Tax 2 Case Digests Part 3 Value-Added Tax PDF

Taxation II Case Digests based on Atty.
Bobby Locks Course Outline

Part III- VALUE-ADDED TAX
PRELIMINARY MATTERS
Commissioner of Internal Revenue vs. Magsaysay lines, Inc., 497 SCRA 63(2006)
TINGA, J.
Taxation; Value Added Tax (VAT); Value Added Tax (VAT) is ultimately a tax on consumption, even
though it is assessed on many levels of transactions on the basis of a fixed percentage.A brief
reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even
though it is assessed on many levels of transactions on the basis of a fixed percentage. It is the end user of
consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the
end users by the providers of these goods or services who in turn may credit their own VAT liability (or
input VAT) from the VAT payments they receive from the final consumer (or output VAT).
Value Added Tax (VAT); The tax is levied only on the sale, barter or exchange of goods or services by
persons who engage in such activities in the course of trade or business.VAT is not a singular-minded
tax on every transactional level. Its assessment bears direct relevance to the 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.
Facts:
Pursuant to a government program of privatization, The NDC decided to sell in one lot its NMC shares and
five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels. The vessels were
constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also
its wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to
the NMC. The NMC shares and the vessels were offered for public bidding. Among the stipulated terms
and conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on
the value of the vessels." On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines)
offered to buy the shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines,
1|Ms. Nolaida Aguirre
Taxation II Case Digests based on Atty. Bobby Locks Course Outline

purportedly for a new company still to be formed composed of itself and was approved by the Committee
on Privatization, and a Notice of Award dated 1 July 1988 was issued to Magsaysay Lines who in turn was
assessed of VAT through VAT Ruling No. 568-88 dated 14 December 1988 from the BIR, holding that the
sale of the vessels was subject to the 10% VAT. The ruling cited the fact that NDC was a VAT-registered
enterprise, and thus its "transactions incident to its normal VAT registered activity of leasing out personal
propertyincluding sale of its own assets that are movable, tangible objects which are appropriable or
transferable are subject to the 10% [VAT].
CTA ruled that the sale of a vessel was an "isolated transaction," not done in the ordinary course of NDCs
business, and was thus notsubject to VAT, which under Section 99 of the Tax Code, was applied only to
sales in the course of trade or business. The CTA further held that the sale of the vessels could not be
"deemed sale," and thus subject to VAT, as the transaction did not fall under the enumeration
of transactions deemed sale as listed either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 587. Finally, the CTA ruled that any case of doubt should be resolved in favor of private respondents since
Section 99 of the Tax Code which implemented VAT is not an exemption provision, but a classification
provision which warranted the resolution of doubts in favor of the taxpayer. Hence CIR appealed the CTA
Decision.
Issue:
Whether the sale by the National Development Company (NDC) of five (5) of its vessels to the private
respondents is subject to value-added tax (VAT) under the National Internal Revenue Code of 1986
(Tax Code) then prevailing at the time of the sale. The facts are culled primarily from the ruling of the
CTA.
Held: NOT SUBJECT TO VAT.
VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the
basis of a fixed percentage. It is the end user of consumer goods or services which ultimately shoulders
the tax, as the liability therefrom is passed on to the end users by the providers of these goods or
services who in turn may credit their own VAT liability (or input VAT) from the VAT payments they
receive from the final consumer (or output VAT). The final purchase by the end consumer represents the
final link in a production chain that itself involves several transactions and several acts of consumption.
The VAT system assures fiscal adequacy through the collection of taxes on every level of consumption, yet
assuages the manufacturers or providers of goods and services by enabling them to pass on their respective
VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to
the taxpayers role or link in the production chain. Hence, as affirmed by Section 99 of the TaxCode and its
subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or services by
persons who engage in such activities, in the course of trade or business. These transactions outside the
course of trade or business may invariably contribute to the production chain, but they do so only as a
matter of accident or incident. As the sales of goods or services do not occur within the course of trade or

business, the providers of such goods or services would hardly, if at all, have the opportunity to
appropriately credit any VAT liability as against their own accumulated VAT collections since the
accumulation of output VAT arises in the first place only through the ordinary course of trade or business.
That the sale of the vessels was not in the ordinary course of tradeor business of NDC was appreciated by
both the CTA and the Court of Appeals, the latter doing so even in its first decision which it eventually
reconsidered. We cite with approval the 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."Course of business" is what is usually done in the management of trade or business
Court explained that "course of business" or "doing business" connotes regularity of activity. In the instant
case, the sale was an isolated transaction. The sale which was involuntary and made pursuant to the
declared policy of Government for privatization could no longer be repeated or carried on with regularity.
It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property.
This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was
created for the primary purpose of selling real property. The conclusion that the sale was not in the
course of trade or business, which the CIR does not dispute before this Court, should have definitively
settled the matter. Any sale, barter or exchange of goods or services not in the courseof trade or business is
not subject to VAT. Accordingly, the Court rules that given the undisputed finding that the transaction in
question was not made in the course of trade or business of the seller, NDC that is, the sale is not subject
to VAT pursuant to Section 99 of the Tax Code, no matter how the said sale may hew to
those transactions deemed sale as defined under Section 100. Petition Denied.
Commissioner of Internal Revenue vs. Seagate Technology (Philippines), 451 SCRA 132(2005)
PANGANIBAN, J.
Taxation; Tax Exemption; Value Added Tax (VAT); Petitioner is not subject to internal revenue laws
and regulations and is even entitled to tax credits.From the above-cited laws, it is immediately clear
that petitioner enjoys preferential tax treatment. It is not subject to internal revenue laws and regulations
and is even entitled to tax credits. The VAT on capital goods is an internal revenue tax from which
petitioner as an entity is exempt. Although the transactions involving such tax are not exempt, petitioner as
a VAT-registered person, however, is entitled to their credits.
Same; Same; Same; The VAT is an indirect tax that may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties or services.Viewed broadly, the VAT is a uniform tax ranging, at
present, from 0 percent to 10 percent levied on every importation of goods, whether or not in the course of
trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each

rendition of services in the course of trade or business as they pass along the production and distribution
chain, the tax being limited only to the value added to such goods, properties or services by the seller,
transferor or lessor. It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of
the goods, properties or services. As such, it should be understood not in the context of the person or entity
that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on
consumption. In either case, though, the same conclusion is arrived at.
Same; Same; Same; Zero-rated transactions generally refer to the export sale of goods and supply of
services.Zero-rated transactions generally refer to the export sale of goods and supply of services. The
tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against
the purchaser. The seller of such transactions charges no output tax, but can claim a refund of or a tax
credit certificate for the VAT previously charged by suppliers.
Same; Same; Same; Respondent as an exempt entity, can neither be directly charged for the VAT on its
sales nor indirectly made to bear as added cost to such sales, the equivalent VAT on its purchases.
Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal
revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the
very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but
the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly
charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent
VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not
distinguish, we ought not to distinguish.
Same; Same; Same; Tax Refunds; Claimants of tax refunds bear the burden of proving the factual basis
of their claims; and of showing, by words too plain to be mistaken, that the legislature intended to
exempt them.Tax refunds are in the nature of such exemptions. Accordingly, the claimants of those
refunds bear the burden of proving the factual basis of their claims; and of showing, by words too plain to
be mistaken, that the legislature intended to exempt them. In the present case, all the cited legal provisions
are teeming with life with respect to the grant of tax exemptions too vivid to pass unnoticed. In addition,
respondent easily meets the challenge.
Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like
herein respondent -- are entities exempt from all internal revenue taxes and the implementing rules
relevant thereto, including the value-added taxes or VAT. Although export sales are not deemed
exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the distinction between
exempt entities and exempt transactions has little significance, because the net result is that the taxpayer
is not liable for the VAT. Respondent, a VAT-registered enterprise, has complied with all requisites for
claiming a tax refund of or credit for the input VAT it paid on capital goods it purchased. Thus, the
Court of Tax Appeals and the Court of Appeals did not err in ruling that it is entitled to such refund or
credit.
Facts:

[Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued PEZA
Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the manufacture
of recording components primarily used in computers for export. Such registration was made on 6 June
1997;
[Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration
Certification No. 97-083-000600-V issued on 2 April 1997; VAT returns for the period 1 April 1998 to 30
June 1999 have been filed by [respondent];
An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting
documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for Review), was filed
on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu; No final action has been received
by [respondent] from [petitioner] on [respondents] claim for VAT refund.
The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the
[petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of
Petition for Review in order to toll the running of the two-year prescriptive period.
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.
The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit
certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66.
The appellate court reasoned that respondent had availed itself only of the fiscal incentives under Executive
Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of those under both
Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was, therefore,
considered exempt only from the payment of income tax when it opted for the income tax holiday in lieu of
the 5 percent preferential tax on gross income earned. As a VAT-registered entity, though, it was still
subject to the payment of other national internal revenue taxes, like the VAT.
Issue:
Whether or not Seagate, a VAT-Registered PEZA Enterprise is entitled to the refund.
Held:
YES. Respondent, a VAT-registered enterprise, has complied with all requisites for claiming a tax refund
of or credit for the input VAT it paid on capital goods it purchased.

It is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on
capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although the
transactions involving such tax are not exempt, petitioner as a VAT-registered person,[28] however, is
entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every
importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter,
exchange or lease of goods or properties or on each rendition of services in the course of trade or
business[29] as they pass along the production and distribution chain, the tax being limited only to the value
added[30] to such goods, properties or services by the seller, transferor or lessor. [31] It is an indirect tax that
may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. [32] As
such, it should be understood not in the context of the person or entity that is primarily, directly and legally
liable for its payment, but in terms of its nature as a tax on consumption. [33] In either case, though, the
same conclusion is arrived at.
Under the present method that relies on invoices, an entity can credit against or subtract from the VAT
charged on its sales or outputs the VAT paid on its purchases, inputs and imports. [37]
If at the end of a taxable quarter the output taxes[38] charged by a seller[39] are equal to the input
taxes[40] passed on by the suppliers, no payment is required. It is when the output taxes exceed the input
taxes that the excess has to be paid.[41] If, however, the input taxes exceed the output taxes, the excess shall
be carried over to the succeeding quarter or quarters. [42] Should the input taxes result from zero-rated or
effectively zero-rated transactions or from the acquisition of capital goods, [43] any excess over the output
taxes shall instead be refunded[44] to the taxpayer or credited[45] against other internal revenue taxes.[46]
Zero-Rated vs. Effectively Zero-Rated Transactions (in effect similar ; As to source different)
Zero-rated transactions
Effectively Zero-rated transactions
As to source
export sale of goods and sale of goods[50] or supply of services[51] to persons or

supply of services.[47] The tax entities whose exemption under special laws or
international agreements to which the Philippines is a
rate is set at zero.[48]
signatory effectively subjects such transactions to a zero
rate
In effect
results in no tax chargeable against the purchaser. The seller of such transactions
charges no output tax,[49] but can claim a refund of or a tax credit certificate for the
VAT previously charged by suppliers.
Zero Rating and Exemption (In terms of the VAT computation same; the extent of relief different)

Automatic Zero-rating
Effective zero rating
intended to be enjoyed by the seller who is

directly and legally liable for the VAT,
making such seller internationally
competitive by allowing the refund or
credit of input taxes that are attributable
to export sales
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, there is total relief for the purchaser from the burden of the tax
In exemption there is
only partial relief
because
the
purchaser is not
allowed any tax
refund of or credit
for input taxes
paid.[58]
Exempt Transaction vs. Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties to the
transaction.[59]
exempt transaction
exempt party
involves goods or services which are expressly person or entity granted VAT exemption under the
exempted from the VAT under the Tax Code, Tax Code, a special law or an international
without regard to the tax status -- VAT-exempt agreement
or not -- of the party to the transaction
such transaction is not subject to the VAT, but Such party is also not subject to the VAT, but may
the seller is not allowed any tax refund of or credit be allowed a tax refund of or credit for input taxes
paid, depending on its registration as a VAT or nonfor any input taxes paid.
VAT taxpayer.
Tax Refund as Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juris[102] against the taxpayer[103] and
liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions.
VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law. [131] Petitioner alleges that respondent did
register for VAT purposes with the appropriate Revenue District Office. However, it is now too late in the
day for petitioner to challenge the VAT-registered status of respondent, given the latters prior
representation before the lower courts and the mode of appeal taken by petitioner before this Court.
Tax Refund or Credit in Order

Having determined that respondents purchase transactions are subject to a zero VAT rate, the tax refund or
credit is in order.
Compliance with All Requisites for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT
refund or credit.[150]
First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in
which this Court held that the petitioner therein was registered as a non-VAT taxpayer.[151] Hence, for being
merely VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and
have not been offset against any output taxes.
Summary
To summarize, special laws expressly grant preferential tax treatment to business establishments registered
and operating within an ecozone, which by law is considered as a separate customs territory. As such,
respondent is exempt from all internal revenue taxes, including the VAT, and regulations pertaining
thereto. It has opted for the income tax holiday regime, instead of the 5 percent preferential tax regime. As
a matter of law and procedure, its registration status entitling it to such tax holiday can no longer be
questioned. Its sales transactions intended for export may not be exempt, but like its purchase transactions,
they are zero-rated. No prior application for the effective zero rating of its transactions is necessary. Being
VAT-registered and having satisfactorily complied with all the requisites for claiming a tax refund of or
credit for the input VAT paid on capital goods purchased, respondent is entitled to such VAT refund or
credit.
Contex Corporation vs. Commissioner of Internal Revenue, 433 SCRA 376(2004)

QUISUMBING, J.
Taxation; Exemptions; Value Added Tax (VAT); VAT as an Indirect Tax; The amount of tax paid on
the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller,
transferor or lessor to the buyer, transferee or lessee.At this juncture, it must be stressed that the VAT
is an indirect tax. As such, the amount of tax paid on the goods, properties or services bought, transferred,
or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee.
Unlike a direct tax, such as the income tax, which primarily taxes an 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.
Same; Same; Same; Same; A seller who is directly and legally liable for payment of an indirect tax, such
as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the

same tax; It is the final purchaser or consumer of such goods or services who although not directly and
legally liable for the payment thereof, ultimately bears the burden of the tax.The amount of tax paid
may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the
liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller
remains the person primarily and legally liable for the payment of the tax. What is shifted only to the
intermediate buyer and ultimately to the final purchaser is the burden of the tax. Stated differently, a seller
who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is
not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or
consumer of such goods or services who, although not directly and legally liable for the payment thereof,
ultimately bears the burden of the tax.
Same; Same; Same; Petitioners claim for exemption from VAT for its purchases of supplies and raw
materials is incongruous with its claim that it is VAT-Exempt for only VAT-Registered entities can claim
Input VAT Credit/Refund.Petitioner rightly claims that it is indeed VAT-Exempt and this fact is not
controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of
Registration issued by the BIR. As such, it is exempt from VAT on all its sales and importations of goods
and services. 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 VAT-Registered entities can claim
Input VAT Credit/Refund.
Same; Same; Same; Petitioner is not the proper party to claim such VAT refund.The point of
contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously passed
on to it by its suppliers. While it is true that the petitioner should not have been liable for the VAT
inadvertently passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the
petitioner is not the proper party to claim such VAT refund.
Facts:
Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and
garments and other hospital supplies for export. 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. [4] As an SBMA-registered firm,
petitioner is exempt from all local and national internal revenue taxes except for the preferential tax
provided for in Section 12 (c)[5] of Rep. Act No. 7227. Petitioner also registered with the Bureau of
Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary
in the conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10%
VAT on the purchased items, which led the petitioner to pay input taxes in the amounts
of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.[6]

Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep.
Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr.
Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application letter, dated
December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time
directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The second letter
sought a refund or issuance of a tax credit certificate in the amount of P1,108,307.72, representing
erroneously paid input VAT for the period January 1, 1997 to November 30, 1998.
Issue:
1. Whether or not the exemption from all local and national internal revenue taxes provided in R.A.
7227 covers the VAT paid by the petitioner, a Subic Bay Freeport enterprise on its purchases of
supplies and materials.
2. Whether or not the CTA correctly held that petitioner is entitled to the tax credit for refund of the
VAT paid on its purchases of supplies and raw materials for the years 1997 and 1998.
Held:
1. NO. SBFZ locators are not relieved from the indirect taxes that may be shifted to them by a VATregistered seller.
It must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods,
properties or services bought, transferred, or leased may be shifted or passed on by the seller,
transferor, or lessor to the buyer, transferee or lessee. [17] Unlike a direct tax, such as the income
tax, which primarily taxes an 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. [18]Stated differently, a seller
who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or
services is not necessarily the person who ultimately bears the burden of the same tax. It is the
final purchaser or consumer of such goods or services who, although not directly and legally
liable for the payment thereof, ultimately bears the burden of the tax.
10 | M s . N o l a i d a A g u i r r e

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.[24]
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not
controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per
Certificate of Registration[25] issued by the BIR. As such, it is exempt from VAT on all its sales
and importations of goods and services.
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 VAT-Registered entities
can claim Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner may claim a refund on the Input VAT
erroneously passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT inadvertently passed on
to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not
the proper party to claim such VAT refund.
Since the transaction is deemed a zero-rated sale, 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.
2. On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a
NON-VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not
allowed any tax credit on VAT (input tax) previously paid. In fine, even if we are to assume that
exemption from the burden of VAT on petitioners purchases did exist, petitioner is still not
entitled to any tax credit or refund on the input tax previously paid as petitioner is an exempt VAT
taxpayer.
Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and
accordingly refund the petitioner of the VAT erroneously passed on to the latter.
Commissioner of Internal Revenue vs. Court of Appeals, 329 SCRA 237(2000)
PARDO, J.
Taxation; Value Added Tax is a tax on transactions, imposed at every stage of the distribution process
on the sale, barter, exchange of goods or property, and on the performance of services, even in the
absence of profit attributable thereto.Contrary to COMASERCOs contention the above provision
clarifies that even a non-stock, nonprofit, organization or government entity, is liable to pay VAT on the
sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process

on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence
of profit attributable thereto. The term in the course of trade or business requires the regular conduct or
pursuit of a commercial or an economic activity, regardless of whether or not the entity is profit-oriented.
Same; Even a nonstock, nonprofit organization or government entity is liable to pay Value Added Tax
for the sale of goods and services.The definition of the term in the course of trade or business
incorporated in the present law applies to all transactions even to those made prior to its enactment.
Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters or
exchanges goods and services, was already liable to pay VAT. The present law merely stresses that even a
nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and
services.
Same; Definition of the phrase sale of services.Section 108 of the National Internal Revenue Code of
1997 defines the phrase sale of services as the performance of all kinds of services for others for a fee,
remuneration or consideration. It includes the supply of technical advice, assistance or services rendered
in connection with technical management or administration of any scientific, industrial or commercial
undertaking or project.
Same; Even if such corporation was organized without any intention of realizing pro fit, any income or
profit generated by the entity in the conduct of its activities was subject to income tax.On February 5,
1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 emphasizing that a domestic
corporation that provided technical, research, management and technical assistance to its affiliated
companies and received payments on a reimbursement-of-cost basis, without any intention of realizing
profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without
any intention of realizing profit, any income or profit generated by the entity in the conduct of its activities
was subject to income tax.
Same; As long as the entity provides service for a fee, remuneration or consideration, then the service
rendered is subject to Value Added Tax.It is immaterial whether the primary purpose of a corporation
indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis
only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long
as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject
to VAT.
Same; Any exemption from the payment of a tax must be clearly stated in the language of the law.It is
a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly
against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the
payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom.
In the case of VAT, Section 109, Republic Act 8424 clearly enumerates the transactions exempted from
VAT. The services rendered by COMASERCO do not fall within the exemptions.
Same; Opinion of the Commissioner of Internal Revenue entitled to great weight in the absence of any
showing that it is plainly wrong.Both the Commissioner of Internal Revenue and the Court of Tax
Appeals correctly ruled that the services rendered by COMASERCO to Philamlife and its affiliates are

subject to VAT. As pointed out by the Commissioner, the performance of all kinds of services for others
for a fee, remuneration or consideration is considered as sale of services subject to VAT. As the
government agency charged with the enforcement of the law, the opinion of the Commissioner of Internal
Revenue, in the absence of any showing that it is plainly wrong, is entitled to great weight.
Facts:
Commonwealth Management and Services Corporation (COMASERCO) is a corporation duly organized
and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co.
(Philamlife), organized by the letter to perform collection, consultative and other technical services,
including functioning as an internal auditor, of Philamlife and its other affiliates.
BIR issued an assessment to COMASERCO for deficiency VAT amounting to P351,851.01 for taxable
year 1988. COMASERCOs annual corporate income tax return ending December 31, 1988 indicated a net
loss in its operations in the amount of P6,077.
COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to collections,
consultative and other technical assistance, including functioning as an internal auditor, were on a "noprofit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing
services to Philamlife and its affiliates. It was established to ensure operational orderliness and
administrative efficiency of Philamlife and its affiliates, and not in the sale of services. It was not profitmotivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable
year 1988. COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.
CIR avers that to "engage in business" and to "engage in the sale of services" are two different things.
Petitioner maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for a fee
or consideration, are subject to VAT. VAT is a tax on the value added by the performance of the service. It
is immaterial whether profit is derived from rendering the service.
The CTA rules in favour of CIR. The CA reversed.
Issue:
Whether or not COMASERCO was engaged in the sale of services and must be liable to pay for VAT.
Held:
VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter,
exchange of goods or property, and on the performance of services, even in the absence of profit
attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of
a commercial or an economic activity regardless of whether or not the entity is profit-oriented.
The Commissioner of Internal Revenue issued BIR Ruling No. 010-98 emphasizing that a domestic
corporation that provided technical, research, management and technical assistance to its affiliated
companies and received payments on a reimbursement-of-cost basis, without any intention of realizing

profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without
any intention realizing profit, any income or profit generated by the entity in the conduct of its activities
was subject to income tax.
Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for
services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for
purposes of determining liability for VAT on services rendered. As long as the entity provides service for a
fee, remuneration or consideration, then the service rendered is subject to VAT.
At any rate, since taxes are the lifeblood of the nation, statutes that allow exemptions are construed against
the grantee and liberally in favour of the government. Any exemption from the payment of a tax must be
clearly stated in the language of the law; it cannot be merely implied therefrom. In the case of VAT,
Section 109, Republic Act 8424 clearly enumerates the transactions exempted from VAT. The services
rendered by COMASERCO do not fall within the exemptions.
Compared with the Sony Philippines case as emphasized by Atty. Lock
It is evident under Section 110 of the 1997 Tax Code that an advertising expense duly
covered by a Value Added Tax (VAT) invoice is a legitimate business expense.The
Court is not persuaded. As aptly found by the CTA- First Division and later affirmed by
the CTA-EB, Sonys deficiency VAT assessment stemmed from the CIRs disallowance
of the input VAT credits that should have been realized from the advertising expense of
the latter. It is evident under Section 110 of the 1997 Tax Code that an advertising
expense duly covered by a VAT invoice is a legitimate business expense. This is
confirmed by no less than CIRs own witness, Revenue Officer Antonio Aluquin. There is
also no denying that Sony incurred advertising expense. Aluquin testified that advertising
companies issued invoices in the name of Sony and the latter paid for the same.
Indubitably, Sony incurred and paid for advertising expense/services. Where the money
came from is another matter alltogether but will definitely not change said fact.
Value Added Tax (VAT); Services rendered for a fee even on reimbursement-on-cost
basis only and without realizing profit are also subject to Value Added Tax (VAT).In
the case of CIR v. Court of Appeals (CA), 329 SCRA 237 (2000), the Court had the
occasion to rule that services rendered for a fee even on reimbursement-on-cost basis only
and without realizing profit are also subject to VAT. The case, however, is not applicable
to the present case. In that case, COMASERCO rendered service to its affiliates and, in
turn, the affiliates paid the former reimbursement-on-cost which means that it was paid
the cost or expense that it incurred although without profit. This is not true in the present
case. Sony did not render any service to SIS at all. The services rendered by the
advertising companies, paid for by Sony using SIS dole-out, were for Sony and not SIS.
SIS just gave assistance to Sony in the amount equivalent to the latters advertising
expense but never received any goods, properties or service from Sony.

Mindanao II Geothermal Partnership vs. Commissioner of Internal Revenue, 693 SCRA 49(2013)
CARPIO, J.
Taxation; Value-Added Tax; Tax Credits; Tax Refunds; Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax
due or paid attributable to such sales.In determining whether the administrative claims of Mindanao I
and Mindanao II for 2003 have prescribed, we see no need to rely on either Atlas or Mirant. Section 112(A)
of the 1997 Tax Code is clear: [A]ny VAT-registered person, whose sales are zero-rated or effectively
zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply
for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such
sales x x x.
Same; Same; Same; Same; In case of full or partial denial of the claim for tax refund or tax credit, or
the failure on the part of the Commissioner to act on the application within the period prescribed above,
the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or
after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with
the Court of Tax Appeals.In determining whether the claims for the second, third and fourth quarters of
2003 have been properly appealed, we still see no need to refer to either Atlas or Mirant, or even to Section
229 of the 1997 Tax Code. The second paragraph of Section 112(C) of the 1997 Tax Code is clear: In case
of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
Same; Court of Tax Appeals; The taxpayer cannot simply file a petition with the Court of Tax Appeals
without waiting for the Commissioners decision within the 120-day mandatory and jurisdictional
period.In the consolidated cases of San Roque, the Court En Banc examined and ruled on the different
claims for tax refund or credit of three different companies. In San Roque, we reiterated that [f]ollowing
the verba legis doctrine, [Section 112(C)] must be applied exactly as worded since it is clear, plain, and
unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting for the
Commissioners decision within the 120-day mandatory and jurisdictional period. The CTA will have no
jurisdiction because there will be no decision or deemed a denial decision of the Commissioner for the
CTA to review.
Same; Summary of the Rules on the Determination of the Prescriptive Period for Filing a Tax Refund
or Credit of Unutilized Input Value Added Tax (VAT) as Provided in Section 112 of the 1997 Tax
Code.We summarize the rules on the determination of the prescriptive period for filing a tax refund or
credit of unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as follows: (1) An
administrative claim must be filed with the CIR within two years after the close of the taxable quarter when

the zero-rated or effectively zero-rated sales were made. (2) The CIR has 120 days from the date of
submission of complete documents in support of the administrative claim within which to decide whether
to grant a refund or issue a tax credit certificate. The 120-day period may extend beyond the two-year
period from the filing of the administrative claim if the claim is filed in the later part of the two-year
period. If the 120-day period expires without any decision from the CIR, then the administrative claim may
be considered to be denied by inaction. (3) A judicial claim must be filed with the CTA within 30 days
from the receipt of the CIRs decision denying the administrative claim or from the expiration of the 120day period without any action from the CIR. (4) All taxpayers, however, can rely on BIR Ruling No. DA489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6
October 2010, as an exception to the mandatory and jurisdictional 120+30 day periods.
Same; A reading of Section 105 of the 1997 Tax Code would show that a transaction in the course of
trade or business includes transactions incidental thereto.Mindanao IIs sale of the Nissan Patrol is
said to be an isolated transaction. However, it does not follow that an isolated transaction cannot be an
incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the 1997 Tax Code
would show that a transaction in the course of trade or business includes transactions incidental
thereto. Mindanao IIs business is to convert the steam supplied to it by PNOC-EDC into electricity and to
deliver the electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a
Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao IIs property, plant, and equipment.
Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao IIs
business which should be liable for VAT.
Facts:
Both Mindanao I and II are partnerships registered with the Securities and Exchange Commission, value
added taxpayers registered with the Bureau of Internal Revenue (BIR), and Block Power Production
Facilities accredited by the Department of Energy. Republic Act No. 9136, or the Electric Power Industry
Reform Act of 2000 (EPIRA), effectively amended Republic Act No. 8424, or the Tax Reform Act of 1997
(1997 Tax Code),9 when it decreed that sales of power by generation companies shall be subjected to a zero
rate of VAT.10 Pursuant to EPIRA, Mindanao I and II filed with the CIR claims for refund or tax credit of
accumulated unutilized and/or excess input taxes due to VAT zero-rated sales in 2003. Mindanao I and II
filed their claims in 2005.
CTA
Case
No.
Period
Covered by
VAT Sales
in 2003
Close of
quarter
when sales
were
made
7227
1st Quarter
31 March 2003
Last day for

Actual date Last day for Actual Date
filing application
of filing
filing case of filing case
of tax refund /
application
with CTA
with CTA
tax credit
for tax
(judicial
certificate with
refund /
claim)
the CIR
credit (admin
claim)
MINDANAO II
31 March 2005
13 April 2005 12 Sept 2005 22 April
2005

7287
7317
2nd Quarter
3rd and 4th
Quarters
30 June 2003
30 Sept 2003
31 Dec. 2003
30 June 2005
30 Sept 2005
13 April 2005
13 April 2005
2 Jan. 2006 (31

Dec. 2005 being a
Saturday)
MINDANAO I
31 March 2005
4 April 2005
7228
1st Quarter
31 March 2003
7286
7318
2nd Quarter
3rd and 4th
Quarters
30 June 2003
30 Sept 2003
30 June 2005
30 Sept 2005
31 Dec. 2003
2 January 2006
(31 Dec. 2005
being a Saturday)
4 April 2005
4 April 2005
12 Sept 2005 7 July 2005

12 Sept 2005 9 Sept 2005
1 Sept 2005
1 Sept 2005
1 Sept 2005
22 April
2005
7 July 2005
9 Sept 2005
CTA (En Banc):

Mindanao IIs judicial claims were filed beyond the period allowed in Sec. 112(A), by which the reckoning
of the two-year prescriptive period for filing the application for refund or credit of input VAT attributable
to zero-rated sales or effectively zero-rated sales shall be counted from the close of the taxable quarter
when the sales were made (regardless of whether the tax was actually paid), according to CIR v. Mirant
Pagbilao Corporation (Mirant). Also, the sale of the fully-depreciated Nissan Patrol is incidental to
Mindanao IIs VAT zero-rated transactions and is VATable pursuant to Sec. 105.
Mindanao Is claims for the first, second, third and fourth quarters of 2003 were filed out of time. Section
229 is inapplicable in light of Mirant. Moreover, the procedure prescribed under Section 112(C) should be
followed first before the CTA En Banc can act on Mindanao Is claim.
Mindanao I and II went up to the Supreme Court arguing that their claims were timely filed pursuant to the
case of Atlas, which was then the controlling ruling at the time of the filing. The Mirant case, which uses
the close of the taxable quarter when the sales were made as the reckoning date in counting the two-year
prescriptive period, cannot be applied retroactively to their prejudice.
[1] ISSUE: Whether the reckoning date for counting the two-year prescriptive period in Section 112 should
be counted from the end of the taxable quarter when the sales were made (Mirant) or the date of filing the
return (Atlas)?
HELD: Neither Atlas nor Mirant applies, because when Mindanao II and Mindanao I filed their respective
administrative and judicial claims in 2005, neither case had been promulgated. Atlas was promulgated on 8
June 2007, Mirant on 12 September 2008. Besides, Atlas merely stated that the two-year prescriptive
period should be counted from the date of payment of the output VAT, not from the close of the taxable

quarter when the sales involving the input VAT were made. The Atlas doctrine did not interpret, expressly
or impliedly, the 120+30 day periods.
Prescriptive Period for the Filing of Administrative Claims
Section 112(A) of the 1997 Tax Code was the applicable law at the time of filing of the claims in issue,
therefore the claims needed to have been filed within two (2) years after the close of the taxable quarter
when the sales were made. Mindanao I and IIs administrative claims for the first quarter of 2003 had
prescribed, but their claims for the second, third and fourth quarters of 2003 were filed on time.
Prescriptive Period for the Filing of Judicial Claims
In determining whether the claims for the second, third and fourth quarters of 2003 had been properly
appealed, there is still see no need to refer to either Atlas or Mirant, or even to Sec. 229. The second
paragraph of Sect. 112(C) is clear that the taxpayer can appeal to the CTA within thirty (30) days from the
receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period.
The 120+30 day periods are mandatory and jurisdictional. The taxpayer cannot simply file a petition with
the CTA without waiting for the Commissioners decision within the 120-day period, because otherwise
there would be no decision or deemed a denial decision for the CTA to review. Moreover, Sec. 112(C)
expressly grants a 30-day period to appeal to the CTA, and this period need not necessarily fall within the
two-year prescriptive period, as long as the administrative claim is filed within such time. The said
prescriptive period does not refer to the filing of the judicial claim with the CTA, but to the administrative
claim with the Commissioner.
San Roque: Recognition of BIR Ruling No. DA-489-03

BIR Ruling No. DA-489-03 provided that the taxpayer-claimant need not wait for the lapse of the 120-day
period before it could seek judicial relief with the CTA. In the consolidated cases of CIR v. San Roque,
however, the Supreme Court En Banc held that the taxpayer cannot simply file a petition with the CTA
without waiting for the Commissioners decision within the 120-day jurisdictional period. Notwithstanding,
the Court also held in San Roque that BIR Ruling No. DA-489-03 constitutes equitable estoppel in favor of
taxpayers. Being a general interpretative rule, it can be relied on by all taxpayers from the time of its
issuance on 10 December 2003 up to its reversal by the Court in Commissioner of Internal Revenue v.
Aichi Forging Company of Asia, Inc. (Aichi) on 6 October 2010, where this Court held that the 120+30
day periods are mandatory and jurisdictional.
Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003 on 13 April
2005. Counting 120 days after filing of the administrative claim (11 August 2005) and 30 days after the
CIRs denial by inaction, the last day for filing a judicial claim with the CTA for the second, third, and
fourth quarters of 2003 was on 12 September 2005. However, the judicial claim could not be filed earlier
than 11 August 2005, which was the expiration of the 120-day period for the Commissioner to act.

Mindanao II filed its judicial claim for the second quarter before the expiration of the 120-day period; it
was thus prematurely filed. However, pursuant to San Roque, the claim qualifies under the exception to the
strict application of the 120+30 day periods. Its judicial claims for the third quarter and fourth quarter of
2003 were filed on time.
Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003 on 4 April
2005. Counting 120 days after filing of the administrative claim with the CIR (2 August 2005) and 30 days
after the CIRs denial by inaction, the last day for filing a judicial claim was on 1 September 2005.
However, the judicial claim cannot be filed earlier than 2 August 2005, which is the expiration of the 120day period for the Commissioner to act on the claim. Mindanao I prematurely filed its judicial claim for the
second quarter of 2003 but claim qualifies under the exception in San Roque. Its judicial claims for the
third and fourth quarters of 2003, however, were filed after the prescriptive period.
Summary of Administrative and Judicial Claims
G.R. No. 193301
Mindanao II v. CIR
Judicial Claim
Action on Claim
1st Quarter, 2003
Administrative
Claim
Filed late
--
2nd Quarter, 2003
Filed on time
Prematurely filed
Deny, pursuant to
Section 112(A) of the
1997 Tax Code
Grant, pursuant to
BIR Ruling No. DA-489-03
3rd Quarter, 2003
Filed on time
Filed on time
4th Quarter, 2003
Filed on time
Filed on time
Grant, pursuant to
Section 112(C) of the
1997 Tax Code
Grant, pursuant to
1997 Tax Code
G.R. No. 194637

Mindanao I v. CIR
Judicial Claim
Action on Claim
1st Quarter, 2003
Administrative
Claim
Filed late
--
2nd Quarter, 2003
Filed on time
Prematurely filed
Deny, pursuant to
Section 112(A) of the
1997 Tax Code
Grant, pursuant to
BIR Ruling No. DA-489-03

3rd Quarter, 2003
Filed on time
Filed late
4th Quarter, 2003
Filed on time
Filed late
Grant, pursuant to
1997 Tax Code
Grant, pursuant to
1997 Tax Code
Summary of Rules on Prescriptive Periods Involving VAT

We summarize the rules on the determination of the prescriptive period for filing a tax refund or credit of
unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as follows:
(1) An administrative claim must be filed with the CIR within two years after the close of the
taxable quarter when the zero-rated or effectively zero-rated sales were made.
(2) The CIR has 120 days from the date of submission of complete documents in support of the
administrative claim within which to decide whether to grant a refund or issue a tax credit
certificate. The 120-day period may extend beyond the two-year period from the filing of the
administrative claim if the claim is filed in the later part of the two-year period. If the 120-day
period expires without any decision from the CIR, then the administrative claim may be
considered to be denied by inaction.
(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIRs
decision denying the administrative claim or from the expiration of the 120-day period without any
action from the CIR.
(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance
on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, as an exception
to the mandatory and jurisdictional 120+30 day periods
[2] ISSUE: Whether the sale of the fully-depreciated Nissan Patrol is a one-time transaction not incidental
to the VAT zero-rated operation of Mindanao II, thus not VATable?
Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in the
course of its business but an isolated transaction that should not have been subject to 10% VAT. It does not
follow that an isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed,
a reading of Section 105 would show that a transaction in the course of trade or business includes
transactions incidental thereto. In the course of its business, Mindanao II bought and eventually sold a
Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao IIs property, plant, and equipment.
Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao IIs
business which should be liable for VAT.

VAT ON GOODS AND SERVICES

Commissioner of Internal Revenue vs. Philippine Health Care Providers, Inc., 522 SCRA 131(2007)
SANDOVAL-GUTIERREZ, J.
Taxation; Value-Added Tax; Health Maintenance Organizations (HMOs); The import of Section 103,
now Section 109 (1), of the National Internal Revenue Code is plainit contemplates the exemption
from VAT of taxpayers engaged in the performance of medical, dental, hospital, and veterinary services.
Section 103 of the same Code specifies the exempt transactions from the provision of Section 102, thus:
SEC. 103. Exempt Transactions.The following shall be exempt from the value-added tax: x x x (1)
Medical, dental, hospital and veterinary services except those rendered by professionals x x x The import
of the above provision is plain. It requires no interpretation. It contemplates the exemption from VAT of
taxpayers engaged in the performance of medical, dental, hospital, and veterinary services. In
Commissioner of International Revenue v. Seagate Technology (Philippines), 451 SCRA 132 (2005), we
defined an exempt transaction as one involving goods or services which, by their nature, are specifically
listed in and expressly exempted from the VAT, under the Tax Code, without regard to the tax status of the
party in the transaction. In Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.)
Inc., 466 SCRA 211 (2005), we reiterated this definition.
Same; Same; Same; Court of Tax Appeals; Where an entity does not actually provide medical and/or
hospital services, as provided under Section 103 on exempt transactions, but merely arranges for the
same, its services are not VAT-exempt; Findings of fact of the CTA, a special court exercising particular
expertise on the subject of tax, are generally regarded as final, binding, and conclusive upon this Court,
more so when these do not conflict with the findings of the Court of Appeals.We note that these factual
findings of the CTA were neither modified nor reversed by the Court of Appeals. It is a doctrine that
findings of fact of the CTA, a special court exercising particular expertise on the subject of tax, are
generally regarded as final, binding, and conclusive upon this Court, more so where these do not conflict
with the findings of the Court of Appeals.Perforce, as respondent does not actually provide medical
and/or hospital services, as provided under Section 103 on exempt transactions, but merely arranges for the
same, its services are not VAT-exempt.
Same; Same; Same; Administrative Law; Rulings, circulars, rules and regulations promulgated by the
Commissioner of Internal Revenue have no retroactive application if to apply them would prejudice the
taxpayer; Exceptions. Relative to the second issue, Section 246 of the 1997 Tax Code, as amended,
provides that rulings, circulars, rules and regulations promulgated by the Commissioner of Internal
Revenue have no retroactive application if to apply them would prejudice the taxpayer. The exceptions to
this rule are: (1) where the taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue; (2) where the facts subsequently gathered by
the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (3)
where the taxpayer acted in bad faith.

Same; Same; Same; Same; National Health Insurance Act of 1995 (R.A. No. 7875); Words and
Phrases; The failure of a taxpayer to describe itself as a health maintenance organization, which is
subject to VAT, is not tantamount to bad faith at a time when the term health maintenance
organization did not as yet have any particular significance for tax purposesthe term health
maintenance organization was first recorded in the Philippine statute books only upon the passage of R.A.
No. 7875, which law considered a health maintenance organization as one of the classes of a health care
provider; Good faith is that state of mind denoting honesty of intention and freedom from knowledge of
circumstances which ought to put the holder upon inquiry, an honest intention to abstain from taking any
unconscientious advantage of another, even through technicalities of law, together with absence of all
information, notice, or benefit or belief of facts which render transaction unconscientious.We agree with
both the Tax Court and the Court of Appeals that respondent acted in good faith. In Civil Service
Commission v. Maala, 467 SCRA 390 (2005), we described good faith as that state of mind denoting
honesty of intention and freedom from knowledge of circumstances which ought to put the holder upon
inquiry; an honest intention to abstain from taking any unconscientious advantage of another, even through
technicalities of law, together with absence of all information, notice, or benefit or belief of facts which
render transaction unconscientious. According to the Court of Appeals, respondents failure to describe
itself as a health maintenance organization, which is subject to VAT, is not tantamount to bad faith. We
note that the term health maintenance organization was first recorded in the Philippine statute books only
upon the passage of The National Health Insurance Act of 1995 (Republic Act No. 7875). Section 4 (o)
(3) thereof defines a health maintenance organization as an entity that provides, offers, or arranges for
coverage of designated health services needed by plan members for a fixed prepaid premium. Under this
law, a health maintenance organization is one of the classes of a health care provider. It is thus apparent
that when VAT Ruling No. 231-88 was issued in respondents favor, the term health maintenance
organization was yet unknown or had no significance for taxation purposes. Respondent, therefore,
believed in good faith that it was VAT exempt for the taxable years 1996 and 1997 on the basis of VAT
Ruling No. 231-88.
Same; Same; Same; Same; The Commissioner of Internal Revenue is precluded from adopting a
position contrary to one previously taken where injustice would result to the taxpayer; The rule is that
the BIR rulings have no retroactive effect where a grossly unfair deal would result to the prejudice of
the taxpayer.In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, 108 SCRA 142 (1981), this
Court held that under Section 246 of the 1997 Tax Code, the Commissioner of Internal Revenue is
precluded from adopting a position contrary to one previously taken where injustice would result to the
taxpayer. Hence, where an assessment for deficiency withholding income taxes was made, three years after
a new BIR Circular reversed a previous one upon which the taxpayer had relied upon, such an assessment
was prejudicial to the taxpayer. To rule otherwise, opined the Court, would be contrary to the tenets of
good faith, equity, and fair play. This Court has consistently reaffirmed its ruling in ABS-CBN
Broadcasting Corp. in the later cases of Commissioner of Internal Revenue v. Borroughs, Ltd., 142 SCRA
324 (1986), Commissioner of Internal Revenue v. Mega Gen. Mdsg. Corp., 166 SCRA 166 (1988),
Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.), Inc., 249 SCRA 401 (1995), and
Commissioner of Internal Revenue v. Court of Appeals, 267 SCRA 557 (1997). The rule is that the BIR

rulings have no retroactive effect where a grossly unfair deal would result to the prejudice of the taxpayer,
as in this case.
Facts: The Philippine Health Care Providers, Inc., is a corporation organized to establish, maintain,
conduct and operate a prepaid group practice health care delivery system or a health maintenance
organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for
the administrative, legal, and financial responsibilities of the organization. On July 25, 1987, E.O. No. 273,
imposing VAT was issued. Prior to effectively thereof, Healthcare wrote the CIR inquiring whether the
services it provides to the participants in its health care program are exempt from the payment of the VAT.
On June 8, 1988, CIR, through the VAT Review Committee of the Bureau of Internal Revenue (BIR),
issued VAT Ruling No. 231-88 stating that as a provider of medical services, it is exempt from the VAT
coverage. This Ruling was subsequently confirmed by Regional Director Osmundo G. Umali of Revenue
Region No. 8 in a letter dated April 22, 1994. 21
On January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT or E-VAT Law) took effect
substantially adopting the provisions of EO 273 on VAT and RA 7716 on E-VAT. On October 1, 1999, the
BIR sent Preliminary Assessment Notice to Healthcare for deficiency VAT and DST for the years
1996/1997. It was protested by healthcare. CIR then sent a demand letter with attached four assessments
for the same taxes which were also protested by Healthcare.
Issues:
(1) Are the services subject to VAT?
(2) Does VAT Ruling No. 231-88 providing exemption from VAT have retroactive application?
Held:
(1). Section 103 of the NIRC specifies the exempt transactions from the provision of Section 102, thus:
Medical, dental, hospital and veterinary services except those rendered by professionals The import of the
above provision is plain. It requires no interpretation. It contemplates the exemption from VAT of
taxpayers engaged in the performance of medical, dental, hospital, and veterinary services. Under the
prepaid group practice health care delivery system adopted by Health Care, individuals enrolled in Health
Care's health care program are entitled to preventive, diagnostic, and corrective medical services to be
dispensed by Health Care's duly licensed physicians, specialists, and other professional technical staff
participating in said group practice health care delivery system established and operated by Health Care.
Such medical services will be dispensed in a hospital or clinic owned, operated, or accredited by Health
Care. To be entitled to receive such medical services from Health Care, an individual must enroll in Health
Care's health care program and pay an annual fee. Enrollment in Health Care's health care program is on a
year-to-year basis and enrollees are issued identification cards. We note that these factual findings of the
CTA were neither modified nor reversed by the Court of Appeals. It is a doctrine that findings of fact of the

CTA, a special court exercising particular expertise on the subject of tax, are generally regarded as final,
binding, and conclusive upon this Court, more so where these do not conflict with the findings of the Court
of Appeals. Perforce, as respondent does not actually provide medical and/or hospital services, as
provided under Section 103 on exempt transactions, but merely arranges for the same, its services
are not VAT-exempt.
(2). Section 246 of the 1997 Tax Code, as amended, provides that rulings, circulars, rules and regulations
promulgated by the Commissioner of Internal Revenue have no retroactive application if to apply them
would prejudice the taxpayer. The exceptions to this rule are: (1) where the taxpayer deliberately misstates
or omits material facts from his return or in any document required of him by the Bureau of Internal
Revenue; (2) where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based, or (3) where the taxpayer acted in bad faith. There is
no showing that respondent "deliberately committed mistakes or omitted material facts" when it obtained
VAT Ruling No. 231-88 from the BIR. The CTA held that respondent's letter which served as the basis for
the VAT ruling "sufficiently described" its business and "there is no way the BIR could be misled by the
said representation as to the real nature" of said business. It is thus apparent that when VAT Ruling No.
231-88 was issued in respondent's favor, the term "health maintenance organization" was yet unknown or
had no significance for taxation purposes. Respondent, therefore, believed in good faith that it was VAT
exempt for the taxable years 1996 and 1997 on the basis of VAT Ruling No. 231-88.
Commissioner of Internal Revenue vs. SM Prime Holdings, Inc., 613 SCRA 774(2010)
DEL CASTILLO, J.
Taxation; Value-Added Tax (VAT); Statutory Construction; A cursory reading of Section 108 of the
National Internal Revenue Code of 1997 clearly shows that the enumeration of the sale or exchange of
services subject to Value-Added Tax (VAT) is not exhaustivethe words, including, similar
services, and shall likewise include, indicate that the enumeration is by way of example only.Section
108 of the NIRC of the 1997 reads: x x x A cursory reading of the foregoing provision clearly shows that
the enumeration of the sale or exchange of services subject to VAT is not exhaustive. The words,
including, similar services, and shall likewise include, indicate that the enumeration is by way of
example only. Among those included in the enumeration is the lease of motion picture films, films, tapes
and discs. This, however, is not the same as the showing or exhibition of motion pictures or films. As
pointed out by the CTA En Banc: Exhibition in Blacks Law Dictionary is defined as To show or
display. x x x To produce anything in public so that it may be taken into possession (6th ed., p. 573).
While the word lease is defined as a contract by which one owning such property grants to another the
right to possess, use and enjoy it on specified period of time in exchange for periodic payment of a
stipulated price, referred to as rent (Blacks Law Dictionary, 6th ed., p. 889). x x x Since the activity of
showing motion pictures, films or movies by cinema/ theater operators or proprietors is not included in the
enumeration, it is incumbent upon the court to the determine whether such activity falls under the phrase
similar services. The intent of the legislature must therefore be ascertained.

Same; Same; Cinema Houses; Several amendments were made to expand the coverage of Value Added
Tax but none pertain to cinema/theater operators or proprietorsat present, only lessors or distri-butors
of cinematographic films are subject to Value-Added Tax (VAT).In 1994, RA 7716 restructured the
VAT system by widening its tax base and enhancing its administration. Three years later, RA 7716 was
amended by RA 8241. Shortly thereafter, the NIRC of 1997 was signed into law. Several amendments were
made to expand the coverage of VAT. However, none pertain to cinema/theater operators or proprietors. At
present, only lessors or distributors of cinematographic films are subject to VAT. While persons subject to
amusement tax under the NIRC of 1997 are exempt from the coverage of VAT.
Same; Same; Same; Legal Research; Historically, the activity of showing motion pictures, films or
movies by cinema/theater operators or proprietors has always been considered as a form of
entertainment subject to amusement tax; Only lessors or distributors of cinematographic films are
included in the coverage of Value-Added Tax (VAT).Based on the foregoing, the following facts can be
established: (1) Historically, the activity of showing motion pictures, films or movies by cinema/theater
operators or proprietors has always been considered as a form of entertainment subject to amusement tax.
(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national government. (3)
When the Local Tax Code was enacted, amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements were transferred to the local
government. (4) Under the NIRC of 1977, the national government imposed amusement tax only on
proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks. (5) The VAT law
was enacted to replace the tax on original and subsequent sales tax and percentage tax on certain services.
(6) When the VAT law was implemented, it exempted persons subject to amusement tax under the NIRC
from the coverage of VAT. (7) When the Local Tax Code was repealed by the LGC of 1991, the local
government continued to impose amusement tax on admission tickets from theaters, cinematographs,
concert halls, circuses and other places of amusements. (8) Amendments to the VAT law have been
consistent in exempting persons subject to amusement tax under the NIRC from the coverage of VAT. (9)
Only lessors or distributors of cinematographic films are included in the coverage of VAT. These reveal the
legislative intent not to impose VAT on persons already covered by the amusement tax. This holds true
even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law
was intended to replace the percentage tax on certain services. The mere fact that they are taxed by the
local government unit and not by the national government is immaterial. The Local Tax Code, in
transferring the power to tax gross receipts derived by cinema/theater operators or proprietor from
admission tickets to the local government, did not intend to treat cinema/theater houses as a separate class.
No distinction must, therefore, be made between the places of amusement taxed by the national
government and those taxed by the local government.
Same; Same; Same; The power of taxation is sometimes called also the power to destroy, therefore, it
should be exercised with caution to minimize injury to the proprietary rights of a taxpayerit must be
exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg.To
hold otherwise would impose an unreasonable burden on cinema/theater houses operators or proprietors,
who would be paying an additional 10% VAT on top of the 30% amusement tax imposed by Section 140 of
the LGC of 1991, or a total of 40% tax. Such imposition would result in injustice, as persons taxed under

the NIRC of 1997 would be in a better position than those taxed under the LGC of 1991. We need not
belabor that a literal application of a law must be rejected if it will operate unjustly or lead to absurd
results. Thus, we are convinced that the legislature never intended to include cinema/theater operators or
proprietors in the coverage of VAT. On this point, it is apropos to quote the case of Roxas v. Court of Tax
Appeals, 23 SCRA 276 (168) to wit: The power of taxation is sometimes called also the power to destroy.
Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden
egg. And, in order to maintain the general publics trust and confidence in the Government this power
must be used justly and not treacherously.
Same; Same; Same; Local Government Code; Statutory Construction; The repeal of the Local Tax Code
by the Local Government Code (LGC) of 1991 is not a legal basis for the imposition of Value-Added Tax
(VAT) on the gross receipts of cinema/theater operators or proprietors derived from admission tickets; A
law will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously; The
power to impose amusement tax on cinema/theater operators or proprietors remains with the local
government.The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition
of VAT on the gross receipts of cinema/theater operators or proprietors derived from admission tickets.
The removal of the prohibition under the Local Tax Code did not grant nor restore to the national
government the power to impose amusement tax on cinema/theater operators or proprietors. Neither did it
expand the coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be
presumed nor can it be extended by implication. A law will not be construed as imposing a tax unless it
does so clearly, expressly, and unambiguously. As it is, the power to impose amusement tax on
cinema/theater operators or proprietors remains with the local government.
Same; Administrative Law; Revenue Memorandum Circulars (RMCs); Revenue Memorandum
Circulars (RMCs) must not override, supplant, or modify the law, but must remain consistent and in
harmony with, the law they seek to apply and implement.Considering that there is no provision of law
imposing VAT on the gross receipts of cinema/theater operators or proprietors derived from admission
tickets, RMC No. 28-2001 which imposes VAT on the gross receipts from admission to cinema houses
must be struck down. We cannot overemphasize that RMCs must not override, supplant, or modify the law,
but must remain consistent and in harmony with, the law they seek to apply and implement.
Same; The rule that tax exemptions should be construed strictly against the taxpayer presupposes that
the taxpayer is clearly subject to the tax being levied against himunless a statute imposes a tax clearly,
expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a tax
cannot be presumed.Contrary to the view of petitioner, respondents need not prove their entitlement to
an exemption from the coverage of VAT. The rule that tax exemptions should be construed strictly against
the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against him. The reason
is obvious: it is both illogical and impractical to determine who are exempted without first determining
who are covered by the provision. Thus, unless a statute imposes a tax clearly, expressly and
unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be

presumed. In fact, in case of doubt, tax laws must be construed strictly against the government and in favor
of the taxpayer.
Facts:
The BIR sent SM Prime Preliminary Assessment Notices for VAT deficiency tax on the sales of cinema
tickets for the taxable years 1999, 2000, 2002 and 2003. In response, the SM filed letters with the BIR.
The CTA First Division held that the House of Representatives resolved that there should only be one
business tax applicable to theaters and movie houses, which is the 30% amusement tax imposed by cities
and provinces under the LGC of 1991. Further, it held that consistent with the States policy to have a
viable, sustainable and competitive theater and film industry, the national government should be precluded
from imposing its own business tax in addition to that already imposed and collected by local government
units. The CTA First Division likewise found that Revenue Memorandum Circular (RMC) No. 28-2001,
which imposes VAT on gross receipts from admission to cinema houses, cannot be given force and effect
because it failed to comply with the procedural due process for tax issuances under RMC No. 20-86.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of what services
are intended to be subject to VAT. And since the showing or exhibition of motion pictures, films or movies by cinema
operators or proprietors is not among the enumerated activities contemplated in the phrase sale or exchange of
services, then gross receipts derived by cinema/ theater operators or proprietors from admission tickets in showing
motion pictures, film or movie are not subject to VAT. It reiterated that the exhibition or showing of motion pictures,
films, or movies is instead subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 282001, the CTA En Banc agreed with its First Division that the same cannot be given force and effect for failure to
comply with RMC No. 20-86.
Issue:
Whether the gross receipts derived by operators or proprietors of cinema/theater houses from admission tickets are
subject to VAT.
Held: No.
The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive
A cursory reading of the foregoing provision clearly shows that the enumeration of the sale or exchange of services
subject to VAT is not exhaustive. The words, including, similar services, and shall likewise include, indicate
that the enumeration is by way of example only.[39]
Among those included in the enumeration is the lease of motion picture films, films, tapes and discs. This,
however, is not the same as the showing or exhibition of motion pictures or films. As pointed out by the CTA En
Banc:
Exhibition in Blacks Law Dictionary is defined as To show or display. x x x To produce
anything in public so that it may be taken into possession (6th ed., p. 573). While the word lease

is defined as a contract by which one owning such property grants to another the right to possess,
use and enjoy it on specified period of time in exchange for periodic payment of a stipulated price,
referred to as rent (Blacks Law Dictionary, 6th ed., p. 889). x x x[40]
Since the activity of showing motion pictures, films or movies by cinema/ theater operators or proprietors is
not included in the enumeration, it is incumbent upon the court to the determine whether such activity falls under the
phrase similar services. The intent of the legislature must therefore be ascertained.
The legislature never intended operators or proprietors of cinema/theater houses to be covered by VAT
These facts were established:
(1) Historically, the activity of showing motion pictures, films or movies by
cinema/theater operators or proprietors has always been considered as a form of
entertainment subject to amusement tax.
(2) Prior to the Local Tax Code, all forms of amusement tax were imposed by the national
government.
(3) When the Local Tax Code was enacted, amusement tax on admission tickets from
theaters, cinematographs, concert halls, circuses and other places of amusements were
transferred to the local government.
(4) Under the NIRC of 1977, the national government imposed amusement tax only on
proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race
tracks.
(5) The VAT law was enacted to replace the tax on original and subsequent sales tax and
percentage tax on certain services.
(6) When the VAT law was implemented, it exempted persons subject to amusement tax
under the NIRC from the coverage of VAT.
(7) When the Local Tax Code was repealed by the LGC of 1991, the local government
continued to impose amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements.
(8) Amendments to the VAT law have been consistent in exempting persons subject to
amusement tax under the NIRC from the coverage of VAT.
(9) Only lessors or distributors of cinematographic films are included in the coverage of
VAT.
These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax.
This holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because
the VAT law was intended to replace the percentage tax on certain services. The mere fact that they are
taxed by the local government unit and not by the national government is immaterial. The Local Tax Code,
in transferring the power to tax gross receipts derived by cinema/theater operators or proprietor from

admission tickets to the local government, did not intend to treat cinema/theater houses as a separate
class. No distinction must, therefore, be made between the places of amusement taxed by the national
government and those taxed by the local government.
To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or
proprietors, who would be paying an additional 10%[55] VAT on top of the 30% amusement tax imposed by
Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in injustice, as
persons taxed under the NIRC of 1997 would be in a better position than those taxed under the LGC of
1991. We need not belabor that a literal application of a law must be rejected if it will operate unjustly or
lead to absurd results.[56] Thus, we are convinced that the legislature never intended to include
cinema/theater operators or proprietors in the coverage of VAT.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the
gross receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of
the prohibition under the Local Tax Code did not grant nor restore to the national government the power to
impose amusement tax on cinema/theater operators or proprietors. Neither did it expand the coverage of
VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it be
extended by implication. A law will not be construed as imposing a tax unless it does so clearly, expressly,
and unambiguously.[59] As it is, the power to impose amusement tax on cinema/theater operators or
proprietors remains with the local government.
Revenue Memorandum Circular No. 28-2001 is invalid
Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater
operators or proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on the
gross receipts from admission to cinema houses must be struck down. We cannot overemphasize that
RMCs must not override, supplant, or modify the law, but must remain consistent and in harmony with, the
law they seek to apply and implement.[60]
Rule on tax exemption does not apply
Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption
from the coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer
presupposes that the taxpayer is clearly subject to the tax being levied against him. [61] The reason is
obvious: it is both illogical and impractical to determine who are exempted without first determining who
are covered by the provision.[62] Thus, unless a statute imposes a tax clearly, expressly and unambiguously,
what applies is the equally well-settled rule that the imposition of a tax cannot be presumed. [63] In fact, in
case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer. [64]
Diaz vs. Secretary of Finance, 654 SCRA 96(2011)
ABAD, J.

Words and Phrases; The law imposes value added tax (VAT) on all kinds of services rendered in the
Philippines for a fee, including those specified in the 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 slowmoving. 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); 6. Transportation
contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for
hire and other domestic common carriers by land relative to their transport of goods or cargoes; and 7.
Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in
the Philippines to another place in the Philippines.
Same; Same; Same; Franchises; Words and Phrases; Tollway operators are franchise grantees and they
do not belong to exceptions that Section 119 spares from the payment of value added tax (VAT); The
word franchise broadly covers government grants of a special right to do an act or series of acts of
public concern.And not only do tollway operators come under the broad term all kinds of services,
they also come under the specific class described in Section 108 as all other franchise grantees who are
subject to VAT, except those under Section 119 of this Code. Tollway operators are franchise grantees
and they do not belong to exceptions (the low-income radio and/or television broadcasting companies with
gross annual incomes of less than P10 million and gas and water utilities) that Section 119 spares from the
payment of VAT. The word franchise broadly covers government grants of a special right to do an act or
series of acts of public concern.

Same; Same; Same; Same; Nothing in Section 108 of the National Internal Revenue Code indicates that
the franchise grantees it speaks of are those who hold legislative franchises; The term franchise
has been broadly construed as referring, not only to authorizations that Congress directly issues in the
form of a special law, but also to those granted by administrative agencies to which the power to grant
franchises has been delegated by Congress.Petitioners of course contend that tollway operators cannot
be considered franchise grantees under Section 108 since they do not hold legislative franchises. But
nothing in Section 108 indicates that the franchise grantees it speaks of are those who hold legislative
franchises. Petitioners give no reason, and the Court cannot surmise any, for making a distinction between
franchises granted by Congress and franchises granted by some other government agency. The latter,
properly constituted, may grant franchises. Indeed, franchises conferred or granted by local authorities, as
agents of the state, constitute as much a legislative franchise as though the grant had been made by
Congress itself. The term franchise has been broadly construed as referring, not only to authorizations
that Congress directly issues in the form of a special law, but also to those granted by administrative
agencies to which the power to grant franchises has been delegated by Congress.
Same; Same; Same; Statutory Construction; Statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not
controlling in the interpretation of 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
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 non-impairment of contract clause on behalf of
private investors in the tollway projects.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 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 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 duty-bound to simply
apply the law as it is found.
Same; Same; Same; Separation of Powers; The grant of tax exemption is a matter of legislative policy
that is within the exclusive prerogative of Congress.The grant of tax exemption is a matter of legislative
policy that is within the exclusive prerogative of Congress. The 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 Value-Added Tax law was passed. It
is only now, however, that the executive has earnestly pursued the VAT imposition against tollway
operators. The executive exercises exclusive discretion in matters pertaining to the implementation and
execution of tax laws. Consequently, the executive is more properly suited to deal with the immediate and
practical consequences of the VAT imposition.
Facts:
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief
assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau
of Internal Revenue (BIR) on the collections of tollway operators. Court treated the case as one
of prohibition. Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include
toll fees within the meaning of "sale of services" that are subject to VAT; that a toll fee is a "user's tax," not
a sale of services; that to impose VAT on toll fees would amount to a tax on public service; and that, since
VAT was never factored into the formula for computing toll fees, its imposition would violate the nonimpairment clause of the constitution. The government avers that the NIRC imposes VAT on all kinds of
services of franchise grantees, including toll way operations; that the Court should seek the meaning and
intent of the law from the words used in the statute; and that the imposition of VAT on tollway operations
has been the subject as early as 2003 of several BIR rulings and circulars. The government also argues that
petitioners have no right to invoke the non-impairment of contracts clause since they clearly
have no personal interest in existing toll operating agreements (TOAs) between the government andtollway
operators. At any rate, the non-impairment clause cannot limit the State's sovereign taxing power which is
generally read into contracts.
Issues:

1.
Whether or not the government is unlawfully expanding VAT coverage by including

tollway operators and tollway operations in the terms franchise grantees and sale of
services under Section 108 of the Code; and
2.
Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and
not a tax on services; b) will impair the tollway operators right to a reasonable return of
investment under their TOAs; and c) is not administratively feasible and cannot be
implemented.
Held:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed, and
collected, according to Section 108, on the gross receipts derived from the sale or exchange of services as
well as from the use or lease of properties.
the law imposes VAT on all kinds of services rendered in the Philippines for a fee, including those
specified in the list. The enumeration of affected services is not exclusive. [11] By qualifying services
with the words all kinds, Congress has given the term services an all-encompassing meaning. The
listing of specific services are intended to illustrate how pervasive and broad is the 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.
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 [12] that its contract and the law
recognize. In this sense, the tollway operator is no different from the following service providers under
Section 108 who allow others to use their properties or facilities for a fee:
1.
2.
3.
4.
5.
6.
Lessors of property, whether personal or real;

Warehousing service operators;
Lessors or distributors of cinematographic films;
Proprietors, operators or keepers of hotels, motels, rest houses, pension
houses, inns, resorts;
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

7.
domestic common carriers by land relative to their transport of goods or

cargoes; and
Common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the
Philippines.
It does not help petitioners cause that Section 108 subjects to VAT all kinds of services rendered for a
fee regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties. This means that services to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term all kinds of services, they also come under
the specific class described in Section 108 as all other franchise grantees who are subject to VAT,
except those under Section 119 of this Code.
Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio
and/or television broadcasting companies with gross annual incomes of less than P10 million and gas and
water utilities) that Section 119[13] spares from the payment of VAT. The word franchise broadly covers
government grants of a special right to do an act or series of acts of public concern. [14]
Tollway operators are, owing to the nature and object of their business, franchise grantees. The
construction, operation, and maintenance of toll facilities on public improvements are activities of public
consequence that necessarily require a special grant of authority from the state. Indeed, Congress granted
special franchise for the operation of tollways to the Philippine National Construction Company, the former
tollway concessionaire for the North and South Luzon Expressways. Apart from Congress, tollway
franchises may also be granted by the TRB, pursuant to the exercise of its delegated powers under P.D.
1112.[17] The franchise in this case is evidenced by a Toll Operation Certificate. [18]
Section 108 of the Code specifically includes by way of example electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered businesses, Section 108 opens other companies
rendering public service for a fee to the imposition of VAT. Businesses of a public nature such as public
utilities and the collection of tolls or charges for its use or service is a franchise. [19]
Two. Petitioners argue that a toll fee is a 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.
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.
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 tax[30] and simply becomes part of the cost that the buyer must pay in order to purchase the good,
property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, [31] VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the seller of services, who in this case is the

tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway
user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a
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]
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
states that services of all other franchise grantees are subject to VAT, except as may be provided under
Section 119 of the Code. Tollway operators are not among the franchise grantees subject to franchise tax
under the latter provision. Neither are their services among the VAT-exempt transactions under Section
109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege, then
it would have been well for the law to clearly say so. Tax exemptions must be justified by clear statutory
grant and based on language in the law too plain to be mistaken. [37] But as the law is written, no such
exemption obtains for tollway operators. The Court is thus duty-bound to simply apply the law as it is
found.
Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive prerogative of
Congress. The 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.
Philippine Amusement and Gaming Corporation (PAGCOR) vs. Bureau of Internal Revenue, 645 SCRA
338(2011)
PERALTA, J.

Taxation; Tax Exemptions; As a rule, tax exemptions are construed strongly against the claimant.
Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming
exemption to prove that it is, in fact, covered by the exemption so claimed. As a rule, tax exemptions are
construed strongly against the claimant. Exemptions must be shown to exist clearly and categorically, and
supported by clear legal provision. In this case, PAGCOR failed to prove that it is still exempt from the
payment of corporate income tax, considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of
the National Internal Revenue Code of 1997 by omitting PAGCOR from the exemption. The legislative
intent, as shown by the discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay
corporate income tax; hence, the omission or removal of PAGCOR from exemption from the payment of
corporate income tax.
Same; Value Added Tax; The provision subjecting Philippine Amusement and Gaming Corporation
(PAGCOR) to 10% Value Added Tax (VAT) is invalid for being contrary to Republic Act (R.A.) No.
9337.Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to
10% VAT is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that
petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioners exemption
from the payment of corporate income tax, which was already addressed above by this Court.
Facts:
PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by
Letter of Instruction No. 1430, which was issued in September 1984.
On January 1, 1998, R.A. No. 8424,[8] otherwise known as the National Internal Revenue Code of 1997,
took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations
(GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government Service and
Insurance Corporation, the Social Security System, the Philippine Health Insurance Corporation, and the
Philippine Charity Sweepstakes Office, thus:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The
provisions of existing special general laws to the contrary notwithstanding, all
corporations, agencies or instrumentalities owned and controlled by the
Government, except the Government Service and Insurance Corporation (GSIS), the
Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC),
the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement
and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations or associations engaged in
similar business, industry, or activity.[9]
With the enactment of R.A. No. 9337[10] on May 24, 2005, certain sections of the National Internal
Revenue Code of 1997 were amended. The particular amendment that is at issue in this case is Section 1 of
R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by excluding
PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income tax.

Respondent BIR issued Revenue Regulations (RR) No. 16-2005,[13] specifically identifying PAGCOR as
one of the franchisees subject to 10% VAT imposed under Section 108 of the National Internal Revenue
Code of 1997, as amended by R.A. No. 9337.
Issue:
Whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment of R.A.
No. 9337.
Held:
PAGCOR is subject to income tax but remains exempt from the imposition of value-added tax.
With the passage of Republic Act No. (RA) 9337, the Philippine Amusement and Gaming Corporation
(PAGCOR) has been excluded from the list of government-owned and controlled corporations (GOCCs)
that are exempt from tax under Section 27(c) of the Tax Code; PAGCOR is now subject to corporate
income tax. The Supreme Court (SC) held that the omission of PAGCOR from the list of tax-exempt
GOCCs by RA 9337 does not violate the right to equal protection of the laws under Section 1, Article III of
the Constitution, because PAGCORs exemption from payment of corporate income tax was not based on
classification showing substantial distinctions; rather, it was granted upon the corporations own request to
be exempted from corporate income tax. Legislative records likewise reveal that the legislative intention is
to require PAGCOR to pay corporate income tax.
With regard to the issue that the removal of PAGCOR from the exempted list violates the non-impairment
clause contained in Section 10, Article III of the Constitution which provides that no law impairing the
obligation of contracts shall be passed the SC explained that following its previous ruling in the case of
Manila Electric Company v. Province of Laguna 366 Phil. 428 (1999), this does not apply. Franchises such
as that granted to PAGCOR partake of the nature of a grant, and is thus beyond the purview of the nonimpairment clause of the Constitution. As regards the liability of PAGCOR to VAT, the SC finds Section
4.108-3 of Revenue Regulations No. (RR) 16-2005, which subjects PAGCOR and its licensees and
franchisees to VAT, null and void for being contrary to the National Internal Revenue Code (NIRC), as
amended by RA 9337.
According to the SC, RA 9337 does not contain any provision that subjects PAGCOR to VAT. Instead, the
SC finds support to the VAT exemption of PAGCOR under Section 109(k) of the Tax Code, which
provides that transactions exempt under international agreements to which the Philippines is a signatory or
under special laws [except Presidential Decree No. (PD) 529] are exempt from VAT. Considering that
PAGCORs charter, i.e., PD 1869 which grants PAGCOR exemption from taxes is a special law, it is
exempt from payment of VAT. Accordingly, the SC held that the BIR exceeded its authority in subjecting
PAGCOR to VAT, and thus declared RR 16-05 null and void insofar as it subjects PAGCOR to VAT
for being contrary to the NIRC, as amended by RA 9337.

ZERO RATED SALES OF GOODS AND SERVICES AND VAT

EXEMPT SALES
Commissioner of Internal Revenue vs. American Express International, Inc. (Philippine Branch), 462
SCRA 197(2005)
PANGANIBAN, J.
Taxation; Value-Added Tax; Services performed by VAT-registered persons in the Philippines (other
than the processing, manufacturing or repacking of goods for persons doing business outside the
Philippines) when paid in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the BSP, are zero-rated.Under the last paragraph quoted above, services performed
by VAT-registered persons in the Philippines (other than the processing, manufacturing or repacking of
goods for persons doing business outside the Philippines), when paid in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP, are zero-rated.
Same; Same; Services rendered by respondent in the Philippines is not in the same category as
processing, manufacturing or repacking of goods and should be zero-rated.Respondent is a VATregistered person that facilitates the collection and payment of receivables belonging to its non-resident
foreign client, for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in
conformity with BSP rules and regulations. Certainly, the service it renders in the Philippines is not in the
same category as processing, manufacturing or repacking of goods and should, therefore, be zero-rated.
In reply to a query of respondent, the BIR opined in VAT Ruling No. 080-89 that the income respondent
earned from its parent companys regional operating centers (ROCs) was automatically zero-rated effective
January 1, 1988.
Same; Same; The VAT is a tax on consumption expressed as a percentage of the value added to goods
or services purchased by the producer or taxpayer.The VAT is a tax on consumption expressed as a
percentage of the value added to goods or services purchased by the producer or taxpayer. As an indirect
tax on services, its main object is the transaction itself or, more concretely, the performance of all kinds of
services conducted in the course of trade or business in the Philippines. These services must be regularly
conducted in this country; undertaken in pursuit of a commercial or an economic activity; for a valuable
consideration; and not exempt under the Tax Code, other special laws, or any international agreement.
Same; Same; As a general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax.As a general rule, the VAT system uses the destination principle as a
basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are
consumed. Thus, exports are zero-rated, while imports are taxed.
Same; Same; The law clearly provides for an exception to the destination principle.The law clearly
provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that

are performed in the Philippines, paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the [BSP]. Thus, for the supply of service to be zero-rated as an
exception, the law merely requires that first, the service be performed in the Philippines; second, the
service fall under any of the categories in Section 102(b) of the Tax Code; and, third,it be paid in
acceptable foreign currency accounted for in accordance with BSP rules and regulations.
Same; Same; The place where the service is rendered determines the jurisdiction to impose the VAT;
The place of payment is immaterial; much less is the place where the output of the service will be further
or ultimately used.The law neither makes a qualification nor adds a condition in determining the tax
situs of a zero-rated service. Under this criterion, the place where the service is rendered determines the
jurisdiction to impose the VAT. Performed in the Philippines, such service is necessarily subject to its
jurisdiction, for the State necessarily has to have a substantial connection to it, in order to enforce a zero
rate. The place of payment is immaterial; much less is the place where the output of the service will be
further or ultimately used.
Facts:
American Express international is a foreign corporation operating in the Philippines, it is a registered
taxpayer. On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997
excess input taxes in the amount of P3,751,067.04, which amount was arrived at after deducting from its
total input VAT paid of P3,763,060.43 its applied output VAT liabilities only for the third and fourth
quarters of 1997 amounting to P5,193.66 and P6,799.43, respectively. The CTA ruled in favor of the herein
respondent holding that its services are subject to zero-rate pursuant to Section 108(b) of the Tax Reform
Act of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations 5-96. The CA affirmed the decision of the
CTA.
Issue:
Whether or not the company is subject to zero-rate tax pursuant to the Tax Reform Act of 1997.
Held:
Services performed by VAT-registered persons in the Philippines (other than the processing, manufacturing
or repacking of goods for persons doing business outside the Philippines), when paid in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated.
Respondent is a VAT-registered person that facilitates the collection and payment of receivables belonging
to its non-resident foreign client, for which it gets paid in acceptable foreign currency inwardly remitted
and accounted for in conformity with BSP rules and regulations. Certainly, the service it renders in the
Philippines is not in the same category as processing, manufacturing or repacking of goods and should,
therefore, be zero-rated. In reply to a query of respondent, the BIR opined in VAT Ruling No. 080-89 that
the income respondent earned from its parent companys regional operating centers (ROCs) was
automatically zero-rated effective January 1, 1988. Service has been defined as the art of doing something
useful for a person or company for a fee or useful labor or work rendered or to be rendered by one person
to another. For facilitating in the Philippines the collection and payment of receivables belonging to its

Hong Kong-based foreign client, and getting paid for it in duly accounted acceptable foreign currency,
respondent renders service falling under the category of zero rating. Pursuant to the Tax Code, a VAT of
zero percent should, therefore, be levied upon the supply of that service.
As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of
the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports are zerorated, while imports are taxed. VAT rate for services that are performed in the Philippines, paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.
Thus, for the supply of service to be zero-rated as an exception, the law merely requires that first, the
service be performed in the Philippines; second, the service fall under any of the However, the law clearly
provides for an exception to the destination principle; that is, for a zero percent categories in Section 102(b)
of the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in accordance with BSP
rules and regulations. Indeed, these three requirements for exemption from the destination principle are met
by respondent. Its facilitation service is performed in the Philippines. It falls under the second category
found in Section 102(b) of the Tax Code, because it is a service other than processing, manufacturing or
repacking of goods as mentioned in the provision. Undisputed is the fact that such service meets the
statutory condition that it be paid in acceptable foreign currency duly accounted for in accordance with
BSP rules. Thus, it should be zero-rated.
Commissioner of Internal Revenue vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc.,
512 SCRA 124(2007)
CARPIO, J.
Taxation; Value-Added Tax (VAT); The Tax Code not only requires that the services be other than
processing, manufacturing or repacking of goods and that payment for such services be in acceptable
foreign currency accounted for in accordance with Bangko Sen-tral ng Pilipinas (BSP) rulesanother
essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such
services is doing business outside the Philippines.The Tax Code not only requires that the services be
other than processing, manufacturing or repacking of goods and that payment for such services be in
acceptable foreign currency accounted for in accordance with BSP rules. Another essential condition for
qualification to zero-rating under Section 102(b)(2) is that the recipient of such services is doing business
outside the Philippines. While this requirement is not expressly stated in the second paragraph of Section
102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services must be
for other persons doing business outside the Philippines. The phrase for other persons doing business
outside the Philippines not only refers to the services enumerated in the first paragraph of Section 102(b),
but also pertains to the general term services appearing in the second paragraph of Section 102(b). In
short, services other than processing, manufacturing, or repacking of goods must likewise be performed for
persons doing business outside the Philippines.
Same; Same; When Section 102(b)(2) stipulates payment in acceptable foreign currency under BSP
rules, the law clearly envisions the payer-recipient of services to be doing business outside the

Philippinesonly those not doing business in the Philippines can be required under BSP rules to pay in
acceptable foreign currency for their purchase of goods or services from the Philippines.When Section
102(b)(2) stipulates payment in acceptable foreign currency under BSP rules, the law clearly envisions
the payer-recipient of services to be doing business outside the Philippines. Only those not doing business
in the Philippines can be required under BSP rules to pay in acceptable foreign currency for their purchase
of goods or services from the Philippines. In a domestic transaction, where the provider and recipient of
services are both doing business in the Philippines, the BSP cannot require any party to make payment in
foreign currency. Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the
payer-recipient of services is doing business outside the Philippines. Under BSP rules, the proceeds of
export sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the
provider of services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the
BSP. The same rationale does not apply if the provider and recipient of the services are both doing business
in the Philippines since their transaction is not in the nature of an export sale even if payment is
denominated in foreign currency.
Same; Same; An essential condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that
the recipient of the services is a person doing business outside the Philippines.Respondent, as
subcontractor of the Consortium, operates and maintains NAPOCORs power barges in the Philippines.
NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency outwardly
remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted and accounted
for in accordance with BSP rules. This payment scheme does not entitle respondent to 0% VAT. As the
Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine
Branch), 462 SCRA 197 (2005), the place of payment is immaterial, much less is the place where the
output of the service is ultimately used. An essential condition for entitlement to 0% VAT under Section
102(b)(1) and (2) is that the recipient of the services is a person doing business outside the Philippines. In
this case, the recipient of the services is the Consortium, which is doing business not outside, but within the
Philippines because it has a 15-year contract to operate and maintain NAPOCORs two 100-megawatt
power barges in Mindanao.
Same; Same; Destination Principle; While the Court recognizes the rule that the VAT system generally
follows the destination principle (exports are zero-rated whereas imports are taxed), an exception to
this rule is the 0% VAT on services enumerated in Section 102 and performed in the Philippines.The
Court recognizes the rule that the VAT system generally follows the destination principle (exports are
zero-rated whereas imports are taxed). However, as the Court stated in American Express, there is an
exception to this rule. This exception refers to the 0% VAT on services enumerated in Section 102 and
performed in the Philippines. For services covered by Section 102(b)(1) and (2), the recipient of the
services must be a person doing business outside the Philippines. Thus, to be exempt from the destination
principle under Section 102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a
person doing business outside the Philippines; and (c) paid in acceptable foreign currency accounted for in
accordance with BSP rules.

Facts:
Burmeister is a domestic corporation. A foreign consortium was formed between BWSC-Denmark, Mitsui
Engineering and Shipbuilding, and Mitsui and Co. It entered into a contract with NAPOCOR for the
operation & maintenance of two power barges. BWSC-Denmark established Burmeister which
subcontracted the actual operation and maintenance of NAPOCORs two power barges as well as the
performance of other duties and acts which necessarily have to be done in the Philippines.
NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and
Peso). The freely convertible non-Peso component is deposited directly to the Consortiums bank accounts
in Denmark and Japan, while the Peso-denominated component is deposited in a separate and special
designated bank account in the Philippines. On the other hand, the Consortium pays Burmeister in foreign
currency inwardly remitted to the Philippines through the banking system.
In order to ascertain the tax implications of the above transactions, Burmeister sought a ruling from the
BIR. It declared that - if Burmeister chooses to register as a VAT person and the consideration for its
services is paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate.
Burmeister then chose to register as a VAT Tax payer.
For the year 1996, Burmeister seasonably filed its quarterly Value-Added Tax Returns reflecting, among
others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14.
In 1997 Burmeister availed of the Voluntary Assessment Program (VAP) of the BIR. It allegedly
misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case.
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby
amended to read as follows:
Section 4.102-2(b)(2) "Services other than processing, manufacturing or repacking for
other persons doing business outside the Philippines for goods which are subsequently
exported, as well as services by a resident to a non-resident foreign client such as project
studies, information services, engineering and architectural designs and other similar
services, the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP."
In conformity with the aforecited Revenue Regulations, Burmeister subjected its sale of services to the
Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December 1996
sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum of
P43,893,951.07, representing January to March 1996 sales was subjected to zero rate.

In 1999, Burmeister secured a ruling form the VAT committee saying that the services of Burmeister is
really VAT-Free. In short, it affirmed the ruling of BIR.
Burmeister now filed a claim for the issuance of a tax credit certificate with BIR. Burmeister believed that
it erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program
(VAP) of the BIR.
CTA and CA ruled in favor of Burmeister.
Issue:
Whether or not Burmeister is entitled to a tax credit?
Held:
Section 102(b) of the Tax Code, the applicable provision in 1996 when respondent rendered the services
and paid the VAT in question, enumerates which services are zero-rated, thus:
(b) Transactions subject to zero-rate. The following services performed in the
Philippines by VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, where the services
are paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas(BSP);
(2) Services other than those mentioned in the preceding sub-paragraph, the
consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects
the supply of such services to zero rate;
(4) Services rendered to vessels engaged exclusively in international shipping; and
(5) Services performed by subcontractors and/or contractors in processing,
converting, or manufacturing goods for an enterprise whose export sales exceed
seventy percent (70%) of total annual production
Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of
such services is doing business outside the Philippines. While this requirement is not expressly stated in

the second paragraph of Section 102(b), this is clearly provided in the first paragraph of Section 102(b)
where the listed services must be "for other persons doing business outside the Philippines."
The phrase "for other persons doing business outside the Philippines" not only refers to the services
enumerated in the first paragraph of Section 102(b), but also pertains to the general term "services"
appearing in the second paragraph of Section 102(b). In short, services other than processing,
manufacturing, or repacking of goods must likewise be performed for persons doing business outside the
Philippines.
If the provider and recipient of the "other services" are both doing business in the Philippines, the payment
of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can
avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient
of services.
In this case, the payer-recipient of 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.
Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power barges in the
Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency
outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted
and accounted for in accordance with BSP rules. This payment scheme does not entitle respondent to 0%
VAT.
PETITION DENIED. NOT BECAUSE - BURMEISTER IS SUBJECT TO 0% VAT BUT
BECAUSE on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-9517 and
VAT Ruling No. 003-99,18 which held that respondents services are subject to 0% VAT and which
respondent invoked in applying for refund of the output VAT.
Commissioner of Internal Revenue vs. Acesite (Philippines) Hotel Corporation, 516 SCRA 93,
2007
VELASCO, JR., J.
Taxation; Tax Exemptions; Philippine Amusement and Gaming Corporation (PAGCOR) is also exempt
from indirect taxes.A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption
to taxes with no distinction on whether the taxes are direct or indirect. We are one with the CA ruling that
PAGCOR is also exempt from indirect taxes, like VAT.
Same; Same; Acesite is not liable for the payment of the 10% Value Added Tax (VAT) as it is exempt in
this particular transaction by operation of law to pay the indirect tax.While it was proper for PAGCOR
not to pay the 10% VAT charged by Acesite, the latter is not liable for the payment of it as it is exempt in

this particular transaction by operation of law to pay the indirect tax. Such exemption falls within the
former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424).
Same; Same; The proviso in P.D. No. 1869 extending the exemption to entities or individuals dealing
with Philippine Amusement and Gaming Corporation [PAGCOR] in casino operations is clearly to
proscribe any indirect tax, like Value Added Tax (VAT), that may be shifted to PAGCOR.The rationale
for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to
entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case of
Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., 148 SCRA 36 (1987), where the
absolute tax exemption of the World Health Organization (WHO) upon an international agreement was
upheld. We held in said case that the exemption of contractee WHO should be implemented to mean that
the entity or person exempt is the contractor itself who constructed the building owned by contractee
WHO, and such does not violate the rule that tax exemptions are personal because the manifest intention of
the agreement is to exempt the contractor so that no contractors tax may be shifted to the contractee WHO.
Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR
in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.
Facts:
Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along United Nations Avenue
in Manila. It leases 6,768.53 square meters of the hotels premises to the Philippine Amusement and
Gaming Corporation [hereafter, PAGCOR] for casino operations. It also caters food and beverages to
PAGCORs casino patrons through the hotels restaurant outlets. For the period January (sic) 96 to April
1997, Acesite incurred VAT amounting to P30,152,892.02 from its rental income and sale of food and
beverages to PAGCOR during said period. Acesite tried to shift the said taxes to PAGCOR by
incorporating it in the amount assessed to PAGCOR but the latter refused to pay the taxes on account of its
tax exempt status.
Thus, PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT while the latter paid the
VAT to the Commissioner of Internal Revenue [hereafter, CIR] as it feared the legal consequences of nonpayment of the tax. However, Acesite belatedly arrived at the conclusion that its transaction with PAGCOR
was subject to zero rate as it was rendered to a tax-exempt entity. On 21 May 1998, Acesite filed an
administrative claim for refund with the CIR but the latter failed to resolve the same. Thus on 29 May
1998, Acesite filed a petition with the Court of Tax Appeals [hereafter, CTA] which was decided in this
wise:
As earlier stated, Petitioner is subject to zero percent tax pursuant to Section 102 (b)(3)
[now 106(A)(C)] insofar as its gross income from rentals and sales to PAGCOR, a tax
exempt entity by virtue of a special law. Accordingly, the amounts of P21,413,026.78 and
P8,739,865.24, representing the 10% EVAT on its sales of food and services and gross
rentals, respectively from PAGCOR shall, as a matter of course, be refunded to the
petitioner for having been inadvertently remitted to the respondent.

Thus, taking into consideration the prescribed portion of Petitioners claim for refund of P98,743.40, and
considering further the principle of solutio indebiti which requires the return of what has been delivered
through mistake, Respondent must refund to the Petitioner the amount of P30,054,148.64.
Upon appeal by petitioner, the CA affirmed in toto the decision of the CTA holding that PAGCOR was not
only exempt from direct taxes but was also exempt from indirect taxes like the VAT and consequently, the
transactions between respondent Acesite and PAGCOR were "effectively zero-rated" because they
involved the rendition of services to an entity exempt from indirect taxes. Thus, the CA affirmed the CTAs
determination by ruling that respondent Acesite was entitled to a refund of PhP 30,054,148.64 from
petitioner.
Issue:
Whether PAGCORs tax exempton privilege includes indirect tax of VAT to entitle Acesite to zero percent
(0%) VAT rate?
Held:
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the
payment of taxes. Section 13 of P.D. 1869.
The VAT exemption extend to Acesite. Thus, while it was proper for PAGCOR not to pay the 10% VAT
charged by Acesite, the latter is not liable for the payment of it as it is exempt in this particular transaction
by operation of law to pay the indirect tax. Such exemption falls within the former Section 102 (b) (3) of
the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:
Section 102. Value-added tax on sale of services (a) Rate and base of tax There shall
be levied, assessed and collected, a value-added tax equivalent to 10% of gross receipts
derived by any person engaged in the sale of services x x x; Provided, that the following
services performed in the Philippines by VAT-registered persons shall be subject to 0%.
xxxx
(b) Transactions subject to zero percent (0%) rated.
xxxx
(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the
supply of such services to zero (0%) rate (emphasis supplied).
The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such
exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from
the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc.,5 where the absolute tax
exemption of the World Health Organization (WHO) upon an international agreement was upheld. We held

in said case that the exemption of contractee WHO should be implemented to mean that the entity or
person exempt is the contractor itself who constructed the building owned by contractee WHO, and such
does not violate the rule that tax exemptions are personal because the manifest intention of the agreement
is to exempt the contractor so that no contractors tax may be shifted to the contractee WHO. Thus,
the proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in
casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.
Acesite paid VAT by mistake. Considering the foregoing discussion, there are undoubtedly erroneous
payments of the VAT pertaining to the effectively zero-rate transactions between Acesite and PAGCOR.
Verily, Acesite has clearly shown that it paid the subject taxes under a mistake of fact, that is, when it was
not aware that the transactions it had with PAGCOR were zero-rated at the time it made the payments.
In UST Cooperative Store v. City of Manila,6 we explained that "there is erroneous payment of taxes when
a taxpayer pays under a mistake of fact, as for the instance in a case where he is not aware of an existing
exemption in his favor at the time the payment was made." 7 Such payment is held to be not voluntary and,
therefore, can be recovered or refunded.8
Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.), Inc., 466 SCRA
211(2005)
CHICO-NAZARIO, J.
Taxation; Value-Added Tax; Words and Phrases; A VAT-exempt transaction involves goods or services
which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax
Code, without regard to the tax status of the party to the transaction; A VAT-exempt party is a person or
entity granted VAT exemption under the Tax Code, a special law or an international agreement to which
the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT;
Section 103(q) of the Tax Code of 1977, as amended, relates to VAT-exempt transactions.It would
seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-exempt
entities. In the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines), this Court
already made such 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. Since such transactions
are not subject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods, properties,
or services, and they may not claim tax credit/refund of the input VAT they had paid thereon.
Same; Same; Philippine Economic Zone Authority (PEZA); P.D. No. 66, creating the Export Processing
Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as amended, under which the EPZA
evolved into the PEZA. Consequently, the exception of Presidential Decree No. 66 from Section 103(q)
of the Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as amended.Section

103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent Toshiba because
although the said section recognizes that transactions covered by special laws may be exempt from VAT,
the very same section provides that those falling under Presidential Decree No. 66 are not. Presidential
Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the precursor of Rep. Act No.
7916, as amended, under which the EPZA evolved into the PEZA. Consequently, the exception of
Presidential Decree No. 66 from Section 103(q) of the Tax Code of 1977, as amended, extends likewise to
Rep. Act No. 7916, as amended.
Same; Same; Same; Special Economic Zones (Ecozones); Words and Phrases; PEZA-registered
enterprises, which would necessarily be located within ECOZONES, are VAT-exempt entities, not
because of Section 24 of Rep. Act No. 7916, as amended, but, rather, because of Section 8 of the same
statute which establishes the fiction that ECOZONES are foreign territory; An ECOZONE refers to
selected areas with highly developed or which have the potential to be developed into agro-industrial,
industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and
bounds are fixed or delimited by Presidential Proclamations; Section 8 of Rep. Act No. 7916, as
amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate customs
territory, thus creating the fiction that the ECOZONE is a foreign territory.This Court agrees,
however, that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are
VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five
percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but,
rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign
territory. It is important to note herein that respondent Toshiba is located within an ECOZONE. An
ECOZONE or a Special Economic Zone has been described as. . . [S]elected areas with highly
developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational,
commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by
Presidential Proclamations. An ECOZONE may contain any or all of the following: industrial estates (IEs),
export processing zones (EPZs), free trade zones and tourist/recreational centers. The national territory of
the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs
Territory. Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate
the ECOZONES as a separate customs territory; thus, creating the fiction that the ECOZONE is a foreign
territory. As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE
shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from
the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the
Customs Territory.
Same; Same; Same; Same; Cross Border Doctrine; The Philippine VAT system adheres to the Cross
Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined
for consumption outside of the territorial border of the taxing authority.The Philippine VAT system
adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the
cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence,
actual export of goods and services from the Philippines to a foreign country must be free of VAT; while,

those destined for use or consumption within the Philippines shall be imposed with ten percent (10%)
VAT.
Same; Same; Same; Same; Same; Sales of goods, properties and services by a VAT-registered supplier
from the Customs Territory to an ECOZONE enterprise shall be treated as export sales, while sales to an
ECOZONE enterprise made by a non-VAT or unregistered supplier would only be exempt from VAT
and the supplier shall not be able to claim credit/refund of its input VAT.Sales of goods, properties and
services by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be
treated as export sales. If such sales are made by a VAT-registered supplier, they shall be subject to VAT at
zero percent (0%). In zero-rated transactions, the VAT-registered supplier shall not pass on any output
VAT to the ECOZONE enterprise, and at the same time, shall be entitled to claim tax credit/refund of its
input VAT attributable to such sales. Zero-rating of export sales primarily intends to benefit the exporter
(i.e., the supplier from the Customs Territory), who is directly and legally liable for the VAT, making it
internationally competitive by allowing it to credit/refund the input VAT attributable to its export sales.
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be
exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.
Same; Same; Same; Same; Same; The rule that any sale by a VAT-registered supplier from the Customs
Territory to a PEZA-registered enterprise shall be considered an export sale and subject to zero percent
(0%) VAT was clearly established only on 15 October 1999, upon the issuance of RMC No. 74-99prior
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 VAT-exempt
depended on the type of fiscal incentives availed of by the said enterprise. This old rule on VAT-exemption
or liability of PEZA-registered enterprises, followed by the BIR, also recognized and affirmed by the CTA,
the Court of Appeals, and even this Court, cannot be lightly disregarded considering the great number of
PEZA-registered enterprises which did rely on it to determine its tax liabilities, as well as, its privileges.
According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered
enterprise the option to choose between two sets of fiscal incentives: (a) The five percent (5%) preferential
tax rate on its gross income under Rep. Act No. 7916, as amended; and (b) the income tax holiday provided
under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, as amended.
The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is in lieu
of all taxes. Except for real property taxes, no other national or local tax may be imposed on a PEZAregistered enterprise availing of this particular fiscal incentive, not even an indirect tax like VAT.
Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to registered
pioneer and non-pioneer enterprises for six-year and four-year periods, respectively. Those availing of this
incentive are exempt only from income tax, but shall be subject to all other taxes, including the ten percent
(10%) VAT.

Same; Same; Same; Same; Same; The old rule clearly did not take into consideration the Cross Border
Doctrine essential to the VAT system or the fiction of the ECOZONE as a foreign territory.This old
rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system or the
fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal incentives of the
PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered enterprises was
based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the five percent (5%)
preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as amended,
then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax holiday
under Exec. Order No. 226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction
was abolished by RMC No. 74-99, which categorically declared that all sales of goods, properties, and
services made by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall
be subject to VAT, at zero percent (0%) rate, regardless of the 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 PEZAregistered 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.
Facts:
Toshiba registered with the Philippine Economic Zone Authority (PEZA) as an ECOZONE Export
Enterprise and it registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer and a
withholding agent
Toshiba filed its VAT returns for the first and second quarters of taxable year 1996, reporting input VAT in
the amount of P13,118,542.007 and P5,128,761.94,8 respectively, or a total of P18,247,303.94. It alleged
that the said input VAT was from its purchases of capital goods and services which remained unutilized
since it had not yet engaged in any business activity or transaction for which it may be liable for any output
VAT.

Toshiba filed with (DOF) applications for tax credit/refund of its unutilized input VAT. To toll the running
of the two-year prescriptive period for judicially claiming a tax credit/refund Toshiba, filed with the CTA a
Petition for Review.
CTA ordered CIR to refund, or in the alternative, to issue a tax credit certificate to Toshiba in the amount
of P16,188,045.44. CA AFFIRMED.
Issue:
Whether or not Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital
goods and services?
Held:
Yes. An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons
from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%).
It would seem that CIR failed to differentiate between VAT-exempt transactions from VAT-exempt
entities.
An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically
listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status
VAT-exempt or not of the party to the transaction
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which the Philippines is a signatory, and by virtue of which its
taxable transactions become exempt from VAT
CIR, bases its argument on VAT-exempt transactions. Since such transactions are not subject to VAT, the
sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and they may not
claim tax credit/refund of the input VAT they had paid thereon.
This cannot apply to transactions of Toshiba because although the transactions covered by special laws
may be exempt from VAT, those falling under Presidential Decree No. 66 (EPZA) are not.
This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within
ECOZONES, are VAT-exempt entities because ECOZONES are foreign territory. As a result, sales made
by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be treated as an exportation
from the Customs Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in
the Customs Territory shall be considered as an importation into the Customs Territory.
The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined for consumption outside of the territorial border of the
taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must
be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with
ten percent (10%) VAT.

No output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. The VAT
treatment of sales to it, however, varies depending on whether the supplier from the Customs Territory is
VAT-registered or not.
Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-registered supplier,
they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-registered supplier
shall not pass on any output VAT to the ECOZONE enterprise, and at the same time, shall be entitled to
claim tax credit/refund of its input VAT attributable to such sales. Zero-rating of export sales primarily
intends to benefit the exporter (i.e., the supplier from the Customs Territory), who is directly and legally
liable for the VAT, making it internationally competitive by allowing it to credit/refund the input VAT
attributable to its export sales.
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be
exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.
Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-exempt
entity that could not have engaged in a VAT-taxable business, this Court still believes, given the particular
circumstances of the present case, that it is entitled to a credit/refund of its input VAT.
The sale of capital goods by suppliers from the Customs Territory to Toshiba took place way before the
issuance of RMC No. 74-99, and when the old rule was accepted and implemented by no less than the BIR
itself. Since Toshiba opted to avail itself of the income tax holiday under Exec. Order No. 226, as amended,
then it was deemed subject to the ten percent (10%) VAT. It was very likely therefore that suppliers from
the Customs Territory had passed on output VAT to Toshiba, and the latter, thus, incurred input VAT.
Accordingly, this Court gives due respect to and adopts herein the CTAs findings that the suppliers of
capital goods from the Customs Territory did pass on output VAT to Toshiba and the amount of input VAT
which Toshiba could claim as credit/refund.
Commissioner of Internal Revenue vs. Cebu Toyo Corporation, 451 SCRA 447(2005)
QUISUMBING, J.:
Taxation; Value-Added Tax (VAT); Under the fiscal incentives granted to PEZA-registered enterprises
under Sec. 23 of R.A. No. 7916, the taxpayer had two options with respect to its tax burdenit 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 (out-put
tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid; A VAT-registered
purchaser of goods, properties or services that are VAT-exempt, is not entitled to any input tax on such
purchases despite the issuance of a VAT invoice or receipt.Taxable transactions are those transactions
which are subject to value-added tax either at the rate of ten percent (10%) or zero percent (0%). In taxable
transactions, the seller shall be entitled to tax credit for the value-added tax paid on purchases and leases of
goods, properties or services. An exemption means that the sale of goods, properties or services and the use
or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT
(input tax) previously paid. The person making the exempt sale of goods, properties or services shall not
bill any output tax to his customers because the said transaction is not subject to VAT. Thus, a VATregistered purchaser of goods, properties or services that are VAT-exempt, is not entitled to any input tax
on such purchases despite the issuance of a VAT invoice or receipt.
Same; Same; Under the value-added tax system, a zero-rated sale by a VAT-registered person, which is a
taxable transaction for VAT purposes, shall not result in any output tax, but the input tax on his
purchase of goods, properties or services related to such zero-rated sale shall be available as tax credit or
refund.Now, having determined that respondent is engaged in taxable transactions subject to VAT, let us
then proceed to determine whether it is subject to 10% or zero (0%) rate of VAT. To begin with, it must be
recalled that generally, sale of goods and supply of services performed in the Philippines are taxable at the
rate of 10%. However, export sales, or sales outside the Philippines, shall be subject to value-added tax at
0% if made by a VAT-registered person. Under the value-added tax system, a zero-rated sale by a VATregistered 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 VATregistered person with zero-rated sales may be allowed as tax credits or refunded while the seller in an
exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice
or receipt; (c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to
register while registration is optional for VAT-exempt persons.
Facts:
Mactan Export Processing Zone (MEPZ) as a zone export enterprise registered with the PEZA. It is also
registered with the BIR as a VAT taxpayer. Cebu sells 80% of its products to its mother corporation,
pursuant to an Agreement of Offsetting. The rest are sold to various enterprises doing business in the
MEPZ.
On March 30, 1998, it filed an application for tax credit/refund of VAT paid for the period April 1996 to
December 1997 amounting to about P4.4 million representing excess VAT input payments. Cebu argues
that as a VAT-registered exporter of goods, it is subject to VAT at the rate of 0% on its export sales that do
not result in any output tax. Hence, the unutilized VAT input taxes on its purchases of goods and services
related to such zero-rated activities are available as tax credits or refund.
The BIR opposed this on the following grounds: It failed to show that the tax was erroneously or illegally
collected; the taxes paid and collected are presumed to have been made in accordance with law; and that
claims for refund are strictly construed against the claimant.
The CTA ruled that not the entire amount claimed for refund by Toyo were actually offset against its
related accounts. It determined that the refund/credit amounted only to P2.1M. The same was affirmed by
the CA.
Issue:
Whether the CA erred in affirming the CTA granting a refund representing unutilized input VAT on goods
and services.
Held:
The petition is denied. Cebu is entitled to the P2.1M tax refund/credit. Petitioners contention that
respondent is not entitled to refund for being exempt form VAT is untenable. This argument turns a blind
eye to the fiscal incentives given to PEZA registered enterprises under RA 7916. Under this statute, Cebu
has to options with respect to its tax burden. It could avail of an income tax holiday pursuant to EO 226,
thus exempting it from income taxes for a number of years (in this case, 4 years) but not from other internal
revenue taxes such as VAT; or it could avail of the tax exemption on all taxes, including VAT under PD 66
and pay only the preferential rate of 5% under RA 7916. Thus, availing of the first option, respondent is not
exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is engaged in a taxable
rather than exempt transactions. In taxable transactions, the seller (Cebu) shall be entitled to tax credit for
the VAT paid on purchases and leases of goods properties or services.


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Taxation II Case Digests based on Atty.

Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

3|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

4|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

5|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Effectively Zero-rated transactions

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

6|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Effective zero rating

intended to be enjoyed by the seller who is

intended to benefit the purchaser

Exempt Transaction vs. Exempt Party

Tax Refund as Tax Exemption

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

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

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

9|Ms. Nolaida Aguirre

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Last day for

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

2 Jan. 2006 (31

12 Sept 2005 7 July 2005

CTA (En Banc):

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

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

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

1st Quarter, 2003

2nd Quarter, 2003

3rd Quarter, 2003

4th Quarter, 2003

G.R. No. 194637

1st Quarter, 2003

2nd Quarter, 2003

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

3rd Quarter, 2003

4th Quarter, 2003

Summary of Rules on Prescriptive Periods Involving VAT

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

VAT ON GOODS AND SERVICES

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Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline

Taxation II Case Digests based on Atty. Bobby Locks Course Outline