CIR vs Cebu Toyo Corporation

Facts:
Cebu Toyo Corp. (Cebu) is a domestic subsidiary of Toyo Lens Corporation Japan,
engaged in the manufacture of lenses and various optical components used in TV
set, cameras, CDs, etc. Its principal office is located at the 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.
Ruling:
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.

CIR vs. Sekisui Jushi Philippines, Inc. - 496 SCRA 206

Facts :

Sekisui Jushi Philippines, Inc. (Sekisui) is a domestic corporation principally

engaged in the business of manufacturing, importing, exporting, buying,
selling, or otherwise dealing in, at wholesale goods such as strapping bands
and other packaging materials and good of similar nature, and any and all
equipment, materials, supplies used or employed in or related to the
manufacture of such finished goods.
Having registered with the BIR as a value-added (VAT) taxpayer, Sekisui filed
its quarterly returns with the BIR, for the period January 1 to June 30 1997,
reflecting therein input taxes in the amount of P4,631,132.70 paid by it in
connection with its domestic purchase of capital goods and services. Said
input taxes remained unutilized since Sekisui has not engaged in any
business activity or transaction for which it may be liable for output tax and
for which said input tax may be credited.
Sekisui filed with the One-Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center of the department of Finance (CENTER-DOF) two separate
applications for tax credit/refund of vat input taxes paid for the period
January to March 31, 1997 and April 1 to June 30, 1997, respectively.
There being no action on its application, Sekisui filed, within the two year
prescriptive period, a petition for review with the Court of Tax Appeals
claiming
CIR filed its answer claiming that: (1) said claim for tax credit/refund is
subject to administrative routinary investigation by the BIR; (2) Sekisui failed
to show that the amount claimed as VAT input taxes were erroneously
collected or that the same were properly collected; (3) taxes due and
collected are presumed to have been made in accordance with law; (4) the
burden of proof is on the tax payer to establish his right to a refund in an
action for tax refund; (5) respondent should show that it complied with the
provisions of Section 204 in relation with Section 229 of the Tax Code; and (6)
claims for refund are strictly construed against the taxpayer.
CTA: Sekisui was entitled to the refund. While the company was registered
with the Philippine Export Zone Authority (PEZA) as an ecozone and was, as
such, exempt from the income tax, it availed itself of the fiscal incentive
under EO 226. It thereby subjected itself to other internal revenue taxes like
the VAT. It ruled that only input taxes amounting to P4, 377,102.26 were duly

substantiated by invoices and official receipts while those amounting to P254,

313.43 had not been sufficiently proven and were thus disallowed.
The Court of Appeals affirmed the decision of the CTA. Hence, this petition.
Issue(s):
Whether or not Sekisui is entitled to the refund or issuance of tax credit as
alleged unutilized input taxes paid on domestic purchase of capital goods and
services?

Ruling:
Yes.
Ratio:
An entity registered with the PEZA as an ecozone may be covered by the VAT
system. Section 23 of RA 7916 gives a PEZA-registered enterprise the option to
choose between the two fiscal incentives: (a) five percent preferential tax rate on its
gross income under the said law; or (b) an income tax holiday provided under EO
No. 226 or the Omnibus Investment Code of 1987. If the entity avails itself of the
five percent preferential tax rate under the first scheme, it is exempt from all taxes,
including the VAT; under the second, and it is exempt from income taxes for a
number of years, nut not from other national internal revenue taxes like the VAT.
Sekisui availed itself of the 2 nd scheme which is fiscal incentive of an income
tax holiday under EO No. 226. By availing itself of the income tax holiday, Sekisui
became subject of VAT, because its transactions were not VAT-exempt.
Notable, while an ecozone is geographically within the Philippines, it is
deemed a separate customs territory and is regarded in law as foreign soil. Sales by
suppliers from outside the borders of the ecozone to this separate customs territory
are deemed as exports and treated as export sales. These sales are zero-rated or
subject to a tax rate of zero percent.
Sekisui paid input taxes in the amount of P4, 377,102.26. On the other hand,
100 percent of the products of Sekisui are exported which means that all its
transactions are deemed export sales and are thus VAT zero-rated. Since Sekisui has
no output tax which it could offset its input tax, as shown by the fact that the said
input tax it paid for its domestic purchases of capital goods and services remained
unutilized, it can claim a refund for the input VAT previously charged by its
suppliers.

COMMISSIONER OF INTERNAL REVENUE, vs. MAGSAYSAY LINES

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.
1 The vessels were constructed for the NDC between 1981 and 1984, then initially
leased to Luzon Stevedoring Company, also its wholly-owned subsidiary.
Subsequently, the vessels were transferred and leased, on a bareboat basis, to the
NMC.
2 The NMC shares and the vessels were offered for public bidding. Among the
stipulated terms and conditions for the public auction was that the winning bidder
was to pay "a value added tax of 10% on the value of the vessels."
3 On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines)
offered to buy the shares and the vessels for P168,000,000.00. The bid was made
by Magsaysay Lines, purportedly for a new company still to be formed composed of
itself and was approved by the Committee on Privatization, and a Notice of Award
dated 1 July 1988 was issued to Magsaysay Lines who in turn was assessed of VAT
through VAT Ruling No. 568-88 dated 14 December 1988 from the BIR, holding that
the sale of the vessels was subject to the 10% VAT. The ruling cited the fact that
NDC was a VAT-registered enterprise, and thus its "transactions incident to its
normal VAT registered activity of leasing out personal property including sale of its
own assets that are movable, tangible objects which are appropriable or
transferable are subject to the 10% [VAT].
CTA ruled that the sale of a vessel was an "isolated transaction," not done in the
ordinary course of NDC s business, and was thus not subject to VAT, which under
Section 99 of the Tax Code, was applied only to sales in the course of trade or
business.
The CTA further held that - the sale of the vessels could not be "deemed sale," and
thus subject to VAT, as the transaction did not fall under the enumeration of
transactions deemed sale as listed either in Section 100(b) of the Tax Code, or
Section 4 of R.R. No. 5-87.
Finally, the CTA ruled that any case of doubt should be resolved in favor of private
respondents since Section 99 of the Tax Code which implemented VAT is not an
exemption provision, but a classification provision which warranted the resolution of
doubts in favor of the taxpayer.
Hence CIR appealed the CTA Decision.

ISSUE: Whether the sale by the 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 taxpayer s 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

CIR v. CA/COMASERCO
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 "no-profit, reimbursement-of-cost-only"

basis. It averred that it was not engaged in the business of providing services to
Philamlife and its affiliates. 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 profit-motivated, thus not engaged in business. In fact, it did not
generate profit but suffered a net loss in taxable year 1988. COMASERCO averred
that since it was not engaged in business, it was not liable to pay VAT.
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-oncost 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.
COMMISSIONER OF INTERNAL REVENUE VS. SONY
PHILIPPINES, INC.- Value Added Tax, Final
Withholding Tax, Letter of Authority
FACTS:
Sony Philippines was ordered examined for the period 1997 and unverified prior
years as indicated in the Letter of Authority. The audit yielded assessments agains
reimbursable was couched as an aid for Sony Philippines by SIS
in view of the companys dire or adverse economic conditions More importantly,
the absence of a sale, barter or exchange of goods or properties supports the nonVAT nature of the reimbursement. This was distinguished from the COMASERCO
case where even if there was similarly a reimbursement-on-cost arrangement
between affiliates, there was in fact an underlying service. Here, the advertising
services were rendered in favor of Sony Philippines not SIS.
(2) NO. A Letter of Authority should cover a taxable period not exceeding one year
and to indicate that it covers unverified prior years should be enough to invalidate
it. In addition, even if the Final Withholding Tax was covered by Sony Philippines
fiscal year ending March 1998, the same fell outside of the period 1997 and was
thus not validly covered by the Letter of Authority.t Sony Philippines for deficiency
VAT and FWT, viz: (1) late remittance of Final Withholding Tax on royalties for the
period January to March 1998 and (2) deficiency VAT on reimbursable received by
Sony Philippines from its offshore affiliate, Sony International Singapore (SIS).
ISSUES:
(1) Is Petitioner liable for deficiency Value Added Tax?
(2) Was the investigation of its 1998 Final Withholding Tax return valid?
HELD:
(1) NO. Sony Philippines did in fact incur expenses supported by valid VAT invoices
when it paid for certain advertising costs. This is sufficient to accord it the benefit of
input VAT credits and where the money came from to satisfy said advertising billings
is another matter but does not alter the VAT effect. In the same way, Sony
Philippines can not be deemed to have received the reimbursable as a fee for a VATtaxable activity. The reimbursable was couched as an aid for Sony Philippines by SIS
in view of the companys dire or adverse economic conditions. More importantly,
the absence of a sale, barter or exchange of goods or properties supports the nonVAT nature of the reimbursement. This was distinguished from the COMASERCO
case where even if there was similarly a reimbursement-on-cost arrangement
between affiliates, there was in fact an underlying service. Here, the advertising
services were rendered in favor of Sony Philippines not SIS.
(2) NO. A Letter of Authority should cover a taxable period not exceeding one year
and to indicate that it covers unverified prior years should be enough to invalidate
it. In addition, even if the Final Withholding Tax was covered by Sony Philippines

fiscal year ending March 1998, the same fell outside of the period 1997 and was
thus not validly covered by the Letter of Authority.
CIR v. BENGUET CORP.
G.R. Nos. 134587 & 134588, August 08, 2005
WHAT IS INPUT VAT?!
- It represents the actual payments, costs and expenses incurred by a VATregistered taxpayer in connection with his purchase of goods and services.
- It is the VAT paid by a VAT-registered person in the course of his trade or business
on the importation of goods or local purchase of goods or services from a VATregistered person.
WHAT IS OUTPUT VAT?!
- When the seller sells his products or services, the VAT-registered taxpayer
generally becomes liable for 12% of the selling price as output VAT.
- Hence, it is the VAT on the sale of taxable goods or services by any person
registered or required to register under the NIRC.
EXAMPLE:
Mang Nats is in the business of making leather goods (e.g. leather bound codals).
He imports Italian leather from China (hehe). Mang Nats will have to pay an INPUT
VAT on his importation.
Now Ate Pearl wants to buy a codal to decorate her cubicle. She buys from Mang
Nats the Labor Code because blue is her favorite color. When Mang Nats sold the
codal to Ate Pearl, the price already included the OUTPUT VAT. Remember that VAT
is an indirect tax that may be shifted to the buyer. Mang Nats is liable for the
OUTPUT VAT but he shifted the burden to Ate pearl. GETS?!
FACTS: Benguet Corp. (Benguet) is a domestic corporation engaged in mining. It
is a VAT-registered enterprise. In January 1988, Benguet filed an application for zerorating of its sales of mine products. The application was approved.
1ST VAT RULING (AUG. 1988): The CIR issued VAT Ruling No. 378-88 which
declared that the sale of gold to the Central Bank (CB) is considered an export
sale and therefor subject to 0% VAT. From 1988 to 1990, the CIR (more than 5
times) reiterated and confirmed its position that the sale of gold by a VAT-registered
taxpayer to the CB is subject to 0% VAT.
In reliance to the CIRs position, Benguet (from January 1988 to July 1989) sold gold
to the CB and treated these sales as 0% VAT rated. In this same period, Benguet
incurred input taxes attributable to its sale of gold to the CB. Consequently, Benguet

filed with the CIR applications for the issuance of Tax Credit Certificates for input
VAT Credits attributable to its export sales (inclusive of direct export sales and sale
of gold to the CB).
2ND VAT RULING (JAN. 1992): The CIR issued VAT Ruling No. 008-92 declaring that
the sales of gold to the CB are considered domestic sales subject to 10% VAT
(instead of 0% from 1998-1990 in the 1ST VAT RULING).
3RD VAT RULING (AUG. 1992): The CIR issued VAT Ruling No. 59-92. It stated the
retroactive application of the 2ND VAT RULING to all such sales starting January 1,
1988. It also said that mining companies will not be unduly prejudiced by the
retroactive application of the 2ND VAT RULING because their claim for refund of input
taxes are not lost because they are allowable on its:
(1) Output taxes on the sales of gold to CB
(2) Output taxes on other sales
(3) As a deduction to income tax
The CIR treated Benguets sales to CB as domestic sales subject to 10% VAT but
allowed Benguet a total tax credit of only around P81M which corresponded to VAT
input taxes attributable only to its direct EXPORT SALES. Despite this, Benguet was
not refunded the said amounts of tax credit claimed. Hence, Benguet prayed for the
issuance of Tax Credit Certificates with the CTA. Benguets computation of tax credit
amounted to P131M which included input tax to BOTH EXPORT SALES and SALES OF
GOLD TO THE CB.
CTA: Denied Benguets claim for tax credit. The alleged prejudice to Benguet of the
retroactive application is merely speculative and not actual and imminent so as to
prohibit its retroactivity. There wont be any prejudice because the 3RD VAT RULING
provides for the remedies for the recovery of the input VAT.
CA: Affirmed the CTA. On MR, the CA reversed itself. Ergo, the P131M tax credit
claim was approved! According to the CA, the P131M includes:
(1) P81M (input VAT credits attributable to direct EXPORT SALES)
(2) P50M (input VAT credits attributable to SALES OF GOLD TO CB which were
subject to 0% when the said sales were made)
ISSUES: W/N the 2ND VAT RULING (subjecting sales of gold to the CB to 10% VAT)
would be prejudicial to Benguet.
NOTE:
General rule: BIR rules would have no retroactive application if to so apply them
would be prejudicial to the taxpayers.
Exception:

(1) Taxpayer deliberately misstates or omits material facts from his return
(2) The facts subsequently gathered by the BIR are materially different from the
facts on which the ruling is based
(3) Taxpayer acted in bad faith
CIRS POSITION: The CA erred in rejecting the retroactive application of the 2ND
VAT RULING because its retroactive application will not prejudice Benguet. It may:
(1) Use said input taxes in paying its output taxes in connection with its other sales
transactions which are subject to the 10% VAT
(2) If there are no other sales transaction subject to the 10% VAT, treat the input
VAT as cost and deduct the same from income for income tax purposes.
HELD: CIR FAIL! BENGUET FTW! The prejudice to Benguet is obvious! No retroactive
effect! Benguet may claim the P50M input VAT credit!
The VAT system allows a VAT-registered taxpayer to recover its input VAT either by:
(1) Passing on the 10% output VAT (now 12%) on the gross selling price or gross
receipts to its buyers.
(2) If the input tax is attributable to the purchase of capital goods or to zero-rated
sales, by filing a claim for a refund or tax credit with the BIR.
Benguets claimed tax credit of input tax amounting to P50M represents the costs or
expenses incurred by Benguet in connection with its gold production. Relying on the
1ST VAT RULING (sales of gold to the CB are considered export sales subject to 0%),
Benguet sold gold to the CB without passing on CB its input VAT costs, obviously
intending to obtain a refund or credit thereof from the BIR at the end of the taxable
period.
However, by the time Benguet applied for credit of its input VAT costs, the 2ND VAT
RULING treated sales of gold to the CB as domestic sales subject to 10% VAT. And
the 3RD VAT RULING retroactively applied the 2ND VAT RULING to such sales made
from January 1, 1988 onwards. By reason of the denial of its claim for credit,
Benguet has been precluded from recovering its input VAT costs. The CIRS
remedies (set off with other transactions or income deduction) cannot be applied.
(1) Benguet has clearly shown that it has no other transactions subject to 10%
VAT and CIR has failed to prove the existence of such other transactions against
which to set off Benguets input VAT.
(2) Treating the input VAT as an income tax deduction will yield only to a partial
benefit. The use of input VAT as a tax deductions results in a loss of 65% of the
input VAT which could have otherwise fully utilized as a tax credit. There is
substantial difference between a tax credit and a tax deduction. A tax credit
reduces tax liability, while a tax deduction only reduces taxable income (SEE P.70

OF THE CASE! It illustrates the difference between using the tax credit and tax
deduction methods).
Prejudice is all the more highlighted by the fact that it has been issued assessments
for deficiency output VAT in the amounts of P252M (for 1988) and P244M (for 1989)!
Benguet relied on the formal assurances of the BIRs 1ST VAT RULING. To retroact a
later ruling revoking the grant of 0% rating status and applying a new and contrary
position that such sales are now subject to 10% is inconsistent with justice and fair
play.