CIR VS CA AND COMMONWEALTH MANAGEMENT AND SERVICES (COMASERCO)

Facts:
COMASERCO an affiliate of Philamlife is organized to perform collection, consultative and other
technical services to Philamlife.
BIR assessed COMASERCO with deficiency VAT in the amount of 351,851.00, for the taxable
year of 1988.
COMASERCO declared a net loss on its operation during the same year
A protest against the assessment was thereafter filed by COMASERCO before the CTA, which
later on affirmed the BIRs assessment.
Upon appeal, the CA reversed and set aside CTAs decision, on the ground that COMASERCO
was not engaged in business of providing services to Philamlife. It anchored its decision based
on another case involving the same parties in dispute, where the CA held that COMASERCO is
not liable to pay contractors tax for services rendered to Philamlife.
CIRs contention:
To "engage in business" and to "engage in the sale of services" are two different things.
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
COMASERCOs contention:
The term "in the course of trade or business" requires that the "business" is carried on with
a view to profit or livelihood. It avers that the activities of the entity must be profit- oriented
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
It is not engaged in the business of providing service and was only established to ensure
administration of efficiency of Philamlife and its affiliates.
It is not profit oriented and thus, not engaged in business of rendering service.
Profit motive is material in ascertaining who to tax for purposes of determining liability for
VAT.

Issue:
Whether or not COMASERCO is engaged in the sale of service and thus liable to pay VAT

Held:
YES
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.
Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other sections,
Section 99 of the Tax Code. 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 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.
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.
BIR Ruling No. 010-98 emphasizing that a domestic corporation that provided technical,
research, management and technical assistance to its affiliated companies and received
payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject
to VAT on services rendered. In fact, even if such corporation was organized without any
intention of realizing profit, any income or profit generated by the entity in the conduct of its
activities was subject to income tax.
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.
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.

CIR VS AMERICAN EXPRESS INTERNATIONAL CORPORATION (AMEX)

Facts:
AMEX-Phil. is the branch of AMEX (USA) in the Philippines and functions as a servicing unit of
AMEX-HK. It is engaged primarily to facilitate collections of AMEX-HKs receivables from card
members situated in the Philippines and payment to service establishments in the Phil.
AMEX-Phil. registered itself as a VAT taxpayer before the BIR.
It filed its VAT returns on 1997 and on 1999 it sent a letter-request to BIR, for refund in the
amount of 3,751,067 representing the excess input taxes it paid, after deducting its total output
VAT liabilities to its total input VAT paid.
Due to CIRs inaction and disallowance of tax credit, AMEX-Phil. filed a protest before the CTA
where it rendered a decision in favor of respondent holding that its services are subject to zero-
rate pursuant to Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of
Revenue Regulations 5-96 and ordered refund the amount of P3,352,406.59 representing the
latters excess input VAT paid for the year 1997.
The CA affirmed the decision and held that respondents services fell under the first type
enumerated in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More particularly, its
services were not of the same class or of the same nature as project studies, information, or
engineering and architectural designs for non-resident foreign clients; rather, they were services
other than the processing, manufacturing or repacking of goods for persons doing business
outside the Philippines. The consideration in both types of service, however, was paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas.
VAT Ruling No. 040-98 was unwarranted. By requiring that respondents services be consumed
abroad in order to be zero-rated, petitioner went beyond the sphere of interpretation and into that
of legislation.
CIRs contention:
Claim for refund is subject to investigation by the Bureau of Internal Revenue;
Taxes paid and collected are presumed to have been made in accordance with laws and
regulations, hence, not refundable;
Claims for tax refund are construed strictly against the claimant as they partake of the
nature of tax exemption;
VAT Ruling No. 040-98 states that the services must be destined for consumption outside of
the Philippines in order to qualify for zero-rating.
AMEX-Phil.s contention:
Export sales by a VAT-registered person, the consideration for which is paid for in
acceptable foreign currency inwardly remitted to the Philippines and accounted for in
accordance with existing regulations of the Bangko Sentral ng Pilipinas, are subject to [VAT]
at zero percent (0%) as provided by Sec. 102.
 Relied on VAT Ruling No. 080-89, as a VAT registered entity whose service is paid for in
acceptable foreign currency which is remitted inwardly to the Philippines and accounted for
in accordance with the rules and regulations of the Central [B]ank of the Philippines, your
service income is automatically zero rated effective January 1, 1998. [Section 102(a)(2) of
the Tax Code as amended].
Input taxes on domestic purchases of taxable goods and services related to zero-rated
revenues are available as tax refund in accordance with Section 106 (now Section 112) of
the [Tax Code] and Section 8(a) of [Revenue] Regulations [(RR)] No. 5-87, to state:
Section 106. Refunds or tax credits of input tax. -
(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except
those covered by paragraph (a) above, whose sales are zero-rated or are effectively
zero-rated, may, within two (2) years after the close of the taxable quarter when such
sales were made, apply for the issuance of tax credit certificate or refund of the input
taxes due or attributable to such sales, to the extent that such input tax has not been
applied against output tax. x x x. [Section 106(a) of the Tax Code][5]
Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for
value-added tax purposes. A sale by a VAT-registered person of goods and/or services
taxed at zero rate shall not result in any output tax. The input tax on his purchases of goods
or services related to such zero-rated sale shall be available as tax credit or refundable in
accordance with Section 16 of these Regulations. x x x. [Section 8(a), [RR] 5-87].

Issue:
Whether or not AMEX-Phil. is entitled to tax refund

Held:
YES
Entitlement to Tax Refund
General rule: VAT system uses the Destination Principle as basis for jurisdiction of taxing
authority. Goods and services are taxed only in the country where they are consumed. Thus,
exports are zero-rated, while imports are taxed.
Sec. 102 however, provides for exceptions to wit:
"(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 subparagraph, the
consideration for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the [BSP];
Zero Rating of Other Services
AMEX-Phil. is a VAT-registered person that facilitates the collection and payment of receivables
belonging to its non-resident foreign client, for which it gets paid in acceptable foreign currency
inwardly remitted and accounted for in conformity with BSP rules and regulations. Certainly, the
service it renders in the Philippines is not in the same category as processing, manufacturing or
repacking of goods and should, therefore, be zero-rated.
For facilitating in the Philippines the collection and payment of receivables belonging to its Hong
Kong-based foreign client, and getting paid for it in duly accounted acceptable foreign currency,
respondent renders service falling under the category of zero rating. Pursuant to the Tax Code, a
VAT of zero percent should, therefore, be levied upon the supply of that service.
The Credit Card System and Its Components
The ancillary business of facilitating the said collection is different from the main business of
issuing credit cards. The consumer-credit arrangement that exists between the issuer and the
holder of the credit card enables the latter to procure goods or services on a continuing basis as
long as the outstanding balance does not exceed a specified limit.
In the present case, respondents role in the consumer credit process described above primarily
consists of gathering the bills and credit card drafts of different service establishments located in
the Philippines and forwarding them to the ROCs outside the country. Servicing the bill is not the
same as billing. For the former type of service alone, respondent already gets paid.
Branch and Home Office
A branch may be operated as a revenue center, cost center, profit center or investment center,
depending upon the policies and accounting system of its parent company. Furthermore, the
latter may choose not to make any sale itself, but merely to function as a control center, where
most or all of its expenses are allocated to any of its branches.
The sending of drafts and bills by service establishments to respondent is equivalent to the act of
sending them directly to its parent company abroad, and the service partakes of the nature of
export sales as applied to goods, especially when rendered in the Philippines by a VAT-registered
person that gets paid in acceptable foreign currency accounted for in accordance with BSP rules
and regulations.
Services Subject to Zero VAT
Confusion in zero rating arises because petitioner equates the performance of a particular type of
service with the consumption of its output abroad. In the present case, the facilitation of the
collection of receivables is different from the utilization or consumption of the outcome of such
service. While the facilitation is done in the Philippines, the consumption is not. Respondent
renders assistance to its foreign clients -- the ROCs outside the country -- by receiving the bills of
 service establishments located here in the country and forwarding them to the ROCs abroad.
The consumption contemplated by law, contrary to petitioners administrative interpretation, does
not imply that the service be done abroad in order to be zero-rated.
The services rendered by respondent are performed or successfully completed upon its sending
to its foreign client the drafts and bills it has gathered from service establishments here. Its
services, having been performed in the Philippines, are therefore also consumed in the
Philippines.
Performance of Service versus Product Arising from Performance
The law neither imposes such requirement nor associates services with exported goods. It simply
states that the services performed by VAT-registered persons in the Philippines -- services other
than the processing, manufacturing or repacking of goods for persons doing business outside
this country -- if paid in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP, are zero-rated.
Tax Situs of a Zero-Rated Service
The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-
rated service. Under this criterion, the place where the service is rendered determines the
jurisdiction to impose the VAT. Performed in the Philippines, such service is necessarily subject to
its jurisdiction, for the State necessarily has to have a substantial connection to it, in order to
enforce a zero rate. The place of payment is immaterial; much less is the place where the output
of the service will be further or ultimately used.
VAT Ruling Nos. 040-98 and 080-89
VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the
administrative level, rendered by the BIR commissioner upon request of a taxpayer to clarify
certain provisions of the VAT law. As correctly held by the CA, when this ruling states that the
service must be destined for consumption outside of the Philippines , in order to qualify for zero
rating, it contravenes both the law and the regulations issued pursuant to it. This portion of VAT
Ruling No. 040-98 is clearly ultra vires and invalid.
Upon the enactment of RA 8424, which substantially carries over the particular provisions on
zero rating of services under Section 102(b) of the Tax Code, the principle of legislative approval
of administrative interpretation by reenactment clearly obtains.
Under a zero-rating scheme, the sale or exchange of a particular service is completely freed from
the VAT, because the seller is entitled to recover, by way of a refund or as an input tax credit, the
tax that is included in the cost of purchases attributable to the sale or exchange. [T]he tax paid or
withheld is not deducted from the tax base. Having been applied for within the reglementary
period, respondents refund is in order.
CIR VS BURMEISTER AND WAIN VELASCO AND SCANDINAVIAN CONTRACTOR (BWSC)
Facts:
BWSC is a domestic corporation established by BWSC-Denmark.
BWSC represented foreign Consortium, BWSC-Denmark and Mitsui Engineering, and entered
into a contract with NAPOCOR for the operation and maintenance of its two power barges for a
period of 15 years.
NAPOCOR paid BWSC in a mixture of currencies. The Mark and Yen were deposited in its
foreign bank accounts in Denmark , while the peso-denominated component was deposited in
the Philippines.
The Consortium pays BWSC in foreign currency inwardly remitted to the Philippines.
In order to ascertain the tax implication of its transactions, BWSC sought a ruling from the BIR
and pursuant to BIR Ruling 023-95, it registered as a VAT entity and the services it renders were
subject to zero-rate VAT.
BWSC filed its 1996 quarterly VAT Tax Returns and on 1997 it mistakenly availed of the
Voluntary Assessment Program (VAP) due to misinterpretation of BIR Regulation and subject its
sale of service to Consortium to 10% VAT.
On 1999, BWSC secure BIR Ruling 2033-99 from the VAT Review Committee of BIR which
reconfirmed the previous BIR Ruling it issued.
Armed with the said ruling, BWSC filed a claim for refund due to its availment of VAP.
BWSC filed a petition for review with the CTA in order to toll the running of the two-year
prescriptive period under the Tax Code.
The CTA ordered refund of the VAT based on the Principle of Solutio Indebiti, which requires
return of what has been delivered by mistake.
Upon appeal, the CA affirmed the decision of CTA.
CIRs contention:
BWSCs services are not destined for consumption abroad and therefore subject to 10%
VAT.
VAT Ruling 040-98 states that services should be destined for consumption abroad to enjoy
the zero-rate.
BWSCs contention:
It complied with the requirements for zero-rating to wit: (1) the payment of its service fees
was in acceptable foreign currency; (2) there was inward remittance of the foreign currency
into the Philippines; and (3) accounting of such remittance was in accordance with BSP
rules.
Its services which constitute the actual operation and management of two (2) power barges
in Mindanao are not even remotely similar to project studies, information services and
 engineering and architectural designs under Section 4.102-2(b)(2) of Revenue Regulations
No. 5-96. As such, respondents services need not be destined to be consumed abroad in
order to be VAT zero-rated.

Issue:
Whether or not BWSC is entitled to refund

Held:
NO
The Tax Code not only requires that the services be other than processing, manufacturing or
repacking of goods and that payment for such services be in acceptable foreign currency
accounted for in accordance with BSP rules. Another essential condition for qualification to zero-
rating under Section 102(b)(2) is that the recipient of such services is doing business
outside the Philippines. While this requirement is not expressly stated in the second paragraph
of Section 102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed
services must be for other persons doing business outside the Philippines.
When Section 102(b)(2) stipulates payment in acceptable foreign currency under BSP rules, the
law clearly envisions the payer-recipient of services to be doing business outside the Philippines.
Only those not doing business in the Philippines can be required under BSP rules to pay in
acceptable foreign currency for their purchase of goods or services from the Philippines.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the
payer-recipient of services is doing business outside the Philippines.
Further, when the provider and recipient of services are both doing business in the Philippines,
their transaction falls squarely under Section 102(a) governing domestic sale or exchange of
services. Indeed, this is a purely local sale or exchange of services subject to the regular VAT,
unless of course the transaction falls under the other provisions of Section 102(b).
In this case, the payer-recipient of respondents services is the Consortium which is a joint-
venture doing business in the Philippines. While the Consortiums principal members are non-
resident foreign corporations, the Consortium itself is doing business in the Philippines. This
is shown clearly in BIR Ruling No. 023-95 which states that the contract between the Consortium
and NAPOCOR is for a 15-year term.
Considering this length of time, the Consortiums operation and maintenance of NAPOCORs
power barges cannot be classified as a single or isolated transaction. The Consortium does not
fall under Section 102(b)(2) which requires that the recipient of the services must be a person
doing business outside the Philippines. Therefore, respondents services to the Consortium, not
being supplied to a person doing business outside the Philippines, cannot legally qualify for 0%
VAT.
 Though reliance of BWSC to the BIR Rulings binds the CIR, its subsequent filing of answer
before the CTA revokes the effectivity of the same.

CIR VS MAGSAYSAY LINES, BALIWAG NAVIGAYIONA ND NATIONAL DEVELOPMENT

COMPANY
Facts:
Pursuant to government program of privatization, NDC decided to sell all of its shares in NMC
and all its five vessels in a public bidding.
Among the stipulated terms of the auction was that the winning bidder has to pay the 10% VAT of
the vessels.
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) and was the highest bidder.
A Deed of Sale was then executed and 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.
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.
Respondents moved for reconsideration of the Ruling but was denied by the BIR, which
prompted the former to file an Appeal and Petition for Refund with the CTA.
The CTA held that the sale is not subject to VAT and that the sale of the vessels was an isolated
transaction not subject to VAT, as provided in Sec. 99 of 1986 Tax Code. Further, doubts are
resolved in favor of respondents because VAT is not an exemption provision, but a classification
provision.
On appeal, the CA reversed the ruling of CTA on the ground that the sal brought a change in the
ownership of NDC and thus subject to VAT. However later on, it reversed itself and affirmed the
CTA decision.
CIRs contention:
 Respondents are not real parties in interest, as they were not the sellers
The sale of vessels were among those transactions considered as deemed sale under
Revenue Regulation No. 587.

Issue:
Whether or not the sale of vessels of NDC is subject to VAT

Held:
NO
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).
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.
Sale of the vessels was not in the ordinary course of trade or business of NDC.The Revised
Charter of the NDC which bears no indication that the NDC was created for the primary purpose
of selling real property. 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.
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.
CIR VS SEAGATE TECHNOLOGY PHILIPPINES
Facts:
SEAGATE is a resident foreign corporation, duly registered with the Phil. Export Zone Authority
(PEZA) and has a principal address in Cebu. It is likewise registered as a VAT entity.
SEAGATE is engaged in the manufacturing of recording components primarily used in computers
for EXPORT.
It file its VAT Returns for the periods of 1998-1999.
An administrative claim for refund of VAT Input Taxes in the amount of 28,369,226,with
supporting documents, was later on filed by SEAGATE.
Due to BIRs inaction, SEAGATE elevate the case to CTA by way of Petition for Review.
The CTA ruled in favor of SEAGATE and granted the refund which was later on affirmed by CA
where it states that SEAGATE availed itself only of the Income Tax Holiday under EO226 and
was therefore exempt only from payment of income tax but still subject to payment of VAT.
However, having paid the input VAT on capital goods it purchased, the claim for refund is proper.
CIRs contention:
Claim for tax refund/credit is subject to administrative routinary investigation/examination by
[petitioners] Bureau;
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;
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;
Since SEAGATE is registered with PEZA, 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. Then
the purchased of capital goods are considered NOT USED in a VAT taxable business;
SEAGATE not entitled to refund pursuant to Revenue Regulations 795.

Issue:
Whether or not a VAT-registered PEZA Enterprise is entitled to a refund

Held:
YES
Preferential Tax Treatment Under Special Laws
PEZA-registered enterprise within a special economic zone is entitled to fiscal incentives ad
benefits under PD 66 and EO 226.
 PD 66 provides that SEAGATE shall not be subject to internal revenue rules and regulations
for supplies, equipments, etc., used directly or indirectly in manufacturing or processing and
shall be exempted from export taxes.
EO 226 provides for Income Tax Holiday, tax credits, exemption from export taxes and other
benefits.
RA 7227 states that, no local or national taxes shall be imposed on importation of raw
materials, capital and equipment.
RA 8744 provides for the negotiable tax credits for locally produced materials used as inputs.
Based on the above-mentioned laws, SEAGATE enjoys preferential tax treatment. Since VAT on
capital goods is an internal revenue tax, it is exempted.
Nature of the VAT and the Tax Credit Method
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.
Zero-Rated and Effectively Zero-Rated Transactions
Zero Rated Transactions (ZRT) refers to the export sale of goods and supply of services and
the tax rate is zero. The tax base results in no tax chargeable against the purchaser. While the
seller charges no output tax but can claim for refund.
Effectively zero-rated transactions, however, refer to the sale of goods or supply of services 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. 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
Automatic zero rating is primarily intended to be enjoyed by the seller who is directly and legally
liable for the VAT, making such seller internationally competitive by allowing the refund or credit
of input taxes that are attributable to export sales.
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.
But in an exemption there is only partial relief, because the purchaser is not allowed any tax
refund of or credit for input taxes paid.
Exempt Transaction and Exempt Party
An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to
the tax status -- VAT-exempt or not -- of the party to the transaction. 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. 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.
If SEAGATE enters into such sales transactions with a purchaser -- usually in a foreign country --
for use or consumption outside the Philippines, these shall be subject to 0 percent. [66] If entered
into with a purchaser for use or consumption in the Philippines, then these shall be subject to 10
percent, 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, because the ecozone within which it is registered is managed and operated by the PEZA as
a separate customs territory. This means that in such zone is created the legal fiction of foreign
territory.
Under the cross-border principle[ of the VAT system being enforced by the Bureau of Internal
Revenue (BIR), 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, then the same rule holds for
such exports from the national territory -- except specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country.
If respondent is located in an export processing zone 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. Considered as export sales, such purchase transactions by respondent
would indeed be subject to a zero rate.
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.
Tax Refund as Tax Exemption
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.
VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT
Refund
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. This is a non
sequitur. By the VATs very nature as a tax on consumption, the capital goods and services
respondent has purchased are subject to the VAT, although at zero rate. Registration does not
determine taxability under the VAT law.
The BIR regulations additionally requiring an approved prior application for effective zero rating
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.
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.

MICROSOFT PHILIPPINES VS CIR

Facts:
Microsoft is a VAT-registered taxpayer, rendering marketing services to Microsoft Operations Pte.
(MOP) and Microsoft Licensing Inc. (MLI), both affiliated non-resident foreign corporations.
The services are paid for in acceptable foreign currency and qualified as zero rated VAT,
pursuant to Sec. 108.
On 2001, its sales amount to 261,901,858.
235,724,614 was derived from sales of service to MOP and MLI
26,177,214 was derived from sales to local customers
Microsoft paid 11,449,814 as VAT Input Taxes on its domestic purchases of taxable goods and
services.
On 2002, it claim for the tax credit of the VAT Input Taxes paid on 2001, since it is attributable to
its zero-rated sales.
Due to BIRs inaction, Microsoft filed a petition for review before the CTA.
The CTA Second Division denied the same on the ground of failure to comply with the invoicing
requirements under Sec. 113 and 237 of the NIRC and Revenue Regulation No. 795. Microsofts
receipts do not bear the imprinted word zero-rated on its face, thus its O.R. cannot be
considered as valid evidence to prove the zero-rated sales for VAT purposes. Upon appeal, the
CTA EN Bank affirmed the decision.

Issue:
Whether or not Microsoft is entitled to a claim for tax refund or credit

Held:
NO
SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons.
(A) Invoicing Requirements. A VAT-registered person shall, for every sale, issue an invoice or
receipt. In addition to the information required under Section 237, the following information
shall be indicated in the invoice or receipt:
(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's
identification number (TIN); and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the
indication that such amount includes the value-added tax. x x x

SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. All persons subject to an
internal revenue tax shall, for each sale or transfer of merchandise or for services rendered
valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or
 commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit
cost and description of merchandise or nature of service: Provided, however, That in the case of
sales, receipts or transfers in the amount of One hundred pesos (P100.00) or more, or
regardless of the amount, where the sale or transfer is made by a person liable to value-added
tax to another person also liable to value-added tax; or where the receipt is issued to cover
payment made as rentals, commissions, compensations or fees, receipts or invoices shall be
issued which shall show the name, business style, if any, and address of the purchaser,
customer or client: Provided, further, That where the purchaser is a VAT-registered person, in
addition to the information herein required, the invoice or receipt shall further show the Taxpayer
Identification Number (TIN) of the purchaser.
Revenue Regulation No. 795 Sec. 4.108-1. Invoicing Requirements. All VAT-registered
persons shall, for every sale or lease of goods or properties or services, issue duly registered
receipts or sales or commercial invoices which must show:
1. the name, TIN and address of seller;
2. date of transaction;
3. quantity, unit cost and description of merchandise or nature of service;
4. the name, TIN, business style, if any, and address of the VAT-registered purchaser,
customer or client;
5. the word zero-rated imprinted on the invoice covering zero-rated sales; and
6. the invoice value or consideration.

The invoicing requirements for a VAT-registered taxpayer as provided in the NIRC and revenue
regulations are clear. A VAT-registered taxpayer is required to comply with all the VAT invoicing
requirements to be able to file a claim for input taxes on domestic purchases for goods or
services attributable to zero-rated sales.
RR 7-95 expressly states that [A]ll purchases covered by invoices other than a VAT invoice
shall not give rise to any input tax. Microsoft's invoice, lacking the word zero-rated, is not a
VAT invoice, and thus cannot give rise to any input tax.
The subsequent enactment of Republic Act No. 9337 on 1 November 2005 elevating provisions
of RR 7-95 into law merely codified into law administrative regulations that already had the force
and effect of law. Such codification does not mean that prior to the codification the administrative
regulations were not enforceable.
In Panasonic v. Commissioner of Internal Revenue, we held that the appearance of the word
zero-rated on the face of invoices covering zero-rated sales prevents buyers from falsely
claiming input VAT from their purchases when no VAT is actually paid. Absent such word, the
government may be refunding taxes it did not collect.