[G.R. No. 149073. February 16, 2005] Initially, the CTA denied the petition for insufficiency of evidence.
Initially, the CTA denied the petition for insufficiency of evidence.[8] The tax court
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CEBU TOYO
CORPORATION, respondent.
DECISION
QUISUMBING, J.:
In its Decision[1] dated July 6, 2001, the Court of Appeals, in CA-G.R. SP No. 60304,
affirmed theResolutions dated May 31, 2000[2] and August 2, 2000,[3] of the Court of Tax
Appeals (CTA) ordering the Commissioner of Internal Revenue (CIR) to allow a partial refund or,
alternatively, to issue a tax credit certificate in favor of Cebu Toyo Corporation in the sum
of P2,158,714.46, representing the unutilized input value-added tax (VAT) payments.
The facts, as culled from the records, are as follows:
Respondent Cebu Toyo Corporation is a domestic corporation engaged in the manufacture
of lenses and various optical components used in television sets, cameras, compact discs and
other similar devices. Its principal office is located at the Mactan Export Processing Zone (MEPZ)
in Lapu-Lapu City, Cebu. It is a subsidiary of Toyo Lens Corporation, a non-resident corporation
organized under the laws of Japan. Respondent is a zone export enterprise registered with the
Philippine Economic Zone Authority (PEZA), pursuant to the provisions of Presidential Decree
No. 66.[4] It is also registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer.[5]
As an export enterprise, respondent sells 80% of its products to its mother corporation,
the Japan-based Toyo Lens Corporation, pursuant to an Agreement of Offsetting. The rest are
sold to various enterprises doing business in the MEPZ. Inasmuch as both sales are considered
export sales subject to Value-Added Tax (VAT) at 0% rate under Section 106(A)(2)(a) [6] of the
National Internal Revenue Code, as amended, respondent filed its quarterly VAT returns from
April 1, 1996 to December 31, 1997 showing a total input VAT of P4,462,412.63.
On March 30, 1998, respondent filed with the Tax and Revenue Group of the One-Stop
Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance, an
application for tax credit/refund of VAT paid for the period April 1, 1996 to December 31, 1997
amounting to P4,439,827.21 representing excess VAT input payments.
Respondent, however, did not bother to wait for the Resolution of its claim by the CIR.
Instead, on June 26, 1998, it filed a Petition for Review with the CTA to toll the running of the
two-year prescriptive period pursuant to Section 230[7] of the Tax Code.
Before the CTA, the respondent posits that as a VAT-registered exporter of goods, it is
subject to VAT at the rate of 0% on its export sales that do not result in any output tax. Hence,
the unutilized VAT input taxes on its purchases of goods and services related to such zero-rated
activities are available as tax credits or refunds.
The petitioners position is that respondent was not entitled to a refund or tax
credit since: (1) it failed to show that the tax was erroneously or illegally collected;
(2) the taxes paid and collected are presumed to have been made in accordance with
law; and (3) claims for refund are strictly construed against the claimant as these
partake of the nature of tax exemption.
sustained respondents argument that it was a VAT-registered entity. It also found that the
petition was timely, as it was filed within the prescription period. The CTA also ruled that the
respondents sales to Toyo Lens Corporation and to certain establishments in the Mactan Export
Processing Zone were export sales subject to VAT at 0% rate. It found that the input VAT
covered by respondents claim was not applied against any output VAT. However, the tax court
decreed that the petition should nonetheless be denied because of the respondents failure to
present documentary evidence to show that there were foreign currency exchange proceeds
from its export sales. The CTA also observed that respondent failed to submit the approval by
Bangko Sentral ng Pilipinas (BSP) of its Agreement of Offsetting with Toyo Lens Corporation and
the certification of constructive inward remittance.
Undaunted, respondent filed on February 21, 2000, a Motion for
Reconsideration arguing that: (1) proof of its inward remittance was not required by law; (2)
BSP and BIR regulations do not require BSP approval on its Agreement of Offsetting nor do they
require certification on the amount constructively remitted; (3) it was not legally required to
prove foreign currency payments on the remaining sales to MEPZ enterprises; and (4) it had
complied with the substantiation requirements under Section 106(A)(2)(a) of the Tax Code.
Hence, it was entitled to a refund of unutilized VAT input tax.
On May 31, 2000, the tax court partly granted the motion for reconsideration in
a Resolution, to wit:
WHEREFORE, finding the motion of petitioner to be meritorious, the same is hereby partially
granted. Accordingly, the Court hereby MODIFIES its decision in the above-entitled case, the
dispositive portion of which shall now read as follows:
WHEREFORE, finding the petition for review partially meritorious, respondent is hereby
ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of
Petitioner in the amount of P2,158,714.46 representing unutilized input tax payments.
SO ORDERED.[9]
In granting partial reconsideration, the tax court found that there was no need for BSP
approval of the Agreement of Offsetting since the same may be categorized as an inter-
company open account offset arrangement. Hence, the respondent need not present proof of
foreign currency exchange proceeds from its sales to MEPZ enterprises pursuant to Section
106(A)(2)(a)[10] of the Tax Code. However, the CTA stressed that respondent must still prove
that there was an actual offsetting of accounts to prove that constructive foreign currency
exchange proceeds were inwardly remitted as required under Section 106(A)(2)(a).
The CTA found that only the amount of Y274,043,858.00 covering respondents sales to
Toyo Lens Corporation and purchases from said mother company for the period August 7, 1996
to August 26, 1997 were actually offset against respondents related accounts receivable and
accounts payable as shown by the Agreement for Offsetting dated August 30, 1997. Resort to
the respondents Accounts Receivable and Accounts Payable subsidiary ledgers corroborated the
amount. The tax court also found that out of the total export sales for the period April 1, 1996
to December 31, 1997 amounting to Y700,654,606.15, respondents sales to MEPZ enterprises
amounted only to Y136,473,908.05 of said total. Thus, allocating the input taxes supported by
receipts to the export sales, the CTA determined that the refund/credit amounted to
only P2,158,714.46,[11]computed as follows:
Total Input Taxes Claimed by respondent P4,439,827.21
Less: Exceptions made by SGV
1
a.) 1996 P651,256.17
b.) 1997 104,129.13 755,385.30
Validly Supported Input Taxes P3,684,441.91
Allocation:
Verified Zero-Rated Sales
a.) Toyo Lens Corporation Y274,043,858.00
b.) MEPZ Enterprises 136,473,908.05 Y410,517,766.05
Divided by Total Zero-Rated Sales Y700,654,606.15
Quotient 0.5859
Multiply by Allowable Input Tax P3,684,441.91
Amount Refundable P2,158,714.[52][12]
On June 21, 2000, petitioner Commissioner filed a Motion for Reconsideration arguing
that respondent was not entitled to a refund because as a PEZA-registered enterprise, it was not
subject to VAT pursuant to Section 24[13] of Republic Act No. 7916,[14] as amended by Rep. Act
No. 8748.[15] Thus, since respondent was not subject to VAT, the Commissioner contended that
the capital goods it purchased must be deemed not used in VAT taxable business and therefore
it was not entitled to refund of input taxes on such capital goods pursuant to Section 4.106-1 of
Revenue Regulations No. 7-95.[16]
Petitioner filed a Motion for Reconsideration on June 21, 2000 based on the following
theories: (1) that respondent being registered with the PEZA as an ecozone enterprise is not
subject to VAT pursuant to Sec. 24 of Rep. Act No. 7916; and (2) since respondents business is
not subject to VAT, the capital goods it purchased are considered not used in a VAT taxable
business and therefore is not entitled to a refund of input taxes.[17]
The respondent opposed the Commissioners Motion for Reconsideration and prayed
that the CTA resolution be modified so as to grant it the entire amount of tax refund or credit it
was seeking.
On August 2, 2000, the Court of Tax Appeals denied the petitioners motion for
reconsideration. It held that the grounds relied upon were only raised for the first time and that
Section 24 of Rep. Act No. 7916 was not applicable since respondent has availed of
the income tax holiday incentive under Executive Order No. 226 or the Omnibus
Investment Code of 1987 pursuant to Section 23[18] of Rep. Act No. 7916. The tax
court pointed out that E.O. No. 226 granted PEZA-registered enterprises an exemption from
payment of income taxes for 4 or 6 years depending on whether the registration was as a
pioneer or as a non-pioneer enterprise, but subject to other national taxes including VAT.
The petitioner then filed a Petition for Review with the Court of Appeals (CA), docketed
as CA-G.R. SP No. 60304, praying for the reversal of the CTA Resolutions dated May 31, 2000
and August 2, 2000, and reiterating its claim that respondent is not entitled to a refund of input
taxes since it is VAT-exempt.
On July 6, 2001, the appellate court decided CA-G.R. SP No. 60304 in respondents favor,
thus:
WHEREFORE, finding no merit in the petition, this Court DISMISSES it and AFFIRMS the
Resolutions dated May 31, 2000 and August 2, 2000 . . . of the Court of Tax Appeals.
SO ORDERED.[19]
The Court of Appeals found no reason to set aside the conclusions of the Court of Tax
Appeals. The appellate court held as untenable herein petitioners argument that respondent is
not entitled to a refund because it is VAT-exempt since the evidence showed that it is a VAT-
registered enterprise subject to VAT at the rate of 0%. It agreed with the ruling of the tax court
that respondent had two options under Section 23 of Rep. Act No. 7916, namely: (1) to avail of
an income tax holiday under E.O. No. 226 and be subject to VAT at the rate of 0%; or (2) to
avail of the 5% preferential tax under P.D. No. 66 and enjoy VAT exemption. Since respondent
availed of the incentives under E.O. No. 226, then the 0% VAT rate would be applicable to it
and any unutilized input VAT should be refunded to respondent upon proper application with
and substantiation by the BIR.
Hence, the instant petition for review now before us, with herein petitioner alleging that:
I. RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE
AUTHORITY (PEZA) AS AN ECOZONE EXPORT ENTERPRISE, ITS BUSINESS IS
NOT SUBJECT TO VAT PURSUANT TO SECTION 24 OF REPUBLIC ACT NO. 7916
IN RELATION TO SECTION 103 OF THE TAX CODE, AS AMENDED BY RA NO.
7716.
II. SINCE RESPONDENTS BUSINESS IS NOT SUBJECT TO VAT, IT IS NOT
ENTITLED TO REFUND OF INPUT TAXES PURSUANT TO SECTION 4.103-1 OF
REVENUE REGULATIONS NO. 7-95.[20]
In our view, the main issue for our resolution is whether the Court of Appeals erred in
affirming the Court of Tax Appeals resolution granting a refund in the amount of P2,158,714.46
representing unutilized input VAT on goods and services for the period April 1, 1996 to
December 31, 1997.
Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue
that respondent Cebu Toyo Corporation, as a PEZA-registered enterprise, is exempt from
national and local taxes, including VAT, under Section 24 of Rep. Act No. 7916 and Section
109[21] of the NIRC. Thus, they contend that respondent Cebu Toyo Corporation is not entitled
to any refund or credit on input taxes it previously paid as provided under Section 4.103-1[22] of
Revenue Regulations No. 7-95, notwithstanding its registration as a VAT taxpayer. For petitioner
claims that said registration was erroneous and did not confer upon the respondent any right to
claim recognition of the input tax credit.
The respondent counters that it availed of the income tax holiday under E.O. No. 226 for
four years from August 7, 1995 making it exempt from income tax but not from other taxes
such as VAT. Hence, according to respondent, its export sales are not exempt from VAT,
contrary to petitioners claim, but its export sales is subject to 0% VAT. Moreover, it argues that
it was able to establish through a report certified by an independent Certified Public Accountant
that the input taxes it incurred from April 1, 1996 to December 31, 1997 were directly
attributable to its export sales. Since it did not have any output tax against which said input
taxes may be offset, it had the option to file a claim for refund/tax credit of its unutilized input
taxes.
Considering the submission of the parties and the evidence on record, we find the petition
bereft of merit.
Petitioners contention that respondent is not entitled to refund for being
exempt from VAT is untenable. This argument turns a blind eye to the fiscal
incentives granted to PEZA-registered enterprises under Section 23 of Rep. Act No.
7916. Note that under said statute, the respondent had two options with respect to
its tax burden. It could avail of an income tax holiday pursuant to provisions of E.O.
No. 226, thus exempt it from income taxes for a number of years but not from other
internal revenue taxes such as VAT; or it could avail of the tax exemptions on all
taxes, including VAT under P.D. No. 66 and pay only the preferential tax rate of 5%
under Rep. Act No. 7916. Both the Court of Appeals and the Court of Tax Appeals found that
2
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.
tax problems and has accordingly developed an expertise on the subject, unless there has been
an abuse or improvident exercise of authority.[28]In this case, we find no cogent reason to
deviate from this well-entrenched principle. Thus, we are persuaded that indeed the Court of
Appeals committed no reversible error in affirming the assailed ruling of the Court of Tax
Appeals.

Taxable transactions are those transactions which are subject to value-added tax either at WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision dated July
the rate of ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall be 6, 2001 of the Court of Appeals, in CA-G.R. SP No. 60304 is AFFIRMED with very slight
entitled to tax credit for the value-added tax paid on purchases and leases of goods, properties modification. Petitioner is hereby ORDERED to REFUND or, in the alternative, to ISSUE a TAX
or services.[23] CREDIT CERTIFICATE in favor of respondent in the amount of P2,158,714.52 representing
unutilized input tax payments. No pronouncement as to costs.
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 SO ORDERED.
any tax credit on VAT (input tax) previously paid. The person making the exempt
sale of goods, properties or services shall not bill any output tax to his customers
because the said transaction is not subject to VAT. Thus, a VAT-registered purchaser
of goods, properties or services that are VAT-exempt, is not entitled to any input tax
on such purchases despite the issuance of a VAT invoice or receipt.[24]
Now, having determined that respondent is engaged in taxable transactions subject to
VAT, let us then proceed to determine whether it is subject to 10% or zero (0%) rate of VAT.
To begin with, it must be recalled that generally, sale of goods and supply of services performed
in the Philippines are taxable at the rate of 10%. However, export sales, or sales outside the
Philippines, shall be subject to value-added tax at 0% if made by a VAT-registered
person.[25] Under the value-added tax system, a zero-rated sale by a VAT-registered person,
which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the
input tax on his purchase of goods, properties or services related to such zero-rated sale shall
be available as tax credit or refund.[26]

In principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is
to exempt the transaction completely from VAT previously collected on inputs. It is thus the only
true way to ensure that goods are provided free of VAT. While the zero rating and the
exemption are computationally the same, they actually differ in several aspects, to wit:

(a) A zero-rated sale is a taxable transaction but does not result in an output tax while an
exempted transaction is not subject to the output tax;

(b) The input VAT on the purchases of a VAT-registered person with zero-rated sales may be
allowed as tax credits or refunded while the seller in an exempt transaction is not entitled to any
input tax on his purchases despite the issuance of a VAT invoice or receipt.

(c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to
register while registration is optional for VAT-exempt persons.

In this case, it is undisputed that respondent is engaged in the export business

and is registered as a VAT taxpayer per Certificate of Registration of the
BIR.[27] Further, the records show that the respondent is subject to VAT as it availed
of the income tax holiday under E.O. No. 226. Perforce, respondent is subject to VAT
at 0% rate and is entitled to a refund or credit of the unutilized input taxes, which
the Court of Tax Appeals computed at P2,158,714.46, but which we find after re-
computation should be P2,158,714.52.
The Supreme Court will not set aside lightly the conclusions reached by the Court of Tax
Appeals which, by the very nature of its functions, is dedicated exclusively to the resolution of

3
[G.R. No. 153866. February 11, 2005]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY
(PHILIPPINES), respondent.
DECISION
PANGANIBAN, J.:
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.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set
aside the May 27, 2002 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 66093. The
decretal portion of the Decision reads as follows:
WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of
merit.[3]
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:
As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities and
Exchange Commission to do business in the Philippines, with principal office address at the new
Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to
perform the duties of his office, including, among others, the duty to act and approve claims for
refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been
issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to
engage in the manufacture of recording components primarily used in computers for export.
Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration
Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition
for Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondents] claim
for VAT refund.
The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon
by the [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000
by way of Petition for Review in order to toll the running of the two-year prescriptive period.
For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:
1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary
investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and regulations,
the [respondent] has the burden of proof that the taxes sought to be refunded were
erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:
A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer. This is
due to the fact that claims for refund/credit [partake of] the nature of an exemption from tax.
Thus, it is incumbent upon the [respondent] to prove that it is indeed entitled to the
refund/credit sought. Failure on the part of the [respondent] to prove the same is fatal to its
claim for tax credit. He who claims exemption must be able to justify his claim by the clearest
grant of organic or statutory law. An exemption from the common burden cannot be permitted
to exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority
(PEZA) registered Ecozone Enterprise, then its business is not subject to VAT pursuant to
Section 24 of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as
amended. As [respondents] business is not subject to VAT, the capital goods and services it
alleged to have purchased are considered not used in VAT taxable business. As such,
[respondent] is not entitled to refund of input taxes on such capital goods pursuant to Section
4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services pursuant to
Section 4.103 of said regulations.
4
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the
1997 Tax Code on filing of a written claim for refund within two (2) years from the date of
payment of tax.
On July 19, 2001, the Tax Court rendered a decision granting the claim for refund.[4]
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax
credit certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This
sum represented the unutilized but substantiated input VAT paid on capital goods purchased for
the period covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal
incentives under Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment
Code of 1987), not of those under both Presidential Decree No. (PD) 66, as amended, and
Section 24 of RA 7916. Respondent was, therefore, considered exempt only from the payment
of income tax when it opted for the income tax holiday in lieu of the 5 percent preferential tax
on gross income earned. As a VAT-registered entity, though, it was still subject to the payment
of other national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and
4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it
purchased, respondent correctly filed the administrative and judicial claims for its refund within
the two-year prescriptive period. Such payments were -- to the extent of the refundable value --
duly supported by VAT invoices or official receipts, and were not yet offset against any output
VAT liability.
Hence this Petition.[5]
Sole Issue
Petitioner submits this sole issue for our consideration:
Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the
amount of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods
purchased for the period April 1, 1998 to June 30, 1999.[6]
The Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic zone,[7] respondent is
entitled to the fiscal incentives and benefits[8] provided for in either PD 66[9] or EO 226.[10] It
shall, moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic
Act Nos. (RA) 7227[11] and 7844.[12]
Preferential Tax Treatment
Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary,
respondent shall not be subject to internal revenue laws and regulations for raw materials,
supplies, articles, equipment, machineries, spare parts and wares, except those prohibited by
law, brought into the zone to be stored, broken up, repacked, assembled, installed, sorted,
cleaned, graded or otherwise processed, manipulated, manufactured, mixed or used directly or
indirectly in such activities.[13] Even so, respondent would enjoy a net-operating loss carry over;
accelerated depreciation; foreign exchange and financial assistance; and exemption from export
taxes, local taxes and licenses.[14]
Comparatively, the same exemption from internal revenue laws and regulations applies if
EO 226[15] is chosen. Under this law, respondent shall further be entitled to an income tax
holiday; additional deduction for labor expense; simplification of customs procedure;
unrestricted use of consigned equipment; access to a bonded manufacturing warehouse system;
privileges for foreign nationals employed; tax credits on domestic capital equipment, as well as
for taxes and duties on raw materials; and exemption from contractors taxes, wharfage dues,
taxes and duties on imported capital equipment and spare parts, export taxes, duties, imposts
and fees,[16] local taxes and licenses, and real property taxes.[17]
A privilege available to respondent under the provision in RA 7227 on tax and duty-free
importation of raw materials, capital and equipment[18] -- is, ipso facto, also accorded to the
zone[19] under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws, rules
and regulations to the contrary -- extends[20] to that zone the provision stating that no local or
national taxes shall be imposed therein.[21] No exchange control policy shall be applied; and free
markets for foreign exchange, gold, securities and future shall be allowed and
maintained.[22] Banking and finance shall also be liberalized under minimum Bangko Sentral
regulation with the establishment of foreign currency depository units of local commercial banks
and offshore banking units of foreign banks.[23]
In the same vein, respondent benefits under RA 7844 from negotiable tax credits[24] for
locally-produced materials used as inputs. Aside from the other incentives possibly already
granted to it by the Board of Investments, it also enjoys preferential credit facilities[25] and
exemption from PD 1853.[26]
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax
treatment.[27] It is not subject to internal revenue laws and regulations and is even entitled to
tax credits. The VAT on capital goods is an internal revenue tax from which petitioner as an
entity is exempt. Although the transactions involving such tax are not exempt, 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
5
on to the buyer, transferee or lessee of the goods, properties or services.[32] As such, it should
be understood not in the context of the person or entity that is primarily, directly and legally
liable for its payment, but in terms of its nature as a tax on consumption.[33] In either case,
though, the same conclusion is arrived at.
The law[34] that originally imposed the VAT in the country, as well as the subsequent
amendments of that law, has been drawn from the tax credit method.[35] Such method adopted
the mechanics and self-enforcement features of the VAT as first implemented and practiced in
Europe and subsequently adopted in New Zealand and Canada.[36] Under the present method
that relies on invoices, an entity can credit against or subtract from the VAT charged on its sales
or outputs the VAT paid on its purchases, inputs and imports.[37]
If at the end of a taxable quarter the output 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 and Effectively
Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions differ from
effectively zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of
services.[47] The tax rate is set at zero.[48] When applied to the tax base, such rate obviously
results in no tax chargeable against the purchaser. The seller of such transactions charges no
output tax,[49] but can claim a refund of or a tax credit certificate for the VAT previously charged
by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods[50] or supply of
services[51] to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such transactions to a
zero rate.[52] Again, as applied to the tax base, such rate does not yield any tax chargeable
against the purchaser. The seller who charges zero output tax on such transactions can also
claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.
Zero Rating and
Exemption
In terms of the VAT computation, zero rating and exemption are the same, but the extent
of relief that results from either one of them is not.
Applying the destination principle[53] to the exportation of goods, automatic zero
rating[54] is primarily intended to be enjoyed by the seller who is directly and legally liable for the
VAT, making such seller internationally competitive by allowing the refund or credit of input
taxes that are attributable to export sales.[55]Effective zero rating, on the contrary, is intended to
benefit the purchaser who, not being directly and legally liable for the payment of the VAT, will
ultimately bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of
the tax.[56] But in an exemption there is only partial relief,[57] because the purchaser is not
allowed any tax refund of or credit for input taxes paid.[58]
Exempt Transaction
and Exempt Party
The object of exemption from the VAT may either be the transaction itself or any of the
parties to the transaction.[59]
An exempt transaction, on the one hand, involves goods or services which, by their
nature, are specifically listed in and expressly exempted from the VAT under the Tax Code,
without regard to the tax status -- VAT-exempt or not -- of the party to
the transaction.[60] Indeed, such transaction is not subject to the VAT, but the seller is not
allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under
the Tax Code, a special law or an international agreement to which the Philippines is a
signatory, and by virtue of which its taxable transactions become exempt from the
VAT.[61] Such party is also not subject to the VAT, but may be allowed a tax refund of or credit
for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be
shifted or passed on by the seller to the purchaser of the goods, properties or services.[62] While
the liability is imposed on one person, the burden may be passed on to another. Therefore, if a
special law merely exempts a party as a seller from its direct liability for payment of the VAT,
but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to
it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this principle
to the case at bar, the purchase transactions entered into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT.[63] However, the Tax Code
provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special
law under which respondent was registered. The purchase transactions it entered into are,
therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of
10 percent,[64]depending again on the application of the destination principle.[65]
If respondent enters into such sales transactions with a purchaser -- usually in a foreign
country -- for use or consumption outside the Philippines, these shall be subject to 0
percent.[66] If entered into with a purchaser for use or consumption in the Philippines, then
these shall be subject to 10 percent,[67] unless the purchaser is exempt from the indirect burden
of the VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is
zero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a
zero rate,[68] because the ecozone within which it is registered is managed and operated by the
PEZA as a separate customs territory.[69]This means that in such zone is created the legal fiction
of foreign territory.[70] Under the cross-border principle[71] of the VAT system being enforced by
the Bureau of Internal Revenue (BIR),[72] no VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the territorial border of the taxing authority. If
exports of goods and services from the Philippines to a foreign country are free of the
VAT,[73] then the same rule holds for such exports from the national territory -- except
specifically declared areas -- to an ecozone.
6
 Sales made by a VAT-registered person in the customs territory to a PEZA-registered
entity are considered exports to a foreign country; conversely, sales by a PEZA-registered entity
to a VAT-registered person in the customs territory are deemed imports from a foreign
country.[74] An ecozone -- indubitably a geographical territory of the Philippines -- is, however,
regarded in law as foreign soil.[75] This legal fiction is necessary to give meaningful effect to the
policies of the special law creating the zone.[76] If respondent is located in an export processing
zone[77] within that ecozone, sales to the export processing zone, even without being actually
exported, shall in fact be viewed as constructively exported under EO 226.[78] Considered as
export sales,[79]such purchase transactions by respondent would indeed be subject to a zero
rate.[80]
Tax Exemptions
Broad and Express
Applying the special laws we have earlier discussed, respondent as an entity is exempt
from internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of
the VAT as a tax on consumption, for which the direct liability is imposed on one person but the
indirect burden is passed on to another. Respondent, as an exempt entity, can neither be
directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such
sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus.
Where the law does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed on business
establishments operating within the ecozone.[81] Since this law does not exclude the VAT from
the prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An
exception confirms the rule in cases not excepted; that is, a thing not being excepted must be
regarded as coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction, it
may still be passed on and, therefore, indirectly imposed on the same entity -- a patent
circumvention of the law. That no VAT shall be imposed directly upon business establishments
operating within the ecozone under RA 7916 also means that no VAT may be passed on and
imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When
anything is prohibited directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied,
except for real property taxes that presently are imposed on land owned by developers.[82] This
similar and repeated prohibition is an unambiguous ratification of the laws intent in not imposing
local or national taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like shall not
be subject to x x x internal revenue laws and regulations under PD 66[83] -- the original charter
of PEZA (then EPZA) that was later amended by RA 7916.[84] No provisions in the latter law
modify such exemption.
Although this exemption puts the government at an initial disadvantage, the reduced tax
collection ultimately redounds to the benefit of the national economy by enticing more business
investments and creating more employment opportunities.[85]
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise --
except those prohibited by law -- shall not be subject to x x x internal revenue laws and
regulations x x x[86] if brought to the ecozones restricted area[87] for manufacturing by registered
export enterprises,[88] of which respondent is one. These rules also apply to all enterprises
registered with the EPZA prior to the effectivity of such rules.[89]
Fifth, export processing zone enterprises registered[90] with the Board of Investments
(BOI) under EO 226 patently enjoy exemption from national internal revenue taxes on imported
capital equipment reasonably needed and exclusively used for the manufacture of their
products;[91] on required supplies and spare part for consigned equipment;[92] and on foreign
and domestic merchandise, raw materials, equipment and the like -- except those prohibited by
law -- brought into the zone for manufacturing.[93] In addition, they are given credits for the
value of the national internal revenue taxes imposed on domestic capital equipment also
reasonably needed and exclusively used for the manufacture of their products,[94] as well as for
the value of such taxes imposed on domestic raw materials and supplies that are used in the
manufacture of their export products and that form part thereof.[95]
Sixth, the exemption from local and national taxes granted under RA 7227[96] are ipso
facto accorded to ecozones.[97] In case of doubt, conflicts with respect to such tax exemption
privilege shall be resolved in favor of the ecozone.[98]
And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily
used in the production of export goods,[99] and for locally produced raw materials, capital
equipment and spare parts used by exporters of non-traditional products[100] -- shall also be
continuously enjoyed by similar exporters within the ecozone.[101] Indeed, the latter exporters
are likewise entitled to such tax exemptions and credits.
Tax Refund as
Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi juris[102] against
the taxpayer[103]and liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions.[105] Accordingly, the claimants of those
refunds bear the burden of proving the factual basis of their claims;[106] and of showing, by
words too plain to be mistaken, that the legislature intended to exempt them.[107] In the present
case, all the cited legal provisions are teeming with life with respect to the grant of tax
exemptions too vivid to pass unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions which are not
exempt. The end result, however, is that it is not subject to the VAT. The non-taxability of
transactions that are otherwise taxable is merely a necessary incident to the tax exemption
conferred by law upon it as an entity, not upon the transactions themselves.[108] Nonetheless, its
exemption as an entity and the non-exemption of its transactions lead to the same result for the
following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called
upon to execute or administer such laws[109] will have to be adopted. Their prior tax issuances
have held inconsistent positions brought about by their probable failure to comprehend and fully
appreciate the nature of the VAT as a tax on consumption and the application of the destination
principle.[110] Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and
correctly provides that any VAT-registered suppliers sale of goods, property or services from the
customs territory to any registered enterprise operating in the ecozone -- regardless of the class
or type of the latters PEZA registration -- is legally entitled to a zero rate.[111]
Second, the policies of the law should prevail. Ratio legis est anima. The reason for the
law is its very soul.
7
 In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the
establishment of export processing zones, seeks to encourage and promote foreign commerce
as a means of x x x strengthening our export trade and foreign exchange position, of hastening
industrialization, of reducing domestic unemployment, and of accelerating the development of
the country.[112]
RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the
special economic zones, the government shall actively encourage, promote, induce and
accelerate a sound and balanced industrial, economic and social development of the country x x
x through the establishment, among others, of special economic zones x x x that shall
effectively attract legitimate and productive foreign investments.[113]
Under EO 226, the State shall encourage x x x foreign investments in industry x x x which
shall x x x meet the tests of international competitiveness[,] accelerate development of less
developed regions of the country[,] and result in increased volume and value of exports for the
economy.[114] Fiscal incentives that are cost-efficient and simple to administer shall be devised
and extended to significant projects to compensate for market imperfections, to reward
performance contributing to economic development,[115] and to stimulate the establishment and
assist initial operations of the enterprise.[116]
Wisely accorded to ecozones created under RA 7916[117] was the governments policy --
spelled out earlier in RA 7227 -- of converting into alternative productive uses[118] the former
military reservations and their extensions,[119] as well as of providing them incentives[120] to
enhance the benefits that would be derived from them[121] in promoting economic and social
development.[122]
Finally, under RA 7844, the State declares the need to evolve export development into a
national effort[123]in order to win international markets. By providing many export and tax
incentives,[124] the State is able to drive home the point that exporting is indeed the key to
national survival and the means through which the economic goals of increased employment
and enhanced incomes can most expeditiously be achieved.[125]
The Tax Code itself seeks to promote sustainable economic growth x x x; x x x increase
economic activity; and x x x create a robust environment for business to enable firms to
compete better in the regional as well as the global market.[126] After all, international
competitiveness requires economic and tax incentives to lower the cost of goods produced for
export. State actions that affect global competition need to be specific and selective in the
pricing of particular goods or services.[127]
All these statutory policies are congruent to the constitutional mandates of providing
incentives to needed investments,[128] as well as of promoting the preferential use of domestic
materials and locally produced goods and adopting measures to help make these
competitive.[129] Tax credits for domestic inputs strengthen backward linkages. Rightly so, the
rule of law and the existence of credible and efficient public institutions are essential
prerequisites for sustainable economic development.[130]
VAT Registration, Not Application
for Effective Zero Rating,
Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law.[131] Petitioner alleges that
respondent did register for VAT purposes with the appropriate Revenue District Office. However,
it is now too late in the day for petitioner to challenge the VAT-registered status of respondent,
given the latters prior representation before the lower courts and the mode of appeal taken by
petitioner before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting
from internal revenue laws and regulations the equipment -- including capital goods -- that
registered enterprises will use, directly or indirectly, in manufacturing.[132] EO 226 even
reiterates this privilege among the incentives it gives to such enterprises.[133] Petitioner merely
asserts that by virtue of the PEZA registration alone of respondent, the latter is not subject to
the VAT. Consequently, the capital goods and services respondent has purchased are not
considered used in the VAT business, and no VAT refund or credit is due.[134] This is a non
sequitur. By the VATs very nature as a tax on consumption, the capital goods and services
respondent has purchased are subject to the VAT, although at zero rate. Registration does not
determine taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts. Having failed to
present evidence to support its contentions against the income tax holiday privilege of
respondent,[135] petitioner is deemed to have conceded. It is a cardinal rule that issues and
arguments not adequately and seriously brought below cannot be raised for the first time on
appeal.[136] This is a matter of procedure[137] and a question of fairness.[138]Failure to assert
within a reasonable time warrants a presumption that the party entitled to assert it either has
abandoned or declined to assert it.[139]
The BIR regulations additionally requiring an approved prior application for effective zero
rating[140] cannot prevail over the clear VAT nature of respondents transactions. The scope of
such regulations is not within the statutory authority x x x granted by the legislature.[141]
First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the
former cannot purport to do any more than interpret the latter.[142] The courts will not
countenance one that overrides the statute it seeks to apply and implement.[143]
Other than the general registration of a taxpayer the VAT status of which is aptly
determined, no provision under our VAT law requires an additional application to be made for
such taxpayers transactions to be considered effectively zero-rated. An effectively zero-rated
transaction does not and cannot become exempt simply because an application therefor was not
made or, if made, was denied. To allow the additional requirement is to give unfettered
discretion to those officials or agents who, without fluid consideration, are bent on denying a
valid application. Moreover, the State can never be estopped by the omissions, mistakes or
errors of its officials or agents.[144]
Second, grantia argumenti that such an application is required by law, there is still the
presumption of regularity in the performance of official duty.[145] Respondents registration
carries with it the presumption that, in the absence of contradictory evidence, an application for
effective zero rating was also filed and approval thereof given. Besides, it is also presumed that
the law has been obeyed[146] by both the administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we have tackled
exempt respondent not only from internal revenue laws but also from the regulations issued
pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative,
precisely to spur economic growth in the country and attain global competitiveness as
envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing requirements,[147] is
sufficient for the effective zero rating of the transactions of a taxpayer. The nature of its
business and transactions can easily be perused from, as already clearly indicated in, its VAT
registration papers and photocopied documents attached thereto. Hence, its transactions cannot
be exempted by its mere failure to apply for their effective zero rating. Otherwise, their VAT
exemption would be determined, not by their nature, but by the taxpayers negligence -- a result
not at all contemplated. Administrative convenience cannot thwart legislative mandate.
8
Tax Refund or xxxxxxxxx
Credit in Order
MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an
Having determined that respondents purchase transactions are subject to a zero VAT rate, environment conducive for investors, the bill offers incentives such as the exemption from local
the tax refund or credit is in order. and national taxes, x x x tax credits for locally sourced inputs x x x.[153]

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal
incentives in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday
regime instead of the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA
law,[148] for EO 226[149] also has provisions to contend with. These two regimes are in fact
incompatible and cannot be availed of simultaneously by the same entity. While EO 226 merely
exempts it from income taxes, the PEZA law exempts it from all taxes.
And third, no question as to either the filing of such claims within the prescriptive period
or the validity of the VAT returns has been raised. Even if such a question were raised, the tax
exemption under all the special laws cited above is broad enough to cover even the
enforcement of internal revenue laws, including prescription.[154]
Summary

Therefore, respondent can be considered exempt, not from the VAT, but only from the
payment of income tax for a certain number of years, depending on its registration as a pioneer
or a non-pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of gross income
earned in lieu of local and national taxes imposable upon business establishments within the
ecozone cannot outrightly determine a VAT exemption. Being subject to VAT, payments
erroneously collected thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in
RA 7916, Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that
such provision merely exempts respondent from taxes imposed on business. To repeat, the VAT
is a tax imposed on consumption, not on business. Although respondent as an entity is exempt,
the transactions it enters into are not necessarily so. The VAT payments made in excess of the
zero rate that is imposable may certainly be refunded or credited.
Compliance with All Requisites
for VAT Refund or Credit
To summarize, special laws expressly grant preferential tax treatment to business
establishments registered and operating within an ecozone, which by law is considered as
a separate customs territory. As such, respondent is exempt from all internal revenue taxes,
including the VAT, and regulations pertaining thereto. It has opted for the income tax holiday
regime, instead of the 5 percent preferential tax regime. As a matter of law and procedure, its
registration status entitling it to such tax holiday can no longer be questioned. Its sales
transactions intended for export may not be exempt, but like its purchase transactions, they are
zero-rated. No prior application for the effective zero rating of its transactions is necessary.
Being VAT-registered and having satisfactorily complied with all the requisites for claiming a tax
refund of or credit for the input VAT paid on capital goods purchased, respondent is entitled to
such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as
to costs.
SO ORDERED.

As further enunciated by the Tax Court, respondent complied with all the requisites for
claiming a VAT refund or credit.[150]

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case
from Contex, in which this Court held that the petitioner therein was registered as a non-VAT
taxpayer.[151] Hence, for being merely VAT-exempt, the petitioner in that case cannot claim any
VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by
VAT invoices and have not been offset against any output taxes. Although enterprises registered
with the BOI after December 31, 1994 would no longer enjoy the tax credit incentives on
domestic capital equipment -- as provided for under Article 39(d), Title III, Book I of EO
226[152] -- starting January 1, 1996, respondent would still have the same benefit under a
general and express exemption contained in both Article 77(1), Book VI of EO 226; and Section
12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt investors
in ecozones from national and local taxes, but also to grant them tax credits. This fact was
revealed by the sponsorship speeches in Congress during the second reading of House Bill No.
14295, which later became RA 7916, as shown below:

MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and
local taxes; x x x tax credit for locally-sourced inputs x x x.
9
CIR v. Burmeister and Wain, G.R. No. 153205, January 22, 2007
DECISION
CARPIO, J.:
The Case
This petition for review[1] seeks to set aside the 16 April 2002 Decision[2] of the Court of Appeals
in CA-G.R. SP No. 66341 affirming the 8 August 2001 Decision[3] of the Court of Tax Appeals
(CTA). The CTA ordered the Commissioner of Internal Revenue (petitioner) to issue a tax credit
certificate for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor
Mindanao, Inc. (respondent).
The Antecedents
The CTA summarized the facts, which the Court of Appeals adopted, as follows:
[Respondent] is a domestic corporation duly organized and existing under and by virtue of the
laws of the Philippines with principal address located at Daruma Building, Jose P. Laurel
Avenue, Lanang, Davao City.
It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian
Contractor A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co.,
Ltd. entered into a contract with the National Power Corporation (NAPOCOR) for the operation
and maintenance of [NAPOCORs] two power barges. The Consortium appointed BWSC-Denmark
as its coordination manager.
BWSC-Denmark established [respondent] 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 [respondent] in foreign currency inwardly remitted to
the Philippines through the banking system.
In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling
from the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring
therein that if [respondent] 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.
[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of
Registration bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the
Revenue District Office No. 113 of Davao City.
For the year 1996, [respondent] 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, detailed as follows
Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax
1st E 04-18-96 P 33,019,651.07 P608,953.48
2nd F 07-16-96 37,108,863.33 756,802.66
3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86
Totals P147,317,189.62 P3,361,174.14
On December 29, 1997, [respondent] 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.Revenue Regulations No. 5-96 provides in part thus:
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.
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations, [respondent] 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. Consequently, [respondent] filed its 1996 amended VAT return
consolidating therein the VAT output and input taxes for the four calendar quarters of 1996. It
paid the amount of P6,994,659.67 through BIRs collecting agent, PCIBank, as its output tax
liability for the year 1996, computed as follows:
Amount subject to 10% VAT P103,558,338.11Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT
Review Committee which reconfirmed BIR Ruling No. 023-95 insofar as it held that the services
being rendered by BWSCMI is subject to VAT at zero percent (0%).
On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for
the issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent]
believed that it erroneously paid the output VAT for 1996 due to its availment of the Voluntary
Assessment Program (VAP) of the BIR.[4]
On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the
running of the two-year prescriptive period under the Tax Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate
for P6,994,659.67 in favor of respondent. The CTAs ruling stated:
10
[Respondents] sale of services to the Consortium [was] paid for in acceptable foreign currency
inwardly remitted to the Philippines and accounted for in accordance with the rules and
regulations of Bangko Sentralng Pilipinas. These were established by various BPI Credit Memos
showing remittances in Danish Kroner(DKK) and US dollars (US$) as payments for the specific
invoices billed by [respondent] to the consortium.These remittances were further certified by
the Branch Manager x x x of BPI-Davao Lanang Branch to represent payments for sub-contract
fees that came from Den Danske Aktieselskab Bank-Denmark for the account of
[respondent]. Clearly, [respondents] sale of services to the Consortium is subject to VAT at 0%
pursuant to Section 108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondents] sale of services to the Consortium was even confirmed by the
[petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-
99 dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by [respondent] were indeed
subject to VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment
Program by paying output tax for its sale of services. x x x
x x x Considering the principle of solutio indebiti which requires the return of what has been
delivered by mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by
[respondent]. x x x[5]
Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for
lack of merit and affirmed the CTA decision.[6]
Hence, this petition.
The Court of Appeals Ruling
In affirming the CTA, the Court of Appeals rejected petitioners view that since
respondents services are not destined for consumption abroad, they are not of the same nature
as project studies, information services, engineering and architectural designs, and other similar
services mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5-96[7] as subject to
0% VAT. Thus, according to petitioner, respondents services cannot legally qualify for 0% VAT
but are subject to the regular 10% VAT.[8]
The Court of Appeals found untenable petitioners contention that under VAT Ruling No. 040-98,
respondents services should be destined for consumption abroad to enjoy zero-rating. Contrary
to petitioners interpretation, there are two kinds of transactions or services subject to zero
percent VAT under VAT Ruling No. 040-98. These are (a) services other than repacking goods
for other persons doing business outside the Philippines which goods are subsequently
exported; and (b) 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 Bangko Sentral ng Pilipinas (BSP).[9]
The Court of Appeals stated that only the first classification is required by the provision to be
consumed abroad in order to be taxed at zero rate. In x x x the absence of such express or
implied stipulation in the statute, the second classification need not be consumed abroad.[10]
The Court of Appeals further held that assuming petitioners interpretation of Section 4.102-
2(b)(2) of Revenue Regulations No. 5-96 is correct, such administrative provision is void being
an amendment to the Tax Code. Petitioner went beyond merely providing the implementing
details by adding another requirement to zero-rating. This is indicated by the additional
phrase as well as services by a resident to a non-resident foreign client, such as project studies,
information services and engineering and architectural designs and other similar services. In
effect, this phrase adds not just one but two requisites: (a) servicesmust be rendered by a
resident to a non-resident; and (b) these must be in the nature of project studies, information
services, etc.[11]
The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,[12] for services
which were performed in the Philippines to enjoy zero-rating, these must comply only with two
requisites, to wit: (1) payment in acceptable foreign currency and (2) accounted for in
accordance with the rules of the BSP. Section 108(b)(2) of the Tax Code does not provide that
services must be destined for consumption abroad in order to be VAT zero-rated.[13]
The Court of Appeals disagreed with petitioners argument that our VAT law generally follows the
destination principle (i.e., exports exempt, imports taxable).[14] The Court of Appeals stated that
if indeed the destination principle underlies and is the basis of the VAT laws, then petitioners
proper remedy would be to recommend an amendment of Section 108(b)(2) to
Congress. Without such amendment, however, petitioner should apply the terms of the basic
law. Petitioner could not resort to administrative legislation, as what [he] had done in this
case.[15]
The Issue
The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as
erroneously paid output VAT for the year 1996.[16]
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant petition is not on the ground that
respondents services are subject to 0% VAT. Rather, it is based on the non-retroactivity of the
prejudicial revocation of BIR Ruling No. 023-95[17] 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.
Section 102(b) of the Tax Code,[19] 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 ngPilipinas (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);
11
(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 zerorate;
(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.(Emphasis supplied)
In insisting that its services should be zero-rated, respondent claims that it complied with the
requirements of the Tax Code for zero rating under the second paragraph of Section
102(b). Respondent asserts that (1) the payment of its service fees was in acceptable foreign
currency, (2) there was inward remittance of the foreign currency into the Philippines, and (3)
accounting of such remittance was in accordance with BSP rules. Moreover, respondent
contends that its services which constitute the actual operation and management of two (2)
power barges in Mindanao are not even remotely similar to project studies, information services
and engineering and architectural designs under Section 4.102-2(b)(2) of Revenue Regulations
No. 5-96. As such, respondents services need not be destined to be consumed abroad in order
to be VAT zero-rated.
Respondent is mistaken.
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.
This can only be the logical interpretation of Section 102(b)(2). 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. To interpret Section 102(b)(2) to apply to a payer-recipient of services
doing business in the Philippines is to make the payment of the regular VAT under Section
102(a) dependent on the generosity of the taxpayer. The provider of services can choose to pay
the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the
payer-recipient. Such interpretation removes Section 102(a) as a tax measure in the Tax Code,
an interpretation this Court cannot sanction. A tax is a mandatory exaction, not a voluntary
contribution.
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[20] 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,[21] 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.
Further, when the provider and recipient of services are both doing business in the
Philippines, their transaction falls squarely under Section 102(a) governing domestic sale or
exchange of services. Indeed, this is a purely local sale or exchange of services subject to the
regular VAT, unless of course the transaction falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of [s]ervices other than those mentioned
in the preceding subparagraph, the legislative intent is that only the services are different
between subparagraphs 1 and 2.The requirements for zero-rating, including the essential
condition that the recipient of services is doing business outside the Philippines, remain the
same under both subparagraphs.
Significantly, the amended Section 108(b)[22] [previously Section 102(b)] of the present Tax
Code clarifies this legislative intent. Expressly included among the transactions subject to 0%
VAT are [s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)]
rendered to a person engaged in business conducted outside the Philippines or to a
nonresident person not engaged in business who is outside the Philippines when the
services are performed, 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 this case, the payer-recipient of respondents services is the Consortium which is a joint-
venture doing business in the Philippines. While the Consortiums principal members are non-
resident foreign corporations, the Consortium itself is doing business in the
Philippines. This is shown clearly in BIR Ruling No. 023-95 which states that the contract
between the Consortium and NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a clarification of the tax
implications of a contract between a consortium composed of Burmeister & Wain Scandinavian
Contractor A/S (BWSC), Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd.
(MITSUI), all referred to hereinafter as the Consortium, and the National Power Corporation
(NAPOCOR) for the operation and maintenance of two 100-Megawatt power barges
(Power Barges) acquired by NAPOCOR for a 15-year term.[23] (Emphasis supplied)
Considering this length of time, the Consortiums operation and
maintenance of NAPOCORs power barges cannot be classified as a single or isolated
transaction. The Consortium does not fall under Section 102(b)(2) which requires that the
recipient of the services must be a person doing business outside the Philippines. Therefore,
respondents services to the Consortium, not being supplied to a person doing business outside
the Philippines, cannot legally qualify for 0% VAT.
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),[24] 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
12
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.

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.[25] 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.

Respondents reliance on the ruling in American Express[26] is misplaced. That case involved a
recipient of services, specifically American Express International, Inc. (Hongkong Branch), doing
business outside the Philippines. There, the Court stated:

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered

person that facilitates the collection and payment of receivables belonging to its non-resident
foreign client [American Express International, Inc. (Hongkong Branch)], for which it gets paid
in acceptable foreign currency inwardly remitted and accounted for in accordance with BSP rules
and regulations. x x x x[27] (Emphasis supplied)

In contrast, this case involves a recipient of services the Consortium which is doing business in
the Philippines. Hence, American Express services were subject to 0% VAT, while respondents
services should be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No.
003-99,[28] which reconfirmed BIR Ruling No. 023-95[29] insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%). Respondents reliance on these
BIR rulings binds petitioner.

Petitioners filing of his Answer before the CTA challenging respondents claim for refund
effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.
However, such revocation cannot be given retroactive effect since it will prejudice respondent.
Changing respondents status will deprive respondent of a refund of a substantial amount
representing excess output tax.[30] Section 246 of the Tax Code provides that any revocation of
a ruling by the Commissioner of Internal Revenue shall not be given retroactive application if the
revocation will prejudice the taxpayer. Further, there is no showing of the existence of any of
the exceptions enumerated in Section 246 of the Tax Code for the retroactive application of
such revocation.
However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA contesting
respondents claim for refund, respondents services shall be subject to the regular 10%
VAT.[31] Such filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.

SO ORDERED.

13
COMMISSIONER OF G.R. No. 152609 004868. For the period January 1, 1997 to December 31, 1997, [respondent] filed with the BIR
INTERNAL REVENUE, its quarterly VAT returns as follows:
Petitioner, Present:
Panganiban, J.,
Chairman, Exhibit Period Covered Date Filed
Sandoval-Gutierrez,
- versus - Corona, D 1997 1st Qtr. April 18, 1997
Carpio Morales, and F 2nd Qtr. July 21, 1997
Garcia, JJ G 3rd Qtr. October 2, 1997
AMERICAN EXPRESS H 4th Qtr. January 20, 1998
INTERNATIONAL, INC. Promulgated:
(PHILIPPINE BRANCH),
Respondent. June 29, 2005 On March 23, 1999, however, [respondent] amended the
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x aforesaid returns and declared the following:

DECISION
Taxable Output Zero-rated Domestic Input
PANGANIBAN, J.: Exh Sales VAT Sales Purchases VAT
1997
A s a general rule, the value-added tax (VAT) system uses the destination principle. However,
our VAT law itself provides for a clear exception, under which the supply of service shall be I P59,597.20 P5,959.72 P17,513,801.1 P6,778,182.30 P677,818.23
zero-rated when the following requirements are met: (1) the service is performed in the 1st qtr 1
Philippines; (2) the service falls under any of the categories provided in Section 102(b) of the J 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29
Tax Code; and (3) it is paid for in acceptable foreign currency that is accounted for in 2nd qt
accordance with the regulations of the Bangko Sentral ng Pilipinas. Since respondents services r
meet these requirements, they are zero-rated. Petitioners Revenue Regulations that alter or K 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70
revoke the above requirements are ultra vires and invalid. 3rd qt
r
The Case L 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21
4th qtr

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the Total P247,045.3 P24,704.5 P80,309,633.2 P37,630,604.3 P3,763,060.4
February 28, 2002 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 62727. The assailed 0 3 0 0 3
Decision disposed as follows: 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
WHEREFORE, premises considered, the petition is hereby DISMISSED for lack of deducting from its total input VAT paid of P3,763,060.43 its applied output VAT liabilities only
merit. The assailed decision of the Court of Tax Appeals (CTA) is AFFIRMED in toto.[3] for the third and fourth quarters of 1997 amounting to P5,193.66 and P6,799.43, respectively.
[Respondent] cites as basis therefor, Section 110 (B) of the 1997 Tax Code, to state:
The Facts
Section 110. Tax Credits. –
xxxxxxxxx

Quoting the CTA, the CA narrated the undisputed facts as follows
[Respondent] is a Philippine branch of American Express International, Inc., a
corporation duly organized and existing under and by virtue of the laws of the State of
Delaware, U.S.A., with office in the Philippines at the Ground Floor, ACE Building, corner Rada
and de la Rosa Streets, Legaspi Village, Makati City. It is a servicing unit of American Express
International, Inc. - Hongkong Branch (Amex-HK) and is engaged primarily to facilitate the
collections of Amex-HK receivables from card members situated in the Philippines and payment
to service establishments in the Philippines.
(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds
the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds
the output tax, the excess shall be carried over to the succeeding quarter or quarters. Any
input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-
registered person may at his option be refunded or credited against other internal revenue
taxes, subject to the provisions of Section 112.
There being no immediate action on the part of the [petitioner], [respondents] petition was
filed on April 15, 1999.

Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue In support of its Petition for Review, the following arguments were raised by [respondent]:
District Office No. 47 (East Makati) as a value-added tax (VAT) taxpayer effective March 1988
and was issued VAT Registration Certificate No. 088445 bearing VAT Registration No. 32A-3-
14
A. Export sales by a VAT-registered person, the consideration for which is paid for in
acceptable foreign currency inwardly remitted to the Philippines and accounted for in
accordance with existing regulations of the Bangko Sentral ng Pilipinas, are subject to [VAT] at
zero percent (0%). According to [respondent], being a VAT-registered entity, it is subject to
the VAT imposed under Title IV of the Tax Code, to wit:
Section 102.(sic) 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% percent of gross
receipts derived by any person engaged in the sale of services. The phrase sale of services
means the performance of all kinds of services for others for a fee, remuneration or
consideration, including those performed or rendered by construction and service contractors:
stock, real estate, commercial, customs and immigration brokers; lessors of personal property;
lessors or distributors of cinematographic films; persons engaged in milling, processing,
manufacturing or repacking goods for others; and similar services regardless of whether o[r]
not the performance thereof calls for the exercise or use of the physical or mental
faculties: Provided That the following services performed in the Philippines by VAT-registered
persons shall be subject to 0%:
(1) xxx
(2) Services other than those mentioned in the preceding subparagraph, the
consideration is paid for in acceptable foreign currency which is remitted inwardly to
the Philippines and accounted for in accordance with the rules and regulations of the BSP. x x x.
In addition, [respondent] relied on VAT Ruling No. 080-89, dated April 3, 1989, the pertinent
portion of which reads as follows:
In Reply, please be informed that, as a VAT registered entity whose service is paid for in
acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in
accordance with the rules and regulations of the Central [B]ank of the Philippines, your service
income is automatically zero rated effective January 1, 1998. [Section 102(a)(2) of the Tax
Code as amended].[4] For this, there is no need to file an application for zero-rate.
B. Input taxes on domestic purchases of taxable goods and services related to zero-rated
revenues are available as tax refund in accordance with Section 106 (now Section 112) of the
[Tax Code] and Section 8(a) of [Revenue] Regulations [(RR)] No. 5-87, to state:
Section 106. Refunds or tax credits of input tax. –
(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered person, except those
covered by paragraph (a) above, whose sales are zero-rated or are effectively zero-rated, may,
within two (2) years after the close of the taxable quarter when such sales were made, apply
for the issuance of tax credit certificate or refund of the input taxes due or attributable to such
sales, to the extent that such input tax has not been applied against output tax. x x x. [Section
106(a) of the Tax Code][5]
Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a taxable transaction for
value-added tax purposes. A sale by a VAT-registered person of goods and/or services taxed at
zero rate shall not result in any output tax. The input tax on his purchases of goods or services
related to such zero-rated sale shall be available as tax credit or refundable in accordance with
Section 16 of these Regulations. x x x. [Section 8(a), [RR] 5-87].[6]
[Petitioner], in his Answer filed on May 6, 1999, claimed by way of Special and Affirmative
Defenses that:
7. The claim for refund is subject to investigation by the Bureau of Internal Revenue;
8. Taxes paid and collected are presumed to have been made in accordance with laws and
regulations, hence, not refundable. Claims for tax refund are construed strictly against the
claimant as they partake of the nature of tax exemption from tax and it is incumbent upon the
[respondent] to prove that it is entitled thereto under the law and he who claims exemption
must be able to justify his claim by the clearest grant of organic or statu[t]e law. An exemption
from the common burden [cannot] be permitted to exist upon vague implications;
9. Moreover, [respondent] must prove that it has complied with the governing rules with
reference to tax recovery or refund, which are found in Sections 204(c) and 229 of the Tax
Code, as amended, which are quoted as follows:
Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit
Taxes. - The Commissioner may - x x x.
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that have
been rendered unfit for use and refund their value upon proof of destruction. No credit or
refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after payment of the tax or
penalty: Provided, however, That a return filed with an overpayment shall be considered a
written claim for credit or refund.
Section 229. Recovery of tax erroneously or illegally collected.- No suit or proceeding
shall be maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to
have been collected without authority, or of any sum alleged to have been excessively or in
any manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax,
penalty or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun (sic) after the expiration of two (2)
years from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: Provided, however, That the Commissioner may, even without
written claim therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly to have been erroneously paid.
From the foregoing, the [CTA], through the Presiding Judge Ernesto D. Acosta rendered a
decision[7] 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 decretal portion of which reads as follows:
WHEREFORE, in view of all the foregoing, this Court finds the [petition] meritorious and in
accordance with law. Accordingly, [petitioner] is hereby ORDEREDto REFUND to
[respondent] the amount of P3,352,406.59 representing the latters excess input VAT paid for
the year 1997.[8]
Ruling of the Court of Appeals
In affirming the CTA, the CA held that respondents services fell under the first type
enumerated in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More particularly, its
services were not of the same class or of the same nature as project studies, information, or
engineering and architectural designs for non-resident foreign clients; rather, they were
services other than the processing, manufacturing or repacking of goods for persons doing
business outside the Philippines. The consideration in both types of service, however, was paid
15
 for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas.
Furthermore, the CA reasoned that reliance on VAT Ruling No. 040-98 was unwarranted. By
requiring that respondents services be consumed abroad in order to be zero-rated, petitioner
went
beyond the sphere of interpretation and into that of legislation. Even granting that it is valid,
the ruling cannot be given retroactive effect, for it will be harsh and oppressive to respondent,
which has already relied upon VAT Ruling No. 080-89 for zero rating.
Hence, this Petition.[9]
The Issue
Petitioner raises this sole issue for our consideration:
Whether or not the Court of Appeals committed reversible error in holding that respondent is
entitled to the refund of the amount of P3,352,406.59 allegedly representing excess input VAT
for the year 1997.[10]
The Courts Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement to Tax Refund
Section 102 of the Tax Code[11] provides:
Sec. 102. Value-added tax on sale of services and use or lease of properties. -- (a) Rate and
base of tax. -- There shall be levied, assessed and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or exchange of services x x x.
The phrase 'sale or exchange of services' means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by x x x persons engaged in milling, processing, manufacturing or repacking goods for
others; x x x services of banks, non-bank financial intermediaries and finance companies; x x x
and similar services regardless of whether or not the performance thereof calls for the exercise
or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise
include:
xxxxxxxx
(3) The supply of x x x commercial knowledge or information
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a
means of enabling the application or enjoyment of x x x any such knowledge or information
as is mentioned in subparagraph (3)
xxxxxxxxx
(6) The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any x x x commercial undertaking, venture, project or
scheme;
xxxxxxxxx
"The term 'gross receipts means the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services performed or to be performed
for another person, excluding value-added tax.
"(b) Transactions subject to zero percent (0%) rate. -- The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate[:]
(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding subparagraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the [BSP];
xxxxxxxxx
Zero Rating of
Other Services
The law is very clear. 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.
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.[12]
Service has been defined as the art of doing something useful for a person or company for a
fee[13] or useful labor or work rendered or to be rendered by one person to another.[14] 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,
16
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.[15]
The Credit Card Systemnand Its Components
For sure, the ancillary business of facilitating the said collection is different from
the mainbusiness of issuing credit cards.[16] Under the credit card system, the credit card
company extends credit accommodations to its card holders for the purchase of goods and
services from its member establishments, to be reimbursed by them later on upon proper billing.
Given the complexities of present-day business transactions, the components of this system can
certainly function as separate billable services.
Under RA 8484,[17] the credit card that is issued by banks[18] in general, or by non-banks in
particular, refers to any card x x x or other credit device existing for the purpose of obtaining x x
x goods x x x or services x x x on credit;[19] and is being used usually on a revolving
basis.[20]This means that the consumer-credit arrangement that exists between the issuer and
the holder of the credit card enables the latter to procure goods or services on a continuing
basis as long as the outstanding balance does not exceed a specified limit.[21] The card holder is,
therefore, given the power to obtain present control of goods or service on a promise to pay for
them in the future.[22]
Business establishments may extend credit sales through the use of the credit card facilities of a
non-bank credit card company to avoid the risk of uncollectible accounts from their customers.
Under
this system, the establishments do not deposit in their bank accounts the credit card
drafts[23]that arise from the credit sales. Instead, they merely record their receivables from the
credit card company and periodically send the drafts evidencing those receivables to the latter.
The credit card company, in turn, sends checks as payment to these business establishments,
but it does not redeem the drafts at full price. The agreement between them usually provides
for discounts to be taken by the company upon its redemption of the drafts.[24] At the end of
each month, it then bills its credit card holders for their respective drafts redeemed during the
previous month. If the holders fail to pay the amounts owed, the company sustains the loss.[25]
In the present case, respondents role in the consumer credit[26]
process described above primarily consists of gathering the bills and credit card drafts of
different service establishments located in the Philippines and forwarding them to the ROCs
outside the country. Servicing the bill is not the same as billing. For the former type of service
alone, respondent already gets paid.
The parent company -- to which the ROCs and respondent belong -- takes charge not only of
redeeming the drafts from the ROCs and sending the checks to the service establishments, but
also of billing the credit card holders for their respective drafts that it has redeemed. While it
usually imposes finance charges[27] upon the holders, none may be exacted by respondent upon
either the ROCs or the card holders.
Branch and Home Office
By designation alone, respondent and the ROCs are operated as branches. This means that
each of them is a unit, an offshoot, lateral extension, or division[28] located at some distance
from the home office[29] of the parent company; carrying separate inventories; incurring their
own expenses; and generating their respective incomes. Each may conduct sales operations in
any locality as an extension of the principal office.[30]
The extent of accounting activity at any of these branches depends upon company policy,[31]but
the financial reports of the entire business enterprise -- the credit card company to which they
all belong -- must always show its financial position, results of operation, and changes in its
financial position as a single unit.[32] Reciprocal accounts are reconciled or eliminated, because
they lose all significance when the branches and home office are viewed as a single entity. [33] In
like manner, intra-company profits or losses must be offset against each other for accounting
purposes.
Contrary to petitioners assertion,[34] respondent can sell its services to another branch of the
same parent company.[35] In fact, the business concept of a transfer price allows goods and
services to be sold between and among intra-company units at cost or above cost.[36] A branch
may be operated as a revenue center, cost center, profit center or investment center, depending
upon the policies and accounting system of its parent company.[37] Furthermore, the latter may
choose not to make any sale itself, but merely to function as a control center, where most or all
of its expenses are allocated to any of its branches.[38]
Gratia argumenti that the sending of drafts and bills by service establishments to respondent is
equivalent to the act of sending them directly to its parent company abroad, and that the parent
companys subsequent redemption of these drafts and billings of credit card holders is also
attributable to respondent, then with greater reason should the service rendered by respondent
be zero-rated under our VAT system. The service partakes of the nature of export sales as
applied to goods,[39] especially when rendered in the Philippines by a VAT-registered
person[40] that gets paid in acceptable foreign currency accounted for in accordance with BSP
rules and regulations.
VAT Requirements for the Supply of Service
The VAT is a tax on consumption[41] expressed as a percentage of the value added to goods or
services[42] purchased by the producer or taxpayer.[43] As an indirect tax[44] on services,[45] its
main object is the transaction[46] itself or, more concretely, the performance of all kinds of
services[47] conducted in the course of trade or business in the Philippines.[48] These services
must be regularly conducted in this country; undertaken in pursuit of a commercial or an
economic activity;[49] for a valuable consideration; and not exempt under the Tax Code, other
special laws, or any international agreement.[50]
Without doubt, the transactions respondent entered into with its Hong Kong-based client meet
all these requirements.
First, respondent regularly renders in the Philippines the service of facilitating the collection and
payment of receivables belonging to a foreign company that is a clearly separate and distinct
entity.
Second, such service is commercial in nature; carried on over a sustained period of time; on a
significant scale; with a reasonable degree of frequency; and not at random, fortuitous or
attenuated.
Third, for this service, respondent definitely receives consideration in foreign currency that is
accounted for in conformity with law.
Finally, respondent is not an entity exempt under any of our laws or international agreements.
Services Subject to Zero VAT
17
 As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional
reach of the tax.[51] Goods and services are taxed only in the country where they are consumed.
Thus, exports are zero-rated, while imports are taxed.
Confusion in zero rating arises because petitioner equates the performance of a particular type
of service with the consumption of its output abroad. In the present case, the facilitation of the
collection of receivables is different from the utilization or consumption of the outcome of such
service. While the facilitation is done in the Philippines, the consumption is not. Respondent
renders assistance to its foreign clients -- the ROCs outside the country -- by receiving the bills
of service establishments located here in the country and forwarding them to the ROCs abroad.
The consumption contemplated by law, contrary to petitioners administrative
interpretation,[52] does not imply that the service be done abroad in order to be zero-rated.
Consumption is the use of a thing in a way that thereby exhausts it.[53] Applied to services, the
term means the performance or successful completion of a contractual duty, usually resulting in
the performers release from any past or future liability x x x.[54] The services rendered by
respondent are performed or successfully completed upon its sending to its foreign client the
drafts and bills it has gathered from service establishments here. Its services, having been
performed in the Philippines, are therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in or bound for a specific place when their
destination is determined. Instead, there can only be a predetermined end of a course[55] when
determining the service location or position x x x for legal purposes.[56] Respondents facilitation
service has no physical existence, yet takes place upon rendition, and therefore upon
consumption, in the Philippines. Under the destination principle, as petitioner asserts, such
service is subject to VAT at the rate of 10 percent.
Respondents Services Exempt from the Destination Principle
However, 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].[57] 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.
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.
Performance of Service versus Product Arising from Performance
Again, contrary to petitioners stand, for the cost of respondents service to be zero-rated, it need not
be tacked in as part of the cost of goods exported.[58] The law neither imposes such requirement nor
associates services with exported goods. It simply states that the services performed by VAT-
registered persons in the Philippines -- services other than the processing, manufacturing or repacking
of goods for persons doing business outside this country -- if paid in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP, are zero-rated. The service
rendered by respondent is clearly different from the product that arises from the rendition of such
service. The activity that creates the income must not be confused with the main business in the
course of which that income is realized.[59]
Tax Situs of a Zero-Rated Service
The law neither makes a qualification nor adds a condition in determining the tax situs of a
zero-rated service. Under this criterion, the place where the service is rendered determines the
jurisdiction[60] to impose the VAT.[61] Performed in the Philippines, such service is necessarily
subject to its jurisdiction,[62] for the State necessarily has to have a substantial connection[63] to
it, in order to enforce a zero rate.[64] The place of payment is immaterial;[65] much less is the
place where the output of the service will be further or ultimately used.
Statutory Construction or Interpretation Unnecessary
As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear. Therefore, no
statutory construction or interpretation is needed. Neither can conditions or limitations be
introduced where none is provided for. Rewriting the law is a forbidden ground that only
Congress may tread upon.
The Court may not construe a statute that is free from doubt.[66] [W]here the law speaks in
clear and categorical language, there is no room for interpretation. There is only room for
application.[67] The Court has no choice but to see to it that its mandate is obeyed.[68]
No Qualifications Under RR 5-87
In implementing the VAT provisions of the Tax Code, RR 5-87 provides for the zero rating of
services other than the processing, manufacturing or repacking of goods -- in general and
without qualifications -- when paid for by the person to whom such services are rendered in
acceptable foreign currency inwardly remitted and duly accounted for in accordance with the
BSP (then Central Bank) regulations. Section 8 of RR 5-87 states:
SECTION 8. Zero-rating. -- (a) In general. -- A zero-rated sale is a taxable transaction for value-
added tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero
rate shall not result in any output tax. The input tax on his purchases of goods or services
related to such zero-rated sale shall be available as tax credit or refundable in accordance with
Section 16 of these Regulations.
xxxxxxxxx
(c) Zero-rated sales of services. -- The following services rendered by VAT-registered persons
are zero-rated:
(1) Services in connection with the processing, manufacturing or repacking of goods for persons
doing business outside the Philippines, where such goods are actually shipped out of the
Philippines to said persons or their assignees and the services are paid for in acceptable foreign
currency inwardly remitted and duly accounted for under the regulations of the Central Bank of
the Philippines.
xxxxxxxxx
(3) Services performed in the Philippines other than those mentioned in subparagraph (1) above
which are paid for by the person or entity to whom the service is rendered in acceptable foreign
currency inwardly remitted and duly accounted for in accordance with Central Bank regulations.
Where the contract involves payment in both foreign and local currency, only the service
18
corresponding to that paid in foreign currency shall enjoy zero-rating. The portion paid for in
local currency shall be subject to VAT at the rate of 10%.
RR 7-95 Broad Enough
RR 7-95, otherwise known as the Consolidated VAT Regulations,[69] reiterates the above-quoted provision
and further presents as examples only the services performed in the Philippines by VAT-registered hotels
and other service establishments. Again, the condition remains that these services must be paid
in acceptable foreign currency inwardly remitted and accounted for in accordance with the rules
and regulations of the BSP. The term other service establishments is obviously broad enough to
cover respondents facilitation service. Section 4.102-2 of RR 7-95 provides thus:
SECTION 4.102-2. Zero-Rating. -- (a) In general. -- A zero-rated sale by a VAT registered
person, which is a taxable transaction for VAT purposes, shall not result in any output tax.
However, the input tax on his purchases of goods, properties or services related to such zero-
rated sale shall be available as tax credit or refund in accordance with these regulations.
(b) Transaction 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 BSP;
(2) Services other than those mentioned in the preceding subparagraph, e.g. those rendered by
hotels and other service establishments, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP;
xxxxxxxxx
Meaning of as well as in RR 5-96
Section 4.102-2(b)(2) of RR 7-95 was subsequently amended by RR 5-96 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."
Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 7-95, the
amendment introduced by RR 5-96 further enumerates specific services entitled to zero rating.
Although superfluous, these sample services are meant to be merely illustrative. In this
provision, the use of the term as well as is not restrictive. As a prepositional phrase with an
adverbial relation to some other word, it simply means in addition to, besides, also or too.[70]
Neither the law nor any of the implementing revenue regulations aforequoted categorically
defines or limits the services that may be sold or exchanged for a fee, remuneration or
consideration. Rather, both merely enumerate the items of service that fall under the term sale
or exchange of services.[71]
Ejusdem Generis Inapplicable
The canon of statutory construction known as ejusdem generis or of the same kind or specie
does not apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96.
First, although the regulatory provision contains an enumeration of particular or specific words,
followed by the general phrase and other similar services, such words do not constitute a readily
discernible class and are patently not of the same kind.[72] Project studies involve investments or
marketing; information services focus on data technology; engineering and architectural designs
require creativity. Aside from calling for the exercise or use of mental faculties or perhaps
producing written technical outputs, no common denominator to the exclusion of all others
characterizes these three services. Nothing sets them apart from other and similar general
services that may involve advertising, computers, consultancy, health care, management,
messengerial work -- to name only a few.
Second, there is the regulatory intent to give the general phrase and other similar services a
broader meaning.[73] Clearly, the preceding phrase as well as is not meant to limit the effect of
and other similar services.
Third, and most important, the statutory provision upon which this regulation is based is by
itself not restrictive. The scope of the word services in Section 102(b)(2) of the Tax Code is
broad; it is not susceptible of narrow interpretation.[74]
VAT Ruling Nos. 040-98 and 080-89
VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the
administrative level,[75] rendered by the BIR commissioner upon request of a taxpayer to clarify
certain provisions of the VAT law. As correctly held by the CA, when this ruling states that the
service must be destined for consumption outside of the Philippines[76] in order to qualify for
zero rating, it contravenes both the law and the regulations issued pursuant to it.[77] This portion
of VAT Ruling No. 040-98 is clearly ultra vires and invalid.[78]
Although [i]t is widely accepted that the interpretation placed upon a statute by the executive
officers, whose duty is to enforce it, is entitled to great respect by the courts,[79] this
interpretation is not conclusive and will have to be ignored if judicially found to be
erroneous[80] and clearly absurd x x x or improper.[81] An administrative issuance that overrides
the law it merely seeks to interpret, instead of remaining consistent and in harmony with it, will
not be countenanced by this Court.[82]
In the present case, respondent has relied upon VAT Ruling No. 080-89, which clearly
recognizes its zero rating. Changing this status will certainly deprive respondent of a refund of
the substantial amount of excess input taxes to which it is entitled.
Again, assuming arguendo that VAT Ruling No. 040-98 revoked VAT Ruling No. 080-89, such
revocation could not be given retroactive effect if the application of the latter ruling would only
be prejudicial to respondent.[83] Section 246 of the Tax Code categorically declares that [a]ny
revocation x x x of x x x any of the rulings x x x promulgated by the Commissioner shall not be
given retroactive application if the revocation x x x will be prejudicial to the taxpayers.[84]
It is also basic in law that no x x x rule x x x shall be given retrospective effect[85] unless
explicitly stated.[86] No indication of such retroactive application to respondent does the Court
find in VAT Ruling No. 040-98. Neither do the exceptions enumerated in Section 246[87] of the
Tax Code apply.
Though vested with the power to interpret the provisions of the Tax Code[88] and not bound by
predecessors acts or rulings, the BIR commissioner may render a different construction to a
19
statute[89] only if the new interpretation is in congruence with the law. Otherwise, no amount of
interpretation can ever revoke, repeal or modify what the law says.
Consumed Abroad Not Required by Legislature
Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part of
the legislators not to impose the condition of being consumed abroad in order
for servicesperformed in the Philippines by a VAT-registered person to be zero-rated. We quote
the relevant portions of the proceedings:
Senator Maceda: Going back to Section 102 just for the moment. Will the Gentleman kindly
explain to me - I am referring to the lower part of the first paragraph with the Provided. Section
102. Provided that the following services performed in the Philippines by VAT registered persons
shall be subject to zero percent. There are three here. What is the difference between the three
here which is subject to zero percent and Section 103 which is exempt transactions, to being
with?
Senator Herrera: Mr. President, in the case of processing and manufacturing or repacking
goods for persons doing business outside the Philippines which are subsequently exported, and
where the services are paid for in acceptable foreign currencies inwardly remitted, this is
considered as subject to 0%. But if these conditions are not complied with, they are subject to
the VAT.
In the case of No. 2, again, as the Gentleman pointed out, these three are zero-rated and the
other one that he indicated are exempted from the very beginning. These three enumerations
under Section 102 are zero-rated provided that these conditions indicated in these three
paragraphs are also complied with. If they are not complied with, then they are not entitled to
the zero ratings. Just like in the export of minerals, if these are not exported, then they cannot
qualify under this provision of zero rating.
Senator Maceda: Mr. President, just one small item so we can leave this. Under the proviso, it
is required that the following services be performed in the Philippines.
Under No. 2, services other than those mentioned above includes, let us say, manufacturing
computers and computer chips or repacking goods for persons doing business outside the
Philippines. Meaning to say, we ship the goods to them in Chicago or Washington and they send
the payment inwardly to the Philippines in foreign currency, and that is, of course, zero-rated.
Now, when we say services other than those mentioned in the preceding subsection[,] may I
have some examples of these?
Senator Herrera: Which portion is the Gentleman referring to?
Senator Maceda: I am referring to the second paragraph, in the same Section 102. The first
paragraph is when one manufactures or packages something here and he sends it abroad and
they pay him, that is covered. That is clear to me. The second paragraph says Services other
than those mentioned in the preceding subparagraph, the consideration of which is paid for in
acceptable foreign currency
One example I could immediately think of -- I do not know why this comes to my mind tonight -
- is for tourism or escort services. For example, the services of the tour operator or tour escort -
- just a good name for all kinds of activities -- is made here at the Midtown Ramada Hotel or at
the Philippine Plaza, but the payment is made from outside and remitted into the country.
Senator Herrera: What is important here is that these services are paid in acceptable foreign
currency remitted inwardly to the Philippines.
Senator Maceda: Yes, Mr. President. Like those Japanese tours which include $50 for the
services of a woman or a tourist guide, it is zero-rated when it is remitted here.
Senator Herrera: I guess it can be interpreted that way, although this tourist guide should
also be considered as among the professionals. If they earn more than P200,000, they should
be covered.
xxxxxxxxx
Senator Maceda: So, the services by Filipino citizens outside the Philippines are subject to
VAT, and I am talking of all services. Do big contractual engineers in Saudi Arabia pay VAT?
Senator Herrera: This provision applies to a VAT-registered person. When he performs
services in the Philippines, that is zero-rated.
Senator Maceda: That is right."
Legislative Approval By Reenactment
Finally, upon the enactment of RA 8424, which substantially carries over the particular
provisions on zero rating of services under Section 102(b) of the Tax Code, the principle of
legislative approval of administrative interpretation by reenactment clearly obtains. This principle
means that the reenactment of a statute substantially unchanged is persuasive indication of the
adoption by Congress of a prior executive construction.[91]
The legislature is presumed to have reenacted the law with full knowledge of the contents of
the revenue regulations then in force regarding the VAT, and to have approved or confirmed
them because they would carry out the legislative purpose. The particular provisions of the
regulations we have mentioned earlier are, therefore, re-enforced. When a statute is susceptible
of the meaning placed upon it by a ruling of the government agency charged with its
enforcement and the [l]egislature thereafter [reenacts] the provisions [without] substantial
change, such action is to some extent confirmatory that the ruling carries out the legislative
purpose.[92]
In sum, having resolved that transactions of respondent are zero-rated, the Court upholds the
formers entitlement to the refund as determined by the appellate court. Moreover, there is no
conflict between the decisions of the CTA and CA. This Court respects the findings and
conclusions of a specialized court like the CTA which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax cases and has necessarily developed an
expertise on the subject.[93]
Furthermore, under a zero-rating scheme, the sale or exchange of a particular service is
completely freed from the VAT, because the seller is entitled to recover, by way of a refund or
as an input tax credit, the tax that is included in the cost of purchases attributable to the sale or
exchange.[94] [T]he tax paid or withheld is not deducted from the tax base.[95] Having been
applied for within the reglementary period,[96] respondents refund is in order.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
20