAT or output tax.10 Hence, "output tax" is the
value-added tax on the sale of taxable goods or services by any person registered or required to register under
Section 107 of the (old) Tax Code.11
The VAT system of taxation allows a VAT-registered taxpayer to recover its input VAT either by (1) passing on
the 10% output VAT on the gross selling price or gross receipts, as the case may be, to its buyers, or (2) if the
input tax is attributable to the purchase of capital goods or to zero-rated sales, by filing a claim for a refund or
tax credit with the BIR.12
Simply stated, a taxpayer subject to 10% output VAT on its sales of goods and services may recover its input
VAT costs by passing on said costs as output VAT to its buyers of goods and services but it cannot claim the
same as a refund or tax credit, while a taxpayer subject to 0% on its sales of goods and services may only
recover its input VAT costs by filing a refund or tax credit with the BIR.
Here, the claimed tax credit of input tax amounting to P49,749,223.31 represents the costs or expenses incurred
by respondent in connection with its gold production. Relying on BIR Rulings, specifically VAT Ruling No.
378-88, dated August 28, 1988, and VAT Ruling No. 59-88, dated December 14, 1988, both of which declared
that sales of gold to the CB are considered export sales subject to 0%, respondent sold gold to the CB from
January 1, 1988 to July 31, 1989 without passing on to the latter its input VAT costs, obviously intending to
obtain a refund or credit thereof from the BIR at the end of the taxable period. However, by the time respondent
applied for refund/credit of its input VAT costs, VAT Ruling No. 008-92 dated January 23, 1992, treating sales
of gold to the CB as domestic sales subject to 10% VAT, and VAT Ruling No. 059-92 dated April 28, 1992,
retroactively applying said VAT Ruling No. 008-92 to such sales made from January 1, 1988 onwards, were
issued. As a result, respondent's application for refund/credit was denied and, as likewise found by the CA, it
was even subsequently assessed deficiency output VAT on October 19, 1992 in the total amounts
of P252,283,241.95 for the year 1988, andP244,318,148.56 for the year 1989.13
Clearly, from the foregoing, the prejudice to respondent by the retroactive application of VAT Ruling No. 00892 to its sales of gold to the CB from January 1, 1988 to July 31, 1989 is patently evident.
Verily, by reason of the denial of its claim for refund/credit, respondent has been precluded from recovering its
input VAT costs attributable to its sales of gold to the CB during the period mentioned, for the following
reasons:
First, because respondent could not pass on to the CB the 10% output VAT which would be retroactively
imposed on said transactions, not having passed the same at the time the sales were made on the assumption that
said sales are subject to 0%, and, hence, maybe refunded or credited later. And second, because respondent
could not claim the input VAT costs as a refund/credit as it has been prevented such option, the sales in question
having been retroactively subjected to 10% VAT, ergo limiting recovery of said costs to the application of the
same against the output tax which will result therefrom.
Indeed, respondent stands to suffer substantial economic prejudice by the retroactive application of the VAT
Ruling in question.
But petitioner maintains otherwise, arguing that respondent will not be unduly prejudiced since there are still
other available remedies for it to recover its input VAT costs. Said remedies, so petitioner points out, are for
respondent to either (1) use said input taxes in paying its output taxes in connection with its other sales
transactions which are subject to the 10% VAT or (2) if there are no other sales transactions subject to 10% VAT,
treat the input VAT as cost and deduct the same from income for income tax purposes.

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
We are not persuaded.
The first remedy cannot be applied in this case. As correctly found by the CA, respondent has clearly shown
that it has no "other transactions" subject to 10% VAT, and petitioner has failed to prove the existence of such
"other transactions" against which to set off respondent's input VAT.14
Anent the second remedy, prejudice will still, indubitably, result because treating the input VAT as an income
tax deductible expense will yield only a partial and not full financial benefit of having the input VAT refunded
or used as a tax credit. We quote with approval the CA's observations in this respect, thus:
x x x even assuming that input VAT is still available for deduction, [respondent] still suffers prejudice. As a
zero-rated taxpayer (pursuant to the 1988 to 1990 BIR issuances), [respondent] could have claimed a cash
refund or tax credit of the input VAT in the amount of P49,749,223.31. If it had been allowed a cash refund or
tax credit, it could have used the full amount thereof to pay its other tax obligations (or, in the case of a cash
refund, to fund its operations). With VAT Ruling No. 059-92, [respondent] is precluded from claiming the cash
refund or tax credit and is limited to the so-called remedy of deducting the input VAT from gross income. But a
cash refund or tax credit is not the same as a tax deduction. A tax deduction has less benefits than a tax credit.
Consider the following differences;
2.42.1 A tax credit may be used to pay any national internal revenue tax liability. Section 104(b) of the Tax
Code states;
"(b) Excess output or input tax. xxx Any input tax attributable to xxx zero-rated sales by a VAT-registered
person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions
of Section 106."
On the other hand, a tax deduction may be used only against gross income for purposes of income tax. A tax
deduction is not allowed against other internal revenue taxes such as excise taxes, documentary stamp taxes,
and output VAT.
2.42.2 In terms of income tax, a tax deduction is only an expense item in computing income tax liabilities
(Sections 27 to 29, Tax Code) while a tax credit is a direct credit against final income tax due (Section 106[b],
Tax Code). This is illustrated in the example below:
Assume that in 1988, respondent had a gross income of P1,000,000,000 and deductible expenses in general
(such as salaries, utilities, transportation, fuel and costs of sale) of P500,000,000. Assume also that [respondent]
had input VAT of P131,741,034.22, the amount being claimed in the instant case. [Respondent's] income tax
liability, depending on whether it utilized the input tax as tax credit or tax deduction, would be as follows:
a. Tax credit
Gross Income (Section 28, Tax Code)

P1,000,000,000.00

Deductions (Section 29, Tax Code)

( 500,000,000.00)

Taxable Income (Section 27, Tax Code)

P 500,000.000.00

Tax rate (Section 24[a], Tax Code)

x 35%

Tax Payable

P 175,000,000.00

Tax Credit

(131,741,034.22)

Tax due

P 43,258,965.78

b. Tax deduction
Gross income (Section 28, Tax Code)

P1,000,000,000.00

Deductions
General (Section 29, Tax Code) P500,000,000.00
Input VAT (VAT Ruling No.
059-92)

P131,741,034.22 P 631,741,034.22)

Taxable income (Section 27, Tax Code)

P 368,258,966.78

Tax rate (Section 24[a], Tax Code)

x 35%

Tax payable

P 128,890,638.02

Tax Credit

Tax due

______________

P 128,890,638.02
Thus, if the input VAT of P131,741,034.22 were to be credited against the income tax due, the income tax
payable is only P43,258,965.78. On the other hand, if the input VAT were to be deducted from gross income

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
before arriving at the net income, the income tax payable is P128,890,638.02. This is almost three (3) times the
income tax payable if the input VAT were to be deducted from the income tax payable.
As can be seen from above, there is a substantial difference between a tax credit and a tax deduction. A tax
credit reduces tax liability while a tax deduction only reduces taxable income (emphasis supplied).
A tax credit of input VAT fully utilizes the entire amount of P131,741,034.22, since tax liability is reduced by
the said amount. A tax deduction is not fully utilized because the savings is only 35% or P46,109,361.98. In the
above case, therefore, the use of input VAT as a tax deduction results in a loss of 65% of the input VAT,
or P85,631,672.24, which [respondent] could have otherwise fully utilized as a tax credit.
xxx
xxx
xxx
x x x the deduction of an expense under Section 29 of the Tax Code is not tantamount to a recovery of the
expense. The deduction of a bad debt, for instance, does not result in the recovery of the debt. On the other
hand, a tax credit, because it can be fully utilized to reduce tax liability, is as good as cash and is thus effectively
a full recovery of the input VAT cost.15 (Emphasis in the original; Words in brackets supplied).
We may add that the prejudice which befell respondent is all the more highlighted by the fact that it has been
issued assessments for deficiency output VAT on the basis of the same sales of gold to the CB.
On a final note, the Court is fully cognizant of the well-entrenched principle that the Government is not
estopped from collecting taxes because of mistakes or errors on the part of its agents.16 But, like other principles
of law, this also admits of exceptions in the interest of justice and fair play, as where injustice will result to the
taxpayer.17
As this Court has said in ABS-CBN Broadcasting Corporation v. Court of Tax Appeals and the Commissioner of
Internal Revenue:18
The insertion of Sec. 338-A [now Sec. 246] into the National Internal Revenue Code x x x is indicative of
legislative intention to support the principle of good faith. In fact, in the United States x x x it has been held that
the Commissioner or Collector is precluded from adopting a position inconsistent with one previously taken
where injustice would result therefrom, or where there has been a misrepresentation to the taxpayer. [Word in
brackets supplied].
Here, when respondent sold gold to the CB, it relied on the formal assurances of the BIR, i.e., VAT Ruling No.
378-88 dated August 28, 1988 and VAT Ruling RMC No. 59-88 dated December 14, 1988, that such sales are
zero-rated. To retroact a later ruling VAT Ruling No. 008-92 - revoking the grant of zero-rating status to the
sales of gold to the CB and applying a new and contrary position that such sales are now subject to 10%, is
clearly inconsistent with justice and the elementary requirements of fair play.
Accordingly, we find that the CA did not commit a reversible error in holding that VAT Ruling No. 008-92
cannot be retroactively applied to respondent's sales of gold to the CB during the period January 1, 1988 to July
31, 1989, hence, it is entitled to tax credit in the amount of P49,749,223.31 attributable to such sales.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed CA Resolutions are AFFIRMED.
No costs.
SO ORDERED.

THIRD DIVISION

VAT
G.R. No. 153866

TAXATION 2
February 11, 2005

ATTY. BERNIE MENDOZA

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.
DECISION
PANGANIBAN, J.:
Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like herein
respondent -- are entities exempt from all internal revenue taxes and the implementing rules relevant thereto,
including the value-added taxes or VAT. Although export sales are not deemed exempt transactions, they are
nonetheless zero-rated. Hence, in the present case, the distinction between exempt entities and exempt
transactions has little significance, because the net result is that the taxpayer is not liable for the VAT.
Respondent, a VAT-registered enterprise, has complied with all requisites for claiming a tax refund of or credit
for the input VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and the Court of Appeals
did not err in ruling that it is entitled to such refund or credit.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the May 27, 2002
Decision2 of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision reads as
follows:
"WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit."3
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:
"As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange Commission
to do business in the Philippines, with principal office address at the new Cebu Township One, Special
Economic Zone, Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform the duties
of his office, including, among others, the duty to act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued PEZA
Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the manufacture of
recording components primarily used in computers for export. Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration Certification
No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting
documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for Review), was filed on 4
October 1999 with Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondents] claim for VAT refund.
"The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the
[petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of Petition for
Review in order to toll the running of the two-year prescriptive period.
"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

VAT
TAXATION 2
ATTY. BERNIE MENDOZA
1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary
investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and regulations, the [respondent]
has the burden of proof that the taxes sought to be refunded were erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:
"A claimant has the burden of proof to establish the factual basis of his or her claim for tax credit/refund."
4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer. This is due to the fact
that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is incumbent upon the
[respondent] to prove that it is indeed entitled to the refund/credit sought. Failure on the part of the [respondent]
to prove the same is fatal to its claim for tax credit. He who claims exemption must be able to justify his claim
by the clearest grant of organic or statutory law. An exemption from the common burden cannot be permitted to
exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA) registered
Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of Republic Act No. ([RA])
7916 in relation to Section 103 of the Tax Code, as amended. As [respondents] business is not subject to VAT,
the capital goods and services it alleged to have purchased are considered not used in VAT taxable business. As
such, [respondent] is not entitled to refund of input taxes on such capital goods pursuant to Section 4.106.1 of
Revenue Regulations No. ([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said
regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997 Tax Code on
filing of a written claim for refund within two (2) years from the date of payment of tax.
"On July 19, 2001, the Tax Court rendered a decision granting the claim for refund."4
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit certificate
(TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum represented the unutilized but
substantiated input VAT paid on capital goods purchased for the period covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal incentives under Executive
Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of those under both
Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was, therefore,
considered exempt only from the payment of income tax when it opted for the income tax holiday in lieu of the
5 percent preferential tax on gross income earned. As a VAT-registered entity, though, it was still subject to the
payment of other national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of RR 7-95
were applicable. Having paid the input VAT on the capital goods it purchased, respondent correctly filed the
administrative and judicial claims for its refund within the two-year prescriptive period. Such payments were -to the extent of the refundable value -- duly supported by VAT invoices or official receipts, and were not yet
offset against any output VAT liability.
Hence this Petition.5
Sole Issue
Petitioner submits this sole issue for our consideration:
"Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount of
P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period April
1, 1998 to June 30, 1999."6
The Courts Ruling

VAT
The Petition is unmeritorious.

TAXATION 2

ATTY. BERNIE MENDOZA

Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic zone,7 respondent is entitled to the fiscal
incentives and benefits8 provided for in either PD 669 or EO 226.10 It shall, moreover, enjoy all privileges,
benefits, advantages or exemptions under both Republic Act Nos. (RA) 722711 and 7844.12
Preferential Tax Treatment Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall not be
subject to internal revenue laws and regulations for raw materials, supplies, articles, equipment, machineries,
spare parts and wares, except those prohibited by law, brought into the zone to be stored, broken up, repacked,
assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed or used
directly or indirectly in such activities.13 Even so, respondent would enjoy a net-operating loss carry over;
accelerated depreciation; foreign exchange and financial assistance; and exemption from export taxes, local
taxes and licenses.14
Comparatively, the same exemption from internal revenue laws and regulations applies if EO 22615 is chosen.
Under this law, respondent shall further be entitled to an income tax holiday; additional deduction for labor
expense; simplification of customs procedure; unrestricted use of consigned equipment; access to a bonded
manufacturing warehouse system; privileges for foreign nationals employed; tax credits on domestic capital
equipment, as well as for taxes and duties on raw materials; and exemption from contractors taxes, wharfage
dues, taxes and duties on imported capital equipment and spare parts, export taxes, duties, imposts and fees,16
local taxes and licenses, and real property taxes.17
A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of raw
materials, capital and equipment18 -- is, ipso facto, also accorded to the zone19 under RA 7916. Furthermore,
the latter law -- notwithstanding other existing laws, rules and regulations to the contrary -- extends20 to that
zone the provision stating that no local or national taxes shall be imposed therein.21 No exchange control policy
shall be applied; and free markets for foreign exchange, gold, securities and future shall be allowed and
maintained.22 Banking and finance shall also be liberalized under minimum Bangko Sentral regulation with the
establishment of foreign currency depository units of local commercial banks and offshore banking units of
foreign banks.23
In the same vein, respondent benefits under RA 7844 from negotiable tax credits24 for locally-produced
materials used as inputs. Aside from the other incentives possibly already granted to it by the Board of
Investments, it also enjoys preferential credit facilities25 and exemption from PD 1853.26
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment.27 It is not
subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on capital goods is
an internal revenue tax from which petitioner as an entity is exempt. Although the transactions involving such
tax are not exempt, petitioner as a VAT-registered person,28 however, is entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every
importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter,
exchange or lease of goods or properties or on each rendition of services in the course of trade or business29 as
they pass along the production and distribution chain, the tax being limited only to the value added30 to such
goods, properties or services by the seller, transferor or lessor.31 It is an indirect tax that may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or services.32 As such, it should be
understood not in the context of the person or entity that is primarily, directly and legally liable for its payment,
but in terms of its nature as a tax on consumption.33 In either case, though, the same conclusion is arrived at.
The law34 that originally imposed the VAT in the country, as well as the subsequent amendments of that law,
has been drawn from the tax credit method.35 Such method adopted the mechanics and self-enforcement
features of the VAT as first implemented and practiced in Europe and subsequently adopted in New Zealand and

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ATTY. BERNIE MENDOZA
Canada.36 Under the present method that relies on invoices, an entity can credit against or subtract from the
VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.37
If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input taxes40 passed
on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess
has to be paid.41 If, however, the input taxes exceed the output taxes, the excess shall be carried over to the
succeeding quarter or quarters.42 Should the input taxes result from zero-rated or effectively zero-rated
transactions or from the acquisition of capital goods,43 any excess over the output taxes shall instead be
refunded44 to the taxpayer or credited45 against other internal revenue taxes.46
Zero-Rated and Effectively Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated
transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of services.47 The tax rate is set at
zero.48 When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The
seller of such transactions charges no output tax,49 but can claim a refund of or a tax credit certificate for the
VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of services51 to persons or
entities whose exemption under special laws or international agreements to which the Philippines is a signatory
effectively subjects such transactions to a zero rate.52 Again, as applied to the tax base, such rate does not yield
any tax chargeable against the purchaser. The seller who charges zero output tax on such transactions can also
claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that results
from either one of them is not.
Applying the destination principle53 to the exportation of goods, automatic zero rating54 is primarily intended
to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally
competitive by allowing the refund or credit of input taxes that are attributable to export sales.55 Effective zero
rating, on the contrary, is intended to benefit the purchaser who, not being directly and legally liable for the
payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.56 But in an
exemption there is only partial relief,57 because the purchaser is not allowed any tax refund of or credit for
input taxes paid.58
Exempt Transaction >and Exempt Party
The object of exemption from the VAT may either be the transaction itself or any of the parties to the
transaction.59
An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically
listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VATexempt or not -- of the party to the transaction.60 Indeed, such transaction is not subject to the VAT, but the
seller is not allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special
law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable
transactions become exempt from the VAT.61 Such party is also not subject to the VAT, but may be allowed a
tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed on by the
seller to the purchaser of the goods, properties or services.62 While the liability is imposed on one person, the
burden may be passed on to another. Therefore, if a special law merely exempts a party as a seller from its direct
liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of

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ATTY. BERNIE MENDOZA
the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this
principle to the case at bar, the purchase transactions entered into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT.63 However, the Tax Code provides that those
falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which respondent was
registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the
VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent,64 depending
again on the application of the destination principle.65
If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for use or
consumption outside the Philippines, these shall be subject to 0 percent.66 If entered into with a purchaser for
use or consumption in the Philippines, then these shall be subject to 10 percent,67 unless the purchaser is
exempt from the indirect burden of the VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption
under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate,68 because the ecozone
within which it is registered is managed and operated by the PEZA as a separate customs territory.69 This
means that in such zone is created the legal fiction of foreign territory.70 Under the cross-border principle71 of
the VAT system being enforced by the Bureau of Internal Revenue (BIR),72 no VAT shall be imposed to form
part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If
exports of goods and services from the Philippines to a foreign country are free of the VAT,73 then the same
rule holds for such exports from the national territory -- except specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered
exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-registered person in the
customs territory are deemed imports from a foreign country.74 An ecozone -- indubitably a geographical
territory of the Philippines -- is, however, regarded in law as foreign soil.75 This legal fiction is necessary to
give meaningful effect to the policies of the special law creating the zone.76 If respondent is located in an
export processing zone77 within that ecozone, sales to the export processing zone, even without being actually
exported, shall in fact be viewed as constructively exported under EO 226.78 Considered as export sales,79
such purchase transactions by respondent would indeed be subject to a zero rate.80
Tax Exemptions Broad and Express
Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue
laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on
consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to
another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly
made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos
distinguere debemus. Where the law does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that "no taxes, local and national, shall be imposed on business establishments operating
within the ecozone."81 Since this law does not exclude the VAT from the prohibition, it is deemed included.
Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a
thing not being excepted must be regarded as coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on
and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law. That no VAT shall be
imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no
VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per
obliquum. When anything is prohibited directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real property
taxes that presently are imposed on land owned by developers.82 This similar and repeated prohibition is an

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ATTY. BERNIE MENDOZA
unambiguous ratification of the laws intent in not imposing local or national taxes on business enterprises
within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject to x x x
internal revenue laws and regulations" under PD 6683 -- the original charter of PEZA (then EPZA) that was
later amended by RA 7916.84 No provisions in the latter law modify such exemption.
Although this exemption puts the government at an initial disadvantage, the reduced tax collection ultimately
redounds to the benefit of the national economy by enticing more business investments and creating more
employment opportunities.85
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those prohibited
by law -- "shall not be subject to x x x internal revenue laws and regulations x x x"86 if brought to the ecozones
restricted area87 for manufacturing by registered export enterprises,88 of which respondent is one. These rules
also apply to all enterprises registered with the EPZA prior to the effectivity of such rules.89
Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) under EO 226
patently enjoy exemption from national internal revenue taxes on imported capital equipment reasonably
needed and exclusively used for the manufacture of their products;91 on required supplies and spare part for
consigned equipment;92 and on foreign and domestic merchandise, raw materials, equipment and the like -except those prohibited by law -- brought into the zone for manufacturing.93 In addition, they are given credits
for the value of the national internal revenue taxes imposed on domestic capital equipment also reasonably
needed and exclusively used for the manufacture of their products,94 as well as for the value of such taxes
imposed on domestic raw materials and supplies that are used in the manufacture of their export products and
that form part thereof.95
Sixth, the exemption from local and national taxes granted under RA 722796 are ipso facto accorded to
ecozones.97 In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in favor of
the ecozone.98
And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the production
of export goods,99 and for locally produced raw materials, capital equipment and spare parts used by exporters
of non-traditional products100 -- shall also be continuously enjoyed by similar exporters within the ecozone.101
Indeed, the latter exporters are likewise entitled to such tax exemptions and credits.
Tax Refund as Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi juris102 against the taxpayer103 and
liberally in favor of the taxing authority.104
Tax refunds are in the nature of such exemptions.105 Accordingly, the claimants of those refunds bear the
burden of proving the factual basis of their claims;106 and of showing, by words too plain to be mistaken, that
the legislature intended to exempt them.107 In the present case, all the cited legal provisions are teeming with
life with respect to the grant of tax exemptions too vivid to pass unnoticed. In addition, respondent easily meets
the challenge.
Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The end
result, however, is that it is not subject to the VAT. The non-taxability of transactions that are otherwise taxable
is merely a necessary incident to the tax exemption conferred by law upon it as an entity, not upon the
transactions themselves.108 Nonetheless, its exemption as an entity and the non-exemption of its transactions
lead to the same result for the following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to execute or
administer such laws109 will have to be adopted. Their prior tax issuances have held inconsistent positions
brought about by their probable failure to comprehend and fully appreciate the nature of the VAT as a tax on
consumption and the application of the destination principle.110 Revenue Memorandum Circular No. (RMC)
74-99, however, now clearly and correctly provides that any VAT-registered suppliers sale of goods, property or
services from the customs territory to any registered enterprise operating in the ecozone -- regardless of the
class or type of the latters PEZA registration -- is legally entitled to a zero rate.111
Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very soul.

VAT

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ATTY. BERNIE MENDOZA

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of export
processing zones, seeks "to encourage and promote foreign commerce as a means of x x x strengthening our
export trade and foreign exchange position, of hastening industrialization, of reducing domestic unemployment,
and of accelerating the development of the country."112
RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special economic
zones, "the government shall actively encourage, promote, induce and accelerate a sound and balanced
industrial, economic and social development of the country x x x through the establishment, among others, of
special economic zones x x x that shall effectively attract legitimate and productive foreign investments."113
Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shall x x x meet the
tests of international competitiveness[,] accelerate development of less developed regions of the country[,] and
result in increased volume and value of exports for the economy."114 Fiscal incentives that are cost-efficient
and simple to administer shall be devised and extended to significant projects "to compensate for market
imperfections, to reward performance contributing to economic development,"115 and "to stimulate the
establishment and assist initial operations of the enterprise."116
Wisely accorded to ecozones created under RA 7916117 was the governments policy -- spelled out earlier in
RA 7227 -- of converting into alternative productive uses118 the former military reservations and their
extensions,119 as well as of providing them incentives120 to enhance the benefits that would be derived from
them121 in promoting economic and social development.122
Finally, under RA 7844, the State declares the need "to evolve export development into a national effort"123 in
order to win international markets. By providing many export and tax incentives,124 the State is able to drive
home the point that exporting is indeed "the key to national survival and the means through which the economic
goals of increased employment and enhanced incomes can most expeditiously be achieved."125
The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase economic activity; and
x x x create a robust environment for business to enable firms to compete better in the regional as well as the
global market."126 After all, international competitiveness requires economic and tax incentives to lower the
cost of goods produced for export. State actions that affect global competition need to be specific and selective
in the pricing of particular goods or services.127
All these statutory policies are congruent to the constitutional mandates of providing incentives to needed
investments,128 as well as of promoting the preferential use of domestic materials and locally produced goods
and adopting measures to help make these competitive.129 Tax credits for domestic inputs strengthen backward
linkages. Rightly so, "the rule of law and the existence of credible and efficient public institutions are essential
prerequisites for sustainable economic development."130
VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law.131 Petitioner alleges that respondent did
register for VAT purposes with the appropriate Revenue District Office. However, it is now too late in the day
for petitioner to challenge the VAT-registered status of respondent, given the latters prior representation before
the lower courts and the mode of appeal taken by petitioner before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal revenue
laws and regulations the equipment -- including capital goods -- that registered enterprises will use, directly or
indirectly, in manufacturing.132 EO 226 even reiterates this privilege among the incentives it gives to such
enterprises.133 Petitioner merely asserts that by virtue of the PEZA registration alone of respondent, the latter is
not subject to the VAT. Consequently, the capital goods and services respondent has purchased are not
considered used in the VAT business, and no VAT refund or credit is due.134 This is a non sequitur. By the
VATs very nature as a tax on consumption, the capital goods and services respondent has purchased are subject
to the VAT, although at zero rate. Registration does not determine taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts. Having failed to present evidence to
support its contentions against the income tax holiday privilege of respondent,135 petitioner is deemed to have
conceded. It is a cardinal rule that "issues and arguments not adequately and seriously brought below cannot be
raised for the first time on appeal."136 This is a "matter of procedure"137 and a "question of fairness."138

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ATTY. BERNIE MENDOZA
Failure to assert "within a reasonable time warrants a presumption that the party entitled to assert it either has
abandoned or declined to assert it."139
The BIR regulations additionally requiring an approved prior application for effective zero rating140 cannot
prevail over the clear VAT nature of respondents transactions. The scope of such regulations is not "within the
statutory authority x x x granted by the legislature.141
First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to
do any more than interpret the latter.142 The courts will not countenance one that overrides the statute it seeks
to apply and implement.143
Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under
our VAT law requires an additional application to be made for such taxpayers transactions to be considered
effectively zero-rated. An effectively zero-rated transaction does not and cannot become exempt simply because
an application therefor was not made or, if made, was denied. To allow the additional requirement is to give
unfettered discretion to those officials or agents who, without fluid consideration, are bent on denying a valid
application. Moreover, the State can never be estopped by the omissions, mistakes or errors of its officials or
agents.144
Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity
in the performance of official duty.145 Respondents registration carries with it the presumption that, in the
absence of contradictory evidence, an application for effective zero rating was also filed and approval thereof
given. Besides, it is also presumed that the law has been obeyed146 by both the administrative officials and the
applicant.
Third, even though such an application was not made, all the special laws we have tackled exempt respondent
not only from internal revenue laws but also from the regulations issued pursuant thereto. Leniency in the
implementation of the VAT in ecozones is an imperative, precisely to spur economic growth in the country and
attain global competitiveness as envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing requirements,147 is sufficient for the effective
zero rating of the transactions of a taxpayer. The nature of its business and transactions can easily be perused
from, as already clearly indicated in, its VAT registration papers and photocopied documents attached thereto.
Hence, its transactions cannot be exempted by its mere failure to apply for their effective zero rating. Otherwise,
their VAT exemption would be determined, not by their nature, but by the taxpayers negligence -- a result not at
all contemplated. Administrative convenience cannot thwart legislative mandate.
Tax Refund or Credit in Order
Having determined that respondents purchase transactions are subject to a zero VAT rate, the tax refund or
credit is in order.
As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO 226 over
those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5 percent preferential tax
regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,148 for EO
226149 also has provisions to contend with. These two regimes are in fact incompatible and cannot be availed
of simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the PEZA law
exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of income tax
for a certain number of years, depending on its registration as a pioneer or a non-pioneer enterprise. Besides, the
remittance of the aforesaid 5 percent of gross income earned in lieu of local and national taxes imposable upon
business establishments within the ecozone cannot outrightly determine a VAT exemption. Being subject to
VAT, payments erroneously collected thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916, Section 24
thereof does not preclude the VAT. One can, therefore, counterargue that such provision merely exempts
respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on consumption, not on

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ATTY. BERNIE MENDOZA
business. Although respondent as an entity is exempt, the transactions it enters into are not necessarily so. The
VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited.
Compliance with All Requisites for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT refund
or credit.150
First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in which
this Court held that the petitioner therein was registered as a non-VAT taxpayer.151 Hence, for being merely
VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have
not been offset against any output taxes. Although enterprises registered with the BOI after December 31, 1994
would no longer enjoy the tax credit incentives on domestic capital equipment -- as provided for under Article
39(d), Title III, Book I of EO 226152 -- starting January 1, 1996, respondent would still have the same benefit
under a general and express exemption contained in both Article 77(1), Book VI of EO 226; and Section 12,
paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones from
national and local taxes, but also to grant them tax credits. This fact was revealed by the sponsorship speeches
in Congress during the second reading of House Bill No. 14295, which later became RA 7916, as shown below:
"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local taxes;
x x x tax credit for locally-sourced inputs x x x."
xxxxxxxxx
"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment
conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x x x tax
credits for locally sourced inputs x x x."153
And third, no question as to either the filing of such claims within the prescriptive period or the validity of the
VAT returns has been raised. Even if such a question were raised, the tax exemption under all the special laws
cited above is broad enough to cover even the enforcement of internal revenue laws, including prescription.154
Summary
To summarize, special laws expressly grant preferential tax treatment to business establishments registered and
operating within an ecozone, which by law is considered as a separate customs territory. As such, respondent is
exempt from all internal revenue taxes, including the VAT, and regulations pertaining thereto. It has opted for
the income tax holiday regime, instead of the 5 percent preferential tax regime. As a matter of law and
procedure, its registration status entitling it to such tax holiday can no longer be questioned. Its sales
transactions intended for export may not be exempt, but like its purchase transactions, they are zero-rated. No
prior application for the effective zero rating of its transactions is necessary. Being VAT-registered and having
satisfactorily complied with all the requisites for claiming a tax refund of or credit for the input VAT paid on
capital goods purchased, respondent is entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to costs.
SO ORDERED.

P.S VERY LONG AND VOLUMINOUS SEPARATE CONCURRING/DISSENTING OPINIONS


EN BANC

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ATTY. BERNIE MENDOZA
G.R. No. 168056 September 1, 2005
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED
VINCENT S. ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY
OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER
OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondent.
x-------------------------x
G.R. No. 168207
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M.
LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEA III, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF
FINANCE, GUILLERMO L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE, Respondent.
x-------------------------x
G.R. No. 168461
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO;
PETRON DEALERS ASSOCIATION represented by its President, RUTH E. BARBIBI; ASSOCIATION OF
CALTEX DEALERS OF THE PHILIPPINES represented by its President, MERCEDITAS A. GARCIA;
ROSARIO ANTONIO doing business under the name and style of "ANB NORTH SHELL SERVICE
STATION"; LOURDES MARTINEZ doing business under the name and style of "SHELL GATE N.
DOMINGO"; BETHZAIDA TAN doing business under the name and style of "ADVANCE SHELL STATION";
REYNALDO P. MONTOYA doing business under the name and style of "NEW LAMUAN SHELL SERVICE
STATION"; EFREN SOTTO doing business under the name and style of "RED FIELD SHELL SERVICE
STATION"; DONICA CORPORATION represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI
doing business under the name and style of "R&R PETRON STATION"; PETER M. UNGSON doing business
under the name and style of "CLASSIC STAR GASOLINE SERVICE STATION"; MARIAN SHEILA A. LEE
doing business under the name and style of "NTE GASOLINE & SERVICE STATION"; JULIAN CESAR P.
POSADAS doing business under the name and style of "STARCARGA ENTERPRISES"; ADORACION
MAEBO doing business under the name and style of "CMA MOTORISTS CENTER"; SUSAN M.
ENTRATA doing business under the name and style of "LEONAS GASOLINE STATION and SERVICE
CENTER"; CARMELITA BALDONADO doing business under the name and style of "FIRST CHOICE
SERVICE CENTER"; MERCEDITAS A. GARCIA doing business under the name and style of "LORPED
SERVICE CENTER"; RHEAMAR A. RAMOS doing business under the name and style of "RJRAM PTT GAS
STATION"; MA. ISABEL VIOLAGO doing business under the name and style of "VIOLAGO-PTT SERVICE
CENTER"; MOTORISTS HEART CORPORATION represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; MOTORISTS HARVARD CORPORATION represented by its Vice-President
for Operations, JOSELITO F. FLORDELIZA; MOTORISTS HERITAGE CORPORATION represented by its
Vice-President for Operations, JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD OIL CORPORATION
represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; ROMEO MANUEL doing
business under the name and style of "ROMMAN GASOLINE STATION"; ANTHONY ALBERT CRUZ III
doing business under the name and style of "TRUE SERVICE STATION", Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, Respondent.
x-------------------------x
G.R. No. 168463
FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA,
RODOLFO G. PLAZA, DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C.
AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL,
MUJIV S. HATAMAN, RENATO B. MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL. GUINGONA III,
RUY ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A. CASIO, Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in his
capacity as Commissioner of Internal Revenue, and EDUARDO R. ERMITA, in his capacity as Executive
Secretary, Respondent.
x-------------------------x
G.R. No. 168730
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner,
vs.

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ATTY. BERNIE MENDOZA
HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO TEVES, in
his capacity as Secretary of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC Commissioner
of the Bureau of Internal Revenue; and HON. ALEXANDER AREVALO, in his capacity as the OIC
Commissioner of the Bureau of Customs, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the interest of all, should be borne by everyone, and the
more man enjoys the advantages of society, the more he ought to hold himself honored in contributing to those
expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments
for health workers, and wider coverage for full value-added tax benefits these are the reasons why Republic
Act No. 9337 (R.A. No. 9337)1 was enacted. Reasons, the wisdom of which, the Court even with its extensive
constitutional power of review, cannot probe. The petitioners in these cases, however, question not only the
wisdom of the law, but also perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners
failed to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate
Bill No. 1950.
House Bill No. 35552 was introduced on first reading on January 7, 2005. The House Committee on Ways and
Means approved the bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D. Singson
introduced on August 8, 2004. The President certified the bill on January 7, 2005 for immediate enactment. On
January 27, 2005, the House of Representatives approved the bill on second and third reading.
House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F.
Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is House Bill No. 3555.
The House Committee on Ways and Means approved the bill on February 2, 2005. The President also certified it
as urgent on February 8, 2005. The House of Representatives approved the bill on second and third reading on
February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on March 7, 2005, "in
substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos. 3555 and
3705." Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were
both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified
the bill on March 11, 2005, and was approved by the Senate on second and third reading on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a
committee conference on the disagreeing provisions of the proposed bills.
Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill No.
3705, and Senate Bill No. 1950, "after having met and discussed in full free and conference," recommended the
approval of its report, which the Senate did on May 10, 2005, and with the House of Representatives agreeing
thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to the
President, who signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said date came, the Court issued a temporary
restraining order, effective immediately and continuing until further orders, enjoining respondents from
enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through Mr.
Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary restraining order on July 1,
2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little
background. You know when the law took effect on July 1, 2005, the Court issued a TRO at about 5 oclock in
the afternoon. But before that, there was a lot of complaints aired on television and on radio. Some people in a
gas station were complaining that the gas prices went up by 10%. Some people were complaining that their
electric bill will go up by 10%. Other times people riding in domestic air carrier were complaining that the
prices that theyll have to pay would have to go up by 10%. While all that was being aired, per your
presentation and per our own understanding of the law, thats not true. Its not true that the e-vat law necessarily
increased prices by 10% uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted the Petroleum
companies some subsidy . . . interrupted

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ATTY. BERNIE MENDOZA
J. PANGANIBAN : Thats correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise
Tax and the import duties. That is why, it is not correct to say that the VAT as to petroleum dealers increased
prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the EVat tax. If you consider the excise tax and the import duties, the Net Tax would probably be in the neighborhood
of 7%? We are not going into exact figures I am just trying to deliver a point that different industries, different
products, different services are hit differently. So its not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a
Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a mitigating measure. So,
therefore, there is no justification to increase the fares by 10% at best 7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining on that first day, were being
increased arbitrarily by 10%. And thats one reason among many others this Court had to issue TRO because of
the confusion in the implementation. Thats why we added as an issue in this case, even if its tangentially taken
up by the pleadings of the parties, the confusion in the implementation of the E-vat. Our people were subjected
to the mercy of that confusion of an across the board increase of 10%, which you yourself now admit and I
think even the Government will admit is incorrect. In some cases, it should be 3% only, in some cases it should
be 6% depending on these mitigating measures and the location and situation of each product, of each service,
of each company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending the clarification of all
these and we wish the government will take time to clarify all these by means of a more detailed implementing
rules, in case the law is upheld by this Court. . . .6
The Court also directed the parties to file their respective Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition
on May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a
10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6
imposes a 10% VAT on sale of services and use or lease of properties. These questioned provisions contain a
uniform provisoauthorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT
rate to 12%, effective January 1, 2006, after any of the following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been
satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds
two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent
(1 %).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive
authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on the
ground that it amounts to an undue delegation of legislative power, petitioners also contend that the increase in
the VAT rate to 12% contingent on any of the two conditions being satisfied violates the due process clause
embodied in Article III, Section 1 of the Constitution, as it imposes an unfair and additional tax burden on the
people, in that: (1) the 12% increase is ambiguous because it does not state if the rate would be returned to the
original 10% if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are
unsure of the applicable VAT rate from year to year; and (3) the increase in the VAT rate, which is supposed to
be an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year,
should only be based on fiscal adequacy.

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ATTY. BERNIE MENDOZA
Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral
Conference Committee is a violation of the "no-amendment rule" upon last reading of a bill laid down in Article
VI, Section 26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers,
Inc.,et al., assailing the following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall
be amortized over a 60-month period, if the acquisition, excluding the VAT components, exceeds One Million
Pesos (P1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to be
credited against the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political
subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on gross
payments of goods and services, which are subject to 10% VAT under Sections 106 (sale of goods and
properties) and 108 (sale of services and use or lease of properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and
confiscatory.
Petitioners argument is premised on the constitutional right of non-deprivation of life, liberty or property
without due process of law under Article III, Section 1 of the Constitution. According to petitioners, the
contested sections impose limitations on the amount of input tax that may be claimed. Petitioners also argue that
the input tax partakes the nature of a property that may not be confiscated, appropriated, or limited without due
process of law. Petitioners further contend that like any other property or property right, the input tax credit may
be transferred or disposed of, and that by limiting the same, the government gets to tax a profit or value-added
even if there is no profit or value-added.
Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law
under Article III, Section 1 of the Constitution, as the limitation on the creditable input tax if: (1) the entity has a
high ratio of input tax; or (2) invests in capital equipment; or (3) has several transactions with the government,
is not based on real and substantial differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1)
of the Constitution, and that it is the smaller businesses with higher input tax to output tax ratio that will suffer
the consequences thereof for it wipes out whatever meager margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petition
forcertiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of
Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions
present in Senate Bill No. 1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125,7 148, 151,
236, 237 and 288, which were present in Senate Bill No. 1950, violates Article VI, Section 24(1) of the
Constitution, which provides that all appropriation, revenue or tariff bills shall originate exclusively in the
House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July 20,
2005, alleging unconstitutionality of the law on the ground that the limitation on the creditable input tax in
effect allows VAT-registered establishments to retain a portion of the taxes they collect, thus violating the
principle that tax collection and revenue should be solely allocated for public purposes and expenditures.
Petitioner Garcia further claims that allowing these establishments to pass on the tax to the consumers is
inequitable, in violation of Article VI, Section 28(1) of the Constitution.
RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents
contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners failed to cast doubt on its
validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral
proceedings, exclusive origination of revenue measures and the power of the Senate concomitant thereto, have
already been settled. With regard to the issue of undue delegation of legislative power to the President,
respondents contend that the law is complete and leaves no discretion to the President but to increase the rate to
12% once any of the two conditions provided therein arise.
Respondents also refute petitioners argument that the increase to 12%, as well as the 70% limitation on the
creditable input tax, the 60-month amortization on the purchase or importation of capital goods

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ATTY. BERNIE MENDOZA
exceedingP1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, and
confiscatory, and that it violates the constitutional principle on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal reform agenda. A
reform in the value-added system of taxation is the core revenue measure that will tilt the balance towards a
sustainable macroeconomic environment necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12
of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT), as
the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or
properties and services.8 Being an indirect tax on expenditure, the seller of goods or services may pass on the
amount of tax paid to the buyer,9 with the seller acting merely as a tax collector.10 The burden of VAT is
intended to fall on the immediate buyers and ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages
in, without transferring the burden to someone else.11 Examples are individual and corporate income taxes,
transfer taxes, and residence taxes.12
In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different
mode. Prior to 1978, the system was a single-stage tax computed under the "cost deduction method" and was
payable only by the original sellers. The single-stage system was subsequently modified, and a mixture of the
"cost deduction method" and "tax credit method" was used to determine the value-added tax payable.13 Under
the "tax credit method," 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.14
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system
was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the "tax credit method."15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,16 R.A. No. 8241 or the Improved VAT
Law,17 R.A. No. 8424 or the Tax Reform Act of 1997,18 and finally, the presently beleaguered R.A. No. 9337,
also referred to by respondents as the VAT Reform Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded its
authority by:
1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax;
and
4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition
to the value-added tax.
Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.
It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative
body for, as unerringly elucidated by Justice Story, "[i]f the power did not exist, it would be utterly
impracticable to transact the business of the nation, either at all, or at least with decency, deliberation,
and order."19Thus, Article VI, Section 16 (3) of the Constitution provides that "each House may determine the

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ATTY. BERNIE MENDOZA
rules of its proceedings." Pursuant to this inherent constitutional power to promulgate and implement its own
rules of procedure, the respective rules of each house of Congress provided for the creation of a Bicameral
Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:
Sec. 88. Conference Committee. In the event that the House does not agree with the Senate on the amendment
to any bill or joint resolution, the differences may be settled by the conference committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to and support
the House Bill. If the differences with the Senate are so substantial that they materially impair the House Bill,
the panel shall report such fact to the House for the latters appropriate action.
Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed, sufficiently explicit
statement of the changes in or amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the Conference Committee Report prior to the voting
thereon. The House shall vote on the Conference Committee Report in the same manner and procedure as it
votes on a bill on third and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of any
bill or joint resolution, the differences shall be settled by a conference committee of both Houses which shall
meet within ten (10) days after their composition. The President shall designate the members of the Senate
Panel in the conference committee with the approval of the Senate.
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes
in, or amendments to the subject measure, and shall be signed by a majority of the members of each House
panel, voting separately.
A comparative presentation of the conflicting House and Senate provisions and a reconciled version thereof
with the explanatory statement of the conference committee shall be attached to the report.
...
The creation of such conference committee was apparently in response to a problem, not addressed by any
constitutional provision, where the two houses of Congress find themselves in disagreement over changes or
amendments introduced by the other house in a legislative bill. Given that one of the most basic powers of the
legislative branch is to formulate and implement its own rules of proceedings and to discipline its members,
may the Court then delve into the details of how Congress complies with its internal rules or how it conducts its
business of passing legislation? Note that in the present petitions, the issue is not whether provisions of the rules
of both houses creating the bicameral conference committee are unconstitutional, but whether the bicameral
conference committee has strictly complied with the rules of both houses, thereby remaining within the
jurisdiction conferred upon it by Congress.
In the recent case of Farias vs. The Executive Secretary,20 the Court En Banc, unanimously reiterated and
emphasized its adherence to the "enrolled bill doctrine," thus, declining therein petitioners plea for the Court to
go behind the enrolled copy of the bill. Assailed in said case was Congresss creation of two sets of bicameral
conference committees, the lack of records of said committees proceedings, the alleged violation of said
committees of the rules of both houses, and the disappearance or deletion of one of the provisions in the
compromise bill submitted by the bicameral conference committee. It was argued that such irregularities in the
passage of the law nullified R.A. No. 9006, or the Fair Election Act.
Striking down such argument, the Court held thus:
Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate President and
the certification of the Secretaries of both Houses of Congress that it was passed are conclusive of its due
enactment. A review of cases reveals the Courts consistent adherence to the rule. The Court finds no reason
to deviate from the salutary rule in this case where the irregularities alleged by the petitioners mostly
involved the internal rules of Congress, e.g., creation of the 2nd or 3rd Bicameral Conference Committee
by the House. This Court is not the proper forum for the enforcement of these internal rules of Congress,
whether House or Senate. Parliamentary rules are merely procedural and with their observance the
courts have no concern. Whatever doubts there may be as to the formal validity of Rep. Act No. 9006
must be resolved in its favor. The Court reiterates its ruling in Arroyo vs. De Venecia, viz.:
But the cases, both here and abroad, in varying forms of expression, all deny to the courts the power to
inquire into allegations that, in enacting a law, a House of Congress failed to comply with its own rules, in
the absence of showing that there was a violation of a constitutional provision or the rights of private
individuals. In Osmea v. Pendatun, it was held: "At any rate, courts have declared that the rules adopted by
deliberative bodies are subject to revocation, modification or waiver at the pleasure of the body adopting
them. And it has been said that "Parliamentary rules are merely procedural, and with their observance,
the courts have no concern. They may be waived or disregarded by the legislative body." Consequently,
"mere failure to conform to parliamentary usage will not invalidate the action (taken by a deliberative
body) when the requisite number of members have agreed to a particular measure."21(Emphasis supplied)

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ATTY. BERNIE MENDOZA
The foregoing declaration is exactly in point with the present cases, where petitioners allege irregularities
committed by the conference committee in introducing changes or deleting provisions in the House and Senate
bills. Akin to the Farias case,22 the present petitions also raise an issue regarding the actions taken by the
conference committee on matters regarding Congress compliance with its own internal rules. As stated earlier,
one of the most basic and inherent power of the legislature is the power to formulate rules for its proceedings
and the discipline of its members. Congress is the best judge of how it should conduct its own business
expeditiously and in the most orderly manner. It is also the sole
concern of Congress to instill discipline among the members of its conference committee if it believes that said
members violated any of its rules of proceedings. Even the expanded jurisdiction of this Court cannot apply to
questions regarding only the internal operation of Congress, thus, the Court is wont to deny a review of the
internal proceedings of a co-equal branch of government.
Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of Finance,23the
Court already made the pronouncement that "[i]f a change is desired in the practice [of the Bicameral
Conference Committee] it must be sought in Congress since this question is not covered by any
constitutional provision but is only an internal rule of each house." 24 To date, Congress has not seen it fit to
make such changes adverted to by the Court. It seems, therefore, that Congress finds the practices of the
bicameral conference committee to be very useful for purposes of prompt and efficient legislative action.
Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the bicameral
conference committees, the Court deems it necessary to dwell on the issue. The Court observes that there was a
necessity for a conference committee because a comparison of the provisions of House Bill Nos. 3555 and 3705
on one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed disagreements. As pointed
out in the petitions, said disagreements were as follows:
House Bill No. 3555
With regard to "Stand-By Authority" in favor of President
Provides for 12% VAT on every sale of goods or properties (amending Sec. 106 of NIRC); 12% VAT on importation of g
use or lease of properties (amending Sec. 108 of NIRC)
With regard to the "no pass-on" provision
No similar provision

With regard to 70% limit on input tax credit


Provides that the input tax credit for capital goods on which a VAT has been paid shall be equally distributed over 5 year
and services other than capital goods shall not exceed 5% of the total amount of such goods and services; and for person
exceed 11% of the total amount of goods purchased.
With regard to amendments to be made to NIRC provisions regarding income and excise
taxes
No similar provision
No similar provision
Provided for amendments to
several NIRC provisions
regarding corporate income,
percentage, franchise and
excise taxes
The disagreements between the provisions in the House bills and the Senate bill were with regard to (1) what
rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity generation, transmission and
distribution companies should not be passed on to consumers, as proposed in the Senate bill, or both the VAT
imposed on electricity generation, transmission and distribution companies and the VAT imposed on sale of
petroleum products should not be passed on to consumers, as proposed in the House bill; (3) in what manner
input tax credits should be limited; (4) and whether the NIRC provisions on corporate income taxes, percentage,
franchise and excise taxes should be amended.
There being differences and/or disagreements on the foregoing provisions of the House and Senate bills, the
Bicameral Conference Committee was mandated by the rules of both houses of Congress to act on the same by
settling said differences and/or disagreements. The Bicameral Conference Committee acted on the disagreeing
provisions by making the following changes:
1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference
Committee Report that the Bicameral Conference Committee tried to bridge the gap in the difference between
the 10% VAT rate proposed by the Senate, and the various rates with 12% as the highest VAT rate proposed by
the House, by striking a compromise whereby the present 10% VAT rate would be retained until certain
conditions arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP) of the
previous year exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year

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ATTY. BERNIE MENDOZA
exceeds 1%, when the President, upon recommendation of the Secretary of Finance shall raise the rate of VAT
to 12% effective January 1, 2006.
2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission and
distribution companies should not be passed on to consumers or whether both the VAT imposed on electricity
generation, transmission and distribution companies and the VAT imposed on sale of petroleum products may be
passed on to consumers, the Bicameral Conference Committee chose to settle such disagreement by altogether
deleting from its Report any no pass-on provision.
3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral
Conference Committee decided to adopt the position of the House by putting a limitation on the amount of input
tax that may be credited against the output tax, although it crafted its own language as to the amount of the
limitation on input tax credits and the manner of computing the same by providing thus:
(A) Creditable Input Tax. . . .
...
Provided, The input tax on goods purchased or imported in a calendar month for use in trade or business for
which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding
the VAT component thereof, exceeds one million Pesos (P1,000,000.00): PROVIDED, however, that if the
estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes, then the
input VAT shall be spread over such shorter period: . . .
(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters: PROVIDED that the input tax inclusive of input VAT carried
over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of
the output VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zero-rated sales by a VATregistered person may at his option be refunded or credited against other internal revenue taxes, . . .
4. With regard to the amendments to other provisions of the NIRC on corporate income tax, franchise,
percentage and excise taxes, the conference committee decided to include such amendments and basically
adopted the provisions found in Senate Bill No. 1950, with some changes as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral
Conference Committee is mandated to settle the differences between the disagreeing provisions in the House
bill and the Senate bill. The term "settle" is synonymous to "reconcile" and "harmonize."25 To reconcile or
harmonize disagreeing provisions, the Bicameral Conference Committee may then (a) adopt the specific
provisions of either the House bill or Senate bill, (b) decide that neither provisions in the House bill or the
provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the disagreeing
provisions.
In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing provisions
were meant only to reconcile and harmonize the disagreeing provisions for it did not inject any idea or intent
that is wholly foreign to the subject embraced by the original provisions.
The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the Senate is
retained until such time that certain conditions arise when the 12% VAT wanted by the House shall be imposed,
appears to be a compromise to try to bridge the difference in the rate of VAT proposed by the two houses of
Congress. Nevertheless, such compromise is still totally within the subject of what rate of VAT should be
imposed on taxpayers.
The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the Bicameral
Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel, explained the
reason for deleting the no pass-on provision in this wise:
. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no sector
should be a beneficiary of legislative grace, neither should any sector be discriminated on. The VAT is an
indirect tax. It is a pass on-tax. And lets keep it plain and simple. Lets not confuse the bill and put a no passon provision. Two-thirds of the world have a VAT system and in this two-thirds of the globe, I have yet to see a
VAT with a no pass-though provision. So, the thinking of the Senate is basically simple, lets keep the VAT
simple.26 (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really enjoyed the
support of either House."27
With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee
came to a compromise on the percentage rate of the limitation or cap on such input tax credit, but again, the
change introduced by the Bicameral Conference Committee was totally within the intent of both houses to put a
cap on input tax that may be
credited against the output tax. From the inception of the subject revenue bill in the House of Representatives,
one of the major objectives was to "plug a glaring loophole in the tax policy and administration by creating vital

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ATTY. BERNIE MENDOZA
restrictions on the claiming of input VAT tax credits . . ." and "[b]y introducing limitations on the claiming of
tax credit, we are capping a major leakage that has placed our collection efforts at an apparent disadvantage."28
As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No.
1950, since said provisions were among those referred to it, the conference committee had to act on the same
and it basically adopted the version of the Senate.
Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to subjects
of the provisions referred
to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to
lack or excess of jurisdiction committed by the Bicameral Conference Committee. In the earlier cases
of Philippine Judges Association vs. Prado29 and Tolentino vs. Secretary of Finance,30 the Court recognized the
long-standing legislative practice of giving said conference committee ample latitude for compromising
differences between the Senate and the House. Thus, in the Tolentino case, it was held that:
. . . it is within the power of a conference committee to include in its report an entirely new provision that is not
found either in the House bill or in the Senate bill. If the committee can propose an amendment consisting of
one or two provisions, there is no reason why it cannot propose several provisions, collectively considered as an
"amendment in the nature of a substitute," so long as such amendment is germane to the subject of the bills
before the committee. After all, its report was not final but needed the approval of both houses of Congress to
become valid as an act of the legislative department. The charge that in this case the Conference Committee
acted as a third legislative chamber is thus without any basis.31 (Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No-Amendment Rule"
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has passed three readings on separate days, and
printed copies thereof in its final form have been distributed to its Members three days before its passage,
except when the President certifies to the necessity of its immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be
taken immediately thereafter, and the yeas and nays entered in the Journal.
Petitioners argument that the practice where a bicameral conference committee is allowed to add or delete
provisions in the House bill and the Senate bill after these had passed three readings is in effect a circumvention
of the "no amendment rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the Court to deviate
from its ruling in the Tolentino case that:
Nor is there any reason for requiring that the Committees Report in these cases must have undergone three
readings in each of the two houses. If that be the case, there would be no end to negotiation since each house
may seek modification of the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in
either house of Congress, not to the conference committee report.32 (Emphasis supplied)
The Court reiterates here that the "no-amendment rule" refers only to the procedure to be followed by each
house of Congress with regard to bills initiated in each of said respective houses, before said bill is
transmitted to the other house for its concurrence or amendment. Verily, to construe said provision in a way
as to proscribe any further changes to a bill after one house has voted on it would lead to absurdity as this would
mean that the other house of Congress would be deprived of its constitutional power to amend or introduce
changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction
by the Bicameral Conference Committee of amendments and modifications to disagreeing provisions in bills
that have been acted upon by both houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of
Revenue Bills
Coming to the issue of the validity of the amendments made regarding the NIRC provisions on corporate
income taxes and percentage, excise taxes. Petitioners refer to the following provisions, to wit:
Section 27
Rates of Income Tax on Domestic Corporation
28(A)(1)
Tax on Resident Foreign Corporation
28(B)(1)
Inter-corporate Dividends
34(B)(1)
Inter-corporate Dividends
116
Tax on Persons Exempt from VAT
117
Percentage Tax on domestic carriers and keepers of Garage
119
Tax on franchises
121
Tax on banks and Non-Bank Financial Intermediaries
148
Excise Tax on manufactured oils and other fuels
151
Excise Tax on mineral products
236
Registration requirements
237
Issuance of receipts or sales or commercial invoices
288
Disposition of Incremental Revenue

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ATTY. BERNIE MENDOZA
Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House.
They aver that House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and 114
of the NIRC, while House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110 and 111
of the NIRC; thus, the other sections of the NIRC which the Senate amended but which amendments were not
found in the House bills are not intended to be amended by the House of Representatives. Hence, they argue
that since the proposed amendments did not originate from the House, such amendments are a violation of
Article VI, Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives but the Senate may
propose or concur with amendments.
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the move
for amending provisions of the NIRC dealing mainly with the value-added tax. Upon transmittal of said House
bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not only to NIRC
provisions on the value-added tax but also amendments to NIRC provisions on other kinds of taxes. Is the
introduction by the Senate of provisions not dealing directly with the value- added tax, which is the only kind of
tax being amended in the House bills, still within the purview of the constitutional provision authorizing the
Senate to propose or concur with amendments to a revenue bill that originated from the House?
The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus:
. . . To begin with, it is not the law but the revenue bill which is required by the Constitution to "originate
exclusively" in the House of Representatives. It is important to emphasize this, because a bill originating in the
House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. . . . At
this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To
insist that a revenue statute and not only the bill which initiated the legislative process culminating in
the enactment of the law must substantially be the same as the House bill would be to deny the Senates
power not only to "concur with amendments" but also to "propose amendments." It would be to violate the
coequality of legislative power of the two houses of Congress and in fact make the House superior to the
Senate.

Given, then, the power of the Senate to propose amendments, the Senate can propose its own version
even with respect to bills which are required by the Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills
authorizing an increase of the public debt, private bills and bills of local application must come from the House
of Representatives on the theory that, elected as they are from the districts, the members of the House can be
expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are
elected at large, are expected to approach the same problems from the national perspective. Both views
are thereby made to bear on the enactment of such laws.33 (Emphasis supplied)
Since there is no question that the revenue bill exclusively originated in the House of Representatives, the
Senate was acting within its
constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No.
1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of
the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be
introduced by the Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in the
House bills are still in furtherance of the intent of the House in initiating the subject revenue bills. The
Explanatory Note of House Bill No. 1468, the very first House bill introduced on the floor, which was later
substituted by House Bill No. 3555, stated:
One of the challenges faced by the present administration is the urgent and daunting task of solving the
countrys serious financial problems. To do this, government expenditures must be strictly monitored and
controlled and revenues must be significantly increased. This may be easier said than done, but our fiscal
authorities are still optimistic the government will be operating on a balanced budget by the year 2009. In fact,
several measures that will result to significant expenditure savings have been identified by the administration. It
is supported with a credible package of revenue measures that include measures to improve tax
administration and control the leakages in revenues from income taxes and the value-added tax (VAT).
(Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:
In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top of
our agenda must be the restoration of the health of our fiscal system.

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ATTY. BERNIE MENDOZA
In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced budget
by the year 2009, we need to seize windows of opportunities which might seem poignant in the beginning,
but in the long run prove effective and beneficial to the overall status of our economy. One such
opportunity is a review of existing tax rates, evaluating the relevance given our present
conditions.34(Emphasis supplied)
Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in
sizeable revenues for the government
to supplement our countrys serious financial problems, and improve tax administration and control of the
leakages in revenues from income taxes and value-added taxes. As these house bills were transmitted to the
Senate, the latter, approaching the measures from the point of national perspective, can introduce amendments
within the purposes of those bills. It can provide for ways that would soften the impact of the VAT measure on
the consumer,i.e., by distributing the burden across all sectors instead of putting it entirely on the shoulders of
the consumers. The sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on
corporation were included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion in additional
revenues annually even while by mitigating prices of power, services and petroleum products.
However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is from the VAT on twelve
goods and services. The rest of the tab P10.5 billion- will be picked by corporations.
What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why should
the latter bear all the pain? Why should the fiscal salvation be only on the burden of the consumer?
The corporate worlds equity is in form of the increase in the corporate income tax from 32 to 35 percent, but up
to 2008 only. This will raise P10.5 billion a year. After that, the rate will slide back, not to its old rate of 32
percent, but two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that
will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal medicine will have an expiry
date.
For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief.
We would like to assure them that not because there is a light at the end of the tunnel, this government will keep
on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to
share the burden.35
As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions in
the tax on income of corporations are germane to the purpose of the house bills which is to raise revenues for
the government.
Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms to
the VAT system, as these sections would cushion the effects of VAT on consumers. Considering that certain
goods and services which were subject to percentage tax and excise tax would no longer be VAT-exempt, the
consumer would be burdened more as they would be paying the VAT in addition to these taxes. Thus, there is a
need to amend these sections to soften the impact of VAT. Again, in his sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to lessen
the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain,
we will however bring down the excise tax on socially sensitive products such as diesel, bunker, fuel and
kerosene.
...
What do all these exercises point to? These are not contortions of giving to the left hand what was taken from
the right. Rather, these sprang from our concern of softening the impact of VAT, so that the people can cushion
the blow of higher prices they will have to pay as a result of VAT.36
The other sections amended by the Senate pertained to matters of tax administration which are necessary for the
implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the house
bills, which is to supplement our countrys fiscal deficit, among others. Thus, the Senate acted within its power
to propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power

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ATTY. BERNIE MENDOZA
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in common that
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC giving
the President the stand-by authority to raise the VAT rate from 10% to 12% when a certain condition is met,
constitutes undue delegation of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of
goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value
in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor:provided, that the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 %).
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods.
(A) In General. There shall be levied, assessed and collected on every importation of goods a value-added tax
equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff
and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the
importer prior to the release of such goods from customs custody: Provided, That where the customs duties are
determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed
cost plus excise taxes, if any: provided, further, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%) after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 %).
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or exchange of services: provided, that the President,
upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%), after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 %). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual
abdication by Congress of its exclusive power to tax because such delegation is not within the purview of
Section 28 (2), Article VI of the Constitution, which provides:
The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff rates,
import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the
national development program of the government.
They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on the
sale or exchange of services, which cannot be included within the purview of tariffs under the exempted
delegation as the latter refers to customs duties, tolls or tribute payable upon merchandise to the government
and usually imposed on goods or merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative
power to tax is contrary to republicanism. They insist that accountability, responsibility and transparency should
dictate the actions of Congress and they should not pass to the President the decision to impose taxes. They also
argue that the law also effectively nullified the Presidents power of control, which includes the authority to set
aside and nullify the acts of her subordinates like the Secretary of Finance, by mandating the fixing of the tax
rate by the President upon the recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the conditions
provided by the law to bring about either or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of the
12% rate would be subject to the whim of the Secretary of Finance, an unelected bureaucrat, contrary to the

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ATTY. BERNIE MENDOZA
principle of no taxation without representation. They submit that the Secretary of Finance is not mandated to
give a favorable recommendation and he may not even give his recommendation. Moreover, they allege that no
guiding standards are provided in the law on what basis and as to how he will make his recommendation. They
claim, nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter, such that, ultimately, it is the President who decides
whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is instructive.
The principle of separation of powers ordains that each of the three great branches of government has exclusive
cognizance of and is supreme in matters falling within its own constitutionally allocated sphere.37 A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in
the Latin maxim: potestas delegata non delegari potest which means "what has been delegated, cannot be
delegated."38 This doctrine is based on the ethical principle that such as delegated power constitutes not only a
right but a duty to be performed by the delegate through the instrumentality of his own judgment and not
through the intervening mind of another.39
With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the Legislative power
shall be vested in the Congress of the Philippines which shall consist of a Senate and a House of
Representatives." The powers which Congress is prohibited from delegating are those which are strictly, or
inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been
described as the authority to make a complete law complete as to the time when it shall take effect and as
to whom it shall be applicable and to determine the expediency of its enactment.40 Thus, the rule is that in
order that a court may be justified in holding a statute unconstitutional as a delegation of legislative power, it
must appear that the power involved is purely legislative in nature that is, one appertaining exclusively to the
legislative department. It is the nature of the power, and not the liability of its use or the manner of its exercise,
which determines the validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized
limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid
only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or
implemented by the delegate;41 and (b) fixes a standard the limits of which are sufficiently determinate and
determinable to which the delegate must conform in the performance of his functions.42 A sufficient standard
is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency
to apply it. It indicates the circumstances under which the legislative command is to be effected.43 Both tests are
intended to prevent a total transference of legislative authority to the delegate, who is not allowed to step into
the shoes of the legislature and exercise a power essentially legislative.44
In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent of
delegation of power in this wise:
In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire
whether the statute was complete in all its terms and provisions when it left the hands of the legislature so that
nothing was left to the judgment of any other appointee or delegate of the legislature.
...
The true distinction, says Judge Ranney, is between the delegation of power to make the law, which
necessarily involves a discretion as to what it shall be, and conferring an authority or discretion as to its
execution, to be exercised under and in pursuance of the law. The first cannot be done; to the latter no
valid objection can be made.
...
It is contended, however, that a legislative act may be made to the effect as law after it leaves the hands of the
legislature. It is true that laws may be made effective on certain contingencies, as by proclamation of the
executive or the adoption by the people of a particular community. In Wayman vs. Southard, the Supreme Court
of the United States ruled that the legislature may delegate a power not legislative which it may itself rightfully
exercise.The power to ascertain facts is such a power which may be delegated. There is nothing essentially
legislative in ascertaining the existence of facts or conditions as the basis of the taking into effect of a law.
That is a mental process common to all branches of the government. Notwithstanding the apparent
tendency, however, to relax the rule prohibiting delegation of legislative authority on account of the complexity
arising from social and economic forces at work in this modern industrial age, the orthodox pronouncement of
Judge Cooley in his work on Constitutional Limitations finds restatement in Prof. Willoughby's treatise on the
Constitution of the United States in the following language speaking of declaration of legislative power to

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administrative agencies: The principle which permits the legislature to provide that the administrative
agent may determine when the circumstances are such as require the application of a law is defended
upon the ground that at the time this authority is granted, the rule of public policy, which is the essence of
the legislative act, is determined by the legislature. In other words, the legislature, as it is its duty to do,
determines that, under given circumstances, certain executive or administrative action is to be taken, and
that, under other circumstances, different or no action at all is to be taken. What is thus left to the
administrative official is not the legislative determination of what public policy demands, but simply the
ascertainment of what the facts of the case require to be done according to the terms of the law by which
he is governed. The efficiency of an Act as a declaration of legislative will must, of course, come from
Congress, but the ascertainment of the contingency upon which the Act shall take effect may be left to
such agencies as it may designate. The legislature, then, may provide that a law shall take effect upon the
happening of future specified contingencies leaving to some other person or body the power to determine
when the specified contingency has arisen.(Emphasis supplied).46
In Edu vs. Ericta,47 the Court reiterated:
What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal them; the
test is the completeness of the statute in all its terms and provisions when it leaves the hands of the legislature.
To determine whether or not there is an undue delegation of legislative power, the inquiry must be directed to
the scope and definiteness of the measure enacted. The legislative does not abdicate its functions when it
describes what job must be done, who is to do it, and what is the scope of his authority. For a complex
economy, that may be the only way in which the legislative process can go forward. A distinction has
rightfully been made between delegation of power to make the laws which necessarily involves a
discretion as to what it shall be, which constitutionally may not be done, and delegation of authority or
discretion as to its execution to be exercised under and in pursuance of the law, to which no valid
objection can be made. The Constitution is thus not to be regarded as denying the legislature the necessary
resources of flexibility and practicability. (Emphasis supplied).48
Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or
conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made to
depend, but the legislature must prescribe sufficient standards, policies or limitations on their authority.49 While
the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration of
an exercise of such power may be left to them, including the power to determine the existence of facts on which
its operation depends.50
The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is
not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty of correlating information
and making recommendations is the kind of subsidiary activity which the legislature may perform through its
members, or which it may delegate to others to perform. Intelligent legislation on the complicated problems of
modern society is impossible in the absence of accurate information on the part of the legislators, and any
reasonable method of securing such information is proper.51 The Constitution as a continuously operative
charter of government does not require that Congress find for itself
every fact upon which it desires to base legislative action or that it make for itself detailed determinations which
it has declared to be prerequisite to application of legislative policy to particular facts and circumstances
impossible for Congress itself properly to investigate.52
In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6 which
reads as follows:
That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds
two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent
(1 %).
The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of
facts upon which enforcement and administration of the increase rate under the law is contingent. The
legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or
condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the
control of the executive.
No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the
wordshall is used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a
statute denotes an imperative obligation and is inconsistent with the idea of discretion.53 Where the law is clear
and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that
the mandate is obeyed.54
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of
the conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the

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law specifically uses the word shall, the exercise of discretion by the President does not come into play. It is a
clear directive to impose the 12% VAT rate when the specified conditions are present. The time of taking into
effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon the
ascertainment of certain facts or conditions by a person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law
effectively nullified the Presidents power of control over the Secretary of Finance by mandating the fixing of
the tax rate by the President upon the recommendation of the Secretary of Finance. The Court cannot also
subscribe to the position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon the
recommendation of the Secretary of Finance." Neither does the Court find persuasive the submission of
petitioners Escudero, et al. that any recommendation by the Secretary of Finance can easily be brushed aside by
the President since the former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of
the Department of Finance he is the assistant and agent of the Chief Executive. The multifarious executive and
administrative functions of the Chief Executive are performed by and through the executive departments, and
the acts of the secretaries of such departments, such as the Department of Finance, performed and promulgated
in the regular course of business, are, unless disapproved or reprobated by the Chief Executive, presumptively
the acts of the Chief Executive. The Secretary of Finance, as such, occupies a political position and holds office
in an advisory capacity, and, in the language of Thomas Jefferson, "should be of the President's bosom
confidence" and, in the language of Attorney-General Cushing, is "subject to the direction of the President."55
In the present case, in making his recommendation to the President on the existence of either of the two
conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In
such instance, he is not subject to the power of control and direction of the President. He is acting as the agent
of the legislative department, to determine and declare the event upon which its expressed will is to take
effect.56The Secretary of Finance becomes the means or tool by which legislative policy is determined and
implemented, considering that he possesses all the facilities to gather data and information and has a much
broader perspective to properly evaluate them. His function is to gather and collate statistical data and other
pertinent information and verify if any of the two conditions laid out by Congress is present. His personality in
such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress and not of the
President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance
and to substitute the judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely,
whether by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half percent (1%). If either of these two
instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the
President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006. There is no
undue delegation of legislative power but only of the discretion as to the execution of a law. This is
constitutionally permissible.57 Congress does not abdicate its functions or unduly delegate power when it
describes what job must be done, who must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative process can go forward.58
As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the
legislative power to tax is contrary to the principle of republicanism, the same deserves scant consideration.
Congress did not delegate the power to tax but the mere implementation of the law. The intent and will to
increase the VAT rate to 12% came from Congress and the task of the President is to simply execute the
legislative policy. That Congress chose to do so in such a manner is not within the province of the Court to
inquire into, its task being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create
the conditions to bring about either or both the conditions precedent does not deserve any merit as this argument
is highly speculative. The Court does not rule on allegations which are manifestly conjectural, as these may not
exist at all. The Court deals with facts, not fancies; on realities, not appearances. When the Court acts on
appearances instead of realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax
burden on the people. Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set
forth in the contested provisions, is ambiguous because it does not state if the VAT rate would be returned to the
original 10% if the rates are no longer satisfied. Petitioners also argue that such rate is unfair and unreasonable,
as the people are unsure of the applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth
therein are satisfied, the President shall increase the VAT rate to 12%. The provisions of the law are clear. It
does not provide for a return to the 10% rate nor does it empower the President to so revert if, after the rate is

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4
increased to 12%, the VAT collection goes below the 2 /5 of the GDP of the previous year or that the national
government deficit as a percentage of GDP of the previous year does not exceed 1%.
Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be
introduced where none is provided for. Rewriting the law is a forbidden ground that only Congress may tread
upon.60
Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds
none, petitioners argument is, at best, purely speculative. There is no basis for petitioners fear of a fluctuating
VAT rate because the law itself does not provide that the rate should go back to 10% if the conditions provided
in Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the law is clear and
unambiguous, so that there is no occasion for the court's seeking the legislative intent, the law must be taken as
it is, devoid of judicial addition or subtraction.61
Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to
raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another
condition, i.e., the national government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 %).
Respondents explained the philosophy behind these alternative conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than
2.8%, it means that government has weak or no capability of implementing the VAT or that VAT is not effective
in the function of the tax collection. Therefore, there is no value to increase it to 12% because such action will
also be ineffectual.
2. Natl Govt Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of
government has reached a relatively sound position or is towards the direction of a balanced budget position.
Therefore, there is no need to increase the VAT rate since the fiscal house is in a relatively healthy position.
Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase the VAT rate.62
That the first condition amounts to an incentive to the President to increase the VAT collection does not render it
unconstitutional so long as there is a public purpose for which the law was passed, which in this case, is mainly
to raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith
in his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as
possible over and above what it brings into the public treasury of the state.63
It simply means that sources of revenues must be adequate to meet government expenditures and their
variations.64
The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the
Bicameral Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the countrys
gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in right now. We are in a position where 90
percent of our revenue is used for debt service. So, for every peso of revenue that we currently raise, 90 goes to
debt service. Thats interest plus amortization of our debt. So clearly, this is not a sustainable situation. Thats
the first fact.
The second fact is that our debt to GDP level is way out of line compared to other peer countries that borrow
money from that international financial markets. Our debt to GDP is approximately equal to our GDP. Again,
that shows you that this is not a sustainable situation.
The third thing that Id like to point out is the environment that we are presently operating in is not as benign as
what it used to be the past five years.
What do I mean by that?
In the past five years, weve been lucky because we were operating in a period of basically global growth and
low interest rates. The past few months, we have seen an inching up, in fact, a rapid increase in the interest rates
in the leading economies of the world. And, therefore, our ability to borrow at reasonable prices is going to be
challenged. In fact, ultimately, the question is our ability to access the financial markets.
When the President made her speech in July last year, the environment was not as bad as it is now, at least based
on the forecast of most financial institutions. So, we were assuming that raising 80 billion would put us in a
position where we can then convince them to improve our ability to borrow at lower rates. But conditions have
changed on us because the interest rates have gone up. In fact, just within this room, we tried to access the
market for a billion dollars because for this year alone, the Philippines will have to borrow 4 billion dollars. Of
that amount, we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent cost. We were
trying to access last week and the market was not as favorable and up to now we have not accessed and we
might pull back because the conditions are not very good.

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So given this situation, we at the Department of Finance believe that we really need to front-end our deficit
reduction. Because it is deficit that is causing the increase of the debt and we are in what we call a debt spiral.
The more debt you have, the more deficit you have because interest and debt service eats and eats more of your
revenue. We need to get out of this debt spiral. And the only way, I think, we can get out of this debt spiral is
really have a front-end adjustment in our revenue base.65
The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe.
Whether the law is indeed sufficient to answer the states economic dilemma is not for the Court to judge. In
theFarias case, the Court refused to consider the various arguments raised therein that dwelt on the wisdom of
Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion of the
political branches of the government. It is not for this Court to look into the wisdom or propriety of legislative
determination. Indeed, whether an enactment is wise or unwise, whether it is based on sound economic theory,
whether it is the best means to achieve the desired results, whether, in short, the legislative discretion within its
prescribed limits should be exercised in a particular manner are matters for the judgment of the legislature, and
the serious conflict of opinions does not suffice to bring them within the range of judicial cognizance.66
In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy,
given that it is not for the judiciary to "pass upon questions of wisdom, justice or expediency of legislation."67
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of
R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337, amending
Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are
arbitrary, oppressive, excessive and confiscatory. Their argument is premised on the constitutional right against
deprivation of life, liberty of property without due process of law, as embodied in Article III, Section 1 of the
Constitution.
Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the law.
The doctrine is that where the due process and equal protection clauses are invoked, considering that they are
not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to
such a conclusion. Absent such a showing, the presumption of validity must prevail.68
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input
tax that may be credited against the output tax. It states, in part: "[P]rovided, that the input tax inclusive of the
input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy
percent (70%) of the output VAT: "
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by
a VAT-registered person on the importation of goods or local purchase of good and services, including lease or
use of property, in the course of trade or business, from a VAT-registered person, and Output Tax is the valueadded tax due on the sale or lease of taxable goods or properties or services by any person registered or required
to register under the law.
Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed.
In effect, a portion of the input tax that has already been paid cannot now be credited against the output tax.
Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and therefore,
the input tax in excess of 70% remains uncredited. However, to the extent that the input tax is less than 70% of
the output tax, then 100% of such input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a businesss books of accounts and remains
creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which provides that "if the
input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters." In
addition, Section 112(B) allows a VAT-registered person to apply for the issuance of a tax credit certificate or
refund for any unused input taxes, to the extent that such input taxes have not been applied against the output
taxes. Such unused input tax may be used in payment of his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners
exaggeratedly contend. Their analysis of the effect of the 70% limitation is incomplete and one-sided. It ends at
the net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed further
to the fact that such unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the
carry-over provision of Section 110(B) or that it may later on be refunded through a tax credit certificate under
Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70% limitation on
the input tax. According to petitioner, the limitation on the creditable input tax in effect allows VAT-registered

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establishments to retain a portion of the taxes they collect, which violates the principle that tax collection and
revenue should be for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys goods.
Output tax meanwhile is the tax due to the person when he sells goods. In computing the VAT payable, three
possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he
paid and passed on by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be
paid to the Bureau of Internal Revenue (BIR);69 and
Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions, any excess over the
output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at the
taxpayers option.70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his
input tax only up to the extent of 70% of the output tax. In laymans term, the value-added taxes that a
person/taxpayer paid and passed on to him by a seller can only be credited up to 70% of the value-added taxes
that is due to him on a taxable transaction. There is no retention of any tax collection because the
person/taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit such
input tax to the BIR. The party directly liable for the payment of the tax is the seller.71 What only needs to be
done is for the person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his output
taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of
a property that may not be confiscated, appropriated, or limited without due process of law.
The input tax is not a property or a property right within the constitutional purview of the due process clause. A
VAT-registered persons entitlement to the creditable input tax is a mere statutory privilege.
The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested
rights in statutory privileges. The state may change or take away rights, which were created by the law of the
state, although it may not take away property, which was vested by virtue of such rights.72
Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable
from the taxes payable, although it becomes part of the cost, which is deductible from the gross revenue. When
Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it was then that the crediting of
the input tax paid on purchase or importation of goods and services by VAT-registered persons against the
output tax was introduced.73 This was adopted by the Expanded VAT Law (R.A. No. 7716),74 and The Tax
Reform Act of 1997 (R.A. No. 8424).75 The right to credit input tax as against the output tax is clearly a
privilege created by law, a privilege that also the law can remove, or in this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337,
amending Section 110(A) of the NIRC, which provides:
SEC. 110. Tax Credits.
(A) Creditable Input Tax.
Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for
which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding
the VAT component thereof, exceeds One million pesos (P1,000,000.00): Provided, however, That if the
estimated useful life of the capital goods is less than five (5) years, as used for depreciation purposes, then the
input VAT shall be spread over such a shorter period: Provided, finally, That in the case of purchase of services,
lease or use of properties, the input tax shall be creditable to the purchaser, lessee or license upon payment of
the compensation, rental, royalty or fee.
The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase
or importation of capital goods with acquisition cost of P1 Million pesos, exclusive of the VAT component.
Such spread out only poses a delay in the crediting of the input tax. Petitioners argument is without basis
because the taxpayer is not permanently deprived of his privilege to credit the input tax.
It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case amounts
to a 4-year interest-free loan to the government.76 In the same breath, Congress also justified its move by saying
that the provision was designed to raise an annual revenue of 22.6 billion.77 The legislature also dispelled the
fear that the provision will fend off foreign investments, saying that foreign investors have other tax incentives
provided by law, and citing the case of China, where despite a 17.5% non-creditable VAT, foreign investments
were not deterred.78 Again, for whatever is the purpose of the 60-month amortization, this involves executive
economic policy and legislative wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable
transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.

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(C) Withholding of Value-added Tax. The Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods and services which are subject to the value-added tax imposed in Sections
106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the
gross payment thereof: Provided, That the payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes
of this Section, the payor or person in control of the payment shall be considered as the withholding agent.
The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the
month the withholding was made.
Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT
withholding system. The government in this case is constituted as a withholding agent with respect to their
payments for goods and services.
Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld -- 3% on
gross payments for purchases of goods; 6% on gross payments for services supplied by contractors other than
by public works contractors; 8.5% on gross payments for services supplied by public work contractors; or 10%
on payment for the lease or use of properties or property rights to nonresident owners. Under the present
Section 114(C), these different rates, except for the 10% on lease or property rights payment to nonresidents,
were deleted, and a uniform rate of 5% is applied.
The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to creditable,
means full. Thus, it is provided in Section 114(C): "final value-added tax at the rate of five percent (5%)."
In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the concept of
final withholding tax on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as full and final payment of the income tax due from the payee on the said
income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of
his failure to withhold the tax or in case of underwithholding, the deficiency tax shall be collected from the
payor/withholding agent.
(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on certain
income payments are intended to equal or at least approximate the tax due of the payee on said income.
Taxes withheld on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of
these regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are creditable in
nature.
As applied to value-added tax, this means that taxable transactions with the government are subject to a 5% rate,
which constitutes as full payment of the tax payable on the transaction. This represents the net VAT payable of
the seller. The other 5% effectively accounts for the standard input VAT (deemed input VAT), in lieu of the
actual input VAT directly or attributable to the taxable transaction.79
The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat
differently taxable transactions with the government.80 This is supported by the fact that under the old provision,
the 5% tax withheld by the government remains creditable against the tax liability of the seller or contractor, to
wit:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Creditable Value-added Tax. The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods from sellers and services rendered by contractors which
are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the valueadded tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent
(6%) on gross receipts for services rendered by contractors on every sale or installment payment which shall
becreditable against the value-added tax liability of the seller or contractor: Provided, however, That in the
case of government public works contractors, the withholding rate shall be eight and one-half percent (8.5%):
Provided, further, That the payment for lease or use of properties or property rights to nonresident owners shall
be subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in
control of the payment shall be considered as the withholding agent.
The valued-added tax withheld under this Section shall be remitted within ten (10) days following the end of the
month the withholding was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the word creditable exhibits Congresss intention to
treat transactions with the government differently. Since it has not been shown that the class subject to the 5%
final withholding tax has been unreasonably narrowed, there is no reason to invalidate the provision. Petitioners,
as petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies to all those who
deal with the government.

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ATTY. BERNIE MENDOZA
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations No.
14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should the
actual input tax exceed 5% of gross payments, the excess may form part of the cost. Equally, should the actual
input tax be less than 5%, the difference is treated as income.81
Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a
profit or value-added even if there is no profit or value-added.
Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a
legal joust where premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the
Court on this point will only be, as Shakespeare describes life in Macbeth,82 "full of sound and fury, signifying
nothing."
Whats more, petitioners contention assumes the proposition that there is no profit or value-added. It need not
take an astute businessman to know that it is a matter of exception that a business will sell goods or services
without profit or value-added. It cannot be overstressed that a business is created precisely for profit.
The equal protection clause under the Constitution means that "no person or class of persons shall be deprived
of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like
circumstances."83
The power of the State to make reasonable and natural classifications for the purposes of taxation has long been
established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the
amounts to be raised, the methods of assessment, valuation and collection, the States power is entitled to
presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness.84
Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or
invests in capital equipment, or has several transactions with the government, is not based on real and
substantial differences to meet a valid classification.
The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of
taxation, the kind of property, the rates to be levied or the amounts to be raised, the methods of assessment,
valuation and collection. Petitioners alleged distinctions are based on variables that bear different
consequences. While the implementation of the law may yield varying end results depending on ones profit
margin and value-added, the Court cannot go beyond what the legislature has laid down and interfere with the
affairs of business.
The equal protection clause does not require the universal application of the laws on all persons or things
without distinction. This might in fact sometimes result in unequal protection. What the clause requires is
equality among equals as determined according to a valid classification. By classification is meant the grouping
of persons or things similar to each other in certain particulars and different from all others in these same
particulars.85
Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmea III
and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The
proposed legislation seeks to amend the 70% limitation by increasing the same to 90%. This, according to
petitioners, supports their stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to
say that these are still proposed legislations. Until Congress amends the law, and absent any unequivocal basis
for its unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the
same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same
class everywhere with all people at all times.86
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and
services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC,
provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of services
and use or lease of properties. These same sections also provide for a 0% rate on certain sales and transaction.
Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on
the creditable input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final
withholding tax by the government. It must be stressed that the rule of uniform taxation does not deprive
Congress of the power to classify subjects of taxation, and only demands uniformity within the particular
class.87
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or
12%) does not apply to sales of goods or services with gross annual sales or receipts not
exceeding P1,500,000.00.88Also, basic marine and agricultural food products in their original state are still not
subject to the tax,89 thus ensuring that prices at the grassroots level will remain accessible. As was stated
in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90

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ATTY. BERNIE MENDOZA
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in
business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are
consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products,
so that the costs of basic food and other necessities, spared as they are from the incidence of the VAT, are
expected to be relatively lower and within the reach of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors
those with high profit margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law
entails, the law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section
109(v), i.e., transactions with gross annual sales and/or receipts not exceeding P1.5 Million. This acts as a
equalizer because in effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on
equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those
previously exempt. Excise taxes on petroleum products91 and natural gas92 were reduced. Percentage tax on
domestic carriers was removed.93 Power producers are now exempt from paying franchise tax.94
Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the burden
of taxation. Domestic, foreign, and non-resident corporations are now subject to a 35% income tax rate, from a
previous 32%.95 Intercorporate dividends of non-resident foreign corporations are still subject to 15% final
withholding tax but the tax credit allowed on the corporations domicile was increased to 20%.96 The Philippine
Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore.97 Even the sale by
an artist of his works or services performed for the production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest
largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the
smaller business with higher input tax-output tax ratio that will suffer the consequences.
Progressive taxation is built on the principle of the taxpayers ability to pay. This principle was also lifted from
Adam Smiths Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible,
in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy
under the protection of the state.
Taxation is progressive when its rate goes up depending on the resources of the person affected.98
The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive
taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every
goods bought or services enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the
income earned by a person or profit margin marked by a business, such that the higher the income or profit
margin, the smaller the portion of the income or profit that is eaten by VAT. A converso, the lower the income or
profit margin, the bigger the part that the VAT eats away. At the end of the day, it is really the lower income
group or businesses with low-profit margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it
simply provides is that Congress shall "evolve a progressive system of taxation." The Court stated in
the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive.
What it simply provides is that Congress shall evolve a progressive system of taxation. The constitutional
provision has been interpreted to mean simply that direct taxes are . . . to be preferred [and] as much as
possible, indirect taxes should be minimized. (E. FERNANDO, THE CONSTITUTION OF THE
PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress is not to prescribe, but to evolve, a
progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have
been prohibited with the proclamation of Art. VIII, 17 (1) of the 1973 Constitution from which the present Art.
VI, 28 (1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to
avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law
minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No.
7716, 3, amending 102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, 4
amending 103 of the NIRC)99
CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid
measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the plight
of the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other cases,
the Court cannot strike down a law as unconstitutional simply because of its yokes.

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ATTY. BERNIE MENDOZA
Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary should
stand ready to afford relief. There are undoubtedly many wrongs the judicature may not correct, for instance,
those involving political questions. . . .
Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all
political or social ills; We should not forget that the Constitution has judiciously allocated the powers of
government to three distinct and separate compartments; and that judicial interpretation has tended to the
preservation of the independence of the three, and a zealous regard of the prerogatives of each, knowing full
well that one is not the guardian of the others and that, for official wrong-doing, each may be brought to
account, either by impeachment, trial or by the ballot box.100
The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things considered,
there is no raison d'tre for the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207,
168461, 168463, and 168730, are hereby DISMISSED.
There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the
temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.
SO ORDERED.