RCBC V. CIR, G.R. NO.

170257 WITHHOLDING TAX

Facts:
Petitioner Rizal Commercial Banking Corporation (RCBC) is a corporation
engaged in general banking operations. It seasonably filed its Corporation Annual
Income Tax Returns for Foreign Currency Deposit Unit for the calendar years 1994
and 1995.
On August 15, 1996, RCBC received Letter of Authority No. 133959 issued
by then Commissioner of Internal Revenue (CIR) Liwayway Vinzons-Chato,
authorizing a special audit team to examine the books of accounts and other
accounting records for all internal revenue taxes from January 1, 1994 to December
31, 1995.
RCBC was assessed deficiency onshore tax and documentary stamp tax. As
regards the deficiency FCDU onshore tax, RCBC contended that because the onshore
tax was collected in the form of a final withholding tax, it was the borrower,
constituted by law as the withholding agent, that was primarily liable for the
remittance of the said tax.
Issue:
Whether or not petitioner is liable for deficiency onshore tax for taxable year
1994 and 1995.
Ruling:
Yes. RCBC is convinced that it is the payor-borrower, as withholding
agent, who is directly liable for the payment of onshore tax, citing Section 2.57(A) of
Revenue Regulations No. 2-98 which states:
(A)
Final Withholding Tax. Under the final withholding tax
system the amount of income tax withheld by the withholding agent is
constituted as a full and final payment of the income tax due from the
payee on the said income. The liability for payment of the tax rests
primarily on the payor as a withholding agent. Thus, in case of his
failure to withhold the tax or in case of under withholding, the
deficiency tax shall be collected from the payor/withholding
agent. The payee is not required to file an income tax return for the
particular income. (Emphasis supplied)
The petitioner is mistaken. It should be pointed out that RCBC erred in citing
the abovementioned Revenue Regulations No. 2-98 because the same governs
collection at source on income paid only on or after January 1, 1998. The deficiency
withholding tax subject of this petition was supposed to have been withheld on
income paid during the taxable years of 1994 and 1995. Hence, Revenue Regulations
No. 2-98 obviously does not apply in this case.
The liability of the withholding agent is independent from that of the
taxpayer. The former cannot be made liable for the tax due because it is the latter
who earned the income subject to withholding tax. The withholding agent is liable
only insofar as he failed to perform his duty to withhold the tax and remit the same to
the government. The liability for the tax, however, remains with the taxpayer because
the gain was realized and received by him.

CONTEX V CIR, G.R. NO. 151135 CONCEPT OF VAT

Facts:
Petitioner is a domestic corporation engaged in the business of manufacturing
hospital textiles and garments and other hospital supplies for export. Petitioners
place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered with
the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise,
pursuant to the provisions of Republic Act No. 7227. As an SBMA-registered firm,
petitioner is exempt from all local and national internal revenue taxes except for the
preferential tax provided for in Section 12 (c) of Rep. Act No. 7227. Petitioner also
registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under
Certificate of Registration RDO Control No. 95-180-000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various
supplies and materials necessary in the conduct of its manufacturing business. The
suppliers of these goods shifted unto petitioner the 10% VAT on the purchased items,
which led the petitioner to pay input taxes in the amounts
of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.
Acting on the belief that it was exempt from all national and local taxes,
including VAT, pursuant to Rep. Act No. 7227, petitioner filed two applications for tax
refund or tax credit of the VAT it paid.
Issue:
Whether or not the exemption from all local and national internal revenue
taxes provided in Republic Act no. 7227 covers the value added tax paid by petitioner,
a Subic Bay Freeport enterprise on its purchases of supplies and materials.
Ruling:
No. The petitioners claim to VAT exemption in the instant case for its
purchases of supplies and raw materials is founded mainly on Section 12 (b) and (c)
of Rep. Act No. 7227, which basically exempts them from all national and local
internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue
Regulations No. 1-95. On this point, petitioner rightly claims that it is indeed VATExempt and this fact is not controverted by the respondent. In fact, petitioner is
registered as a NON-VAT taxpayer per Certificate of Registration issued by the
BIR. As such, it is exempt from VAT on all its sales and importations of goods and
services.
Petitioners claim, however, for exemption from VAT for its purchases of supplies
and raw materials is incongruous with its claim that it is VAT-Exempt, for only VATRegistered entities can claim Input VAT Credit/Refund. The point of contention here
is whether or not the petitioner may claim a refund on the Input VAT erroneously
passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT
inadvertently passed on to it by its supplier since such is a zero-rated sale on the part

of the supplier, the petitioner is not the proper party to claim such VAT refund. Since
the transaction is deemed a zero-rated sale, petitioners supplier may claim an Input
VAT credit with no corresponding Output VAT liability. Congruently, no Output
VAT may be passed on to the petitioner.

It must be stressed that the VAT is an indirect tax. As such, the amount of tax
paid on the goods, properties or services bought, transferred, or leased may be shifted
or passed on by the seller, transferor, or lessor to the buyer, transferee or
lessee. Unlike a direct tax, such as the income tax, which primarily taxes an
individuals ability to pay based on his income or net wealth, an indirect tax, such as
the VAT, is a tax on consumption of goods, services, or certain transactions involving
the same. The VAT, thus, forms a substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for
the tax and the burden of the tax. As earlier pointed out, the amount of tax paid may
be shifted or passed on by the seller to the buyer. What is transferred in such instances
is not the liability for the tax, but the tax burden. In adding or including the VAT due
to the selling price, the seller remains the person primarily and legally liable for the
payment of the tax. What is shifted only to the intermediate buyer and ultimately to
the final purchaser is the burden of the tax. Stated differently, a seller who is directly
and legally liable for payment of an indirect tax, such as the VAT on goods or services
is not necessarily the person who ultimately bears the burden of the same tax. It is the
final purchaser or consumer of such goods or services who, although not directly and
legally liable for the payment thereof, ultimately bears the burden of the tax.
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or
firm. In contrast, exemption only removes the VAT at the exempt stage, and it will
actually increase, rather than reduce the total taxes paid by the exempt firms business
or non-retail customers. It is for this reason that a sharp distinction must be
made between zero-rating and exemption in designating a value-added tax.

ABAKADA GURO V ERMITA, G.R. NO. 168056 VAT

Facts:
Mounting budget deficit, revenue generation, inadequate fiscal allocation for
education, increased emoluments for health workers, and wider coverage for full
value-added tax benefits these are the reasons why Republic Act No. 9337 (R.A.
No. 9337) was enacted. R.A. No. 9337 is a consolidation of three legislative bills
namely, House Bill Nos. 3555 and 3705, and Senate Bill No. 1950.
Because of the conflicting provisions of the proposed bills the Senate agreed
to the request of the House of Representatives for a committee conference. The
Conference Committee on the Disagreeing Provisions of House Bill recommended the
approval of its report, which the Senate and the House of the Representatives did.
The President signed into law the consolidated House and Senate versions as Republic
Act 9337. Before the law was to take effect on July 1, 2005, the Court issued a
temporary restraining order enjoining government from implementing the law in
response to a slew of petitions for certiorari and prohibition questioning the
constitutionality of the new law.
Among others, Petitioners contend that Sections 4, 5, and 6 of R.A. No. 9337
constitute an undue delegation of legislative power, in violation of Article VI, Section
28(2) of the Constitution;

Issue:
Whether or not there is an undue delegation of legislative power.

Ruling:
In the present case, the challenged section of R.A. No. 9337 is the common
proviso in Sections 4, 5 and 6 which reads as follows: That the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of

the previous year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds
one and one-half percent (1 %)
In every case of permissible delegation, there must be a showing that the
delegation itself is valid. It is valid only if the law (a) is complete in itself, setting
forth therein the policy to be executed, carried out, or implemented by the delegate;
and (b) fixes a standard the limits of which are sufficiently determinate and
determinable to which the delegate must conform in the performance of his
functions. A sufficient standard is one which defines legislative policy, marks its
limits, maps out its boundaries and specifies the public agency to apply it. It indicates
the circumstances under which the legislative command is to be effected. Both tests
are intended to prevent a total transference of legislative authority to the delegate,
who is not allowed to step into the shoes of the legislature and exercise a power
essentially legislative.
A distinction has rightfully been made between delegation of power to make
the laws which necessarily involves a discretion as to what it shall be, which
constitutionally may not be done, and delegation of authority or discretion as to its
execution to be exercised under and in pursuance of the law, to which no valid
objection can be made.
The case before the Court is not a delegation of legislative power. It is simply
a delegation of ascertainment of facts upon which enforcement and administration of
the increase rate under the law is contingent. The legislature has made the operation of
the 12% rate effective January 1, 2006, contingent upon a specified fact or condition.
It leaves the entire operation or non-operation of the 12% rate upon factual matters
outside of the control of the executive. No discretion would be exercised by the
President. Highlighting the absence of discretion is the fact that the word shall is used
in the common proviso. The use of the word shall connote a mandatory order. Its use
in a statute denotes an imperative obligation and is inconsistent with the idea of
discretion. Where the law is clear and unambiguous, it must be taken to mean exactly
what it says, and courts have no choice but to see to it that the mandate is obeyed.
There is no undue delegation of legislative power but only of the discretion as to the
execution of a law. This is constitutionally permissible. Congress does not abdicate its
functions or unduly delegate power when it describes what job must be done, who
must do it, and what is the scope of his authority; in our complex economy that is
frequently the only way in which the legislative process can go forward.

COMMISSIONER OF INTERNAL REVENUE V CEBU TOYO

CORPORATION, G.R. NO. 149073 CHARACTER OF VAT
Facts:
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. It is
also registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer.
As an export enterprise, respondent sells 80% of its products to its mother
corporation, the Japan-based Toyo Lens Corporation, pursuant to an Agreement of
Offsetting. The rest are sold to various enterprises doing business in the MEPZ.
Inasmuch as both sales are considered export sales subject to Value-Added Tax (VAT)
at 0% rate under Section 106(A)(2)(a) 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. 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.
Issue:
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.
Ruling:
Petitioners contention that respondent is not entitled to refund for being
exempt from VAT is untenable. This argument turns a blind eye to the fiscal incentives
granted to PEZA-registered enterprises under Section 23 of Rep. Act No. 7916. Note
that under said statute, the respondent had two options with respect to its tax burden.
It could avail of an income tax holiday pursuant to provisions of E.O. No. 226, thus
exempt it from income taxes for a number of years but not from other internal revenue
taxes such as VAT; or it could avail of the tax exemptions on all taxes, including VAT
under P.D. No. 66 and pay only the preferential tax rate of 5% under Rep. Act No.
7916. Both the Court of Appeals and the Court of Tax Appeals found that respondent
availed of the income tax holiday for four (4) years starting from August 7, 1995, as
clearly reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where
respondent specified that it was availing of the tax relief under E.O. No. 226. Hence,
respondent is not exempt from VAT and it correctly registered itself as a VAT
taxpayer. In fine, it is engaged in taxable rather than exempt transactions.

Taxable transactions are those transactions which are subject to value-added

tax either at the rate of ten percent (10%) or zero percent (0%). In taxable
transactions, the seller shall be entitled to tax credit for the value-added tax paid on
purchases and leases of goods, properties or services.
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.
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.
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. Further,
the records show that the respondent is subject to VAT as it availed of the income tax
holiday under E.O. No. 226. Perforce, respondent is subject to VAT at 0% rate and is
entitled to a refund or credit of the unutilized input taxes, which the Court of Tax
Appeals computed atP2,158,714.46, but which we findafter recomputationshould
be P2,158,714.52.

CIR V MAGSAYSAY LINES, G.R. NO. 146984 PERSONS LIABLE FOR VAT

Facts:
Pursuant to a government program of privatization, the National Development
Company (NDC) decided to sell in one lot its National Marine Corporation (NMC)
shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner"
type vessels.The vessels were constructed for the NDC between 1981 and 1984, then
initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary.
Subsequently, the vessels were transferred and leased, on a bareboat basis, to the
NMC. The NMC shares and the vessels were offered for public bidding. Among the
stipulated terms and conditions for the public auction was that the winning bidder was
to pay "a value added tax of 10% on the value of the vessels." On 3 June 1988, private
respondent Magsaysay Lines, Inc. offered to buy the shares and the vessels for
P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new
company still to be formed composed of itself and was approved by the Committee on
Privatization, and a Notice of Award dated 1 July 1988 was issued to Magsaysay
Lines who in turn was assessed of VAT through VAT Ruling No. 568-88 dated 14
December 1988 from the BIR, holding that the sale of the vessels was subject to the
10% VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and
thus its "transactions incident to its normal VAT registered activity of leasing out
personal property including sale of its own assets that are movable, tangible objects
which are appropriable or transferable are subject to the 10% [VAT].
CTA ruled that the sale of a vessel was an "isolated transaction," not done in
the ordinary course of 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. Hence CIR appealed the CTA Decision.
Issue:
Whether the sale by the NDC of five (5) of its vessels to the private
respondents is subject to VAT under the National Internal Revenue Code of 1986 then
prevailing at the time of the sale.
Ruling:
NOT SUBJECT TO VAT. VAT is ultimately a tax on consumption, even
though it is assessed on many levels of transactions on the basis of a fixed
percentage. It is the end user of consumer goods or services, which ultimately
shoulders the tax, as the liability therefrom is passed on to the end users by the
providers of these goods or services who in turn may credit their own VAT liability (or
input VAT) from the VAT payments they receive from the final consumer (or output
VAT). The final purchase by the end consumer represents the final link in a
production chain that itself involves several transactions and several acts of
consumption. The VAT system assures fiscal adequacy through the collection of taxes
on every level of consumption, yet assuages the manufacturers or providers of goods
and services by enabling them to pass on their respective VAT liabilities to the next
link of the chain until finally the end consumer shoulders the entire tax liability.

Yet VAT is not a singular-minded tax on every transactional level. Its

assessment bears direct relevance to the 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.
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. We cite with approval
the CTAs explanation on this point:
The Court explained that "course of business" or "doing business" connotes
regularity of activity. In the instant case, the sale was an isolated transaction. The sale,
which was involuntary and made pursuant to the declared policy of Government for
privatization could no longer be repeated or carried on with regularity. It should be
emphasized that the normal VAT-registered activity of NDC is leasing personal
property.
This finding is confirmed by the Revised Charter of the NDC, which bears no
indication that the NDC was created for the primary purpose of selling real property.
The conclusion that the sale was not in the course of trade or business, which the CIR
does not dispute before this Court, should have definitively settled the matter. Any
sale, barter or exchange of goods or services not in the course of trade or business is
not subject to VAT. Accordingly, the Court rules that given the undisputed finding that
the transaction in question was not made in the course of trade or business of the
seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of the Tax
Code, no matter how the said sale may hew to those transactions deemed sale as
defined under Section 100.

CIR V GOTAMCO, G.R. NO. L-31092 PERSONS LIABLE FOR VAT

Facts:
The World Health Organization is an international organization, which has a
regional office in Manila. An agreement was entered into between the Republic of the
Philippines and the said Organization on July 22, 1951. Section 11 of that Agreement
provides, inter alia, that "the Organization, its assets, income and other properties
shall be: (a) exempt from all direct and indirect taxes. The WHO decided to construct
a building to house its own offices, as well as the other United Nations offices
stationed in Manila. A bidding was held for the building construction. The WHO
informed the bidders that the building to be constructed belonged to an international
organization exempted from the payment of all fees, licenses, and taxes, and that
therefore their bids "must take this into account and should not include items for such
taxes, licenses and other payments to Government agencies."
Thereafter, the construction contract was awarded to John Gotamco & Sons,
Inc. Subsequently, the Commissioner of Internal Revenue sent a letter of demand to
Gotamco demanding payment of for the 3% contractor's tax plus surcharges on the
gross receipts it received from the WHO in the construction of the latter's building.
WHO. The WHO issued a certification that the bid of John Gotamco & Sons, should
be exempted from any taxes in connection with the construction of the World Health
Organization office building because such can be considered as an indirect tax to
WHO. However, The Commissioner of Internal Revenue contends that the 3%
contractor's tax is not a direct nor an indirect tax on the WHO. It is a tax that is
primarily due from the contractor, thus not covered by the tax exemption agreement.
Issue:
Whether or not the said 3% contractors tax imposed upon petitioner
is covered by the direct and indirect tax exemption granted to WHO by the
government.
Ruling:
Yes. The 3% contractors tax imposed upon petitioner is covered by the direct
and indirect tax exemption granted to WHO. Hence, petitioner cannot be held liable
for such contractors tax. The Supreme Court explained that direct taxes are those that
are demanded from the very person who, it is intended or desired, should pay them;

while indirect taxes are those that are demanded in the first instance from one person
in the expectation and intention that he can shift the burden to someone else. While it
is true that the contractor's tax is payable by the contractor, However in the last
analysis it is the owner of the building that shoulders the burden of the tax because the
same is shifted by the contractor to the owner as a matter of self-preservation. Thus, it
is an indirect tax against the WHO because, although it is payable by the petitioner,
the latter can shift its burden on the WHO.

PANASONIC V CIR, G.R. NO. 178090 ZERO-RATED TRANSACTIONS

Facts:
Petitioner
Panasonic
Communications
Imaging
Corporation
of
the Philippines (Panasonic) produces and exports plain paper copiers and their subassemblies, parts, and components. It is registered with the Board of Investments as a
preferred pioneer enterprise under the Omnibus Investments Code of 1987. It is also
a registered value-added tax (VAT) enterprise.
From April 1 to September 30, 1998 and from October 1, 1998 to March 31,
1999, petitioner Panasonic generated export sales amounting to US$12,819,475.15
and US$11,859,489.78, respectively, for a total of US$24,678,964.93. Believing that
these export sales were zero-rated for VAT under Section 106(A)(2)(a)(1) of the 1997
National Internal Revenue Code as amended by R.A. 8424 (1997 NIRC), Panasonic
paid input VAT of P4,980,254.26 and P4,388,228.14 for the two periods or a total
of P9,368,482.40 attributable to its zero-rated sales.
Claiming that the input VAT it paid remained unutilized or unapplied, on
March 12, 1999 and July 20, 1999 petitioner Panasonic filed with the BIR two
separate applications for refund or tax credit of what it paid.
Issue:
Whether or not the CTA en banc correctly denied petitioner Panasonics claim
for refund of the VAT it paid as a zero-rated taxpayer on the ground that its sales
invoices did not state on their faces that its sales were zero-rated.
Ruling:
Yes. For the effective zero rating of such transactions, the taxpayer has to be
VAT-registered and must comply with invoicing requirements. Interpreting these
requirements, respondent CIR ruled that under Revenue Memorandum Circular
(RMC) 42-2003, the taxpayers failure to comply with invoicing requirements will
result in the disallowance of his claim for refund. Petitioners failure to print the word
zero-rated on the invoices covering zero-rated sales justifies the denial of its claim
for refund.
The VAT is a tax on consumption, an indirect tax that the provider of goods or
services may pass on to his customers. Under the VAT method of taxation, which is
invoice-based, an entity can subtract from the VAT charged on its sales or outputs the

VAT it paid on its purchases, inputs and imports. For example, when a seller charges
VAT on its sale, it issues an invoice to the buyer, indicating the amount of VAT he
charged. For his part, if the buyer is also a seller subjected to the payment of VAT on
his sales, he can use the invoice issued to him by his supplier to get a reduction of his
own VAT liability. The difference in tax shown on invoices passed and invoices
received is the tax paid to the government. In case the tax on invoices received
exceeds that on invoices passed, a tax refund may be claimed.
Zero-rated transactions generally refer to the export sale of goods and
services. The tax rate in this case is set at zero. When applied to the tax base or the
selling price of the goods or services sold, such zero rate results in no tax chargeable
against the foreign buyer or customer. But, although the seller in such transactions
charges no output tax, he can claim a refund of the VAT that his suppliers charged
him. The seller thus enjoys automatic zero rating, which allows him to recover the
input taxes he paid relating to the export sales, making him internationally
competitive.
WESTERN MINDANAO V CIR, G.R. NO. 181136 ZERO-RATED
TRANSACTIONS
Facts:
Petitioner WMPC is a domestic corporation engaged in the production and
sale of electricity. It is registered with the BIR as a VAT taxpayer. Petitioner alleges
that it sells electricity solely to the National Power Corporation (NPC), which is in
turn exempt from the payment of all forms of taxes, duties, fees and imposts, pursuant
to Section 13 of R.A. No. 6395 (An Act Revising the Charter of the National Power
Corporation). In view thereof and pursuant to Section 108(B) (3) of the
NIRC petitioners power generation services to NPC is zero-rated.
Under Section 112(A) of the NIRC, a VAT-registered taxpayer may, within
two years after the close of the taxable quarter, apply for the issuance of a tax credit or
refund of creditable input tax due or paid and attributable to zero-rated or effectively
zero-rated sales. Hence, on 20 June 2000 and 13 June 2001, WMPC filed with the
Commissioner of Internal Revenue (CIR) applications for a tax credit certificate of its
input VAT covering the taxable 3rd and 4th quarters of 1999 (amounting to
3,675,026.67) and all the taxable quarters of 2000 (amounting to 5,649,256.81).
Issue:
Whether the CTA En Banc seriously erred in dismissing the claim of petitioner
for a refund or tax credit on input tax on the ground that the latters Official Receipts
do not contain the phrase zero-rated
Ruling:
No. A taxpayer engaged in zero-rated or effectively zero-rated sale may apply
for the issuance of a tax credit certificate, or refund of creditable input tax due or paid,
attributable to the sale. In a claim for tax refund or tax credit, the applicant must prove
not only entitlement to the grant of the claim under substantive law. It must also show
satisfaction of all the documentary and evidentiary requirements for an administrative
claim for a refund or tax credit. Hence, the mere fact that petitioners application for
zero-rating has been approved by the CIR does not, by itself, justify the grant of a
refund or tax credit. The taxpayer claiming the refund must further comply with the
invoicing and accounting requirements mandated by the NIRC, as well as by revenue
regulations implementing them.

Under the NIRC, a creditable input tax should be evidenced by a VAT invoice
or official receipt, which may only be considered as such when it complies with the
requirements of RR 7-95, particularly Section 4.108-1. This section requires, among
others, that (i)f the sale is subject to zero percent (0%) value-added tax, the term
zero-rated sale shall be written or printed prominently on the invoice or receipt.
We are not persuaded by petitioners argument that RR 7-95 constitutes undue
expansion of the scope of the legislation it seeks to implement on the ground that the
statutory requirement for imprinting the phrase zero-rated on VAT official receipts
appears only in Republic Act No. 9337. This law took effect on 1 July 2005, or long
after petitioner had filed its claim for a refund.
RR 7-95, which took effect on 1 January 1996, proceeds from the rule-making
authority granted to the Secretary of Finance by the NIRC for the efficient
enforcement
of
the
same
Tax
Code
and
its
amendments.
In Panasonic Communications Imaging Corporation of the Philippines v.
Commissioner of Internal Revenue, we ruled that this provision is reasonable and is
in accord with the efficient collection of VAT from the covered sales of goods and
services. Moreover, we have held in Kepco Philippines Corporation v.
Commissioner of Internal Revenue that the subsequent incorporation of Section
4.108-1 of RR 7-95 in Section 113 (B) (2) (c) of R.A. 9337 actually confirmed the
validity of the imprinting requirement on VAT invoices or official receipts a case
falling under the principle of legislative approval of administrative interpretation by
reenactment.
In fact, this Court has consistently held as fatal the failure to print the word
zero-rated on the VAT invoices or official receipts in claims for a refund or credit of
input VAT on zero-rated sales, even if the claims were made prior to the effectivity of
R.A. 9337.

CIR V MAGSAYSAY LINES, G.R. NO. 146984 TRANSACTIONS DEEMED

SALE

Facts:
Pursuant to a government program of privatization, the National Development
Company (NDC) decided to sell in one lot its National Marine Corporation (NMC)
shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner"
type vessels.The vessels were constructed for the NDC between 1981 and 1984, then
initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary.
Subsequently, the vessels were transferred and leased, on a bareboat basis, to the
NMC. The NMC shares and the vessels were offered for public bidding. Among the
stipulated terms and conditions for the public auction was that the winning bidder was
to pay "a value added tax of 10% on the value of the vessels." On 3 June 1988, private
respondent Magsaysay Lines, Inc. offered to buy the shares and the vessels for
P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new
company still to be formed composed of itself and was approved by the Committee on
Privatization, and a Notice of Award dated 1 July 1988 was issued to Magsaysay
Lines who in turn was assessed of VAT through VAT Ruling No. 568-88 dated 14
December 1988 from the BIR, holding that the sale of the vessels was subject to the
10% VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and
thus its "transactions incident to its normal VAT registered activity of leasing out
personal property including sale of its own assets that are movable, tangible objects
which are appropriable or transferable are subject to the 10% [VAT].
CTA ruled that the sale of a vessel was an "isolated transaction," not done in
the ordinary course of 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. Hence CIR appealed the CTA Decision.

Issue:
Whether or not Section 100 on transactions deemed sale is applicable in this
case.

Ruling:
No. Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of
R.R. No. 5-87 now relied upon by the CIR, is captioned "Value-added tax on sale of
goods," and it expressly states that "[t]here shall be levied, assessed and collected on
every sale, barter or exchange of goods, a value added tax x x x." Section 100 should
be read in light of Section 99, which lays down the general rule on which persons are
liable for VAT in the first place and on what transaction if at all. It may even be noted
that Section 99 is the very first provision in Title IV of the Tax Code, the Title that
covers VAT in the law. Before any portion of Section 100, or the rest of the law for
that matter, may be applied in order to subject a transaction to VAT, it must first be
satisfied that the taxpayer and transaction involved is liable for VAT in the first place
under Section 99.
It would have been a different matter if Section 100 purported to define the
phrase "in the course of trade or business" as expressed in Section 99. If that were so,
reference to Section 100 would have been necessary as a means of ascertaining
whether the sale of the vessels was "in the course of trade or business," and thus
subject to VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R.
No. 5-87 elaborate on is not the meaning of "in the course of trade or business," but
instead the identification of the transactions which may be deemed as sale. It would
become necessary to ascertain whether under those two provisions the transaction
may be deemed a sale, only if it is settled that the transaction occurred in the course of
trade or business in the first place. If the transaction transpired outside the course of
trade or business, it would be irrelevant for the purpose of determining VAT liability
whether the transaction may be deemed sale, since it anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding that the
transaction in question was not made in the course of trade or business of the seller,
NDC that is, the sale is not subject to VAT pursuant to Section 99 of the Tax Code, no
matter how the said sale may hew to those transactions deemed sale as defined under
Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find
application in this case, the Court finds the discussions offered on this point by the
CTA and the Court of Appeals (in its subsequent Resolution) essentially correct.
Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions deemed sale
those involving "change of ownership of business." However, Section 4(E) of R.R.
No. 5-87, reflecting Section 100 of the Tax Code, clarifies that such "change of
ownership" is only an attending circumstance to "retirement from or cessation of
business[, ] with respect to all goods on hand [as] of the date of such retirement or
cessation." 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.