Intelligentia Et Scientia Semper Mea: Tax 2 Pinedapcgrnman

PINEDAPCGRNMAN
VALUE ADDED TAX

1. NATURE OF VAT (SEC 105, NIRC)
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 to 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
contracts of 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 private
organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members or 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 course of trade or business.
[G.R. No. 125355. March 30, 2000]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT
OF APPEALS and COMMONWEALTH MANAGEMENT AND
SERVICES CORPORATION,respondents. Court
DECISION
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.
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an
assessment to private respondent COMASERCO for deficiency valueadded tax (VAT) amounting to P351,851.01, for taxable year 1988,
computed as follows:
"Taxable sale/receipt P1,679,155.00
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 P 351,831.01"[3]
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. J lexj
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
Appeals[4] 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,
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were on a "no-profit, reimbursement-of-cost-only" basis. It averred that

it was not engaged id 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 value-added 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, 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: Lexj uris
"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 valueadded tax for the 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, [7] where 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 certiorari assailing 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. Juri smis
We agree with the Commissioner.
Section 99 of the National Internal Revenue Code of 1986, as amended
by Executive Order (E.O.) No. 273 in 1988, provides that:
Intelligentia et Scientia Semper Mea
PINEDAPCGRNMAN
"Section 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 profitoriented. 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
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. Jjj
uris
"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"
incorporated in the present law applies to all transactions even to those
made prior to its enactment. Executive Order No. 273 stated that any
person who, in the course of trade or business, sells, barters or
exchanges goods and services, was already liable to pay VAT. The
present law merely stresses that even a nonstock, nonprofit
organization or government entity is liable to pay VAT for the sale of
goods and services.
Section 108 of the 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 of technical advice, assistance or services rendered in
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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-ofcost basis, without any intention of realizing profit, was subject to VAT
on services rendered. In fact, even if such corporation was organized
without any intention of realizing profit, any income or profit generated
by the entity in the conduct of its activities was subject to income tax.lex
Hence, it is immaterial whether the primary purpose of a corporation
indicates that it receives payments for services rendered to its affiliates
on a reimbursement-on-cost basis only, without realizing profit, for
purposes of determining liability for VAT on services rendered. As long
as the entity provides service for a fee, remuneration or consideration,
then the service rendered is subject to VAT.
At any rate, 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. Jksm
WHEREFORE, the Court GRANTS the petition and REVERSES the
decision of the Court of Appeals in CA-G. 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.
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.
Taxation; Value Added Tax (VAT); Value Added Tax (VAT) is
ultimately a tax on consumption, even though it is assessed on
PINEDAPCGRNMAN
many levels of transactions on the basis of a fixed percentage.A

brief reiteration of the basic principles governing VAT is in order.
VAT is ultimately a tax on consumption, even though it is
assessed on many levels of transactions on the basis of a fixed
percentage. It is the end user of consumer goods or services
which ultimately shoulders the tax, as the liability therefrom is
passed on to the end users by the providers of these goods or
services who in turn may credit their own VAT liability (or input
VAT) from the VAT payments they receive from the final consumer
(or output VAT).
Value Added Tax (VAT); The tax is levied only on the sale, barter or
exchange of goods or services by persons who engage in such
activities in the course of trade or business.VAT is not a
singular-minded tax on every transactional level. Its assessment
bears direct relevance to the taxpayers role or link in the
production chain. Hence, as affirmed by Section 99 of the Tax
Code and its subsequent incarnations, the tax is levied only on
the sale, barter or exchange of goods or services by persons who
engage in such activities, in the course of trade or business.
These transactions outside the course of trade or business may
invariably contribute to the production chain, but they do so only
as a matter of accident or incident. As the sales of goods or
services do not occur within the course of trade or business, the
providers of such goods or services would hardly, if at all, have
the opportunity to appropriately credit any VAT liability as against
their own accumulated VAT collections since the accumulation of
output VAT arises in the first place only through the ordinary
course of trade or business.
Same; Any sale, barter or exchange of goods or services not in
the course of trade or business is not subject to Value Added Tax
(VAT).The conclusion that the sale was not in the course of
trade or business, which the CIR does not dispute before this
Court, should have definitively settled the matter. Any sale, barter
or exchange of goods or services not in the course of trade or
business is not subject to VAT.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
The Solicitor General for petitioner.
Office of the Government Corporate Counsel for NDC.
Ma. Valentina S. Santana-Cruz for respondent Magsaysay Lines.
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 TweenDecker, 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,
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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. 395-88 (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.
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. 39588, 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. 587 (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.
PINEDAPCGRNMAN
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.
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
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production chain, but they do so only as a matter of accident or

incident. As the sales of goods or services do not occur within the
course of trade or business, the providers of such goods or services
would hardly, if at all, have the opportunity to appropriately credit any
VAT liability as against their own accumulated VAT collections since the
accumulation of output VAT arises in the first place only through the
ordinary course of trade or business.
That the sale of the vessels was not in the ordinary course of 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
PINEDAPCGRNMAN
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 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.
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.
Quisumbing (Chairperson), Carpio, Carpio-Morales and Velasco, Jr.,
JJ., concur.
Petition denied.
Note.Petitioner is not the proper party to claim such VAT refund.
(Contex Corporation vs. Commissioner of Internal Revenue, 433 SCRA
376 [2004])
G.R. Nos. 134587 & 134588. July 8, 2005.*
COMMISSIONER OF INTERNAL REVENUE,
BENGUET CORPORATION, respondent.\
petitioner, vs.
Taxation; Rulings, 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.In a long line of cases, this Court has affirmed that
the rulings, circular, 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. In fact, both petitioner and respondent agree that the
retroactive application of VAT Ruling No. 008-92 is valid only if
such application would not be prejudicial to the respondent
pursuant to the explicit mandate under Sec. 246 of the NIRC, thus:
Sec. 246. Non-retroactivity of rulings.Any revocation,
modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding Section or any of
the rulings or circulars promulgated by the Commissioner shall
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 on 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 form the facts on which the ruling is based; or
(c) where the taxpayer acted in bad faith.
Same; Appeals; The determination of whether a taxpayer had
suffered prejudice is a factual issue.To begin with, the
determination of whether respondent had suffered prejudice is a
Page 5
TAX 2
factual issue. It is an established rule that in the exercise of its

power of review, the Supreme Court is not a trier of facts.
Moreover, in the exercise of the Supreme Courts power of review,
the findings of facts of the Court of Appeals are conclusive and
binding on the Supreme Court. An exception to this rule is when
the findings of fact a quo are conflicting, as is in this case.
Same; Value Added Tax (VAT); Words and Phrases; VAT is a
percentage tax imposed at every stage of the distribution process
on the sale, barter, exchange or lease of goods or properties and
rendition of services in the course of trade or business, or the
importation of goodsit is an indirect tax which may be shifted to
the buyer, transferee, or lessee of the goods, properties, or
services but the party directly liable for the payment of the tax is
the seller; Transactions which are taxed at zero-rate do not result
in any output tax; Input VAT attributable to zero-rated sales could
be refunded or credited against other internal revenue taxes at the
option of the taxpayer.VAT is a percentage tax imposed at every
stage of the distribution process on the sale, barter, exchange or
lease of goods or properties and rendition of services in the
course of trade or business, or the importation of goods. It is an
indirect tax, which may be shifted to the buyer, transferee, or
lessee of the goods, properties, or services. However, the party
directly liable for the payment of the tax is the seller. In
transactions taxed at a 10% rate, when at the end of any given
taxable quarter the output VAT exceeds the input VAT, the excess
shall be paid to the government; when the input VAT exceeds the
output VAT, the excess would be carried over to VAT liabilities for
the succeeding quarter or quarters. On the other hand,
transactions which are taxed at zero-rate do not result in any
output tax. Input VAT attributable to zero-rated sales could be
refunded or credited against other internal revenue taxes at the
option of the taxpayer.
Same; Same; In the instant case, the retroactive application of
VAT Ruling No. 008-92 unilaterally forfeited or withdrew the option
of the seller to pass on its VAT costs to the Central Bank, with the
adverse effect that said seller became the unexpected and
unwilling debtor to the BIR of the amount equivalent to the total
VAT cost of its product, a liability it previously could have
recovered from the BIR in a zero-rated scenario or at least passed
on to the Central Bank had it known it would have been taxed at a
10% rate.There appears to be no upfront economic difference in
changing the sale of gold to the Central Bank from a 0% to 10%
VAT rate provided that respondent would be allowed the choice to
pass on its VAT costs to the Central Bank. In the instant case, the
retroactive application of VAT Ruling No. 008-92 unilaterally
forfeited or withdrew this option of respondent. The adverse effect
is that respondent became the unexpected and unwilling debtor to
the BIR of the amount equivalent to the total VAT cost of its
product, a liability it previously could have recovered from the BIR
in a zero-rated scenario or at least passed on to the Central Bank
had it known it would have been taxed at a 10% rate. Thus, it is
clear that respondent suffered economic prejudice when its
consummated sales of gold to the Central Bank were taken out of
the zero-rated category. The change in the VAT rating of
respondents transactions with the Central Bank resulted in the
twin loss of its exemption from payment of output VAT and its
opportunity to recover input VAT, and at the same time subjected
it to the 10% VAT sans the option to pass on this cost to the
Central Bank, with the total prejudice in money terms being
PINEDAPCGRNMAN
equivalent to the 10% VAT levied on its sales of gold to the Central
Bank.
Same; Same; The prejudice experienced by the seller lies in the
fact that the tax refunds/credits that it expected to receive had
effectively disappeared by virtue of its newfound output VAT
liability against which the Commissioner of Internal Revenue had
offset the expected refund/credit; What use would a credit be
where there is nothing to set it off against?On petitioners first
suggested recoupment modality, respondent counters that its
other sales subject to 10% VAT are so minimal that this mode is of
little value. Indeed, what use would a credit be where there is
nothing to set it off against? Moreover, respondent points out that
after having been imposed with 10% VAT sans the opportunity to
pass on the same to the Central Bank, it was issued a deficiency
tax assessment because its input VAT tax credits were not enough
to offset the retroactive 10% output VAT. The prejudice then
experienced by respondent lies in the fact that the tax
refunds/credits that it expected to receive had effectively
disappeared by virtue of its newfound output VAT liability against
which petitioner had offset the expected refund/credit.
Additionally, the prejudice to respondent would not simply
disappear, as petitioner claims, when a liability (which liability was
not there to begin with) is imposed concurrently with an
opportunity to reduce, not totally eradicate, the newfound liability.
In sum, contrary to petitioners suggestion, respondents net
income still decreased corresponding to the amount it expected
as its refunds/ credits and the deficiency assessments against it,
which when summed up would be the total cost of the 10%
retroactive VAT levied on respondent.
Same; Same; Tax Refunds; The burden of having to go through an
unnecessary and cumbersome refund process is prejudice
enough.This leads us to the second recourse that petitioner has
suggested to offset any resulting prejudice to respondent as a
consequence of giving retroactive effect to BIR VAT Ruling No.
008-92. Petitioner submits that granting that respondent has no
other sale subject to 10% VAT against which its input taxes may
be used in payment, then respondent is constituted as the final
entity against which the costs of the tax passes-on shall legally
stop; hence, the input taxes may be converted as costs available
as deduction for income tax purposes. Even assuming that the
right to recover respondents excess payment of income tax has
not yet prescribed, this relief would only address respondents
overpayment of income tax but not the other burdens discussed
above. Verily, this remedy is not a feasible option for respondent
because the very reason why it was issued a deficiency tax
assessment is that its input VAT was not enough to offset its
retroactive output VAT. Indeed, the burden of having to go through
an unnecessary and cumbersome refund process is prejudice
enough. Moreover, there is in fact nothing left to claim as a
deduction from income taxes. From the foregoing it is clear that
petitioners suggested options by which prejudice would be
eliminated from a retroactive application of VAT Ruling No. 008-92
are either simply inadequate or grossly unrealistic.
Same; Same; Estoppel; While it is true that government is not
estopped from collecting taxes which remain unpaid on account
of the errors or mistakes of its agents and/or officials and there
could be no vested right arising from an erroneous interpretation
of law, these principles must give way to exceptions based on and
in keeping with the interest of justice and fairplay.At the time
Page 6
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when the subject transactions were consummated, the prevailing

BIR regulations relied upon by respondent ordained that gold
sales to the Central Bank were zero-rated. The BIR interpreted
Sec. 100 of the NIRC in relation to Sec. 2 of E.O. No. 581 s. 1980
which prescribed that gold sold to the Central Bank shall be
considered export and therefore shall be subject to the export and
premium duties. In coming out with this interpretation, the BIR
also considered Sec. 169 of Central Bank Circular No. 960 which
states that all sales of gold to the Central Bank are considered
constructive exports. Respondent should not be faulted for
relying on the BIRs interpretation of the said laws and
regulations. While it is true, as petitioner alleges, that government
is not estopped from collecting taxes which remain unpaid on
account of the errors or mistakes of its agents and/or officials and
there could be no vested right arising from an erroneous
interpretation of law, these principles must give way to exceptions
based on and in keeping with the interest of justice and fairplay,
as has been done in the instant matter. For, it is primordial that
every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith.
Same; Same; The taxpayer in this case has been put on the
receiving end of a grossly unfair deal, the sort of unjust treatment
which the law in Sec. 249 of the National Internal Revenue Code
abhors and forbids.Respondent, in this case, has similarly been
put on the receiving end of a grossly unfair deal. Before
respondent was entitled to tax refunds or credits based on
petitioners own issuances. Then suddenly, it found itself instead
being made to pay deficiency taxes with petitioners retroactive
change in the VAT categorization of respondents transactions
with the Central Bank. This is the sort of unjust treatment of a
taxpayer which the law in Sec. 246 of the NIRC abhors and
forbids.
Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for
respondent.
TINGA, J.:
This is a petition for the review of a consolidated Decision of the
Former Fourteenth Division of the Court of Appeals1 ordering the
Commissioner of Internal Revenue to award tax credits to Benguet
Corporation in the amount corresponding to the input value added
taxes that the latter had incurred in relation to its sale of gold to the
Central Bank during the period of 01 August 1989 to 31 July 1991.
Petitioner is the Commissioner of Internal Revenue (petitioner) acting
in his official capacity as head of the Bureau of Internal Revenue (BIR),
an attached agency of the Department of Finance,2 with the authority,
inter alia, to determine claims for refunds or tax credits as provided by
law.3
Respondent Benguet Corporation (respondent) is a domestic
corporation organized and existing by virtue of Philippine laws,
engaged in the exploration, development and operation of mineral
resources, and the sale or marketing thereof to various entities.4
Respondent is a value added tax (VAT) registered enterprise.5
The transactions in question occurred during the period between 1988
and 1991. Under Sec. 99 of the National Internal Revenue Code
(NIRC),6 as amended by Executive Order (E.O.) No. 273 s. 1987, then
in effect, any person who, in the course of trade or business, sells,
barters or exchanges goods, renders services, or engages in similar
PINEDAPCGRNMAN
transactions and any person who imports goods is liable for output VAT
at rates of either 10% or 0% (zero-rated) depending on the
classification of the transaction under Sec. 100 of the NIRC. Persons
registered under the VAT system7 are allowed to recognize input VAT,
or the VAT due from or paid by it in the course of its trade or business
on importation of goods or local purchases of goods or service,
including lease or use of properties, from a VAT-registered person.8
In January of 1988, respondent applied for and was granted by the BIR
zero-rated status on its sale of gold to Central Bank.9 On 28 August
1988, Deputy Commissioner of Internal Revenue Eufracio D. Santos
issued VAT Ruling No. 3788-88, which declared that [t]he sale of gold
to Central Bank is considered as export sale subject to zero-rate
pursuant to Section 100[10] of the Tax Code, as amended by Executive
Order No. 273. The BIR came out with at least six (6) other
issuances11 reiterating the zero-rating of sale of gold to the Central
Bank, the latest of which is VAT Ruling No. 036-90 dated 14 February
1990.12
Relying on its zero-rated status and the above issuances, respondent
sold gold to the Central Bank during the period of 1 August 1989 to 31
July 1991 and entered into transactions that resulted in input VAT
incurred in relation to the subject sales of gold. It then filed applications
for tax refunds/credits corresponding to input VAT for the amounts13 of
P46,177,861.12,14 P19,218,738.44,15 and P84,909,247.96.16
Respondents applications were either unacted upon or expressly
disallowed by petitioner.17 In addition, petitioner issued a deficiency
assessment against respondent when, after applying respondents
creditable input VAT costs against the retroactive 10% VAT levy, there
resulted a balance of excess output VAT.18
The express disallowance of respondents application for
refunds/credits and the issuance of deficiency assessments against it
were based on a BIR ruling BIR VAT Ruling No. 008-92 dated 23
January 1992 that was issued subsequent to the consummation of the
subject sales of gold to the Central Bank which provides that sales of
gold to the Central Bank shall not be considered as export sales and
thus, shall be subject to 10% VAT. In addition, BIR VAT Ruling No. 00892 withdrew, modified, and superseded all inconsistent BIR issuances.
The relevant portions of the ruling provides, thus:
1. In general, for purposes of the term export sales only direct export
sales and foreign currency denominated sales, shall be qualified for
zero-rating.
....
4. Local sales of goods, which by fiction of law are considered export
sales (e.g., the Export Duty Law considers sales of gold to the Central
Bank of the Philippines, as export sale). This transaction shall not be
considered as export sale for VAT purposes.
....
[A]ll Orders and Memoranda issued by this Office inconsistent herewith
are considered withdrawn, modified or superseded. (Emphasis
supplied)
The BIR also issued VAT Ruling No. 059-92 dated 28 April 1992 and
Revenue Memorandum Order No. 22-92 which decreed that the
revocation of VAT Ruling No. 3788-88 by VAT Ruling No. 008-92 would
not unduly prejudice mining companies and, thus, could be applied
retroactively.19
Respondent filed three separate petitions for review with the Court of
Tax Appeals (CTA), docketed as CTA Case No. 4945, CTA Case No.
4627, and the consolidated cases of CTA Case Nos. 4686 and 4829.
In the three cases, respondent argued that a retroactive application of
BIR VAT Ruling No. 008-92 would violate Sec. 246 of the NIRC, which
mandates the non-retroactivity of rulings or circulars issued by the
Commissioner of Internal Revenue that would operate to prejudice the
taxpayer. Respondent then discussed in detail the manner and extent
Page 7
TAX 2
by which it was prejudiced by this retroactive application.20 Petitioner

on the other hand, maintained that BIR VAT Ruling No. 008-92 is, firstly,
not void and entitled to great respect, having been issued by the body
charged with the duty of administering the VAT law, and secondly, it
may validly be given retroactive effect since it was not prejudicial to
respondent.
In three separate decisions,21 the CTA dismissed respondents
respective petitions. It held, with Presiding Judge Ernesto D. Acosta
dissenting, that no prejudice had befallen respondent by virtue of the
retroactive application of BIR VAT Ruling No. 008-92, and that,
consequently, the application did not violate Sec. 246 of the NIRC.22
The CTA decisions were appealed by respondent to the Court of
Appeals. The cases were docketed therein as CA-G.R. SP Nos. 37205,
38958, and 39435, and thereafter consolidated. The Court of Appeals,
after evaluating the arguments of the parties, rendered the questioned
Decision reversing the Court of Tax Appeals insofar as the latter had
ruled that BIR VAT Ruling No. 008-92 did not prejudice the respondent
and that the same could be given retroactive effect.
In its Decision, the appellate court held that respondent suffered
financial damage equivalent to the sum of the disapproved claims. It
stated that had respondent known that such sales were subject to 10%
VAT, which rate was not the prevailing rate at the time of the
transactions, respondent would have passed on the cost of the input
taxes to the Central Bank. It also ruled that the remedies which the CTA
supposed would eliminate any resultant prejudice to respondent were
not sufficient palliatives as the monetary values provided in the
supposed remedies do not approximate the monetary values of the tax
credits that respondent lost after the implementation of the VAT ruling in
question. It cited Manila Mining Corporation v. Commissioner of Internal
Revenue,23 in which the Court of Appeals held24 that BIR VAT Ruling
No. 008-92 cannot be given retroactive effect. Lastly, the Court of
Appeals observed that R.A. 7716, the The New Expanded VAT Law,
reveals the intent of the lawmakers with regard to the treatment of sale
of gold to the Central Bank since the amended version therein of Sec.
100 of the NIRC expressly provides that the sale of gold to the Bangko
Sentral ng Pilipinas is an export sale subject to 0% VAT rate. The
appellate court thus allowed respondents claims, decreeing in its
dispositive portion, viz.:
WHEREFORE, the appealed decision is hereby REVERSED. The
respondent Commissioner of Internal Revenue is ordered to award the
following tax credits to petitioner.
1) In CA-G.R. SP No. 37209P49,611,914.00
2) In CA-G.R. SP No. 38958P19,218,738.44
3) In CA-G.R. SP No. 39435P84,909,247.9625
Dissatisfied with the above ruling, petitioner filed the instant Petition for
Review questioning the determination of the Court of Appeals that the
retroactive application of the subject issuance was prejudicial to
respondent and could not be applied retroactively.
Apart from the central issue on the validity of the retroactive application
of VAT Ruling No. 008-92, the question of the validity of the issuance
itself has been touched upon in the pleadings, including a reference
made by respondent to a Court of Appeals Decision holding that the
VAT Ruling had no legal basis.26 For its part, as the party that raised
this issue, petitioner spiritedly defends the validity of the issuance.27
Effectively, however, the question is a non-issue and delving into it
would be a needless exercise for, as respondent emphatically pointed
out in its Comment, unlike petitioners formulation of the issues, the
only real issue in this case is whether VAT Ruling No. 008-92 which
revoked previous rulings of the petitioner which respondent heavily
relied upon . . . may be legally applied retroactively to respondent.28
This Court need not invalidate the BIR issuances, which have the force
and effect of law, unless the issue of validity is so crucially at the heart
PINEDAPCGRNMAN
of the controversy that the Court cannot resolve the case without
having to strike down the issuances. Clearly, whether the subject VAT
ruling may validly be given retrospective effect is the lis mota in the
case. Put in another but specific fashion, the sole issue to be
addressed is whether respondents sale of gold to the Central Bank
during the period when such was classified by BIR issuances as zerorated could be taxed validly at a 10% rate after the consummation of
the transactions involved.
In a long line of cases,29 this Court has affirmed that the rulings,
circular, 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. In fact, both petitioner30
and respondent31 agree that the retroactive application of VAT Ruling
No. 008-92 is valid only if such application would not be prejudicial to
the respondentpursuant to the explicit mandate under Sec. 246 of the
NIRC, thus:
Sec. 246. Non-retroactivity of rulings.Any revocation, modification or
reversal of any of the rules and regulations promulgated in accordance
with the preceding Section or any of the rulings or circulars
promulgated by the Commissioner shall 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 on 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 form the facts on which the ruling is based; or (c)
where the taxpayer acted in bad faith. (Emphasis supplied)
In that regard, petitioner submits that respondent would not be
prejudiced by a retroactive application; respondent maintains the
contrary. Consequently, the determination of the issue of retroactivity
hinges on whether respondent would suffer prejudice from the
retroactive application of VAT Ruling No. 008-92.
We agree with the Court of Appeals and the respondent.
To begin with, the determination of whether respondent had suffered
prejudice is a factual issue. It is an established rule that in the exercise
of its power of review, the Supreme Court is not a trier of facts.
Moreover, in the exercise of the Supreme Courts power of review, the
findings of facts of the Court of Appeals are conclusive and binding on
the Supreme Court.32 An exception to this rule is when the findings of
fact a quo are conflicting,33 as is in this case.
VAT is a percentage tax imposed at every stage of the distribution
process on the sale, barter, exchange or lease of goods or properties
and rendition of services in the course of trade or business, or the
importation of goods.34 It is an indirect tax, which may be shifted to the
buyer, transferee, or lessee of the goods, properties, or services.35
However, the party directly liable for the payment of the tax is the
seller.36
In transactions taxed at a 10% rate, when at the end of any given
taxable quarter the output VAT exceeds the input VAT, the excess shall
be paid to the government; when the input VAT exceeds the output
VAT, the excess would be carried over to VAT liabilities for the
succeeding quarter or quarters.37 On the other hand, transactions
which are taxed at zero-rate do not result in any output tax. Input VAT
attributable to zero-rated sales could be refunded or credited against
other internal revenue taxes at the option of the taxpayer.38
To illustrate, in a zero-rated transaction, when a VAT-registered person
(taxpayer) purchases materials from his supplier at P80.00, P7.3039
of which was passed on to him by his supplier as the latters 10%
output VAT, the taxpayer is allowed to recover P7.30 from the BIR, in
addition to other input VAT he had incurred in relation to the zero-rated
transaction, through tax credits or refunds. When the taxpayer sells his
finished product in a zero-rated transaction, say, for P110.00, he is not
Page 8
TAX 2
required to pay any output VAT thereon. In the case of a transaction

subject to 10% VAT, the taxpayer is allowed to recover both the input
VAT of P7.30 which he paid to his supplier and his output VAT of P2.70
(10% the P30.00 value he has added to the P80.00 material) by
passing on both costs to the buyer. Thus, the buyer pays the total 10%
VAT cost, in this case P10.00 on the product.
In both situations, the taxpayer has the option not to carry any VAT cost
because in the zero-rated transaction, the taxpayer is allowed to
recover input tax from the BIR without need to pay output tax, while in
10% rated VAT, the taxpayer is allowed to pass on both input and
output VAT to the buyer. Thus, there is an elemental similarity between
the two types of VAT ratings in that the taxpayer has the option not to
take on any VAT payment for his transactions by simply exercising his
right to pass on the VAT costs in the manner discussed above.
Proceeding from the foregoing, there appears to be no upfront
economic difference in changing the sale of gold to the Central Bank
from a 0% to 10% VAT rate provided that respondent would be allowed
the choice to pass on its VAT costs to the Central Bank. In the instant
case, the retroactive application of VAT Ruling No. 008-92 unilaterally
forfeited or withdrew this option of respondent. The adverse effect is
that respondent became the unexpected and unwilling debtor to the
BIR of the amount equivalent to the total VAT cost of its product, a
liability it previously could have recovered from the BIR in a zero-rated
scenario or at least passed on to the Central Bank had it known it
would have been taxed at a 10% rate. Thus, it is clear that respondent
suffered economic prejudice when its consummated sales of gold to the
Central Bank were taken out of the zero-rated category. The change in
the VAT rating of respondents transactions with the Central Bank
resulted in the twin loss of its exemption from payment of output VAT
and its opportunity to recover input VAT, and at the same time
subjected it to the 10% VAT sans the option to pass on this cost to the
Central Bank, with the total prejudice in money terms being equivalent
to the 10% VAT levied on its sales of gold to the Central Bank.
Petitioner had made its position hopelessly untenable by arguing that
the deficiency 10% that may be assessable will only be equal to 1/11th
of the amount billed to the [Central Bank] rather than 10% thereof. In
short, [respondent] may only be charged based on the tax amount
actually and technically passed on to the [Central Bank] as part of the
invoiced price.40 To the Court, the aforequoted statement is a clear
recognition that respondent would suffer prejudice in the amount
actually and technically passed on to the [Central Bank] as part of the
invoiced price. In determining the prejudice suffered by respondent, it
matters little how the amount charged against respondent is
computed,41 the point is that the amount (equal to 1/11th of the amount
billed to the Central Bank) was charged against respondent, resulting in
damage to the latter.
Petitioner posits that the retroactive application of BIR VAT Ruling No.
008-92 is stripped of any prejudicial effect when viewed in relation to
several available options to recoup whatever liabilities respondent may
have incurred, i.e., respondents input VAT may still be used (1) to
offset its output VAT on the sales of gold to the Central Bank or on its
output VAT on other sales subject to 10% VAT, and (2) as deductions
on its income tax under Sec. 29 of the Tax Code.42
On petitioners first suggested recoupment modality, respondent
counters that its other sales subject to 10% VAT are so minimal that this
mode is of little value. Indeed, what use would a credit be where there
is nothing to set it off against? Moreover, respondent points out that
after having been imposed with 10% VAT sans the opportunity to pass
on the same to the Central Bank, it was issued a deficiency tax
assessment because its input VAT tax credits were not enough to offset
the retroactive 10% output VAT. The prejudice then experienced by
respondent lies in the fact that the tax refunds/credits that it expected to
PINEDAPCGRNMAN
receive had effectively disappeared by virtue of its newfound output

VAT liability against which petitioner had offset the expected
refund/credit. Additionally, the prejudice to respondent would not simply
disappear, as petitioner claims, when a liability (which liability was not
there to begin with) is imposed concurrently with an opportunity to
reduce, not totally eradicate, the newfound liability. In sum, contrary to
petitioners suggestion, respondents net income still decreased
corresponding to the amount it expected as its refunds/credits and the
deficiency assessments against it, which when summed up would be
the total cost of the 10% retroactive VAT levied on respondent.
Respondent claims to have incurred further prejudice. In computing its
income taxes for the relevant years, the input VAT cost that respondent
had paid to its suppliers was not treated by respondent as part of its
cost of goods sold, which is deductible from gross income for income
tax purposes, but as an asset which could be refunded or applied as
payment for other internal revenue taxes. In fact, Revenue Regulation
No. 5-87 (VAT Implementing Guidelines), requires input VAT to be
recorded not as part of the cost of materials or inventory purchased but
as a separate entry called input taxes, which may then be applied
against output VAT, other internal revenue taxes, or refunded as the
case may be.43 In being denied the opportunity to deduct the input VAT
from its gross income, respondents net income was overstated by the
amount of its input VAT. This overstatement was assessed tax at the
32% corporate income tax rate, resulting in respondents overpayment
of income taxes in the corresponding amount. Thus, respondent not
only lost its right to refund/credit its input VAT and became liable for
deficiency VAT, it also overpaid its income tax in the amount of 32% of
its input VAT.
This leads us to the second recourse that petitioner has suggested to
offset any resulting prejudice to respondent as a consequence of giving
retroactive effect to BIR VAT Ruling No. 008-92. Petitioner submits that
granting that respondent has no other sale subject to 10% VAT against
which its input taxes may be used in payment, then respondent is
constituted as the final entity against which the costs of the tax passeson shall legally stop; hence, the input taxes may be converted as costs
available as deduction for income tax purposes.44
Even assuming that the right to recover respondents excess payment
of income tax has not yet prescribed, this relief would only address
respondents overpayment of income tax but not the other burdens
discussed above. Verily, this remedy is not a feasible option for
respondent because the very reason why it was issued a deficiency tax
assessment is that its input VAT was not enough to offset its retroactive
output VAT. Indeed, the burden of having to go through an unnecessary
and cumbersome refund process is prejudice enough. Moreover, there
is in fact nothing left to claim as a deduction from income taxes.
From the foregoing it is clear that petitioners suggested options by
which prejudice would be eliminated from a retroactive application of
VAT Ruling No. 008-92 are either simply inadequate or grossly
unrealistic.
At the time when the subject transactions were consummated, the
prevailing BIR regulations relied upon by respondent ordained that gold
sales to the Central Bank were zero-rated. The BIR interpreted Sec.
100 of the NIRC in relation to Sec. 2 of E.O. No. 581 s. 1980 which
prescribed that gold sold to the Central Bank shall be considered export
and therefore shall be subject to the export and premium duties. In
coming out with this interpretation, the BIR also considered Sec. 169 of
Central Bank Circular No. 960 which states that all sales of gold to the
Central Bank are considered constructive exports.45 Respondent
should not be faulted for relying on the
BIRs interpretation of the said laws and regulations.46 While it is true,
as petitioner alleges, that government is not estopped from collecting
taxes which remain unpaid on account of the errors or mistakes of its
Page 9
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agents and/or officials and there could be no vested right arising from
an erroneous interpretation of law, these principles must give way to
exceptions based on and in keeping with the interest of justice and
fairplay, as has been done in the instant matter. For, it is primordial that
every person must, in the exercise of his rights and in the performance
of his duties, act with justice, give everyone his due, and observe
honesty and good faith.47
The case of ABS-CBN Broadcasting Corporation v. Court of Tax
Appeals48 involved a similar factual milieu. There the Commissioner of
Internal Revenue issued Memorandum Circular No. 4-71 revoking an
earlier circular for being erroneous for lack of legal basis. When the
prior circular was still in effect, petitioner therein relied on it and
consummated its transactions on the basis thereof. We held, thus:
. . . .Petitioner was no longer in a position to withhold taxes due from
foreign corporations because it had already remitted all film rentals and
no longer had any control over them when the new Circular was issued.
...
....
This Court is not unaware of the well-entrenched principle that the
[g]overnment is never estopped from collecting taxes because of
mistakes or errors on the part of its agents. But, like other principles of
law, this also admits of exceptions in the interest of justice and fairplay .
. . . In fact, in the United States, . . . it has been held that the
Commissioner [of Internal Revenue] 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.49
Respondent, in this case, has similarly been put on the receiving end of
a grossly unfair deal. Before respondent was entitled to tax refunds or
credits based on petitioners own issuances. Then suddenly, it found
itself instead being made to pay deficiency taxes with petitioners
retroactive change in the VAT categorization of respondents
transactions with the Central Bank. This is the sort of unjust treatment
of a taxpayer which the law in Sec. 246 of the NIRC abhors and forbids.
WHEREFORE, the petition is DENIED for lack of merit. The Decision of
the Court of Appeals is AFFIRMED. No pronouncement as to costs.
SO ORDERED. [Commissioner of Internal Revenue vs. Benguet
Corporation, 463 SCRA 28(2005)]
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., respondents.
G.R. No. 168207. September 1, 2005.*
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,
respondents.
G.R. No. 168461. September 1, 2005.*
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
PINEDAPCGRNMAN
NORTH SHELL SERVICE STATION; LOURDES MARTINEZ doing

business under the name and style of SHELL GATEN.
DOMINGO; BETH-ZAIDA 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 VicePresident 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, Respondents.
G.R. No. 168463. September 1, 2005.*
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, respondents.
G.R. No. 168730. September 1, 2005. *
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR., petitioner, vs.
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, respondents.
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Courts; Contempt; Separation of Powers; If it were true that

former Finance Secretary Purisima felt that the media
misconstrued his actions, then he should have immediately
rectified it and not waited until the Supreme Court required him to
explain before he denied having made such statements which
impressed upon the publics mind that the issuance of the TRO
was the product of the machinations on the Court by the
executive branch.At the time the reports came out, Purisima did
not controvert the truth or falsity of the statements attributed to
him. It was only after the Court issued the show-cause order that
Purisima saw it fit to deny having uttered these statements. By
then, it was already impressed upon the publics mind that the
issuance of the TRO was the product of machinations on the
Court by the executive branch. If it were true that Purisima felt
that the media misconstrued his actions, then he should have
immediately rectified it. He should not have waited until the Court
required him to explain before he denied having made such
statements. And even then, his denials were made as a result of
the Courts show-cause order and not by any voluntary act on his
part that will show utter regret for having been misquoted.
Purisima should know that these press releases placed the Court
into dis-honor, disrespect, and public contempt, diminished
public confidence, promoted distrust in the Court, and assailed
the integrity of its Members. The Court already took a beating
before Purisima made any disclaimer. The damage has been done,
so to speak.
SPECIAL CIVIL ACTION in the Supreme Court. Contempt.
The facts are stated in the resolution of the Court.
Carlos G. Baniqued and Laura Victoria Yuson-Layug for petitioners
in G.R. No. 168461.
Eugenio H. Villareal, Dionisio B. Marasigan, Ma. Rosa-lie Taguian,
Agustin C. Bacungan III and Roland Allan C. Abarquez for petitioners in
G.R. No. 168463.
Samson S. Alcantara, Ed Vincent S. Albano and Rene B. Gorospe for
petitioners in G.R. No. 168056.
Luis Ma. Gil L. Gana for petitioners in G.R. No. 168207.
The Solicitor General for public respondents.
RESOLUTION
AUSTRIA-MARTINEZ, J.:
In view of the Courts Resolution dated July 12, 2005, which required
Former Finance Secretary Cesar V. Purisima to show cause why he
should not be held in contempt of court for conduct which puts the
Court and its Members into dis-honor, disrepute and discredit, and
degrades the administration of justice, Purisima filed his Compliance
thereto, stating that:
It is not true that I claimed or even insinuated that this Honorable Court
was pressured or influenced by President Gloria Macapagal Arroyo or
Malacaang Palace to issue a Temporary Restraining Order (TRO) in
the instant cases. What I stated was simply that President Arroyo had
on several occasions discussed with the economic team the possibility
of postponing the implementation of Republic Act No. 9337. While I
believe that President Arroyo wanted to postpone the implementation of
the said law, I never claimed or insinuated that this Honorable Court
was influenced or pressured to issue the TRO against its
implementation.
...
I do not deny that I was extremely disappointed when this Honorable
Court issued the TRO, which was a serious setback to our fiscal
consolidation program. And my disappointment grew when I felt that the
Government specifically the Executive branch, was not doing enough to
PINEDAPCGRNMAN
have the TRO lifted. At the height of my disappointment, and after

hearing of rumors that Executive officials may have been instrumental
in procuring the TRO, I did enquire from the other cabinet officials
whether Malacaang had a hand in the issuance of the order. I felt that
it was my right and duty as Finance Secretary to make such an inquiry,
given that before the issuance of the TRO, the President had inquired
about the possibility of deferring the implementation of Republic Act No.
9337. But surely, my inquiries whether Malacaang did so, did not
amount to, as it was not intended to have the effect of, claiming outright
or necessarily insinuating that Malacaang did so, or to hold, in any
manner, this Honorable Court in contempt.1
Purisima cites the July 11, 2005 edition of the Philippine Star and the
July 10, 2005 edition of the Philippine Daily Inquirer, which reported
that Purisima did not directly accuse the President of influencing the
Court in issuing the TRO, and that he would neither confirm nor deny
the reports that the President had a hand in its issuance.
The Court finds Purisimas explanation unsatisfactory.
The Court reproduces excerpts from some of the reports contained in
the newspapers with regard to Purisimas statements, to wit:
(1) July 10, 2005, The Philippine Star, Opinion Section (Its the
Economy, Stupid!)
The present political crisis will inevitably boil down to the economy as
the real issue that will ultimately bring down the Arroyo Administration.
What we are hearing from people close to the Palace is that the TRO
issued by the Supreme Court on the EVAT is the real reason why 10
Cabinet members, specially Cesar Purisima and Johnny Santos,
resigned. Cesar Purisima further pointed out that her decision-making
process has adversely affected the economy. The frustrated economic
team felt that GMA had actually influenced the Supreme Court to issue
the TRO to postpone the bad effects of the EVAT on prices purely for
her political survival. If indeed that is true, then it just confirms that our
present political system has really gone from bad to worse. What I
found disgusting is that the plotters, especially Cesar Purisima,
sounded like Judas Iscariot. They could just have simply resigned
without making a spectacle out of it.
(2) July 10, 2005, The Daily Tribune (SC Denies Palace Pressed
Issuance of E-VAT TRO)
Reports had claimed that the former economic team of Mrs. Arroyo
decided to resign over the weekend due in part to the administrations
lobbying the SC to issue a restraining order on the e-VAT, apparently to
prevent the public from further seething against the government over
the continuous spiraling of the prices of basic goods and services.
...
Finance officials led by Purisima previously expressed dismay over the
suspension of the e-VAT as they claimed that the TRO would cost the
government at least P140 million a day in unrealized revenues.
Purisima hinted that Mrs. Arroyo had a hand in the SCs TRO to save
her presidency.
(3) July 11, 2005, Manila Standard Today (Palace Debunks Purisima
Claim on EVAT)
Malacaang yesterday branded as ridiculous the insinuations that
President Gloria Macapagal Arroyo had a hand in the Supreme Courts
July 1 order suspending the implementation of the Expanded ValueAdded Tax Law.
At the same time, Justice Secretary Raul Gonzalez slammed resigned
Finance Secretary Cesar Purisima and exTrade Secretary Juan Santos
for claiming that the President had wanted the implementation of the
law delayed so she would not get too much political flak for the tax
measure.
(4) July 11, 2005, The Philippine Star, Business Section (The Last
Straw that Broke a Cabinet)
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For ex-Finance Secretary Cesar Purisima, the implementation of the

EVAT law was a major pillar to strengthen the countrys finances, to get
our fiscal house in order. As far as he and the rest of the economic
management team he heads are concerned, they are operating under
the fiscal equivalent of a red alert. They have scored some early
victories, like the increase in revenue collections in recent months, but
they know that they are still far from being in the clear.
That was why Purisima felt truly betrayed when he reportedly got a
phone call from an official telling him yung hinihingi nyo sa Supreme
Court binigay na. He didnt have any pending requests from the Court
so he wondered, refusing to accept the reality of his worst fear: The
EVAT had been sacrificed by the Palace.
(5) July 12, 2005, The Philippine Daily Inquirer (No GMA Influence on
e-VAT freeze-SC)
Bunye made the reaffirmation after Purisima and former Trade
Secretary Juan Santos insinuated that the President might have
influenced the Supreme Court to grant the TRO.
At the time the reports came out, Purisima did not contro-vert the truth
or falsity of the statements attributed to him. It was only after the Court
issued the show-cause order that Purisima saw it fit to deny having
uttered these statements. By then, it was already impressed upon the
publics mind that the issuance of the TRO was the product of
machinations on the Court by the executive branch.
If it were true that Purisima felt that the media misconstrued his actions,
then he should have immediately rectified it. He should not have waited
until the Court required him to explain before he denied having made
such statements. And even then, his denials were made as a result of
the Courts show-cause order and not by any voluntary act on his part
that will show utter regret for having been misquoted. Purisima should
know that these press releases placed the Court into dishonor,
disrespect, and public contempt, diminished public confidence,
promoted distrust in the Court, and assailed the integrity of its
Members. The Court already took a beating before Purisima made any
disclaimer. The damage has been done, so to speak.
WHEREFORE, Cesar V. Purisima is found GUILTY of indirect contempt
of court and FINED in the amount of Twenty Thousand Pesos
(P20,000.00) to be paid within ten (10) days from finality of herein
Resolution.
SO ORDERED.
Davide, Jr. (C.J.), Puno, Panganiban, Quisumbing, Sandoval-Gutierrez,
Carpio, Corona, Carpio-Morales, Callejo, Sr., Azcuna, Tinga, ChicoNazario and Garcia, JJ., concur.
Ynares-Santiago, J., On Leave.
Cesar V. Purisima meted with P20,000.00 fine for indirect contempt.
Notes.A publication which tends to impede, obstruct, embarrass or
influence the courts in administering justice in a pending suit or
proceeding, constitutes criminal contempt which is summarily
punishable by courts. A publication which tends to degrade the courts
and to destroy public confidence in them or that which tends to bring
them in any way into disrepute, constitutes likewise criminal contempt,
and is equally punishable by courts. (Social Weather Stations, Inc. vs.
Asuncion, 228 SCRA xi [1993])
Clearly, the public interest involved in freedom of speech and the
individual interest of judges (and for that matter, all other public
officials) in the maintenance of private honor and reputation need to be
accommodated one to the other. And the point of adjustment or
accommodation between these two legitimate interests is precisely
found in the norm which requires those who, invoking freedom of
speech, publish statements which are clearly defamatory to identifiable
judges or other public officials to exercise bona fide care in ascertaining
the truth of the statements they publish. The norm does not require that
a journalist guarantee the truth of what he says or publishes. But the
PINEDAPCGRNMAN
norm does prohibit the reckless disregard of private reputation by

publishing or circulating defamatory statements without any bona fide
effort to ascertain the truth thereof. (In Re: Emil P. Jurado, 243 SCRA
299 [1995]) [Abakada Guro Party List vs. Ermita, 469 SCRA 1(2005)]
G.R. No. 193007.July 19, 2011.*
RENATO V. DIAZ and AURORA MA. F. TIMBOL, petitioners, vs. THE
SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
Taxation; Value Added Tax (VAT); Tollways; Declaratory Relief;
Prohibition; A petition for declaratory relief may be treated as one
for prohibition if the case has far-reaching implications and raises
questions that need to be resolved for the public good; A petition
for prohibition is a proper remedy to prohibit or nullify acts of
executive officials that amount to usurpation of legislative
authority.On August 24, 2010 the Court issued a resolution,
treating the petition as one for prohibition rather than one for
declaratory relief, the characterization that petitioners Diaz and
Timbol gave their action. The government has sought
reconsideration of the Courts resolution, however, arguing that
petitioners allegations clearly made out a case for declaratory
relief, an action over which the Court has no original jurisdiction.
The government adds, moreover, that the petition does not meet
the requirements of Rule 65 for actions for prohibition since the
BIR did not exercise judicial, quasi-judicial, or ministerial
functions when it sought to impose VAT on toll fees. Besides,
petitioners Diaz and Timbol has a plain, speedy, and adequate
remedy in the ordinary course of law against the BIR action in the
form of an appeal to the Secretary of Finance. But there are
precedents for treating a petition for declaratory relief as one for
prohibition if the case has far-reaching implications and raises
questions that need to be resolved for the public good. The Court
has also held that a petition for prohibition is a proper remedy to
prohibit or nullify acts of executive officials that amount to
usurpation of legislative authority.
Same; Same; Same; Pleadings, Practice and Procedure; The
imposition of value added tax (VAT) on toll fees has far-reaching
implications; The Supreme Court has ample power to waive
technical requirements when the legal questions to be resolved
are of great importance to the public.The imposition of VAT on
toll fees has far-reaching implications. Its imposition would
impact, not only on the more than half a million motorists who use
the tollways everyday, but more so on the governments effort to
raise revenue for funding various projects and for reducing
budgetary deficits. To dismiss the petition and resolve the issues
later, after the challenged VAT has been imposed, could cause
more mischief both to the tax-paying public and the government.
A belated declaration of nullity of the BIR action would make any
attempt to refund to the motorists what they paid an
administrative nightmare with no solution. Consequently, it is not
only the right, but the duty of the Court to take cognizance of and
resolve the issues that the petition raises. Although the petition
does not strictly comply with the requirements of Rule 65, the
Court has ample power to waive such technical requirements
when the legal questions to be resolved are of great importance to
the public. The same may be said of the requirement of locus
standi which is a mere procedural requisite.
Same; Same; Same; Words and Phrases; The law imposes value
added tax (VAT) on all kinds of services rendered in the
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Philippines for a fee, including those specified in the listevery

activity that can be imagined as a form of service rendered for a
fee should be deemed included unless some provision of law
especially excludes it.It is plain from the above that the law
imposes VAT on all kinds of services rendered in the Philippines
for a fee, including those specified in the list. The enumeration of
affected services is not exclusive. By qualifying services with
the words all kinds, Congress has given the term services an
all-encompassing meaning. The listing of specific services are
intended to illustrate how pervasive and broad is the VATs reach
rather than establish concrete limits to its application. Thus, every
activity that can be imagined as a form of service rendered for a
fee should be deemed included unless some provision of law
especially excludes it.
Same; Same; Same; When a tollway operator takes a toll fee from
a motorist, the fee is in effect for the latters use of the tollway
facilities over which the operator enjoys private proprietary rights
that its contract and the law recognize.Now, do tollway
operators render services for a fee? Presidential Decree (P.D.)
1112 or the Toll Operation Decree establishes the legal basis for
the services that tollway operators render. Essentially, tollway
operators construct, maintain, and operate expressways, also
called tollways, at the operators expense. Tollways serve as
alternatives to regular public highways that meander through
populated areas and branch out to local roads. Traffic in the
regular public highways is for this reason slow-moving. In
consideration for constructing tollways at their expense, the
operators are allowed to collect government-approved fees from
motorists using the tollways until such operators could fully
recover their expenses and earn reasonable returns from their
investments. When a tollway operator takes a toll fee from a
motorist, the fee is in effect for the latters use of the tollway
facilities over which the operator enjoys private proprietary rights
that its contract and the law recognize. In this sense, the tollway
operator is no different from the following service providers under
Section 108 who allow others to use their properties or facilities
for a fee: 1. Lessors of property, whether personal or real; 2.
Warehousing service operators; 3. Lessors or distributors of
cinematographic films; 4. Proprietors, operators or keepers of
hotels, motels, resthouses, pension houses, inns, resorts; 5.
Lending investors (for use of money); Transportation contractors
on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common
carriers by land relative to their transport of goods or cargoes;
and 7. Common carriers by air and sea relative to their transport
of passengers, goods or cargoes from one place in the
Philippines to another place in the Philippines.
Same; Same; Same; Franchises; Words and Phrases; Tollway
operators are franchise grantees and they do not belong to
exceptions that Section 119 spares from the payment of value
added tax (VAT); The word franchise broadly covers
government grants of a special right to do an act or series of acts
of public concern.And not only do tollway operators come
under the broad term all kinds of services, they also come
under the specific class described in Section 108 as all other
franchise grantees who are subject to VAT, except those under
Section 119 of this Code. Tollway operators are franchise
grantees and they do not belong to exceptions (the low-income
radio and/or television broadcasting companies with gross annual
incomes of less than P10 million and gas and water utilities) that
PINEDAPCGRNMAN
Section 119 spares from the payment of VAT. The word franchise
broadly covers government grants of a special right to do an act
or series of acts of public concern.
Same; Same; Same; Same; Nothing in Section 108 of the National
Internal Revenue Code indicates that the franchise grantees it
speaks of are those who hold legislative franchises; The term
franchise has been broadly construed as referring, not only to
authorizations that Congress directly issues in the form of a
special law, but also to those granted by administrative agencies
to which the power to grant franchises has been delegated by
Congress.Petitioners of course contend that tollway operators
cannot be considered franchise grantees under Section 108
since they do not hold legislative franchises. But nothing in
Section 108 indicates that the franchise grantees it speaks of
are those who hold legislative franchises. Petitioners give no
reason, and the Court cannot surmise any, for making a
distinction between franchises granted by Congress and
franchises granted by some other government agency. The latter,
properly constituted, may grant franchises. Indeed, franchises
conferred or granted by local authorities, as agents of the state,
constitute as much a legislative franchise as though the grant had
been made by Congress itself. The term franchise has been
broadly construed as referring, not only to authorizations that
Congress directly issues in the form of a special law, but also to
those granted by administrative agencies to which the power to
grant franchises has been delegated by Congress.
Same; Same; Same; Statutory Construction; Statements made by
individual members of Congress in the consideration of a bill do
not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of lawthe
congressional will is ultimately determined by the language of the
law that the lawmakers voted on.Nor can petitioners cite as
binding on the Court statements made by certain lawmakers in
the course of congressional deliberations of the would-be law. As
the Court said in South African Airways v. Commissioner of
Internal Revenue, 612 SCRA 665 (2010), statements made by
individual members of Congress in the consideration of a bill do
not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of law. The
congressional will is ultimately determined by the language of the
law that the lawmakers voted on. Consequently, the meaning and
intention of the law must first be sought in the words of the
statute itself, read and considered in their natural, ordinary,
commonly accepted and most obvious significations, according
to good and approved usage and without resorting to forced or
subtle construction.
Same; Same; Same; Tollway fees are not taxes.As can be seen,
the discussion in the MIAA case on toll roads and toll fees was
made, not to establish a rule that tollway fees are users tax, but
to make the point that airport lands and buildings are properties
of public dominion and that the collection of terminal fees for their
use does not make them private properties. Tollway fees are not
taxes. Indeed, they are not assessed and collected by the BIR and
do not go to the general coffers of the government. It would of
course be another matter if Congress enacts a law imposing a
users tax, collectible from motorists, for the construction and
maintenance of certain roadways. The tax in such a case goes
directly to the government for the replenishment of resources it
spends for the roadways. This is not the case here. What the
Page 13
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government seeks to tax here are fees collected from tollways

that are constructed, maintained, and operated by private tollway
operators at their own expense under the build, operate, and
transfer scheme that the government has adopted for
expressways. Except for a fraction given to the government, the
toll fees essentially end up as earnings of the tollway operators.
Same; Same; Same; A tax is imposed under the taxing power of
the government principally for the purpose of raising revenues to
fund public expenditures while toll fees are collected by private
tollway operators as reimbursement for the costs and expenses
incurred in the construction, maintenance and operation of the
tollways, as well as to assure them a reasonable margin of
income.In sum, fees paid by the public to tollway operators for
use of the tollways, are not taxes in any sense. A tax is imposed
under the taxing power of the government principally for the
purpose of raising revenues to fund public expenditures. Toll fees,
on the other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well
as to assure them a reasonable margin of income. Although toll
fees are charged for the use of public facilities, therefore, they are
not government exactions that can be properly treated as a tax.
Taxes may be imposed only by the government under its
sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of
ownership.
Same; Same; Same; Value added tax (VAT) on tollway operations
cannot be deemed a tax on tax due to the nature of VAT as an
indirect tax; Once shifted, the value added tax (VAT) ceases to be
a tax and simply becomes part of the cost that the buyer must pay
in order to purchase the good, property or service.
Parenthetically, VAT on tollway operations cannot be deemed a tax
on tax due to the nature of VAT as an indirect tax. In indirect
taxation, a distinction is made between the liability for the tax and
burden of the tax. The seller who is liable for the VAT may shift or
pass on the amount of VAT it paid on goods, properties or
services to the buyer. In such a case, what is transferred is not the
selles liability but merely the burden of the VAT. Thus, the seller
remains directly and legally liable for payment of the VAT, but the
buyer bears its burden since the amount of VAT paid by the
former is added to the selling price. Once shifted, the VAT ceases
to be a tax and simply becomes part of the cost that the buyer
must pay in order to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the
tollway user, but on the tollway operator. Under Section 105 of the
Code, VAT is imposed on any person who, in the course of trade
or business, sells or renders services for a fee. In other words, the
seller of services, who in this case is the tollway operator, is the
person liable for VAT. The latter merely shifts the burden of VAT to
the tollway user as part of the toll fees.
Same; Same; Same; Parties; Non-Impairment Clause; A person
who will neither be prejudiced by nor be affected by the alleged
diminution in return of investments that may result from the value
added tax (VAT) imposition has no personality to invoke the nonimpairment of contract clause on behalf of private investors in the
tollway projects.Petitioner Timbol has no personality to invoke
the non-impairment of contract clause on behalf of private
investors in the tollway projects. She will neither be prejudiced by
nor be affected by the alleged diminution in return of investments
PINEDAPCGRNMAN
that may result from the VAT imposition. She has no interest at all
in the profits to be earned under the TOAs. The interest in and
right to recover investments solely belongs to the private tollway
investors.
Same; Same; Same; The Court cannot rule on matters that are
manifestly conjectural, and neither can it prohibit the State from
exercising its sovereign taxing power based on uncertain,
prophetic grounds.Besides, her allegation that the private
investors rate of recovery will be adversely affected by imposing
VAT on tollway operations is purely speculative. Equally
presumptuous is her assertion that a stipulation in the TOAs
known as the Material Adverse Grantor Action will be activated if
VAT is thus imposed. The Court cannot rule on matters that are
manifestly conjectural. Neither can it prohibit the State from
exercising its sovereign taxing power based on uncertain,
prophetic grounds.
Same; Same; Same; Administrative feasibility, one of the canons
of a sound tax system, simply means that the tax system should
be capable of being effectively administered and enforced with
the least inconvenience to the taxpayer; Even if the imposition of
value added tax (VAT) on tollway operations may seem
burdensome to implement, it is not necessarily invalid unless
some aspect of it is shown to violate any law or the Constitution.
Administrative feasibility is one of the canons of a sound tax
system. It simply means that the tax system should be capable of
being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon,
however, will not render a tax imposition invalid except to the
extent that specific constitutional or statutory limitations are
impaired. Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not
necessarily invalid unless some aspect of it is shown to violate
any law or the Constitution. Here, it remains to be seen how the
taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its
implementation is illegal or unconstitutional would be premature.
Although the transcript of the August 12, 2010 Senate hearing
provides some clue as to how the BIR intends to go about it, the
facts pertaining to the matter are not sufficiently established for
the Court to pass judgment on. Besides, any concern about how
the VAT on tollway operations will be enforced must first be
addressed to the BIR on whom the task of implementing tax laws
primarily and exclusively rests. The Court cannot preempt the
BIRs discretion on the matter, absent any clear violation of law or
the Constitution.
Same; Same; Same; Parties; The right to claim the 2% transitional
input value added tax (VAT) belongs to the tollway operators who
have not questioned the Bureau of Internal Revenue Revenue
Memorandum Circular (BIR RMC) 63-2010s validity.For the
same reason, the Court cannot prematurely declare as illegal, BIR
RMC 63-2010 which directs toll companies to record an
accumulated input VAT of zero balance in their books as of
August 16, 2010, the date when the VAT imposition was supposed
to take effect. The issuance allegedly violates Section 111(A) of
the Code which grants first time VAT payers a transitional input
VAT of 2% on beginning inventory. In this connection, the BIR
explained that BIR RMC 63-2010 is actually the product of
negotiations with tollway operators who have been assessed VAT
as early as 2005, but failed to charge VAT-inclusive toll fees which
Page 14
TAX 2
by now can no longer be collected. The tollway operators agreed

to waive the 2% transitional input VAT, in exchange for
cancellation of their past due VAT liabilities. Notably, the right to
claim the 2% transitional input VAT belongs to the tollway
operators who have not questioned the circulars validity. They
are thus the ones who have a right to challenge the circular in a
direct and proper action brought for the purpose.
Same; Same; Same; Statutory Construction; If the legislative
intent was to exempt tollway operations from value added tax
(VAT), as petitioners so strongly allege, then it would have been
well for the law to clearly say so.In fine, the Commissioner of
Internal Revenue did not usurp legislative prerogative or expand
the VAT laws coverage when she sought to impose VAT on
tollway operations. Section 108(A) of the Code clearly states that
services of all other franchise grantees are subject to VAT, except
as may be provided under Section 119 of the Code. Tollway
operators are not among the franchise grantees subject to
franchise tax under the latter provision. Neither are their services
among the VAT-exempt transactions under Section 109 of the
Code. If the legislative intent was to exempt tollway operations
from VAT, as petitioners so strongly allege, then it would have
been well for the law to clearly say so. Tax exemptions must be
justified by clear statutory grant and based on language in the law
too plain to be mistaken. But as the law is written, no such
exemption obtains for tollway operators. The Court is thus dutybound to simply apply the law as it is found.
Same; Same; Same; Separation of Powers; The grant of tax
exemption is a matter of legislative policy that is within the
exclusive prerogative of Congress.The grant of tax exemption is
a matter of legislative policy that is within the exclusive
prerogative of Congress. The Courts role is to merely uphold this
legislative policy, as reflected first and foremost in the language
of the tax statute. Thus, any unwarranted burden that may be
perceived to result from enforcing such policy must be properly
referred to Congress. The Court has no discretion on the matter
but simply applies the law.
Same; Same; Same; Same; The executive exercises exclusive
discretion in matters pertaining to the implementation and
execution of tax lawsit is more properly suited to deal with the
immediate and practical consequences of the value added tax
(VAT) imposition.The VAT on franchise grantees has been in the
statute books since 1994 when R.A. 7716 or the Expanded ValueAdded Tax law was passed. It is only now, however, that the
executive has earnestly pursued the VAT imposition against
tollway operators. The executive exercises exclusive discretion in
matters pertaining to the implementation and execution of tax
laws. Consequently, the executive is more properly suited to deal
with the immediate and practical consequences of the VAT
imposition.
PETITION FOR DECLARATORY RELIEF in the Supreme Court.
Ma. Rica A. Gatchalian for petitioners.
The Solicitor General for respondents.
ABAD,J.:
May toll fees collected by tollway operators be subjected to valueadded tax?
The Facts and the Case
PINEDAPCGRNMAN
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed

this petition for declaratory relief1 assailing the validity of the impending
imposition of value-added tax (VAT) by the Bureau of Internal Revenue
(BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees,
they have an interest as regular users of tollways in stopping the BIR
action. Additionally, Diaz claims that he sponsored the approval of
Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and
Republic Act 8424 (the 1997 National Internal Revenue Code or the
NIRC) at the House of Representatives. Timbol, on the other hand,
claims that she served as Assistant Secretary of the Department of
Trade and Industry and consultant of the Toll Regulatory Board (TRB)
in the past administration.
Petitioners allege that the BIR attempted during the administration of
President Gloria Macapagal-Arroyo to impose VAT on toll fees. The
imposition was deferred, however, in view of the consistent opposition
of Diaz and other sectors to such move. But, upon President Benigno
C. Aquino IIIs assumption of office in 2010, the BIR revived the idea
and would impose the challenged tax on toll fees beginning August 16,
2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the
NIRC, intend to include toll fees within the meaning of sale of services
that are subject to VAT; that a toll fee is a users tax, not a sale of
services; that to impose VAT on toll fees would amount to a tax on
public service; and that, since VAT was never factored into the formula
for computing toll fees, its imposition would violate the non-impairment
clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order
(TRO), enjoining the implementation of the VAT. The Court required the
government, represented by respondents Cesar V. Purisima, Secretary
of the Department of Finance, and Kim S. Jacinto-Henares,
Commissioner of Internal Revenue, to comment on the petition within
10 days from notice.2 Later, the Court issued another resolution
treating the petition as one for prohibition.3
On August 23, 2010 the Office of the Solicitor General filed the
governments comment.4 The government avers that the NIRC
imposes VAT on all kinds of services of franchise grantees, including
tollway operations, except where the law provides otherwise; that the
Court should seek the meaning and intent of the law from the words
used in the statute; and that the imposition of VAT on tollway operations
has been the subject as early as 2003 of several BIR rulings and
circulars.5 The government also argues that petitioners have no right to
invoke the non-impairment of contracts clause since they clearly have
no personal interest in existing toll operating agreements (TOAs)
between the government and tollway operators. At any rate, the nonimpairment clause cannot limit the States sovereign taxing power
which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the
parametric formula for computing toll rates cannot exempt tollway
operators from VAT. In any event, it cannot be claimed that the rights of
tollway operators to a reasonable rate of return will be impaired by the
VAT since this is imposed on top of the toll rate. Further, the imposition
of VAT on toll fees would have very minimal effect on motorists using
the tollways.
In their reply6 to the governments comment, petitioners point out that
tollway operators cannot be regarded as franchise grantees under the
NIRC since they do not hold legislative franchises. Further, the BIR
intends to collect the VAT by rounding off the toll rate and putting any
excess collection in an escrow account. But this would be illegal since
only the Congress can modify VAT rates and authorize its
disbursement. Finally, BIR Revenue Memorandum Circular 63-2010
(BIR RMC 63-2010), which directs toll companies to record an
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TAX 2
accumulated input VAT of zero balance in their books as of August 16,

2010, contravenes Section 111 of the NIRC which grants entities that
first become liable to VAT a transitional input tax credit of 2% on
beginning inventory. For this reason, the VAT on toll fees cannot be
implemented.
The Issues Presented
The case presents two procedural issues:
1.Whether or not the Court may treat the petition for declaratory relief
as one for prohibition; and
2.Whether or not petitioners Diaz and Timbol have legal standing to
file the action.
The case also presents two substantive issues:
1.Whether or not the government is unlawfully expanding VAT
coverage by including tollway operators and tollway operations in the
terms franchise grantees and sale of services under Section 108 of
the Code; and
2.Whether or not the imposition of VAT on tollway operators a)
amounts to a tax on tax and not a tax on services; b) will impair the
tollway operators right to a reasonable return of investment under their
TOAs; and c) is not administratively feasible and cannot be
implemented.
The Courts Rulings
A.On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition
as one for prohibition rather than one for declaratory relief, the
characterization that petitioners Diaz and Timbol gave their action. The
government has sought reconsideration of the Courts resolution,7
however, arguing that petitioners allegations clearly made out a case
for declaratory relief, an action over which the Court has no original
jurisdiction. The government adds, moreover, that the petition does not
meet the requirements of Rule 65 for actions for prohibition since the
BIR did not exercise judicial, quasi-judicial, or ministerial functions
when it sought to impose VAT on toll fees. Besides, petitioners Diaz
and Timbol has a plain, speedy, and adequate remedy in the ordinary
course of law against the BIR action in the form of an appeal to the
Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as
one for prohibition if the case has far-reaching implications and raises
questions that need to be resolved for the public good.8 The Court has
also held that a petition for prohibition is a proper remedy to prohibit or
nullify acts of executive officials that amount to usurpation of legislative
authority.9
Here, the imposition of VAT on toll fees has far-reaching implications.
Its imposition would impact, not only on the more than half a million
motorists who use the tollways everyday, but more so on the
governments effort to raise revenue for funding various projects and for
reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged
VAT has been imposed, could cause more mischief both to the taxpaying public and the government. A belated declaration of nullity of the
BIR action would make any attempt to refund to the motorists what they
paid an administrative nightmare with no solution. Consequently, it is
not only the right, but the duty of the Court to take cognizance of and
resolve the issues that the petition raises.
Although the petition does not strictly comply with the requirements of
Rule 65, the Court has ample power to waive such technical
requirements when the legal questions to be resolved are of great
importance to the public. The same may be said of the requirement of
locus standi which is a mere procedural requisite.10
B.On the Substantive Issues:
PINEDAPCGRNMAN
One.The relevant law in this case is Section 108 of the NIRC, as

amended. VAT is levied, assessed, and collected, according to Section
108, on the gross receipts derived from the sale or exchange of
services as well as from the use or lease of properties. The third
paragraph of Section 108 defines sale or exchange of services as
follows:
The phrase sale or exchange of services means the performance of
all kinds of services in the Philippines for others for a fee, remuneration
or consideration, including those performed or rendered by construction
and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real;
warehousing services; lessors or distributors of cinematographic films;
persons engaged in milling, processing, manufacturing or repacking
goods for others; proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of goods or
cargoes; common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to
another place in the Philippines; sales of electricity by generation
companies, transmission, and distribution companies; services of
franchise grantees of electric utilities, telephone and telegraph, radio
and television broadcasting and all other franchise grantees except
those under Section 119 of this Code and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not
the performance thereof calls for the exercise or use of the physical or
mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on all kinds of
services rendered in the Philippines for a fee, including those specified
in the list. The enumeration of affected services is not exclusive.11 By
qualifying services with the words all kinds, Congress has given the
term services an all-encompassing meaning. The listing of specific
services are intended to illustrate how pervasive and broad is the VATs
reach rather than establish concrete limits to its application. Thus,
every activity that can be imagined as a form of service rendered for a
fee should be deemed included unless some provision of law especially
excludes it.
Now, do tollway operators render services for a fee? Presidential
Decree (P.D.) 1112 or the Toll Operation Decree establishes the legal
basis for the services that tollway operators render. Essentially, tollway
operators construct, maintain, and operate expressways, also called
tollways, at the operators expense. Tollways serve as alternatives to
regular public highways that meander through populated areas and
branch out to local roads. Traffic in the regular public highways is for
this reason slow-moving. In consideration for constructing tollways at
their expense, the operators are allowed to collect governmentapproved fees from motorists using the tollways until such operators
could fully recover their expenses and earn reasonable returns from
their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in
effect for the latters use of the tollway facilities over which the operator
enjoys private proprietary rights12 that its contract and the law
recognize. In this sense, the tollway operator is no different from the
following service providers under Section 108 who allow others to use
their properties or facilities for a fee:
1.Lessors of property, whether personal or real;
2.Warehousing service operators;
3.Lessors or distributors of cinematographic films;
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4.Proprietors, operators or keepers of hotels, motels, resthouses,

pension houses, inns, resorts;
5.Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of goods or
cargoes; and
7.Common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to
another place in the Philippines.
It does not help petitioners cause that Section 108 subjects to VAT all
kinds of services rendered for a fee regardless of whether or not the
performance thereof calls for the exercise or use of the physical or
mental faculties. This means that services to be subject to VAT need
not fall under the traditional concept of services, the personal or
professional kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term all kinds
of services, they also come under the specific class described in
Section 108 as all other franchise grantees who are subject to VAT,
except those under Section 119 of this Code.
Tollway operators are franchise grantees and they do not belong to
exceptions (the low-income radio and/or television broadcasting
companies with gross annual incomes of less than P10 million and gas
and water utilities) that Section 11913 spares from the payment of VAT.
The word franchise broadly covers government grants of a special
right to do an act or series of acts of public concern.14
Petitioners of course contend that tollway operators cannot be
considered franchise grantees under Section 108 since they do not
hold legislative franchises. But nothing in Section 108 indicates that the
franchise grantees it speaks of are those who hold legislative
franchises. Petitioners give no reason, and the Court cannot surmise
any, for making a distinction between franchises granted by Congress
and franchises granted by some other government agency. The latter,
properly constituted, may grant franchises. Indeed, franchises
conferred or granted by local authorities, as agents of the state,
constitute as much a legislative franchise as though the grant had been
made by Congress itself.15 The term franchise has been broadly
construed as referring, not only to authorizations that Congress directly
issues in the form of a special law, but also to those granted by
administrative agencies to which the power to grant franchises has
been delegated by Congress.16
Tollway operators are, owing to the nature and object of their business,
franchise grantees. The construction, operation, and maintenance of
toll facilities on public improvements are activities of public
consequence that necessarily require a special grant of authority from
the state. Indeed, Congress granted special franchise for the operation
of tollways to the Philippine National Construction Company, the former
tollway concessionaire for the North and South Luzon Expressways.
Apart from Congress, tollway franchises may also be granted by the
TRB, pursuant to the exercise of its delegated powers under P.D.
1112.17 The franchise in this case is evidenced by a Toll Operation
Certificate.18
Petitioners contend that the public nature of the services rendered by
tollway operators excludes such services from the term sale of
services under Section 108 of the Code. But, again, nothing in Section
108 supports this contention. The reverse is true. In specifically
including by way of example electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered businesses, Section
108 opens other companies rendering public service for a fee to the
imposition of VAT. Businesses of a public nature such as public utilities
and the collection of tolls or charges for its use or service is a
franchise.19
PINEDAPCGRNMAN
Nor can petitioners cite as binding on the Court statements made by

certain lawmakers in the course of congressional deliberations of the
would-be law. As the Court said in South African Airways v.
Commissioner of Internal Revenue,20 statements made by individual
members of Congress in the consideration of a bill do not necessarily
reflect the sense of that body and are, consequently, not controlling in
the interpretation of law. The congressional will is ultimately
determined by the language of the law that the lawmakers voted on.
Consequently, the meaning and intention of the law must first be sought
in the words of the statute itself, read and considered in their natural,
ordinary, commonly accepted and most obvious significations,
according to good and approved usage and without resorting to forced
or subtle construction.
Two.Petitioners argue that a toll fee is a users tax and to impose
VAT on toll fees is tantamount to taxing a tax.21 Actually, petitioners
base this argument on the following discussion in Manila International
Airport Authority (MIAA) v. Court of Appeals:22
No one can dispute that properties of public dominion mentioned in
Article 420 of the Civil Code, like roads, canals, rivers, torrents, ports
and bridges constructed by the State, are owned by the State. The
term ports includes seaports and airports. The MIAA Airport Lands
and Buildings constitute a port constructed by the State. Under Article
420 of the Civil Code, the MIAA Airport Lands and Buildings are
properties of public dominion and thus owned by the State or the
Republic of the Philippines.
x x x The operation by the government of a tollway does not change the
character of the road as one for public use. Someone must pay for the
maintenance of the road, either the public indirectly through the taxes
they pay the government, or only those among the public who actually
use the road through the toll fees they pay upon using the road. The
tollway system is even a more efficient and equitable manner of taxing
the public for the maintenance of public roads.
The charging of fees to the public does not determine the character of
the property whether it is for public dominion or not. Article 420 of the
Civil Code defines property of public dominion as one intended for
public use. Even if the government collects toll fees, the road is still
intended for public use if anyone can use the road under the same
terms and conditions as the rest of the public. The charging of fees, the
limitation on the kind of vehicles that can use the road, the speed
restrictions and other conditions for the use of the road do not affect the
public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing
fees MIAA charges to airlines, constitute the bulk of the income that
maintains the operations of MIAA. The collection of such fees does not
change the character of MIAA as an airport for public use. Such fees
are often termed users tax. This means taxing those among the public
who actually use a public facility instead of taxing all the public
including those who never use the particular public facility. A users tax
is more equitablea principle of taxation mandated in the 1987
Constitution.23 (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal
fees to a users tax must also pertain to tollway fees. But the main
issue in the MIAA case was whether or not Paraaque City could sell
airport lands and buildings under MIAA administration at public auction
to satisfy unpaid real estate taxes. Since local governments have no
power to tax the national government, the Court held that the City could
not proceed with the auction sale. MIAA forms part of the national
government although not integrated in the department framework.24
Thus, its airport lands and buildings are properties of public dominion
beyond the commerce of man under Article 420(1)25 of the Civil Code
and could not be sold at public auction.
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As can be seen, the discussion in the MIAA case on toll roads and toll
fees was made, not to establish a rule that tollway fees are users tax,
but to make the point that airport lands and buildings are properties of
public dominion and that the collection of terminal fees for their use
does not make them private properties. Tollway fees are not taxes.
Indeed, they are not assessed and collected by the BIR and do not go
to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing
a users tax, collectible from motorists, for the construction and
maintenance of certain roadways. The tax in such a case goes directly
to the government for the replenishment of resources it spends for the
roadways. This is not the case here. What the government seeks to tax
here are fees collected from tollways that are constructed, maintained,
and operated by private tollway operators at their own expense under
the build, operate, and transfer scheme that the government has
adopted for expressways.26 Except for a fraction given to the
government, the toll fees essentially end up as earnings of the tollway
operators.
In sum, fees paid by the public to tollway operators for use of the
tollways, are not taxes in any sense. A tax is imposed under the taxing
power of the government principally for the purpose of raising revenues
to fund public expenditures.27 Toll fees, on the other hand, are
collected by private tollway operators as reimbursement for the costs
and expenses incurred in the construction, maintenance and operation
of the tollways, as well as to assure them a reasonable margin of
income. Although toll fees are charged for the use of public facilities,
therefore, they are not government exactions that can be properly
treated as a tax. Taxes may be imposed only by the government under
its sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of
ownership.28
Parenthetically, VAT on tollway operations cannot be deemed a tax on
tax due to the nature of VAT as an indirect tax. In indirect taxation, a
distinction is made between the liability for the tax and burden of the
tax. The seller who is liable for the VAT may shift or pass on the amount
of VAT it paid on goods, properties or services to the buyer. In such a
case, what is transferred is not the sellers liability but merely the
burden of the VAT.29
Thus, the seller remains directly and legally liable for payment of the
VAT, but the buyer bears its burden since the amount of VAT paid by
the former is added to the selling price. Once shifted, the VAT ceases to
be a tax30 and simply becomes part of the cost that the buyer must pay
in order to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the
tollway user, but on the tollway operator. Under Section 105 of the
Code, 31 VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the seller
of services, who in this case is the tollway operator, is the person liable
for VAT. The latter merely shifts the burden of VAT to the tollway user as
part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even
if toll fees were deemed as a users tax. VAT is assessed against the
tollway operators gross receipts and not necessarily on the toll fees.
Although the tollway operator may shift the VAT burden to the tollway
user, it will not make the latter directly liable for the VAT. The shifted
VAT burden simply becomes part of the toll fees that one has to pay in
order to use the tollways.32
Three.Petitioner Timbol has no personality to invoke the nonimpairment of contract clause on behalf of private investors in the
tollway projects. She will neither be prejudiced by nor be affected by
the alleged diminution in return of investments that may result from the
VAT imposition. She has no interest at all in the profits to be earned
PINEDAPCGRNMAN
under the TOAs. The interest in and right to recover investments solely
belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will
be adversely affected by imposing VAT on tollway operations is purely
speculative. Equally presumptuous is her assertion that a stipulation in
the TOAs known as the Material Adverse Grantor Action will be
activated if VAT is thus imposed. The Court cannot rule on matters that
are manifestly conjectural. Neither can it prohibit the State from
exercising its sovereign taxing power based on uncertain, prophetic
grounds.
Four.Finally, petitioners assert that the substantiation requirements
for claiming input VAT make the VAT on tollway operations impractical
and incapable of implementation. They cite the fact that, in order to
claim input VAT, the name, address and tax identification number of the
tollway user must be indicated in the VAT receipt or invoice. The
manner by which the BIR intends to implement the VATby rounding
off the toll rate and putting any excess collection in an escrow account
is also illegal, while the alternative of giving change to thousands of
motorists in order to meet the exact toll rate would be a logistical
nightmare. Thus, according to them, the VAT on tollway operations is
not administratively feasible.33
Administrative feasibility is one of the canons of a sound tax system. It
simply means that the tax system should be capable of being
effectively administered and enforced with the least inconvenience to
the taxpayer. Non-observance of the canon, however, will not render a
tax imposition invalid except to the extent that specific constitutional or
statutory limitations are impaired.34 Thus, even if the imposition of
VAT on tollway operations may seem burdensome to implement, it is
not necessarily invalid unless some aspect of it is shown to violate any
law or the Constitution.
Here, it remains to be seen how the taxing authority will actually
implement the VAT on tollway operations. Any declaration by the Court
that the manner of its implementation is illegal or unconstitutional would
be premature. Although the transcript of the August 12, 2010 Senate
hearing provides some clue as to how the BIR intends to go about it,35
the facts pertaining to the matter are not sufficiently established for the
Court to pass judgment on. Besides, any concern about how the VAT
on tollway operations will be enforced must first be addressed to the
BIR on whom the task of implementing tax laws primarily and
exclusively rests. The Court cannot preempt the BIRs discretion on the
matter, absent any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal,
BIR RMC 63-2010 which directs toll companies to record an
accumulated input VAT of zero balance in their books as of August 16,
2010, the date when the VAT imposition was supposed to take effect.
The issuance allegedly violates Section 111(A)36 of the Code which
grants first time VAT payers a transitional input VAT of 2% on beginning
inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually
the product of negotiations with tollway operators who have been
assessed VAT as early as 2005, but failed to charge VAT-inclusive toll
fees which by now can no longer be collected. The tollway operators
agreed to waive the 2% transitional input VAT, in exchange for
cancellation of their past due VAT liabilities. Notably, the right to claim
the 2% transitional input VAT belongs to the tollway operators who have
not questioned the circulars validity. They are thus the ones who have
a right to challenge the circular in a direct and proper action brought for
the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative
prerogative or expand the VAT laws coverage when she sought to
impose VAT on tollway operations. Section 108(A) of the Code clearly
Page 18
TAX 2
states that services of all other franchise grantees are subject to VAT,
except as may be provided under Section 119 of the Code. Tollway
operators are not among the franchise grantees subject to franchise tax
under the latter provision. Neither are their services among the VATexempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as
petitioners so strongly allege, then it would have been well for the law
to clearly say so. Tax exemptions must be justified by clear statutory
grant and based on language in the law too plain to be mistaken.37 But
as the law is written, no such exemption obtains for tollway operators.
The Court is thus duty-bound to simply apply the law as it is found.
Lastly, the grant of tax exemption is a matter of legislative policy that is
within the exclusive prerogative of Congress. The Courts role is to
merely uphold this legislative policy, as reflected first and foremost in
the language of the tax statute. Thus, any unwarranted burden that
may be perceived to result from enforcing such policy must be properly
referred to Congress. The Court has no discretion on the matter but
simply applies the law.
The VAT on franchise grantees has been in the statute books since
1994 when R.A. 7716 or the Expanded Value-Added Tax law was
passed. It is only now, however, that the executive has earnestly
pursued the VAT imposition against tollway operators. The executive
exercises exclusive discretion in matters pertaining to the
implementation and execution of tax laws. Consequently, the executive
is more properly suited to deal with the immediate and practical
consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance
and Commissioner of Internal Revenues motion for reconsideration of
its August 24, 2010 resolution, DISMISSES the petitioners Renato V.
Diaz and Aurora Ma. F. Timbols petition for lack of merit, and SETS
ASIDE the Courts temporary restraining order dated August 13, 2010.
SO ORDERED. [Diaz vs. Secretary of Finance, 654 SCRA 96(2011)]
2. 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.
(1) The term 'goods' or 'properties' shall mean all tangible and
intangible objects which are capable of pecuniary estimation and shall
include:
(a) Real properties held primarily for sale to customers or held for lease
in the ordinary course of trade or business;
(b) The right or the privilege to use patent, copyright, design or model,
plan, secret formula or process, goodwill, trademark, trade brand or
other like property or right;
(c) The right or the privilege to use in the Philippines of any industrial,
commercial or scientific equipment;
(d) The right or the privilege to use motion picture films, tapes and
discs; and
(e) Radio, television, satellite transmission and cable television time.
The term 'gross selling price' means the total amount of money or its
equivalent which the purchaser pays or is obligated to pay to the seller
in consideration of the sale, barter or exchange of the goods or
properties, excluding the value-added tax. The excise tax, if any, on
such goods or properties shall form part of the gross selling price.
(2) The following sales by VAT-registered persons shall be subject to
zero percent (0%) rate:
(a) Export Sales. - The term 'export sales' means:
PINEDAPCGRNMAN
(1) The sale and actual shipment of goods from the Philippines to a
foreign country, irrespective of any shipping arrangement that may be
agreed upon which may influence or determine the transfer of
ownership of the goods so exported and paid for in acceptable foreign
currency or its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
(2) Sale of raw materials or packaging materials to a nonresident buyer
for delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of
the said buyer's goods and paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
(3) Sale of raw materials or packaging materials to export-oriented
enterprise whose export sales exceed seventy percent (70%) of total
annual production;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and
(5) Those considered export sales under Executive Order NO. 226,
otherwise known as the Omnibus Investment Code of 1987, and other
special laws.
(b) Foreign Currency Denominated Sale. - The phrase 'foreign
currency denominated sale' means sale to a nonresident of goods,
except those mentioned in Sections 149 and 150, assembled or
manufactured in the Philippines for delivery to a resident in the
Philippines, paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP).
(c) Sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory
effectively subjects such sales to zero rate.
(B) Transactions Deemed Sale. - The following transactions shall be
deemed sale:
(1) Transfer, use or consumption not in the course of business of goods
or properties originally intended for sale or for use in the course of
business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the VATregistered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within sixty (60)
days following the date such goods were consigned; and
(4) Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or cessation.
(C) Changes in or Cessation of Status of a VAT-registered Person.
- The tax imposed in Subsection (A) of this Section shall also apply to
goods disposed of or existing as of a certain date if under
circumstances to be prescribed in rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the
Commissioner, the status of a person as a VAT-registered person
changes or is terminated.
(D) Determination of the Tax. (1) The tax shall be computed by multiplying the total amount indicated
in the invoice by one-eleventh (1/11).
(2) Sales Returns, Allowances and Sales Discounts. - The value of
goods or properties sold and subsequently returned or for which
allowances were granted by a VAT-registered person may be deducted
from the gross sales or receipts for the quarter in which a refund is
made or a credit memorandum or refund is issued. Sales discount
granted and indicated in the invoice at the time of sale and the grant of
which does not depend upon the happening of a future event may be
excluded from the gross sales within the same quarter it was given.
Page 19
TAX 2
(3) Authority of the Commissioner to Determine the Appropriate

Tax Base. - The Commissioner shall, by rules and regulations
prescribed by the Secretary of Finance, determine the appropriate tax
base in cases where a transaction is deemed a sale, barter or
exchange of goods or properties under Subsection (B) hereof, or where
the gross selling price is unreasonably lower than the actual market
value.
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.
(B) Transfer of Goods by Tax-exempt Persons. - In the case of taxfree importation of goods into the Philippines by persons, entities or
agencies exempt from tax where such goods are subsequently sold,
transferred or exchanged in the Philippines to non-exempt persons or
entities, the purchasers, transferees or recipients shall be considered
the importers thereof, who shall be liable for any internal revenue tax
on such importation. The tax due on such importation shall constitute a
lien on the goods superior to all charges or liens on the goods,
irrespective
of
the
possessor
thereof.
3. SALE OF SERVICES
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, including the
use
or
lease
of
properties.
The phrase 'sale or exchange of services' means the performance of all
kinds or services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by construction
and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real;
warehousing services; lessors or distributors of cinematographic films;
persons engaged in milling processing, manufacturing or repacking
goods for others; proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire another
domestic common carriers by land, air and water relative to their
transport of goods or cargoes; services of franchise grantees of
telephone and telegraph, radio and television broadcasting and all
other franchise grantees except those under Section 119 of this Code;
services of banks, non-bank financial intermediaries and finance
companies; and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the
PINEDAPCGRNMAN
performance thereof calls for the exercise or use of the physical or

mental faculties. The phrase 'sale or exchange of services' shall
likewise include:
(1) The lease or the use of or the right or privilege to use any copyright,
patent, design or model, plan secret formula or process, goodwill,
trademark, trade brand or other like property or right;
(2) The lease of the use of, or the right to use of any industrial,
commercial or scientific equipment;
(3) The supply of scientific, technical, industrial or commercial
knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to and
is furnished as a means of enabling the application or enjoyment of any
such property, or right as is mentioned in subparagraph (2) or any such
knowledge or information as is mentioned in subparagraph (3);
(5) The supply of services by a nonresident person or his employee in
connection with the use of property or rights belonging to, or the
installation or operation of any brand, machinery or other apparatus
purchased from such nonresident person.
(6) The supply of technical advice, assistance or services rendered in
connection with technical management or administration of any
scientific, industrial or commercial undertaking, venture, project or
scheme;
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed
irrespective of the place where the contract of lease or licensing
agreement was executed if the property is leased or used in the
Philippines.
The term 'gross receipts' means the total amount of money or its
equivalent representing the contract price, compensation, service fee,
rental or royalty, including the amount charged for materials supplied
with the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services
performed or to be performed for another person, excluding valueadded tax.
(B) Transactions Subject to Zero Percent (0%) Rate - The following
services performed in the Philippines by VAT- registered persons shall
be subject to zero percent (0%) rate.
(1) Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding paragraph,
the consideration for which is paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero
percent (0%) rate;
(4) Services rendered to vessels engaged exclusively in international
shipping; and
(5) Services performed by subcontractors and/or contractors in
processing, converting, of manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production.
(C) Determination of the Tax. - The tax shall be computed by
multiplying the total amount indicated in the official receipt by oneeleventh (1/11).
Page 20
TAX 2
4. VAT ZERO RATED TRANSACTION

DIFFERENCE BETWEEN ZERO RATED AND VAT EXEMPT
G.R. No. 149073. February 16, 2005.*

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CEBU
TOYO CORPORATION, respondent.
Taxation; Value-Added Tax (VAT); Under the fiscal incentives
granted to PEZA-registered enterprises under Sec. 23 of R.A. No.
7916, the taxpayer had two options with respect to its tax burden
it could avail of an income tax holiday pursuant to provisions of
E.O. No. 226, thus exempt it from income taxes for a number of
years but not from other internal revenue taxes such as VAT, or it
could avail of the tax exemptions on all taxes, including VAT
under P.D. No. 66 and pay only the preferential tax rate of 5%
under R.A. No. 7916.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.
Same; Same; Words and Phrases; Taxable transactions are those
transactions which are subject to value-added tax either at the
rate of 10% or 0%, and the seller shall be entitled to tax credit for
the value-added tax paid on purchases and leases of goods,
properties or services; An exemption means that the sale of
goods, properties or services and the use or lease of properties is
not subject to VAT (output tax) and the seller is not allowed any
tax credit on VAT (input tax) previously paid; A VAT-registered
purchaser of goods, properties or services that are VAT-exempt, is
not entitled to any input tax on such purchases despite the
issuance of a VAT invoice or receipt.Taxable transactions are
those transactions which are subject to value-added tax either at
the rate of ten percent (10%) or zero percent (0%). In taxable
transactions, the seller shall be entitled to tax credit for the valueadded tax paid on purchases and leases of goods, properties or
services. An exemption means that the sale of goods, properties
or services and the use or lease of properties is not subject to
VAT (output tax) and the seller is not allowed any tax credit on VAT
(input tax) previously paid. The person making the exempt sale of
goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT.
Thus, a VAT-registered purchaser of goods, properties or services
that are VAT-exempt, is not entitled to any input tax on such
purchases despite the issuance of a VAT invoice or receipt.
PINEDAPCGRNMAN
Same; Same; Under the value-added tax system, a zero-rated sale

by a VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax, but the input tax on
his purchase of goods, properties or services related to such
zero-rated sale shall be available as tax credit or refund.Now,
having determined that respondent is engaged in taxable
transactions subject to VAT, let us then proceed to determine
whether it is subject to 10% or zero (0%) rate of VAT. To begin
with, it must be recalled that generally, sale of goods and supply
of services performed in the Philippines are taxable at the rate of
10%. However, export sales, or sales outside the Philippines, shall
be subject to value-added tax at 0% if made by a VAT-registered
person. Under the value-added tax system, a zero-rated sale by a
VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input
tax on his purchase of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund.
Same; Same; In principle, the purpose of applying a zero percent
(0%) rate on a taxable transaction is to exempt the transaction
completely from VAT previously collected on inputs.In principle,
the purpose of applying a zero percent (0%) rate on a taxable
transaction is to exempt the transaction completely from VAT
previously collected on inputs. It is thus the only true way to
ensure that goods are provided free of VAT. While the zero rating
and the exemption are computationally the same, they actually
differ in several aspects, to wit: (a) A zero-rated sale is a taxable
transaction but does not result in an output tax while an exempted
transaction is not subject to the output tax; (b) The input VAT on
the purchases of a VAT-registered person with zero-rated sales
may be allowed as tax credits or refunded while the seller in an
exempt transaction is not entitled to any input tax on his
purchases despite the issuance of a VAT invoice or receipt; (c)
Persons engaged in transactions which are zero-rated, being
subject to VAT, are required to register while registration is
optional for VAT-exempt persons.
Same; Same; Court of Tax Appeals; 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.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. In this
case, we find no cogent reason to deviate from this wellentrenched 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.
PETITION for review on certiorari of a decision of the Court of
Appeals.
Pablo M. Bastes, Jr., Rhodora J. Corcuera-Menzon and Maricel
G. Gelomio-Quilates for petitioner.
Alexander B. Cabrera for private respondent.
Page 21
TAX 2
QUISUMBING, J.:
In its Decision1 dated July 6, 2001, the Court of Appeals, in CA-G.R.

SP No. 60304, affirmed the Resolutions dated 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 ValueAdded 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
PINEDAPCGRNMAN
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
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 intercompany 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 to
Y136,473,908.05 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
Validly Supported Input Taxes Allocation:
Verified Zero-Rated Sales
a.) Toyo Lens Corporation
b.) MEPZ Enterprises
Divided by Total Zero-Rated Sales
Quotient
Multiply by Allowable Input Tax
Amount Refundable
104,129.13
755,385.30
P3,684,441.91
Y274,043,858.00
136,473,908.05
Y410,517,766.05
Y700,654,606.15
0.5859
P3,684,441.91
P2,158,714.[52]12
Page 22
TAX 2
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 2413 of 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 PEZAregistered 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:
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 VAT-exempt since the evidence showed that it is a VATregistered 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.
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.
PINEDAPCGRNMAN
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 valueadded 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
Page 23
TAX 2
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 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.26
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 at P2,158,714.46, but which we find
after 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. 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 of P2,158,714.52
representing unutilized input tax payments. No pronouncement as to
costs.
SO ORDERED.
Davide, Jr. (C.J., Chairman), Ynares-Santiago, Carpio and Azcuna,
JJ., concur.
Petition denied, assailed decision affirmed with very slight modification.
Notes.The VAT registration fee is a mere administrative fee, one not
imposed on the exercise of a privilege, much less a constitutional right.
(Tolentino vs. Secretary of Finance, 235 SCRA 630 [1994])
PINEDAPCGRNMAN
G.R. No. 153866. February 11, 2005.*

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.
Taxation; Tax Exemption; Value Added Tax (VAT); Petitioner is not
subject to internal revenue laws and regulations and is even
entitled to tax credits.From the above-cited laws, it is
immediately clear that petitioner enjoys preferential tax treatment.
It is not subject to internal revenue laws and regulations and is
even entitled to tax credits. The VAT on capital goods is an
internal revenue tax from which petitioner as an entity is exempt.
Although the transactions involving such tax are not exempt,
petitioner as a VAT-registered person, however, is entitled to their
credits.
Same; Same; Same; The VAT is an indirect tax that may be shifted
or passed on to the buyer, transferee or lessee of the goods,
properties or services.Viewed broadly, the VAT is a uniform tax
ranging, at present, from 0 percent to 10 percent levied on every
importation of goods, whether or not in the course of trade or
business, or imposed on each sale, barter, exchange or lease of
goods or properties or on each rendition of services in the course
of trade or business as they pass along the production and
distribution chain, the tax being limited only to the value added to
such goods, properties or services by the seller, transferor or
lessor. It is an indirect tax that may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services.
As such, it should be understood not in the context of the person
or entity that is primarily, directly and legally liable for its
payment, but in terms of its nature as a tax on consumption. In
either case, though, the same conclusion is arrived at.
Same; Same; Same; Zero-rated transactions generally refer to the
export sale of goods and supply of services.Zero-rated
transactions generally refer to the export sale of goods and
supply of services. The tax rate is set at zero. When applied to the
tax base, such rate obviously results in no tax chargeable against
the purchaser. The seller of such transactions charges no output
tax, but can claim a refund of or a tax credit certificate for the VAT
previously charged by suppliers.
Same; Same; Same; Respondent as an exempt entity, can neither
be directly charged for the VAT on its sales nor indirectly made to
bear as added cost to such sales, the equivalent VAT on its
purchases.Applying the special laws we have earlier discussed,
respondent as an entity is exempt from internal revenue laws and
regulations. This exemption covers both direct and indirect taxes,
stemming from the very nature of the VAT as a tax on
consumption, for which the direct liability is imposed on one
person but the indirect burden is passed on to another.
Respondent, as an exempt entity, can neither be directly charged
for the VAT on its sales nor indirectly made to bear, as added cost
to such sales, the equivalent VAT on its purchases. Ubi lex non
distinguit, nec nos distinguere debemus. Where the law does not
distinguish, we ought not to distinguish.
Same; Same; Same; Tax Refunds; Claimants of tax refunds bear
the burden of proving the factual basis of their claims; and of
showing, by words too plain to be mistaken, that the legislature
intended to exempt them.Tax refunds are in the nature of such
exemptions. Accordingly, the claimants of those refunds bear the
burden of proving the factual basis of their claims; and of
showing, by words too plain to be mistaken, that the legislature
intended to exempt them. In the present case, all the cited legal
Page 24
TAX 2
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.
Quisumbing and Torres for respondent.
PANGANIBAN, J.:
Business companies registered in and operating from the Special
Economic Zone in Naga, Cebulike herein respondentare 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-G.R. 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]
PINEDAPCGRNMAN
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:
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 VATregistered 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 twoyear prescriptive period. Such payments wereto the extent of the
refundable valueduly supported by VAT invoices or official receipts,
and were not yet offset against any output VAT liability.
Hence this Petition.5
Page 25
TAX 2
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
The Petition is unmeritorious.
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 lawnotwithstanding other existing laws, rules
and regulations to the contraryextends20 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,
PINEDAPCGRNMAN
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 selfenforcement features of the VAT as first implemented and practiced in
Europe and subsequently adopted in New Zealand and 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
Page 26
TAX 2
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
VAT-exempt or notof 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 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 7916the 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 countryfor 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
PINEDAPCGRNMAN
such exports from the national territoryexcept specifically declared

areasto 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 ecozoneindubitably a geographical territory of the
Philippinesis, 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 entitya 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 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 6683the 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
merchandiseexcept those prohibited by lawshall not be subject to
Page 27
TAX 2
x x x internal revenue laws and regulations x x x86 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 likeexcept 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 7844given for im-ported 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 products100shall 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 nonexemption 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 ecozoneregardless of the class or type of
the latters PEZA registrationis legally entitled to a zero rate.111
PINEDAPCGRNMAN
Second, the policies of the law should prevail. Ratio legis est anima.
The reason for the law is its very soul.
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 policyspelled out earlier in RA 7227of 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 effort123 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.
Page 28
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The PEZA law, which carried over the provisions of the EPZA law, is
clear in exempting from internal revenue laws and regulations the
equipmentincluding capital goodsthat 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 taxabil-ity 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 procedure137 and a question
of fairness.138 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 negligencea
PINEDAPCGRNMAN
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 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 equipmentas provided for under Article 39(d), Title
III, Book I of EO 226152starting 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 locallysourced inputs x x x.
xxx xxx xxx
MR. DEL MAR. x x x To advance its cause in encouraging investments
and creating an environment conducive for investors, the bill offers
Page 29
TAX 2
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.
Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ.,
concur.
Petition denied, judgment affirmed.
Note.While tax avoidance schemes and arrangements are not
prohibited, tax laws cannot be circumvented in order to evade the
payment of just taxes. (Commissioner of Internal Revenue vs. Lincoln
Philippine Life Insurance Company, Inc., 379 SCRA 423 [2002])
[Commissioner of Internal Revenue vs. Seagate Technology
(Philippines), 451 SCRA 132(2005)]
G.R. No. 150154. August 9, 2005.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBA
INFORMATION EQUIPMENT (PHILS.), INC., respondent.
Taxation; Value-Added Tax; Words and Phrases; A VAT-exempt
transaction involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the
Tax Code, without regard to the tax status of the party to the
transaction; A VAT-exempt party is a person or entity granted VAT
which its taxable transactions become exempt from VAT; Section
103(q) of the Tax Code of 1977, as amended, relates to VAT-exempt
transactions.It would seem that petitioner CIR failed to differentiate
between VAT-exempt transactions from VAT-exempt entities. In the
case of Commissioner of Internal Revenue v. Seagate Technology
(Philippines), this Court already made such distinctionAn 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 statusVAT-exempt or
notof the party to the transaction . . . An exempt party, on the other
hand, is a person or entity granted VAT exemption under the Tax Code,
a special law or an international agreement to which the Philippines is a
signatory, and by virtue of which its taxable transactions become
exempt from VAT . . . Section 103(q) of the Tax Code of 1977, as
amended, relied upon by petitioner CIR, relates to VAT-exempt
transactions. These are transactions exempted from VAT by special
laws or international agreements to which the Philippines is a signatory.
PINEDAPCGRNMAN
Since such transactions are not subject to VAT, the sellers cannot pass
on any output VAT to the purchasers of goods, properties, or services,
and they may not claim tax credit/refund of the input VAT they had paid
thereon.
Same; Same; Philippine Economic Zone Authority (PEZA); P.D. No. 66,
creating the Export Processing Zone Authority (EPZA), is the precursor
of Rep. Act No. 7916, as amended, under which the EPZA evolved into
the PEZA. Consequently, the exception of Presidential Decree No. 66
from Section 103(q) of the Tax Code of 1977, as amended, extends
likewise to Rep. Act No. 7916, as amended.Section 103(q) of the Tax
Code of 1977, as amended, cannot apply to transactions of respondent
Toshiba because although the said section recognizes that transactions
covered by special laws may be exempt from VAT, the very same
section provides that those falling under Presidential Decree No. 66 are
not. Presidential Decree No. 66, creating the Export Processing Zone
Authority (EPZA), is the precursor of Rep. Act No. 7916, as amended,
under which the EPZA evolved into the PEZA. Consequently, the
exception of Presidential Decree No. 66 from Section 103(q) of the Tax
Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as
amended.
Same; Same; Same; Special Economic Zones (Ecozones); Words and
Phrases; PEZA-registered enterprises, which would necessarily be
located within ECOZONES, are VAT-exempt entities, not because of
Section 24 of Rep. Act No. 7916, as amended, but, rather, because of
Section 8 of the same statute which establishes the fiction that
ECOZONES are foreign territory; An ECOZONE refers to selected
areas with highly developed or which have the potential to be
developed into agro-industrial, industrial, tourist, recreational,
commercial, banking, investment and financial centers whose metes
and bounds are fixed or delimited by Presidential Proclamations;
Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA
shall manage and operate the ECOZONES as a separate customs
territory, thus creating the fiction that the ECOZONE is a foreign
territory.This Court agrees, however, that PEZA-registered
enterprises, which would necessarily be located within ECOZONES,
are VAT-exempt entities, not because of Section 24 of Rep. Act No.
7916, as amended, which imposes the five percent (5%) preferential
tax rate on gross income of PEZA-registered enterprises, in lieu of all
taxes; but, rather, because of Section 8 of the same statute which
establishes the fiction that ECOZONES are foreign territory. It is
important to note herein that respondent Toshiba is located within an
ECOZONE. An ECOZONE or a Special Economic Zone has been
described as. . . [S]elected areas with highly developed or which
have the potential to be developed into agro-industrial, industrial,
tourist, recreational, commercial, banking, investment and financial
centers whose metes and bounds are fixed or delimited by Presidential
Proclamations. An ECOZONE may contain any or all of the following:
industrial estates (IEs), export processing zones (EPZs), free trade
zones and tourist/recreational centers. The national territory of the
Philippines outside of the proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory. Section 8 of Rep. Act No. 7916, as
amended, mandates that the PEZA shall manage and operate the
ECOZONES as a separate customs territory; thus, creating the fiction
that the ECOZONE is a foreign territory. As a result, sales made by a
supplier in the Customs Territory to a purchaser in the ECOZONE shall
be treated as an exportation from the Customs Territory. Conversely,
sales made by a supplier from the ECOZONE to a purchaser in the
Customs Territory shall be considered as an importation into the
Customs Territory.
Page 30
TAX 2
Same; Same; Same; Same; Cross Border Doctrine; The Philippine VAT
system adheres to the Cross Border Doctrine, according to which, no
VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority.
The Philippine VAT system adheres to the Cross Border Doctrine,
according to which, no VAT shall be imposed to form part of the cost of
taxing authority. Hence, actual export of goods and services from the
Philippines to a foreign country must be free of VAT; while, those
destined for use or consumption within the Philippines shall be imposed
with ten percent (10%) VAT.
Same; Same; Same; Same; Same; Sales of goods, properties and
services by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be treated as export sales, while sales to
an ECOZONE enterprise made by a non-VAT or unregistered supplier
would only be exempt from VAT and the supplier shall not be able to
claim credit/refund of its input VAT.Sales of goods, properties and
services by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be treated as export sales. If such sales are
made by a VAT-registered supplier, they shall be subject to VAT at zero
percent (0%). In zero-rated transactions, the VAT-registered supplier
shall not pass on any output VAT to the ECOZONE enterprise, and at
the same time, shall be entitled to claim tax credit/refund of its input
VAT attributable to such sales. Zero-rating of export sales primarily
intends to benefit the exporter (i.e., the supplier from the Customs
Territory), who is directly and legally liable for the VAT, making it
internationally competitive by allowing it to credit/refund the input VAT
attributable to its export sales. Meanwhile, sales to an ECOZONE
enterprise made by a non-VAT or unregistered supplier would only be
exempt from VAT and the supplier shall not be able to claim
credit/refund of its input VAT.
Same; Same; Same; Same; Same; The rule that any sale by a VATregistered supplier from the Customs Territory to a PEZA-registered
enterprise shall be considered an export sale and subject to zero
percent (0%) VAT was clearly established only on 15 October 1999,
upon the issuance of RMC No. 74-99prior to the said date, whether
or not a PEZA-registered enterprise was VAT-exempt depended on the
type of fiscal incentives availed of by the said enterprise.The rule that
any sale by a VAT-registered supplier from the Customs Territory to a
PEZA-registered enterprise shall be considered an export sale and
subject to zero percent (0%) VAT was clearly established only on 15
October 1999, upon the issuance of RMC No. 74-99. Prior to the said
date, however, whether or not a PEZA-registered enterprise was VATexempt depended on the type of fiscal incentives availed of by the said
enterprise. This old rule on VAT-exemption or liability of PEZAregistered enterprises, followed by the BIR, also recognized and
affirmed by the CTA, the Court of Appeals, and even this Court, cannot
be lightly disregarded considering the great number of PEZA-registered
enterprises which did rely on it to determine its tax liabilities, as well as,
its privileges. According to the old rule, Section 23 of Rep. Act No.
7916, as amended, gives the PEZA-registered enterprise the option to
choose between two sets of fiscal incentives: (a) The five percent (5%)
preferential tax rate on its gross income under Rep. Act No. 7916, as
amended; and (b) the income tax holiday provided under Executive
Order No. 226, otherwise known as the Omnibus Investment Code of
1987, as amended. The five percent (5%) preferential tax rate on gross
income under Rep. Act No. 7916, as amended, is in lieu of all taxes.
Except for real property taxes, no other national or local tax may be
imposed on a PEZA-registered enterprise availing of this particular
fiscal incentive, not even an indirect tax like VAT. Alternatively, Book VI
PINEDAPCGRNMAN
of Exec. Order No. 226, as amended, grants income tax holiday to

registered pioneer and non-pioneer enterprises for six-year and fouryear periods, respectively. Those availing of this incentive are exempt
only from income tax, but shall be subject to all other taxes, including
the ten percent (10%) VAT.
Same; Same; Same; Same; Same; The old rule clearly did not take into
consideration the Cross Border Doctrine essential to the VAT system or
the fiction of the ECOZONE as a foreign territory.This old rule clearly
did not take into consideration the Cross Border Doctrine essential to
the VAT system or the fiction of the ECOZONE as a foreign territory. It
relied totally on the choice of fiscal incentives of the PEZA-registered
enterprise. Again, for emphasis, the old VAT rule for PEZA-registered
enterprises was based on their choice of fiscal incentives: (1) If the
PEZA-registered enterprise chose the five percent (5%) preferential tax
on its gross income, in lieu of all taxes, as provided by Rep. Act No.
7916, as amended, then it would be VAT-exempt; (2) If the PEZAregistered enterprise availed of the income tax holiday under Exec.
Order No. 226, as amended, it shall be subject to VAT at ten percent
(10%). Such distinction was abolished by RMC No. 74-99, which
categorically declared that all sales of goods, properties, and services
made by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be subject to VAT, at zero percent (0%)
rate, regardless of the latters type or class of PEZA registration; and,
thus, affirming the nature of a PEZA-registered or an ECOZONE
enterprise as a VAT-exempt entity.
Same; Same; Same; It seems irrational and unreasonable for the
Commissioner of Internal Revenue to oppose a PEZA-registered
enterprises application for tax credit/refund of its input VAT when such
claim had already been determined and approved by the Court of Tax
Appeals after due hearing, and even affirmed by the Court of Appeals,
while said CIR could accept, process, and even approve applications
filed by other similarly-situated PEZA-registered enterprises at the
administrative level.Under RMC No. 42-2003, the DOF would still
accept applications for tax credit/refund filed by PEZA-registered
enterprises, availing of the income tax holiday, for input VAT on their
purchases made prior to RMC No. 74-99. Acceptance of applications
essentially implies processing and possible approval thereof depending
on whether the given conditions are met. Respondent Toshibas claim
for tax credit/refund arose from the very same circumstances
recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It therefore
seems irrational and unreasonable for petitioner CIR to oppose
respondent Toshibas application for tax credit/refund of its input VAT,
when such claim had already been determined and approved by the
CTA after due hearing, and even affirmed by the Court of Appeals;
while it could accept, process, and even approve applications filed by
other similarly-situated PEZA-registered enterprises at the
administrative level.
Pablo M. Bastes, Jr. and Rhodora J. Corcuera-Menzon for
petitioner.
Rommel S. Agan and Carlito M. Montenegro for private respondent.
CHICO-NAZARIO, J.:
In this Petition for Review under Rule 45 of the Rules of Court,
petitioner Commissioner of Internal Revenue (CIR) prays for the
reversal of the decision of the Court of Appeals in CA-G.R. SP No.
59106,1 affirming the order of the Court of Tax Appeals (CTA) in CTA
Case No. 5593,2 which ordered said petitioner CIR to refund or, in the
Page 31
TAX 2
alternative, to issue a tax credit certificate to respondent Toshiba

Information Equipment (Phils.), Inc. (Toshiba), in the amount of
P16,188,045.44, representing unutilized input value-added tax (VAT)
payments for the first and second quarters of 1996.
There is hardly any dispute as to the facts giving rise to the present
Petition.
Respondent Toshiba was organized and established as a domestic
corporation, duly-registered with the Securities and
Exchange Commission on 07 July 1995,3 with the primary purpose of
engaging in the business of manufacturing and exporting of electrical
and mechanical machinery, equipment, systems, accessories, parts,
components, materials and goods of all kinds, including, without
limitation, to those relating to office automation and information
technology, and all types of computer hardware and software, such as
HDD, CD-ROM and personal computer printed circuit boards.4
On 27 September 1995, respondent Toshiba also registered with the
Philippine Economic Zone Authority (PEZA) as an ECOZONE Export
Enterprise, with principal office in Laguna Technopark, Bian, Laguna.5
Finally, on 29 December 1995, it registered with the Bureau of Internal
Revenue (BIR) as a VAT taxpayer and a withholding agent.6
Respondent Toshiba filed its VAT returns for the first and second
quarters of taxable year 1996, reporting input VAT in the amount of
P13,118,542.007 and P5,128,761.94,8 respectively, or a total of
P18,247,303.94. It alleged that the said input VAT was from its
purchases of capital goods and services which remained unutilized
since it had not yet engaged in any business activity or transaction for
which it may be liable for any output VAT.9 Consequently, on 27 March
1998, respondent Toshiba filed with the One-Stop Shop InterAgency
Tax Credit and Duty Drawback Center of the Department of Finance
(DOF) applications for tax credit/refund of its unutilized input VAT for 01
January to 31 March 1996 in the amount of P14,176,601.28,10 and for
01 April to 30 June 1996 in the amount of P5,161,820.79,11 for a total
of P19,338,422.07. To toll the running of the two-year prescriptive
period for judicially claiming a tax credit/refund, respondent Toshiba, on
31 March 1998, filed with the CTA a Petition for Review. It would
subsequently file an Amended Petition for Review on 10 November
1998 so as to conform to the evidence presented before the CTA during
the hearings.
In his Answer to the Amended Petition for Review before the CTA,
petitioner CIR raised several Special and Affirmative Defenses, to wit
5. Assuming without admitting that petitioner filed a claim for refund/tax
credit, the same is subject to investigation by the Bureau of Internal
Revenue.
6. Taxes are presumed to have been collected in accordance with law.
Hence, petitioner must prove that the taxes sought to be refunded were
erroneously or illegally collected.
7. Petitioner must prove the allegations supporting its entitlement to a
refund.
8. Petitioner must show that it has complied with the provisions of
Sections 204(c) and 229 of the 1997 Tax Code on the filing of a written
claim for refund within two (2) years from the date of payment of the
tax.
9. Claims for refund of taxes are construed strictly against claimants,
the same being in the nature of an exemption from taxation.12
After evaluating the evidence submitted by respondent Toshiba,13 the
CTA, in its Decision dated 10 March 2000, ordered petitioner CIR to
refund, or in the alternative, to issue a tax credit certificate to
respondent Toshiba in the amount of P16,188,045.44.14
In a Resolution, dated 24 May 2000, the CTA denied petitioner CIRs
Motion for Reconsideration for lack of merit.15
PINEDAPCGRNMAN
The Court of Appeals, in its Decision dated 27 September 2001,

dismissed petitioner CIRs Petition for Review and affirmed the CTA
Decision dated 10 March 2000.
Comes now petitioner CIR before this Court assailing the abovementioned Decision of the Court of Appeals based on the following
grounds
1. The Court of Appeals erred in holding that petitioners failure to raise
in the Tax Court the arguments relied upon by him in the petition, is
fatal to his cause.
2. The Court of Appeals erred in not holding that 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 (now
109) of the Tax Code.
3. The Court of Appeals erred in not holding that since respondents
business is not subject to VAT, the capital goods and services it
purchased are considered not used in VAT taxable business, and,
therefore, it is not entitled to refund of input taxes on such capital goods
pursuant to Section 4.106-1 of Revenue Regulations No. 7-95 and of
input taxes on services pursuant to Section 4.103-1 of said
Regulations.
4. The Court of Appeals erred in holding that respondent is entitled to a
refund or tax credit of input taxes it paid on zero-rated transactions.16
Ultimately, however, the issue still to be resolved herein shall be
whether respondent Toshiba is entitled to the tax credit/refund of its
input VAT on its purchases of capital goods and services, to which this
Court answers in the affirmative.
I
An ECOZONE enterprise is a VAT-exempt entity. Sales of goods,
properties, and services by persons from the Customs Territory to
ECOZONE enterprises shall be subject to VAT at zero percent (0%).
Respondent Toshiba bases its claim for tax credit/refund on Section
106(b) of the Tax Code of 1977, as amended, which reads:
SEC. 106. Refunds or tax credits of creditable input tax.
...
(b) Capital goods.A VAT-registered person may apply for the
issuance of a tax credit certificate or refund of input taxes paid on
capital goods imported or locally purchased, to the extent that such
input taxes have not been applied against output taxes. The application
may be made only within two (2) years after the close of the taxable
quarter when the importation or purchase was made.17
Petitioner CIR, on the other hand, opposes such claim on account of
Section 4.106-1(b) of Revenue Regulations (RR) No. 7-95, otherwise
known as the VAT Regulations, as amended, which provides as follows
Sec. 4.106-1. Refunds or tax credits of input tax.

...
(b) Capital Goods.Only a VAT-registered person may apply for
issuance of a tax credit certificate or refund of input taxes paid on
capital goods imported or locally purchased. The refund shall be
allowed to the extent that such input taxes have not been applied
against output taxes. The application should be made within two (2)
years after the close of the taxable quarter when the importation or
purchase was made.
Refund of input taxes on capital goods shall be allowed only to the
extent that such capital goods are used in VAT taxable business. If it is
also used in exempt operations, the input tax refundable shall only be
the ratable portion corresponding to the taxable operations.
Capital goods or properties refer to goods or properties with estimated
useful life greater than one year and which are treated as depreciable
assets under Section 29(f), used directly or indirectly in the production
or sale of taxable goods or services. (Italics ours)
Page 32
TAX 2
Petitioner CIR argues that although respondent Toshiba may be a VATregistered taxpayer, it is not engaged in a VAT-taxable business.
According to petitioner CIR, respondent Toshiba is actually VATexempt, invoking the following provision of the Tax Code of 1977, as
amended
SEC. 103. Exempt transactions.The following shall be exempt from
value-added tax.
...
(q) Transactions which are exempt under special laws, except those
granted under Presidential Decree No. 66, 529, 972, 1491, and 1590,
and non-electric cooperatives under Republic Act No. 6938, or
international agreements to which the Philippines is a signatory.18
Since respondent Toshiba is a PEZA-registered enterprise, it is subject
to the five percent (5%) preferential tax rate imposed under Chapter III,
Section 24 of Republic Act No. 7916, otherwise known as The Special
Economic Zone Act of 1995, as amended. According to the said
section, [e]xcept for real property taxes on land owned by developers,
no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu thereof, five
percent (5%) of the gross income earned by all business enterprises
within the ECOZONE shall be paid . . . The five percent (5%)
preferential tax rate imposed on the gross income of a PEZA-registered
enterprise shall be in lieu of all national taxes, including VAT. Thus,
petitioner CIR contends that respondent Toshiba is VAT-exempt by
virtue of a special law, Rep. Act No. 7916, as amended.
It would seem that petitioner CIR failed to differentiate between VATexempt transactions from VAT-exempt entities. In the case of
Commissioner of Internal Revenue v. Seagate Technology
(Philippines),19 this Court already made such distinction
An exempt transaction, on the one hand, involves goods or services
which, by their nature, are specifically listed in and expressly exempted
from the VAT under the Tax Code, without regard to the tax status
VAT-exempt or notof the party to the transaction . . .
An exempt party, on the other hand, is a person or entity granted VAT
which its taxable transactions become exempt from VAT . . .
Section 103(q) of the Tax Code of 1977, as amended, relied upon by
petitioner CIR, relates to VAT-exempt transactions. These are
transactions exempted from VAT by special laws or international
agreements to which the Philippines is a signatory. Since such
transactions are not subject to VAT, the sellers cannot pass on any
output VAT to the purchasers of goods, properties, or services, and
they may not claim tax credit/refund of the input VAT they had paid
thereon.
Section 103(q) of the Tax Code of 1977, as amended, cannot apply to
transactions of respondent Toshiba because although the said section
recognizes that transactions covered by special laws may be exempt
from VAT, the very same section provides that those falling under
Presidential Decree No. 66 are not. Presidential Decree No. 66,
creating the Export Processing Zone Authority (EPZA), is the precursor
of Rep. Act No. 7916, as amended,20 under which the EPZA evolved
into the PEZA. Consequently, the exception of Presidential Decree No.
66 from Section 103(q) of the Tax Code of 1977, as amended, extends
likewise to Rep. Act No. 7916, as amended.
This Court agrees, however, that PEZA-registered enterprises, which
would necessarily be located within ECO-ZONES, are VAT-exempt
entities, not because of Section 24 of Rep. Act No. 7916, as amended,
which imposes the five percent (5%) preferential tax rate on gross
income of PEZA-registered enterprises, in lieu of all taxes; but, rather,
because of Section 8 of the same statute which establishes the fiction
that ECOZONES are foreign territory.
PINEDAPCGRNMAN
It is important to note herein that respondent Toshiba is located within

an ECOZONE. An ECOZONE or a Special Economic Zone has been
described as
. . . [S]elected areas with highly developed or which have the potential
to be developed into agro-industrial, industrial, tourist, recreational,
commercial, banking, investment and financial centers whose metes
and bounds are fixed or delimited by Presidential Proclamations. An
ECOZONE may contain any or all of the following: industrial estates
(IEs), export processing zones (EPZs), free trade zones and
tourist/recreational centers.21
The national territory of the Philippines outside of the proclaimed
borders of the ECOZONE shall be referred to as the Customs
Territory.22
Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA
shall manage and operate the ECOZONES as a separate customs
territory;23 thus, creating the fiction that the ECOZONE is a foreign
territory.24 As a result, sales made by a supplier in the Customs
Territory to a purchaser in the ECOZONE shall be treated as an
exportation from the Customs Territory. Conversely, sales made by a
supplier from the ECOZONE to a purchaser in the Customs Territory
shall be considered as an importation into the Customs Territory.
Given the preceding discussion, what would be the VAT implication of
sales made by a supplier from the Customs Territory to an ECOZONE
enterprise?
The Philippine VAT system adheres to the Cross Border Doctrine,
according to which, no VAT shall be imposed to form part of the cost of
taxing authority. Hence, actual export of goods and services from the
Philippines to a foreign country must be free of VAT; while, those
destined for use or consumption within the Philippines shall be imposed
with ten percent (10%) VAT.25
Applying said doctrine to the sale of goods, properties, and services to
and from the ECOZONES,26 the BIR issued Revenue Memorandum
Circular (RMC) No. 74-99, on 15 October 1999. Of particular interest to
the present Petition is Section 3 thereof, which reads
SECTION 3. Tax Treatment of Sales Made by a VAT Registered
Supplier from the Customs Territory, to a PEZA Registered Enterprise.
(1) If the Buyer is a PEZA registered enterprise which is subject to the

5% special tax regime, in lieu of all taxes, except real property tax,
pursuant to R.A. No. 7916, as amended:
(a)Sale of goods (i.e., merchandise).This shall be treated as indirect
export hence, considered subject to zero percent (0%) VAT, pursuant to
Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation to
ART. 77(2) of the Omnibus Investments Code.
(b)Sale of service.This shall be treated subject to zero percent (0%)
VAT under the cross border doctrine of the VAT System, pursuant to
VAT Ruling No. 032-98 dated Nov. 5, 1998.
(2) If Buyer is a PEZA registered enterprise which is not embraced by
the 5% special tax regime, hence, subject to taxes under the NIRC,
e.g., Service Establishments which are subject to taxes under the NIRC
rather than the 5% special tax regime:
(a)Sale of goods (i.e., merchandise).This shall be treated as indirect
export hence, considered subject to zero percent (0%) VAT, pursuant to
Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in relation to
ART. 77(2) of the Omnibus Investments Code.
(b)Sale of Service.This shall be treated subject to zero percent (0%)
VAT under the cross border doctrine of the VAT System, pursuant to
VAT Ruling No. 032-98 dated Nov. 5, 1998.
(3) In the final analysis, any sale of goods, property or services made
by a VAT registered supplier from the Customs Territory to any
registered enterprise operating in the ecozone, regardless of the class
Page 33
TAX 2
or type of the latters PEZA registration, is actually qualified and thus

legally entitled to the zero percent (0%) VAT. Accordingly, all sales of
goods or property to such enterprise made by a VAT registered supplier
from the Customs Territory shall be treated subject to 0% VAT, pursuant
to Sec. 106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus
Investments Code, while all sales of services to the said enterprises,
made by VAT registered suppliers from the Customs Territory, shall be
treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3),
NIRC, in relation to the provisions of R.A. No. 7916 and the Cross
Border Doctrine of the VAT system.
This Circular shall serve as a sufficient basis to entitle such supplier of
goods, property or services to the benefit of the zero percent (0%) VAT
for sales made to the aforementioned ECOZONE enterprises and shall
serve as sufficient compliance to the requirement for prior approval of
zero-rating imposed by Revenue Regulations No. 7-95 effective as of
the date of the issuance of this Circular.
Indubitably, no output VAT may be passed on to an ECOZONE
enterprise since it is a VAT-exempt entity. The VAT treatment of sales to
it, however, varies depending on whether the supplier from the
Customs Territory is VAT-registered or not.
Sales of goods, properties and services by a VAT-registered supplier
from the Customs Territory to an ECOZONE enterprise shall be treated
as export sales. If such sales are made by a VAT-registered supplier,
they shall be subject to VAT at zero percent (0%). In zero-rated
transactions, the VAT-registered supplier shall not pass on any output
VAT to the ECOZONE enterprise, and at the same time, shall be
entitled to claim tax credit/refund of its input VAT attributable to such
sales. Zero-rating of export sales primarily intends to benefit the
exporter (i.e., the supplier from the Customs Territory), who is directly
and legally liable for the VAT, making it internationally competitive by
allowing it to credit/refund the input VAT attributable to its export sales.
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or
unregistered supplier would only be exempt from VAT and the supplier
shall not be able to claim credit/refund of its input VAT.
Even conceding, however, that respondent Toshiba, as a PEZAregistered enterprise, is a VAT-exempt entity that could not have
engaged in a VAT-taxable business, this Court still believes, given the
particular circumstances of the present case, that it is entitled to a
credit/refund of its input VAT.
II
Prior to RMC No. 74-99, however, PEZA-registered enterprises availing
of the income tax holiday under Executive Order No. 226, as amended,
were deemed subject to VAT.
In his Petition, petitioner CIR opposed the grant of tax credit/refund to
respondent Toshiba, reasoning thus
In the first place, respondent could not have paid input taxes on its
purchases of goods and services from VAT-registered suppliers
because such purchases being zero-rated, that is, no output tax was
paid by the suppliers, no input tax was shifted or passed on to
respondent. The VAT is an indirect tax and the amount of tax may be
properties or services (Section 105, 1997 Tax Code).
...
Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:
SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered
person, which is a taxable transaction for VAT purposes, shall not result
in any output tax. However, the input tax on his purchases of goods,
properties or services related to such zero-rated sale shall be available
as tax credit or refund in accordance with these regulations.
From the foregoing, the VAT-registered person who can avail as tax
credit or refund of the input tax on his purchases of goods, services or
properties is the seller whose sale is zero-rated. Applying the foregoing
PINEDAPCGRNMAN
provision to the case at bench, the VAT-registered supplier, whose sale

of goods and services to respondent is zero-rated, can avail as tax
credit or refund the input taxes on its (supplier) own purchases of
goods and services related to its zero-rated sale of goods and services
to respondent. On the other hand, respondent, as the buyer in such
zero-rated sale of goods and services, could not have paid input taxes
for which it can claim as tax credit or refund.27
Before anything else, this Court wishes to point out that petitioner CIR
is working on the erroneous premise that respondent Toshiba is
claiming tax credit or refund of input VAT based on Section 4.100-2,28
in relation to Section 4.106-1(a),29 of RR No. 7-95, as amended, which
allows the tax credit/refund of input VAT on zero-rated sales of goods,
properties or services. Instead, respondent Toshiba is basing its claim
for tax credit or refund on Sec. 4.106-1(b) of the same regulations,
which allows a VAT-registered person to apply for tax credit/refund of
the input VAT on its capital goods. While in the former, the seller of the
goods, properties or services is the one entitled to the tax credit/refund;
in the latter, it is the purchaser of the capital goods.
Nevertheless, regardless of his mistake as to the basis for respondent
Toshibas application for tax credit/refund, petitioner CIR validly raised
the question of whether any output VAT was actually passed on to
respondent Toshiba which it could claim as input VAT subject to
credit/refund. If the VAT-registered supplier from the Customs Territory
did not charge any output VAT to respondent Toshiba believing that it is
exempt from VAT or it is subject to zero-rated VAT, then respondent
Toshiba did not pay any input VAT on its purchase of capital goods and
it could not claim any tax credit/refund thereof.
The rule that any sale by a VAT-registered supplier from the Customs
Territory to a PEZA-registered enterprise shall be considered an export
sale and subject to zero percent (0%) VAT was clearly established only
on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to the
said date, however, whether or not a PEZA-registered enterprise was
VAT-exempt depended on the type of fiscal incentives availed of by the
said enterprise. This old rule on VAT-exemption or liability of PEZAregistered enterprises, followed by the BIR, also recognized and
affirmed by the CTA, the Court of Appeals, and even this Court,30
cannot be lightly disregarded considering the great number of PEZAregistered enterprises which did rely on it to determine its tax liabilities,
as well as, its privileges.
According to the old rule, Section 23 of Rep. Act No. 7916, as
amended, gives the PEZA-registered enterprise the option to choose
between two sets of fiscal incentives: (a) The five percent (5%)
preferential tax rate on its gross income under Rep. Act No. 7916, as
amended; and (b) the income tax holiday provided under Executive
Order No. 226, otherwise known as the Omnibus Investment Code of
1987, as amended.31
The five percent (5%) preferential tax rate on gross income under Rep.
Act No. 7916, as amended, is in lieu of all taxes. Except for real
property taxes, no other national or local tax may be imposed on a
PEZA-registered enterprise availing of this particular fiscal incentive,
not even an indirect tax like VAT.
Alternatively, Book VI of Exec. Order No. 226, as amended, grants
income tax holiday to registered pioneer and non-pioneer enterprises
for six-year and four-year periods, respectively.32 Those availing of this
incentive are exempt only from income tax, but shall be subject to all
other taxes, including the ten percent (10%) VAT.
This old rule clearly did not take into consideration the Cross Border
Doctrine essential to the VAT system or the fiction of the ECOZONE as
a foreign territory. It relied totally on the choice of fiscal incentives of the
PEZA-registered enterprise. Again, for emphasis, the old VAT rule for
PEZA-registered enterprises was based on their choice of fiscal
incentives: (1) If the PEZA-registered enterprise chose the five percent
Page 34
TAX 2
(5%) preferential tax on its gross income, in lieu of all taxes, as

provided by Rep. Act No. 7916, as amended, then it would be VATexempt; (2) If the PEZA-registered enterprise availed of the income tax
holiday under Exec. Order No. 226, as amended, it shall be subject to
VAT at ten percent (10%). Such distinction was abolished by RMC No.
74-99, which categorically declared that all sales of goods, properties,
and services made by a VAT-registered supplier from the Customs
Territory to an ECOZONE enterprise shall be subject to VAT, at zero
percent (0%) rate, regardless of the latters type or class of PEZA
registration; and, thus, affirming the nature of a PEZA-registered or an
ECOZONE enterprise as a VAT-exempt entity.
The sale of capital goods by suppliers from the Customs Territory to
respondent Toshiba in the present Petition took place during the first
and second quarters of 1996, way before the issuance of RMC No. 7499, and when the old rule was accepted and implemented by no less
than the BIR itself.
Since respondent Toshiba opted to avail itself of the income tax holiday
under Exec. Order No. 226, as amended, then it was deemed subject
to the ten percent (10%) VAT. It was very likely therefore that suppliers
from the Customs Territory had passed on output VAT to respondent
Toshiba, and the latter, thus, incurred input VAT. It bears emphasis that
the CTA, with the help of SGV & Co., the independent accountant it
commissioned to make a report, already thoroughly reviewed the
evidence submitted by respondent Toshiba consisting of receipts,
invoices, and vouchers, from its suppliers from the Customs Territory.
Accordingly, this Court gives due respect to and adopts herein the
CTAs findings that the suppliers of capital goods from the Customs
Territory did pass on output VAT to respondent Toshiba and the amount
of input VAT which respondent Toshiba could claim as credit/refund.
Moreover, in another circular, Revenue Memorandum Circular (RMC)
No. 42-2003, issued on 15 July 2003, the BIR answered the following
question
Q-5:
Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by
PEZA-registered firms automatically qualify as zero-rated without
seeking prior approval from the BIR effective October 1999.
1) Will the OSS-DOF Center still accept applications from PEZAregistered claimants who were allegedly billed VAT by their suppliers
before and during the effectivity of the RMC by issuing VAT
invoices/receipts?
...
A-5(1):
If the PEZA-registered enterprise is paying the 5% preferential tax in
lieu of all other taxes, the said PEZA-registered taxpayer cannot claim
TCC or refund for the VAT paid on purchases.
However, if the taxpayer is availing of the income tax holiday, it can
claim VAT credit provided:
a. The taxpayer-claimant is VAT-registered;
b. Purchases are evidenced by VAT invoices or receipts, whichever is
applicable, with shifted VAT to the purchaser prior to the
implementation of RMC No. 74-99; and
c. The supplier issues a sworn statement under penalties of perjury that
it shifted the VAT and declared the sales to the PEZA-registered
purchaser as taxable sales in its VAT returns.
For invoices/receipts issued upon the effectivity of RMC No. 74-99, the
claims for input VAT by PEZA-registered companies, regardless of the
type or class of PEZA registration, should be denied.
Under RMC No. 42-2003, the DOF would still accept applications for
tax credit/refund filed by PEZA-registered enterprises, availing of the
income tax holiday, for input VAT on their purchases made prior to RMC
No. 74-99. Acceptance of applications essentially implies processing
and possible approval thereof depending on whether the given
PINEDAPCGRNMAN
conditions are met. Respondent Toshibas claim for tax credit/refund

arose from the very same circumstances recognized by Q-5(1) and A5(1) of RMC No. 42-2003. It therefore seems irrational and
unreasonable for petitioner CIR to oppose respondent Toshibas
application for tax credit/refund of its input VAT, when such claim had
already been determined and approved by the CTA after due hearing,
and even affirmed by the Court of Appeals; while it could accept,
process, and even approve applications filed by other similarly-situated
PEZA-registered enterprises at the administrative level.
III
Findings of fact by the CTA are respected and adopted by this Court.
Finally, petitioner CIR, in a last desperate attempt to block respondent
Toshibas claim for tax credit/refund, challenges the allegation of said
respondent that it availed of the income tax holiday under Exec. Order
No. 226, as amended, rather than the five percent (5%) preferential tax
rate under Rep. Act No. 7916, as amended. Undoubtedly, this is a
factual matter that should have been raised and threshed out in the
lower courts. Giving it credence would belie petitioner CIRs assertion
that it is raising only issues of law in its Petition that may be resolved
without need for reception of additional evidences. Once more, this
Court respects and adopts the finding of the CTA, affirmed by the Court
Page 35
TAX 2
of Appeals, that respondent Toshiba had indeed availed of the income

tax holiday under Exec. Order No. 226, as amended.
WHEREFORE, based on the foregoing, this Court AFFIRMS the
decision of the Court of Appeals in CA-G.R. SP. No. 59106, and the
order of the CTA in CTA Case No. 5593, ordering said petitioner CIR to
refund or, in the alternative, to issue a tax credit certificate to
respondent Toshiba, in the amount of P16,188,045.44, representing
unutilized input VAT for the first and second quarters of 1996.
SO ORDERED.
Puno (Chairman), Austria-Martinez, Callejo, Sr. and Tinga, JJ.,
concur.
Judgment affirmed.
Note.A VAT invoice can be used only for the sale of goods and
services that are subject to VAT. (Atlas Consolidated Mining &
Development Corporation vs. Commissioner of Internal Revenue, 318
SCRA 386 [1999])
o0o [Commissioner of Internal Revenue vs. Toshiba
Information Equipment (Phils.), Inc., 466 SCRA 211(2005)]

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PINEDAPCGRNMAN

VALUE ADDED TAX

were on a "no-profit, reimbursement-of-cost-only" basis. It averred that

Intelligentia et Scientia Semper Mea

connection with technical management or administration of any

There is no merit to respondent's contention that the Court of Appeals'

Intelligentia et Scientia Semper Mea

many levels of transactions on the basis of a fixed percentage.A

the vessels were transferred and leased, on a bareboat basis, to the

Intelligentia et Scientia Semper Mea

In a Decision dated 27 April 1992, the CTA rejected the CIRs

production chain, but they do so only as a matter of accident or

Intelligentia et Scientia Semper Mea

course of trade or business, it would be irrelevant for the purpose of

Taxation; Rulings, circulars, rules and regulations promulgated by

factual issue. It is an established rule that in the exercise of its

Intelligentia et Scientia Semper Mea

when the subject transactions were consummated, the prevailing

Intelligentia et Scientia Semper Mea

by which it was prejudiced by this retroactive application.20 Petitioner

Intelligentia et Scientia Semper Mea

required to pay any output VAT thereon. In the case of a transaction

Intelligentia et Scientia Semper Mea

receive had effectively disappeared by virtue of its newfound output

Intelligentia et Scientia Semper Mea

NORTH SHELL SERVICE STATION; LOURDES MARTINEZ doing

Courts; Contempt; Separation of Powers; If it were true that

Intelligentia et Scientia Semper Mea

have the TRO lifted. At the height of my disappointment, and after

For ex-Finance Secretary Cesar Purisima, the implementation of the

Intelligentia et Scientia Semper Mea

norm does prohibit the reckless disregard of private reputation by

Philippines for a fee, including those specified in the listevery

Intelligentia et Scientia Semper Mea

government seeks to tax here are fees collected from tollways

Intelligentia et Scientia Semper Mea

by now can no longer be collected. The tollway operators agreed

Intelligentia et Scientia Semper Mea

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed

accumulated input VAT of zero balance in their books as of August 16,

Intelligentia et Scientia Semper Mea

One.The relevant law in this case is Section 108 of the NIRC, as

4.Proprietors, operators or keepers of hotels, motels, resthouses,

Intelligentia et Scientia Semper Mea

Nor can petitioners cite as binding on the Court statements made by

Intelligentia et Scientia Semper Mea

Intelligentia et Scientia Semper Mea

(3) Authority of the Commissioner to Determine the Appropriate

Intelligentia et Scientia Semper Mea

performance thereof calls for the exercise or use of the physical or

4. VAT ZERO RATED TRANSACTION

G.R. No. 149073. February 16, 2005.*

Intelligentia et Scientia Semper Mea

Same; Same; Under the value-added tax system, a zero-rated sale

In its Decision1 dated July 6, 2001, the Court of Appeals, in CA-G.R.

Intelligentia et Scientia Semper Mea

Sentral ng Pilipinas (BSP) of its Agreement of Offsetting with Toyo Lens

On June 21, 2000, petitioner Commissioner filed a Motion for

Intelligentia et Scientia Semper Mea

II. SINCE RESPONDENTS BUSINESS IS NOT SUBJECT TO VAT, IT

input tax on such purchases despite the issuance of a VAT invoice or

Intelligentia et Scientia Semper Mea

G.R. No. 153866. February 11, 2005.*