Abakada Guro Party List v. Ermita, G.R. No. 168056, House Bill No.
House Bill No. 37053 on the other hand, substituted House Bill
September 1, 2005.
DECISION
AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the
interest of all, should be borne by everyone, and the more
man enjoys the advantages of society, the more he ought to
hold himself honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate
fiscal allocation for education, increased emoluments for
health workers, and wider coverage for full value-added tax
benefits … these are the reasons why Republic Act No. 9337
(R.A. No. 9337)1 was enacted. Reasons, the wisdom of which,
the Court even with its extensive constitutional power of
review, cannot probe. The petitioners in these cases,
however, question not only the wisdom of the law, but also
perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of
constitutionality. Their arguments notwithstanding,
petitioners failed to justify their call for the invalidity of the
law. Hence, R.A. No. 9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills
namely, House Bill Nos. 3555 and 3705, and Senate Bill No.
1950.
House Bill No. 35552 was introduced on first reading on
January 7, 2005. The House Committee on Ways and Means
approved the bill, in substitution of House Bill No. 1468, which
Representative (Rep.) Eric D. Singson introduced on August 8,
2004. The President certified the bill on January 7, 2005 for
immediate enactment. On January 27, 2005, the House of
Representatives approved the bill on second and third
reading.
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J. PANGANIBAN : . . . But before I go into the details of your
No. 3105 introduced by Rep. Salacnib F. Baterina, and House
Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother
bill" is House Bill No. 3555. The House Committee on Ways
and Means approved the bill on February 2, 2005. The
President also certified it as urgent on February 8, 2005. The
House of Representatives approved the bill on second and
third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means
approved Senate Bill No. 19504 on March 7, 2005, "in
substitution of Senate Bill Nos. 1337, 1838 and 1873, taking
into consideration House Bill Nos. 3555 and 3705." Senator
Ralph G. Recto sponsored Senate Bill No. 1337, while Senate
Bill Nos. 1838 and 1873 were both sponsored by Sens.
Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan.
The President certified the bill on March 11, 2005, and was
approved by the Senate on second and third reading on April
13, 2005.
On the same date, April 13, 2005, the Senate agreed to the
request of the House of Representatives for a committee
conference on the disagreeing provisions of the proposed
bills.
Before long, the Conference Committee on the Disagreeing
Provisions of House Bill No. 3555, House Bill No. 3705, and
Senate Bill No. 1950, "after having met and discussed in full
free and conference," recommended the approval of its
report, which the Senate did on May 10, 2005, and with the
House of Representatives agreeing thereto the next day, May
11, 2005.
On May 23, 2005, the enrolled copy of the consolidated
House and Senate version was transmitted to the President,
who signed the same into law on May 24, 2005. Thus, came
R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.5 When
said date came, the Court issued a temporary restraining
order, effective immediately and continuing until further
orders, enjoining respondents from enforcing and
implementing the law.
Oral arguments were held on July 14, 2005. Significantly,
during the hearing, the Court speaking through Mr. Justice
Artemio V. Panganiban, voiced the rationale for its issuance of
the temporary restraining order on July 1, 2005, to wit:
presentation, let me just tell you a little background. You
know when the law took effect on July 1, 2005, the Court
issued a TRO at about 5 o’clock in the afternoon. But before
that, there was a lot of complaints aired on television and on
radio. Some people in a gas station were complaining that the
gas prices went up by 10%. Some people were complaining
that their electric bill will go up by 10%. Other times people
riding in domestic air carrier were complaining that the prices
that they’ll have to pay would have to go up by 10%. While all
that was being aired, per your presentation and per our own
understanding of the law, that’s not true. It’s not true that the
e-vat law necessarily increased prices by 10% uniformly isn’t
it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : It’s not, because, Your Honor, there is an
Executive Order that granted the Petroleum companies some
subsidy . . . interrupted
J. PANGANIBAN : That’s correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to
temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating
measures would be the elimination of the Excise Tax and the
import duties. That is why, it is not correct to say that the VAT
as to petroleum dealers increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for
increasing the retail price by 10% to cover the E-Vat tax. If you
consider the excise tax and the import duties, the Net Tax
would probably be in the neighborhood of 7%? We are not
going into exact figures I am just trying to deliver a point that
different industries, different products, different services are
hit differently. So it’s not correct to say that all prices must go
up by 10%.
Page 1
ATTY. BANIQUED : You’re right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline
companies, Mr. Counsel, are at present imposed a Sales Tax of
3%. When this E-Vat law took effect the Sales Tax was also
removed as a mitigating measure. So, therefore, there is no
justification to increase the fares by 10% at best 7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people
were complaining on that first day, were being increased
arbitrarily by 10%. And that’s one reason among many others
this Court had to issue TRO because of the confusion in the
implementation. That’s why we added as an issue in this case,
even if it’s tangentially taken up by the pleadings of the
parties, the confusion in the implementation of the E-vat. Our
people were subjected to the mercy of that confusion of an
across the board increase of 10%, which you yourself now
admit and I think even the Government will admit is incorrect.
In some cases, it should be 3% only, in some cases it should be
6% depending on these mitigating measures and the location
and situation of each product, of each service, of each
company, isn’t it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So that’s one reason why we had to
issue a TRO pending the clarification of all these and we wish
the government will take time to clarify all these by means of
a more detailed implementing rules, in case the law is upheld
by this Court. . . .6
The Court also directed the parties to file their respective
Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA
GURO Party List, et al., filed a petition for prohibition on May
27, 2005. They question the constitutionality of Sections 4, 5
and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the National Internal Revenue Code (NIRC).
Section 4 imposes a 10% VAT on sale of goods and properties,
Section 5 imposes a 10% VAT on importation of goods, and
Section 6 imposes a 10% VAT on sale of services and use or
lease of properties. These questioned provisions contain a
uniform proviso authorizing the President, upon
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recommendation of the Secretary of Finance, to raise the VAT
rate to 12%, effective January 1, 2006, after any of the
following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the
rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and
four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 ½%).
Petitioners argue that the law is unconstitutional, as it
constitutes abandonment by Congress of its exclusive
authority to fix the rate of taxes under Article VI, Section 28(2)
of the 1987 Philippine Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a
petition for certiorari likewise assailing the constitutionality of
Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the
President to increase the VAT rate to 12%, on the ground that
it amounts to an undue delegation of legislative power,
petitioners also contend that the increase in the VAT rate to
12% contingent on any of the two conditions being satisfied
violates the due process clause embodied in Article III, Section
1 of the Constitution, as it imposes an unfair and additional
tax burden on the people, in that: (1) the 12% increase is
ambiguous because it does not state if the rate would be
returned to the original 10% if the conditions are no longer
satisfied; (2) the rate is unfair and unreasonable, as the
people are unsure of the applicable VAT rate from year to
year; and (3) the increase in the VAT rate, which is supposed
to be an incentive to the President to raise the VAT collection
to at least 2 4/5 of the GDP of the previous year, should only
be based on fiscal adequacy.
Petitioners further claim that the inclusion of a stand-by
authority granted to the President by the Bicameral
Conference Committee is a violation of the "no-amendment
rule" upon last reading of a bill laid down in Article VI, Section
26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29,
2005, by the Association of Pilipinas Shell Dealers, Inc., et al.,
assailing the following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC,
requiring that the input tax on depreciable goods shall be
amortized over a 60-month period, if the acquisition,
excluding the VAT components, exceeds One Million Pesos
(₱1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a
70% limit on the amount of input tax to be credited against
the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC,
authorizing the Government or any of its political
subdivisions, instrumentalities or agencies, including GOCCs,
to deduct a 5% final withholding tax on gross payments of
goods and services, which are subject to 10% VAT under
Sections 106 (sale of goods and properties) and 108 (sale of
services and use or lease of properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional
for being arbitrary, oppressive, excessive, and confiscatory.
Petitioners’ argument is premised on the constitutional right
of non-deprivation of life, liberty or property without due
process of law under Article III, Section 1 of the Constitution.
According to petitioners, the contested sections impose
limitations on the amount of input tax that may be claimed.
Petitioners also argue that the input tax partakes the nature
of a property that may not be confiscated, appropriated, or
limited without due process of law. Petitioners further
contend that like any other property or property right, the
input tax credit may be transferred or disposed of, and that by
limiting the same, the government gets to tax a profit or
value-added even if there is no profit or value-added.
Petitioners also believe that these provisions violate the
constitutional guarantee of equal protection of the law under
Article III, Section 1 of the Constitution, as the limitation on
the creditable input tax if: (1) the entity has a high ratio of
input tax; or (2) invests in capital equipment; or (3) has
Page 2
several transactions with the government, is not based on real
and substantial differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but
progressive, violative of Article VI, Section 28(1) of the
Constitution, and that it is the smaller businesses with higher
input tax to output tax ratio that will suffer the consequences
thereof for it wipes out whatever meager margins the
petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep.
Francis Joseph G. Escudero filed this petition for certiorari on
June 30, 2005. They question the constitutionality of R.A. No.
9337 on the following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue
delegation of legislative power, in violation of Article VI,
Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without
jurisdiction in deleting the no pass on provisions present in
Senate Bill No. 1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of
Sections 27, 28, 34, 116, 117, 119, 121, 125,7 148, 151, 236,
237 and 288, which were present in Senate Bill No. 1950,
violates Article VI, Section 24(1) of the Constitution, which
provides that all appropriation, revenue or tariff bills shall
originate exclusively in the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a
petition for certiorari and prohibition on July 20, 2005,
alleging unconstitutionality of the law on the ground that the
limitation on the creditable input tax in effect allows VAT-
registered establishments to retain a portion of the taxes they
collect, thus violating the principle that tax collection and
revenue should be solely allocated for public purposes and
expenditures. Petitioner Garcia further claims that allowing
these establishments to pass on the tax to the consumers is
inequitable, in violation of Article VI, Section 28(1) of the
Constitution.
RESPONDENTS’ COMMENT
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The Office of the Solicitor General (OSG) filed a Comment in
behalf of respondents. Preliminarily, respondents contend
that R.A. No. 9337 enjoys the presumption of constitutionality
and petitioners failed to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235
SCRA
630 (1994), respondents argue that the procedural issues
raised by petitioners, i.e., legality of the bicameral
proceedings, exclusive origination of revenue measures and
the power of the Senate concomitant thereto, have already
been settled. With regard to the issue of undue delegation of
legislative power to the President, respondents contend that
the law is complete and leaves no discretion to the President
but to increase the rate to 12% once any of the two conditions
provided therein arise.
Respondents also refute petitioners’ argument that the
increase to 12%, as well as the 70% limitation on the
creditable input tax, the 60-month amortization on the
purchase or importation of capital goods exceeding
₱1,000,000.00, and the 5% final withholding tax by
government agencies, is arbitrary, oppressive, and
confiscatory, and that it violates the constitutional principle
on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor
of the government’s fiscal reform agenda. A reform in the
value-added system of taxation is the core revenue measure
that will tilt the balance towards a sustainable
macroeconomic environment necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the
Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108 of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections
110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No.
9337, amending Section 114(C) of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the general
principles and concepts of value-added tax (VAT), as the
confusion and inevitably, litigation, breeds from a fallacious
notion of its nature.
The VAT is a tax on spending or consumption. It is levied on
the sale, barter, exchange or lease of goods or properties and
services.8 Being an indirect tax on expenditure, the seller of
goods or services may pass on the amount of tax paid to the
buyer,9 with the seller acting merely as a tax collector.10 The
burden of VAT is intended to fall on the immediate buyers and
ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly
liable on the transaction or business it engages in, without
transferring the burden to someone else.11 Examples are
individual and corporate income taxes, transfer taxes, and
residence taxes.12
In the Philippines, the value-added system of sales taxation
has long been in existence, albeit in a different mode. Prior to
1978, the system was a single-stage tax computed under the
"cost deduction method" and was payable only by the original
sellers. The single-stage system was subsequently modified,
and a mixture of the "cost deduction method" and "tax credit
method" was used to determine the value-added tax
payable.13 Under the "tax credit method," 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.14
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It was only in 1987, when President Corazon C. Aquino issued
Executive Order No. 273, that the VAT system was rationalized
by imposing a multi-stage tax rate of 0% or 10% on all sales
using the "tax credit method."15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded
VAT Law,16 R.A. No. 8241 or the Improved VAT Law,17 R.A. No.
8424 or the Tax Reform Act of 1997,18 and finally, the
presently beleaguered R.A. No. 9337, also referred to by
respondents as the VAT Reform Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the
Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that
the Bicameral Conference Committee exceeded its authority
by:
1) Inserting the stand-by authority in favor of the President in
Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both
the House and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount
of input tax to be credited against the output tax; and
4) Including the amendments introduced only by Senate Bill
No. 1950 regarding other kinds of taxes in addition to the
value-added tax.
Petitioners now beseech the Court to define the powers of
the Bicameral Conference Committee.
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It should be borne in mind that the power of internal
regulation and discipline are intrinsic in any legislative body
for, as unerringly elucidated by Justice Story, "[i]f the power
did not exist, it would be utterly impracticable to transact
the business of the nation, either at all, or at least with
decency, deliberation, and order."19 Thus, Article VI, Section
16 (3) of the Constitution provides that "each House may
determine the rules of its proceedings." Pursuant to this
inherent constitutional power to promulgate and implement
its own rules of procedure, the respective rules of each house
of Congress provided for the creation of a Bicameral
Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of
Representatives provides as follows:
Sec. 88. Conference Committee. – In the event that the House
does not agree with the Senate on the amendment to any bill
or joint resolution, the differences may be settled by the
conference committees of both chambers.
In resolving the differences with the Senate, the House panel
shall, as much as possible, adhere to and support the House
Bill. If the differences with the Senate are so substantial that
they materially impair the House Bill, the panel shall report
such fact to the House for the latter’s appropriate action.
Sec. 89. Conference Committee Reports. – . . . Each report shall
contain a detailed, sufficiently explicit statement of the
changes in or amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the
Conference Committee Report prior to the voting thereon.
The House shall vote on the Conference Committee Report in
the same manner and procedure as it votes on a bill on third
and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the
House of Representatives on the provision of any bill or joint
resolution, the differences shall be settled by a conference
committee of both Houses which shall meet within ten (10)
days after their composition. The President shall designate the
members of the Senate Panel in the conference committee
with the approval of the Senate.
Each Conference Committee Report shall contain a detailed
and sufficiently explicit statement of the changes in, or
amendments to the subject measure, and shall be signed by a
majority of the members of each House panel, voting
separately.
A comparative presentation of the conflicting House and
Senate provisions and a reconciled version thereof with the
explanatory statement of the conference committee shall be
attached to the report.
...
The creation of such conference committee was apparently in
response to a problem, not addressed by any constitutional
provision, where the two houses of Congress find themselves
in disagreement over changes or amendments introduced by
the other house in a legislative bill. Given that one of the most
basic powers of the legislative branch is to formulate and
implement its own rules of proceedings and to discipline its
members, may the Court then delve into the details of how
Congress complies with its internal rules or how it conducts its
business of passing legislation? Note that in the present
petitions, the issue is not whether provisions of the rules of
both houses creating the bicameral conference committee are
unconstitutional, but whether the bicameral conference
committee has strictly complied with the rules of both
houses, thereby remaining within the jurisdiction conferred
upon it by Congress.
In the recent case of Fariñas vs. The Executive Secretary,20 the
Court En Banc, unanimously reiterated and emphasized its
adherence to the "enrolled bill doctrine," thus, declining
therein petitioners’ plea for the Court to go behind the
enrolled copy of the bill. Assailed in said case was Congress’s
creation of two sets of bicameral conference committees, the
lack of records of said committees’ proceedings, the alleged
violation of said committees of the rules of both houses, and
the disappearance or deletion of one of the provisions in the
compromise bill submitted by the bicameral conference
committee. It was argued that such irregularities in the
passage of the law nullified R.A. No. 9006, or the Fair Election
Act.
Striking down such argument, the Court held thus:
Under the "enrolled bill doctrine," the signing of a bill by the
Speaker of the House and the Senate President and the
certification of the Secretaries of both Houses of Congress
Page 4
that it was passed are conclusive of its due enactment. A only the internal operation of Congress, thus, the Court is products (amending
review of cases reveals the Court’s consistent adherence to wont to deny a review of the internal proceedings of a co- Sec. 107 of NIRC);
the rule. The Court finds no reason to deviate from the equal branch of government. and 12% VAT on
salutary rule in this case where the irregularities alleged by sale of services and
the petitioners mostly involved the internal rules of Moreover, as far back as 1994 or more than ten years ago, in use or lease of
Congress, e.g., creation of the 2nd or 3rd Bicameral the case of Tolentino vs. Secretary of Finance,23 the Court properties and a
Conference Committee by the House. This Court is not the already made the pronouncement that "[i]f a change is reduced rate for
proper forum for the enforcement of these internal rules of desired in the practice [of the Bicameral Conference certain services
Congress, whether House or Senate. Parliamentary rules are Committee] it must be sought in Congress since this question including power
merely procedural and with their observance the courts have is not covered by any constitutional provision but is only an generation
no concern. Whatever doubts there may be as to the formal internal rule of each house." 24 To date, Congress has not (amending Sec. 108
validity of Rep. Act No. 9006 must be resolved in its seen it fit to make such changes adverted to by the Court. It of NIRC)
favor.The Court reiterates its ruling in Arroyo vs. De seems, therefore, that Congress finds the practices of the With regard to the "no pass-on" provision
Venecia, viz.: bicameral conference committee to be very useful for No similar Provides that the Provides that the
purposes of prompt and efficient legislative action. provision VAT imposed on VAT imposed on
But the cases, both here and abroad, in varying forms of power generation sales of electricity
expression, all deny to the courts the power to inquire into Nevertheless, just to put minds at ease that no blatant and on the sale of by generation
allegations that, in enacting a law, a House of Congress failed irregularities tainted the proceedings of the bicameral petroleum products companies and
to comply with its own rules, in the absence of showing that conference committees, the Court deems it necessary to shall be absorbed services of
there was a violation of a constitutional provision or the dwell on the issue. The Court observes that there was a by generation transmission
rights of private individuals. In Osmeña v. Pendatun, it was necessity for a conference committee because a comparison companies or companies and
held: "At any rate, courts have declared that ‘the rules of the provisions of House Bill Nos. 3555 and 3705 on one sellers, respectively, distribution
adopted by deliberative bodies are subject to revocation, hand, and Senate Bill No. 1950 on the other, reveals that and shall not be companies, as
modification or waiver at the pleasure of the body adopting there were indeed disagreements. As pointed out in the passed on to well as those of
them.’ And it has been said that "Parliamentary rules are petitions, said disagreements were as follows: consumers franchise grantees
merely procedural, and with their observance, the courts of electric utilities
have no concern. They may be waived or disregarded by the shall not apply to
legislative body." Consequently, "mere failure to conform to House Bill No. House Bill No.3705 Senate Bill No. residential
parliamentary usage will not invalidate the action (taken by 3555 1950
a deliberative body) when the requisite number of members With regard to "Stand-By Authority" in favor of President
end-users. VAT
have agreed to a particular measure."21 (Emphasis supplied) Provides for 12% Provides for 12% Provides for a shall be absorbed
VAT on every sale VAT in general on single rate of 10% by generation,
The foregoing declaration is exactly in point with the present of goods or sales of goods or VAT on sale of transmission, and
cases, where petitioners allege irregularities committed by the properties properties and goods or distribution
conference committee in introducing changes or deleting (amending Sec. reduced rates for properties companies.
provisions in the House and Senate bills. Akin to 106 of NIRC); sale of certain (amending Sec.
With regard to 70% limit on input tax credit
the Fariñas case,22 the present petitions also raise an issue 12% VAT on locally 106 of NIRC), 10%
Provides that the No similar provision Provides that the
regarding the actions taken by the conference committee on importation of manufactured VAT on sale of
goods (amending goods and services including input tax credit input tax credit
matters regarding Congress’ compliance with its own internal for capital goods for capital goods
rules. As stated earlier, one of the most basic and inherent Sec. 107 of NIRC); petroleum products sale of electricity
and 12% VAT on and raw materials by generation on which a VAT on which a VAT
power of the legislature is the power to formulate rules for its has been paid has been paid
proceedings and the discipline of its members. Congress is the sale of services to be used in the companies,
and use or lease manufacture transmission and shall be equally shall be equally
best judge of how it should conduct its own business distributed over distributed over 5
expeditiously and in the most orderly manner. It is also the of properties thereof (amending distribution
(amending Sec. Sec. 106 of NIRC); companies, and 5 years or the years or the
sole depreciable life depreciable life of
108 of NIRC) 12% VAT on use or lease of
of such capital such capital
importation of properties
concern of Congress to instill discipline among the members goods and reduced (amending Sec. goods; the input goods; the input
of its conference committee if it believes that said members tax credit for tax credit for
rates for certain 108 of NIRC)
violated any of its rules of proceedings. Even the expanded imported products goods and goods and
jurisdiction of this Court cannot apply to questions regarding services other services other
including petroleum

TAX 2 | VAT CASES Page 5

than capital than capital goods 1. With regard to the disagreement on the rate of VAT to be
goods shall not shall not exceed imposed, it would appear from the Conference Committee
exceed 5% of the 90% of the output Report that the Bicameral Conference Committee tried to
total amount of VAT. bridge the gap in the difference between the 10% VAT rate
such goods and proposed by the Senate, and the various rates with 12% as the
services; and for highest VAT rate proposed by the House, by striking a
persons engaged compromise whereby the present 10% VAT rate would be
in retail trading retained until certain conditions arise, i.e., the value-added
of goods, the tax collection as a percentage of gross domestic product
allowable input (GDP) of the previous year exceeds 2 4/5%, or National
tax credit shall Government deficit as a percentage of GDP of the previous
not exceed 11% year exceeds 1½%, when the President, upon
of the total recommendation of the Secretary of Finance shall raise the
amount of goods rate of VAT to 12% effective January 1, 2006.
purchased.
With regard to amendments to be made to NIRC provisions 2. With regard to the disagreement on whether only the VAT
regarding income and excise taxes imposed on electricity generation, transmission and
No similar No similar provision Provided for distribution companies should not be passed on to consumers
provision amendments to or whether both the VAT imposed on electricity generation,
several NIRC transmission and distribution companies and the VAT
provisions imposed on sale of petroleum products may be passed on to
regarding consumers, the Bicameral Conference Committee chose to
corporate income, settle such disagreement by altogether deleting from its
percentage, Report any no pass-on provision.
franchise and
excise taxes 3. With regard to the disagreement on whether input tax
credits should be limited or not, the Bicameral Conference
The disagreements between the provisions in the House bills Committee decided to adopt the position of the House by
and the Senate bill were with regard to (1) what rate of VAT is putting a limitation on the amount of input tax that may be
to be imposed; (2) whether only the VAT imposed on credited against the output tax, although it crafted its own
electricity generation, transmission and distribution language as to the amount of the limitation on input tax
companies should not be passed on to consumers, as credits and the manner of computing the same by providing
proposed in the Senate bill, or both the VAT imposed on thus:
electricity generation, transmission and distribution
companies and the VAT imposed on sale of petroleum
(A) Creditable Input Tax. – . . .
products should not be passed on to consumers, as proposed
in the House bill; (3) in what manner input tax credits should
be limited; (4) and whether the NIRC provisions on corporate ...
income taxes, percentage, franchise and excise taxes should
be amended. Provided, The input tax on goods purchased or imported in a
calendar month for use in trade or business for which
There being differences and/or disagreements on the deduction for depreciation is allowed under this Code, shall be
foregoing provisions of the House and Senate bills, the spread evenly over the month of acquisition and the fifty-nine
Bicameral Conference Committee was mandated by the rules (59) succeeding months if the aggregate acquisition cost for
of both houses of Congress to act on the same by settling said such goods, excluding the VAT component thereof, exceeds
differences and/or disagreements. The Bicameral Conference one million Pesos (₱1,000,000.00): PROVIDED, however, that
Committee acted on the disagreeing provisions by making the if the estimated useful life of the capital good is less than five
following changes: (5) years, as used for depreciation purposes, then the input
VAT shall be spread over such shorter period: . . .
TAX 2 | VAT CASES
(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: PROVIDED that the input tax
inclusive of input VAT carried over from the previous quarter
that may be credited in every quarter shall not exceed seventy
percent (70%) of the output VAT: PROVIDED, HOWEVER, THAT
any input tax attributable to zero-rated sales by a VAT-
registered person may at his option be refunded or credited
against other internal revenue taxes, . . .
4. With regard to the amendments to other provisions of the
NIRC on corporate income tax, franchise, percentage and
excise taxes, the conference committee decided to include
such amendments and basically adopted the provisions found
in Senate Bill No. 1950, with some changes as to the rate of
the tax to be imposed.
Under the provisions of both the Rules of the House of
Representatives and Senate Rules, the Bicameral Conference
Committee is mandated to settle the differences between the
disagreeing provisions in the House bill and the Senate bill.
The term "settle" is synonymous to "reconcile" and
"harmonize."25 To reconcile or harmonize disagreeing
provisions, the Bicameral Conference Committee may then (a)
adopt the specific provisions of either the House bill or Senate
bill, (b) decide that neither provisions in the House bill or the
provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive
at a compromise between the disagreeing provisions.
In the present case, the changes introduced by the Bicameral
Conference Committee on disagreeing provisions were meant
only to reconcile and harmonize the disagreeing provisions for
it did not inject any idea or intent that is wholly foreign to the
subject embraced by the original provisions.
The so-called stand-by authority in favor of the President,
whereby the rate of 10% VAT wanted by the Senate is
retained until such time that certain conditions arise when the
12% VAT wanted by the House shall be imposed, appears to
be a compromise to try to bridge the difference in the rate of
VAT proposed by the two houses of Congress. Nevertheless,
such compromise is still totally within the subject of what rate
of VAT should be imposed on taxpayers.
Page 6
The no pass-on provision was deleted altogether. In the
transcripts of the proceedings of the Bicameral Conference
Committee held on May 10, 2005, Sen. Ralph Recto, Chairman
of the Senate Panel, explained the reason for deleting the no
pass-on provision in this wise:
. . . the thinking was just to keep the VAT law or the VAT bill
simple. And we were thinking that no sector should be a
beneficiary of legislative grace, neither should any sector be
discriminated on. The VAT is an indirect tax. It is a pass on-
tax. And let’s keep it plain and simple. Let’s not confuse the
bill and put a no pass-on provision. Two-thirds of the world
have a VAT system and in this two-thirds of the globe, I have
yet to see a VAT with a no pass-though provision. So, the
thinking of the Senate is basically simple, let’s keep the VAT
simple.26 (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that
the no pass-on provision "never really enjoyed the support of
either House."27
With regard to the amount of input tax to be credited against
output tax, the Bicameral Conference Committee came to a
compromise on the percentage rate of the limitation or cap
on such input tax credit, but again, the change introduced by
the Bicameral Conference Committee was totally within the
intent of both houses to put a cap on input tax that may be
credited against the output tax. From the inception of the
subject revenue bill in the House of Representatives, one of
the major objectives was to "plug a glaring loophole in the tax
policy and administration by creating vital restrictions on the
claiming of input VAT tax credits . . ." and "[b]y introducing
limitations on the claiming of tax credit, we are capping a
major leakage that has placed our collection efforts at an
apparent disadvantage."28
As to the amendments to NIRC provisions on taxes other than
the value-added tax proposed in Senate Bill No. 1950, since
said provisions were among those referred to it, the
conference committee had to act on the same and it basically
adopted the version of the Senate.
Thus, all the changes or modifications made by the Bicameral
Conference Committee were germane to subjects of the
provisions referred
to it for reconciliation. Such being the case, the Court does
not see any grave abuse of discretion amounting to lack or
TAX 2 | VAT CASES
excess of jurisdiction committed by the Bicameral Conference
Committee. In the earlier cases of Philippine Judges
Association vs. Prado29 and Tolentino vs. Secretary of
Finance,30 the Court recognized the long-standing legislative
practice of giving said conference committee ample latitude
for compromising differences between the Senate and the
House. Thus, in the Tolentino case, it was held that:
. . . it is within the power of a conference committee to
include in its report an entirely new provision that is not
found either in the House bill or in the Senate bill. If the
committee can propose an amendment consisting of one or
two provisions, there is no reason why it cannot propose
several provisions, collectively considered as an "amendment
in the nature of a substitute," so long as such amendment is
germane to the subject of the bills before the committee.
After all, its report was not final but needed the approval of
both houses of Congress to become valid as an act of the
legislative department. The charge that in this case the
Conference Committee acted as a third legislative chamber is
thus without any basis.31 (Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of
the Constitution on the "No-Amendment Rule"
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it
has passed three readings on separate days, and printed
copies thereof in its final form have been distributed to its
Members three days before its passage, except when the
President certifies to the necessity of its immediate
enactment to meet a public calamity or emergency. Upon the
last reading of a bill, no amendment thereto shall be allowed,
and the vote thereon shall be taken immediately thereafter,
and the yeas and nays entered in the Journal.
Petitioners’ argument that the practice where a bicameral
conference committee is allowed to add or delete provisions
in the House bill and the Senate bill after these had passed
three readings is in effect a circumvention of the "no
amendment rule" (Sec. 26 (2), Art. VI of the 1987
Constitution), fails to convince the Court to deviate from its
ruling in the Tolentino case that:
Nor is there any reason for requiring that the Committee’s
Report in these cases must have undergone three readings in
each of the two houses. If that be the case, there would be no
end to negotiation since each house may seek modification of
the compromise bill. . . .
Art. VI. § 26 (2) must, therefore, be construed as referring
only to bills introduced for the first time in either house of
Congress, not to the conference committee
report.32 (Emphasis supplied)
The Court reiterates here that the "no-amendment rule"
refers only to the procedure to be followed by each house of
Congress with regard to bills initiated in each of said
respective houses, before said bill is transmitted to the other
house for its concurrence or amendment. Verily, to construe
said provision in a way as to proscribe any further changes to
a bill after one house has voted on it would lead to absurdity
as this would mean that the other house of Congress would
be deprived of its constitutional power to amend or introduce
changes to said bill. Thus, Art. VI, Sec. 26 (2) of the
Constitution cannot be taken to mean that the introduction
by the Bicameral Conference Committee of amendments and
modifications to disagreeing provisions in bills that have been
acted upon by both houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the
Constitution on Exclusive Origination of Revenue Bills
Coming to the issue of the validity of the amendments made
regarding the NIRC provisions on corporate income taxes and
percentage, excise taxes. Petitioners refer to the following
provisions, to wit:
Section Rates of Income Tax on Domestic Corporation
27
28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of
Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue
Page 7
Petitioners claim that the amendments to these provisions of
the NIRC did not at all originate from the House. They aver
that House Bill No. 3555 proposed amendments only
regarding Sections 106, 107, 108, 110 and 114 of the NIRC,
while House Bill No. 3705 proposed amendments only to
Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the
other sections of the NIRC which the Senate amended but
which amendments were not found in the House bills are not
intended to be amended by the House of Representatives.
Hence, they argue that since the proposed amendments did
not originate from the House, such amendments are a
violation of Article VI, Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the
House of Representatives but the Senate may propose or
concur with amendments.
In the present cases, petitioners admit that it was indeed
House Bill Nos. 3555 and 3705 that initiated the move for
amending provisions of the NIRC dealing mainly with the
value-added tax. Upon transmittal of said House bills to the
Senate, the Senate came out with Senate Bill No. 1950
proposing amendments not only to NIRC provisions on the
value-added tax but also amendments to NIRC provisions on
other kinds of taxes. Is the introduction by the Senate of
provisions not dealing directly with the value- added tax,
which is the only kind of tax being amended in the House bills,
still within the purview of the constitutional provision
authorizing the Senate to propose or concur with
amendments to a revenue bill that originated from the
House?
The foregoing question had been squarely answered in
the Tolentino case, wherein the Court held, thus:
. . . To begin with, it is not the law – but the revenue bill –
which is required by the Constitution to "originate exclusively"
in the House of Representatives. It is important to emphasize
this, because a bill originating in the House may undergo such
extensive changes in the Senate that the result may be a
rewriting of the whole. . . . At this point, what is important to
note is that, as a result of the Senate action, a distinct bill may
be produced. To insist that a revenue statute – and not only
TAX 2 | VAT CASES
the bill which initiated the legislative process culminating in
the enactment of the law – must substantially be the same
as the House bill would be to deny the Senate’s power not
only to "concur with amendments" but also to "propose
amendments." It would be to violate the coequality of
legislative power of the two houses of Congress and in fact
make the House superior to the Senate.
… savings have been identified by the administration. It is
…Given, then, the power of the Senate to propose
amendments, the Senate can propose its own version even
with respect to bills which are required by the Constitution
to originate in the House.
...
Indeed, what the Constitution simply means is that the
initiative for filing revenue, tariff or tax bills, bills authorizing
an increase of the public debt, private bills and bills of local
application must come from the House of Representatives on
the theory that, elected as they are from the districts, the
members of the House can be expected to be more sensitive
to the local needs and problems. On the other hand, the
senators, who are elected at large, are expected to approach
the same problems from the national perspective. Both
views are thereby made to bear on the enactment of such
laws.33 (Emphasis supplied)
Since there is no question that the revenue bill exclusively
originated in the House of Representatives, the Senate was
acting within its
constitutional power to introduce amendments to the House
bill when it included provisions in Senate Bill No. 1950
amending corporate income taxes, percentage, excise and
franchise taxes. Verily, Article VI, Section 24 of the
Constitution does not contain any prohibition or limitation on
the extent of the amendments that may be introduced by the
Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to
the NIRC provisions that had not been touched in the House
bills are still in furtherance of the intent of the House in
initiating the subject revenue bills. The Explanatory Note of
House Bill No. 1468, the very first House bill introduced on the
floor, which was later substituted by House Bill No. 3555,
stated:
One of the challenges faced by the present administration is
the urgent and daunting task of solving the country’s serious
financial problems. To do this, government expenditures must
be strictly monitored and controlled and revenues must be
significantly increased. This may be easier said than done, but
our fiscal authorities are still optimistic the government will
be operating on a balanced budget by the year 2009. In fact,
several measures that will result to significant expenditure
supported with a credible package of revenue measures that
include measures to improve tax administration and control
the leakages in revenues from income taxes and the value-
added tax (VAT). (Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill
No. 3555, declared that:
In the budget message of our President in the year 2005, she
reiterated that we all acknowledged that on top of our agenda
must be the restoration of the health of our fiscal system.
In order to considerably lower the consolidated public sector
deficit and eventually achieve a balanced budget by the year
2009, we need to seize windows of opportunities which
might seem poignant in the beginning, but in the long run
prove effective and beneficial to the overall status of our
economy. One such opportunity is a review of existing tax
rates, evaluating the relevance given our present
conditions.34 (Emphasis supplied)
Notably therefore, the main purpose of the bills emanating
from the House of Representatives is to bring in sizeable
revenues for the government
to supplement our country’s serious financial problems, and
improve tax administration and control of the leakages in
revenues from income taxes and value-added taxes. As these
house bills were transmitted to the Senate, the latter,
approaching the measures from the point of national
perspective, can introduce amendments within the purposes
of those bills. It can provide for ways that would soften the
impact of the VAT measure on the consumer, i.e., by
distributing the burden across all sectors instead of putting it
entirely on the shoulders of the consumers. The sponsorship
speech of Sen. Ralph Recto on why the provisions on income
tax on corporation were included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and
Means will raise ₱64.3 billion in additional revenues annually
Page 8
even while by mitigating prices of power, services and
petroleum products.
However, not all of this will be wrung out of VAT. In fact, only
₱48.7 billion amount is from the VAT on twelve goods and
services. The rest of the tab – ₱10.5 billion- will be picked by
corporations.
What we therefore prescribe is a burden sharing between
corporate Philippines and the consumer. Why should the
latter bear all the pain? Why should the fiscal salvation be
only on the burden of the consumer?
The corporate world’s equity is in form of the increase in the
corporate income tax from 32 to 35 percent, but up to 2008
only. This will raise ₱10.5 billion a year. After that, the rate
will slide back, not to its old rate of 32 percent, but two
notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay,
corporations, to bear with this emergency provision that will
be in effect for 1,200 days, while we put our fiscal house in
order. This fiscal medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them.
We intend to keep the length of their sacrifice brief. We
would like to assure them that not because there is a light at
the end of the tunnel, this government will keep on making
the tunnel long.
The responsibility will not rest solely on the weary shoulders
of the small man. Big business will be there to share the
burden.35
As the Court has said, the Senate can propose amendments
and in fact, the amendments made on provisions in the tax on
income of corporations are germane to the purpose of the
house bills which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other
percentage and excise taxes germane to the reforms to the
VAT system, as these sections would cushion the effects of
VAT on consumers. Considering that certain goods and
services which were subject to percentage tax and excise tax
would no longer be VAT-exempt, the consumer would be
burdened more as they would be paying the VAT in addition
to these taxes. Thus, there is a need to amend these sections
TAX 2 | VAT CASES
to soften the impact of VAT. Again, in his sponsorship speech,
Sen. Recto said:
However, for power plants that run on oil, we will reduce to
zero the present excise tax on bunker fuel, to lessen the effect
of a VAT on this product.
For electric utilities like Meralco, we will wipe out the
franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil
products, so as not to destroy the VAT chain, we will however
bring down the excise tax on socially sensitive products such
as diesel, bunker, fuel and kerosene.
...
What do all these exercises point to? These are not
contortions of giving to the left hand what was taken from the
right. Rather, these sprang from our concern of softening the
impact of VAT, so that the people can cushion the blow of
higher prices they will have to pay as a result of VAT.36
The other sections amended by the Senate pertained to
matters of tax administration which are necessary for the
implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are
germane to the subject matter and purposes of the house
bills, which is to supplement our country’s fiscal deficit,
among others. Thus, the Senate acted within its power to
propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108 of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et
al., and Escudero, et al. contend in common that Sections 4, 5
and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC giving the President the stand-by
authority to raise the VAT rate from 10% to 12% when a
certain condition is met, constitutes undue delegation of the
legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby
further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and
collected on every sale, barter or exchange of goods or
properties, a value-added tax equivalent to ten percent (10%)
of the gross selling price or gross value in money of the goods
or properties sold, bartered or exchanged, such tax to be paid
by the seller or transferor: provided, that the President, upon
the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax
to twelve percent (12%), after any of the following
conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1 ½%).
SEC. 5. Section 107 of the same Code, as amended, is hereby
further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods. –
(A) In General. – There shall be levied, assessed and collected
on every importation of goods a value-added tax equivalent to
ten percent (10%) based on the total value used by the
Bureau of Customs in determining tariff and customs duties,
plus customs duties, excise taxes, if any, and other charges,
such tax to be paid by the importer prior to the release of
such goods from customs custody: Provided, That where the
customs duties are determined on the basis of the quantity or
volume of the goods, the value-added tax shall be based on
the landed cost plus excise taxes, if any: provided, further,
Page 9
that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%) after
any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1 ½%).
SEC. 6. Section 108 of the same Code, as amended, is hereby
further amended to read as follows:
SEC. 108. 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: provided, that the President, upon the
recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following conditions has been
satisfied.
(i) value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1
½%). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to
the President to increase the VAT rate is a virtual abdication
by Congress of its exclusive power to tax because such
delegation is not within the purview of Section 28 (2), Article
VI of the Constitution, which provides:
The Congress may, by law, authorize the President to fix
within specified limits, and may impose, tariff rates, import
and export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the national
development program of the government.
TAX 2 | VAT CASES
They argue that the VAT is a tax levied on the sale, barter or
exchange of goods and properties as well as on the sale or
exchange of services, which cannot be included within the
purview of tariffs under the exempted delegation as the latter
refers to customs duties, tolls or tribute payable upon
merchandise to the government and usually imposed on
goods or merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend
that delegating to the President the legislative power to tax is
contrary to republicanism. They insist that accountability,
responsibility and transparency should dictate the actions of
Congress and they should not pass to the President the
decision to impose taxes. They also argue that the law also
effectively nullified the President’s power of control, which
includes the authority to set aside and nullify the acts of her
subordinates like the Secretary of Finance, by mandating the
fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample
powers to cause, influence or create the conditions provided
by the law to bring about either or both the conditions
precedent.
On the other hand, petitioners Escudero, et al. find bizarre
and revolting the situation that the imposition of the 12% rate
would be subject to the whim of the Secretary of Finance, an
unelected bureaucrat, contrary to the principle of no taxation
without representation. They submit that the Secretary of
Finance is not mandated to give a favorable recommendation
and he may not even give his recommendation. Moreover,
they allege that no guiding standards are provided in the law
on what basis and as to how he will make his
recommendation. They claim, nonetheless, that any
recommendation of the Secretary of Finance can easily be
brushed aside by the President since the former is a mere
alter ego of the latter, such that, ultimately, it is the President
who decides whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers
is instructive.
The principle of separation of powers ordains that each of the
three great branches of government has exclusive cognizance
of and is supreme in matters falling within its own
constitutionally allocated sphere.37 A logical
corollary to the doctrine of separation of powers is the
principle of non-delegation of powers, as expressed in the
Latin maxim: potestas delegata non delegari potest which
means "what has been delegated, cannot be
delegated."38 This doctrine is based on the ethical principle
that such as delegated power constitutes not only a right but
a duty to be performed by the delegate through the
instrumentality of his own judgment and not through the
intervening mind of another.39
With respect to the Legislature, Section 1 of Article VI of the
Constitution provides that "the Legislative power shall be
vested in the Congress of the Philippines which shall consist of
a Senate and a House of Representatives." The powers which
Congress is prohibited from delegating are those which are
strictly, or inherently and exclusively, legislative. Purely
legislative power, which can never be delegated, has been
described as the authority to make a complete law –
complete as to the time when it shall take effect and as to
whom it shall be applicable – and to determine the
expediency of its enactment.40 Thus, the rule is that in order
that a court may be justified in holding a statute
unconstitutional as a delegation of legislative power, it must
appear that the power involved is purely legislative in nature –
that is, one appertaining exclusively to the legislative
department. It is the nature of the power, and not the liability
of its use or the manner of its exercise, which determines the
validity of its delegation.
Nonetheless, the general rule barring delegation of legislative
powers is subject to the following recognized limitations or
exceptions:
(1) Delegation of tariff powers to the President under Section
28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under
Section 23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a
showing that the delegation itself is valid. It is valid only if the
law (a) is complete in itself, setting forth therein the policy to
Page 10
be executed, carried out, or implemented by the
delegate;41 and (b) fixes a standard — the limits of which are
sufficiently determinate and determinable — to which the
delegate must conform in the performance of his
functions.42 A sufficient standard is one which defines
legislative policy, marks its limits, maps out its boundaries and
specifies the public agency to apply it. It indicates the
circumstances under which the legislative command is to be
effected.43 Both tests are intended to prevent a total
transference of legislative authority to the delegate, who is
not allowed to step into the shoes of the legislature and
exercise a power essentially legislative.44
In People vs. Vera,45 the Court, through eminent Justice Jose
P. Laurel, expounded on the concept and extent of delegation
of power in this wise:
In testing whether a statute constitutes an undue delegation
of legislative power or not, it is usual to inquire whether the
statute was complete in all its terms and provisions when it
left the hands of the legislature so that nothing was left to the
judgment of any other appointee or delegate of the
legislature.\
...
‘The true distinction’, says Judge Ranney, ‘is between the
delegation of power to make the law, which necessarily
involves a discretion as to what it shall be, and conferring an
authority or discretion as to its execution, to be exercised
under and in pursuance of the law. The first cannot be done;
to the latter no valid objection can be made.’
...
It is contended, however, that a legislative act may be made
to the effect as law after it leaves the hands of the legislature.
It is true that laws may be made effective on certain
contingencies, as by proclamation of the executive or the
adoption by the people of a particular community. In Wayman
vs. Southard, the Supreme Court of the United States ruled
that the legislature may delegate a power not legislative
which it may itself rightfully exercise. The power to ascertain
facts is such a power which may be delegated. There is
nothing essentially legislative in ascertaining the existence of
facts or conditions as the basis of the taking into effect of a
law. That is a mental process common to all branches of the
government. Notwithstanding the apparent tendency,
however, to relax the rule prohibiting delegation of legislative
TAX 2 | VAT CASES
authority on account of the complexity arising from social and
economic forces at work in this modern industrial age, the
orthodox pronouncement of Judge Cooley in his work on
Constitutional Limitations finds restatement in Prof.
Willoughby's treatise on the Constitution of the United States
in the following language — speaking of declaration of
legislative power to administrative agencies: The principle
which permits the legislature to provide that the
administrative agent may determine when the
circumstances are such as require the application of a law is
defended upon the ground that at the time this authority is
granted, the rule of public policy, which is the essence of the
legislative act, is determined by the legislature. In other
words, the legislature, as it is its duty to do, determines that,
under given circumstances, certain executive or
administrative action is to be taken, and that, under other
circumstances, different or no action at all is to be taken.
What is thus left to the administrative official is not the
legislative determination of what public policy demands, but
simply the ascertainment of what the facts of the case
require to be done according to the terms of the law by
which he is governed. The efficiency of an Act as a
declaration of legislative will must, of course, come from
Congress, but the ascertainment of the contingency upon
which the Act shall take effect may be left to such agencies
as it may designate. The legislature, then, may provide that a
law shall take effect upon the happening of future specified
contingencies leaving to some other person or body the
power to determine when the specified contingency has
arisen. (Emphasis supplied).46
In Edu vs. Ericta,47 the Court reiterated:
What cannot be delegated is the authority under the
Constitution to make laws and to alter and repeal them; the
test is the completeness of the statute in all its terms and
provisions when it leaves the hands of the legislature. To
determine whether or not there is an undue delegation of
legislative power, the inquiry must be directed to the scope
and definiteness of the measure enacted. The legislative does
not abdicate its functions when it describes what job must
be done, who is to do it, and what is the scope of his
authority. For a complex economy, that may be the only way
in which the legislative process can go forward. A distinction
has rightfully been made between delegation of power to
make the laws which necessarily involves a discretion as to
what it shall be, which constitutionally may not be done, and
delegation of authority or discretion as to its execution to be
exercised under and in pursuance of the law, to which no
valid objection can be made. The Constitution is thus not to
be regarded as denying the legislature the necessary
resources of flexibility and practicability. (Emphasis
supplied).48
Clearly, the legislature may delegate to executive officers or
bodies the power to determine certain facts or conditions, or
the happening of contingencies, on which the operation of a
statute is, by its terms, made to depend, but the legislature
must prescribe sufficient standards, policies or limitations on
their authority.49 While the power to tax cannot be delegated
to executive agencies, details as to the enforcement and
administration of an exercise of such power may be left to
them, including the power to determine the existence of facts
on which its operation depends.50
The rationale for this is that the preliminary ascertainment of
facts as basis for the enactment of legislation is not of itself a
legislative function, but is simply ancillary to legislation. Thus,
the duty of correlating information and making
recommendations is the kind of subsidiary activity which the
legislature may perform through its members, or which it may
delegate to others to perform. Intelligent legislation on the
complicated problems of modern society is impossible in the
absence of accurate information on the part of the legislators,
and any reasonable method of securing such information is
proper.51 The Constitution as a continuously operative charter
of government does not require that Congress find for itself
every fact upon which it desires to base legislative action or
that it make for itself detailed determinations which it has
declared to be prerequisite to application of legislative policy
to particular facts and circumstances impossible for Congress
itself properly to investigate.52
In the present case, the challenged section of R.A. No. 9337 is
the common proviso in Sections 4, 5 and 6 which reads as
follows:
That the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the
rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and
four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 ½%).
Page 11
The case before the Court is not a delegation of legislative
power. It is simply a delegation of ascertainment of facts upon
which enforcement and administration of the increase rate
under the law is contingent. The legislature has made the
operation of the 12% rate effective January 1, 2006,
contingent upon a specified fact or condition. It leaves the
entire operation or non-operation of the 12% rate upon
factual matters outside of the control of the executive.
No discretion would be exercised by the President.
Highlighting the absence of discretion is the fact that the
word shall is used in the common proviso. The use of the
word shall connotes a mandatory order. Its use in a statute
denotes an imperative obligation and is inconsistent with the
idea of discretion.53 Where the law is clear and unambiguous,
it must be taken to mean exactly what it says, and courts have
no choice but to see to it that the mandate is obeyed.54
Thus, it is the ministerial duty of the President to immediately
impose the 12% rate upon the existence of any of the
conditions specified by Congress. This is a duty which cannot
be evaded by the President. Inasmuch as the law specifically
uses the word shall, the exercise of discretion by the President
does not come into play. It is a clear directive to impose the
12% VAT rate when the specified conditions are present. The
time of taking into effect of the 12% VAT rate is based on the
happening of a certain specified contingency, or upon the
ascertainment of certain facts or conditions by a person or
body other than the legislature itself.
The Court finds no merit to the contention of
petitioners ABAKADA GURO Party List, et al. that the law
effectively nullified the President’s power of control over the
Secretary of Finance by mandating the fixing of the tax rate by
the President upon the recommendation of the Secretary of
Finance. The Court cannot also subscribe to the position of
petitioners
Pimentel, et al. that the word shall should be interpreted to
mean may in view of the phrase "upon the recommendation
of the Secretary of Finance." Neither does the Court find
persuasive the submission of petitioners Escudero, et al. that
any recommendation by the Secretary of Finance can easily be
brushed aside by the President since the former is a mere
alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego
of the President, it simply means that as head of the
Department of Finance he is the assistant and agent of the
TAX 2 | VAT CASES
Chief Executive. The multifarious executive and administrative
functions of the Chief Executive are performed by and
through the executive departments, and the acts of the
secretaries of such departments, such as the Department of
Finance, performed and promulgated in the regular course of
business, are, unless disapproved or reprobated by the Chief
Executive, presumptively the acts of the Chief Executive. The
Secretary of Finance, as such, occupies a political position and
holds office in an advisory capacity, and, in the language of
Thomas Jefferson, "should be of the President's bosom
confidence" and, in the language of Attorney-General
Cushing, is "subject to the direction of the President."55
In the present case, in making his recommendation to the
President on the existence of either of the two conditions, the
Secretary of Finance is not acting as the alter ego of the
President or even her subordinate. In such instance, he is not
subject to the power of control and direction of the President.
He is acting as the agent of the legislative department, to
determine and declare the event upon which its expressed
will is to take effect.56 The Secretary of Finance becomes the
means or tool by which legislative policy is determined and
implemented, considering that he possesses all the facilities
to gather data and information and has a much broader
perspective to properly evaluate them. His function is to
gather and collate statistical data and other pertinent
information and verify if any of the two conditions laid out by
Congress is present. His personality in such instance is in
reality but a projection of that of Congress. Thus, being the
agent of Congress and not of the President, the President
cannot alter or modify or nullify, or set aside the findings of
the Secretary of Finance and to substitute the judgment of the
former for that of the latter.
Congress simply granted the Secretary of Finance the
authority to ascertain the existence of a fact, namely, whether
by December 31, 2005, the value-added tax collection as a
percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (24/5%) or the
national government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1½%). If
either of these two instances has occurred, the Secretary of
Finance, by legislative mandate, must submit such
information to the President. Then the 12% VAT rate must be
imposed by the President effective January 1, 2006. There is
no undue delegation of legislative power but only of the
discretion as to the execution of a law. This is
constitutionally permissible.57 Congress does not abdicate its
functions or unduly delegate power when it describes what
job must be done, who must do it, and what is the scope of
his authority; in our complex economy that is frequently the
only way in which the legislative process can go forward.58
As to the argument of petitioners ABAKADA GURO Party
List, et al. that delegating to the President the legislative
power to tax is contrary to the principle of republicanism, the
same deserves scant consideration. Congress did not delegate
the power to tax but the mere implementation of the law. The
intent and will to increase the VAT rate to 12% came from
Congress and the task of the President is to simply execute
the legislative policy. That Congress chose to do so in such a
manner is not within the province of the Court to inquire into,
its task being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the
President has ample powers to cause, influence or create the
conditions to bring about either or both the conditions
precedent does not deserve any merit as this argument is
highly speculative. The Court does not rule on allegations
which are manifestly conjectural, as these may not exist at all.
The Court deals with facts, not fancies; on realities, not
appearances. When the Court acts on appearances instead of
realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and
Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the
VAT rate imposes an unfair and additional tax burden on the
people. Petitioners also argue that the 12% increase,
dependent on any of the 2 conditions set forth in the
contested provisions, is ambiguous because it does not state if
the VAT rate would be returned to the original 10% if the
rates are no longer satisfied. Petitioners also argue that such
rate is unfair and unreasonable, as the people are unsure of
the applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No.
9337, if any of the two conditions set forth therein are
satisfied, the President shall increase the VAT rate to 12%. The
provisions of the law are clear. It does not provide for a return
to the 10% rate nor does it empower the President to so
revert if, after the rate is increased to 12%, the VAT collection
goes below the 24/5 of the GDP of the previous year or that
the national government deficit as a percentage of GDP of the
previous year does not exceed 1½%.
Therefore, no statutory construction or interpretation is
needed. Neither can conditions or limitations be introduced
Page 12
where none is provided for. Rewriting the law is a forbidden
ground that only Congress may tread upon.60
Thus, in the absence of any provision providing for a return to
the 10% rate, which in this case the Court finds none,
petitioners’ argument is, at best, purely speculative. There is
no basis for petitioners’ fear of a fluctuating VAT rate because
the law itself does not provide that the rate should go back to
10% if the conditions provided in Sections 4, 5 and 6 are no
longer present. The rule is that where the provision of the law
is clear and unambiguous, so that there is no occasion for the
court's seeking the legislative intent, the law must be taken as
it is, devoid of judicial addition or subtraction.61
Petitioners also contend that the increase in the VAT rate,
which was allegedly an incentive to the President to raise the
VAT collection to at least 2 4/5 of the GDP of the previous year,
should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT
collection is not the only condition. There is another
condition, i.e., the national government deficit as a
percentage of GDP of the previous year exceeds one and one-
half percent (1 ½%).
Respondents explained the philosophy behind these
alternative conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have
economic or fiscal meaning. If VAT/GDP is less than 2.8%, it
means that government has weak or no capability of
implementing the VAT or that VAT is not effective in the
function of the tax collection. Therefore, there is no value to
increase it to 12% because such action will also be ineffectual.
2. Nat’l Gov’t Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP is 1.5%
or less means the fiscal condition of government has reached
a relatively sound position or is towards the direction of a
balanced budget position. Therefore, there is no need to
increase the VAT rate since the fiscal house is in a relatively
healthy position. Otherwise stated, if the ratio is more than
1.5%, there is indeed a need to increase the VAT rate.62
TAX 2 | VAT CASES
That the first condition amounts to an incentive to the
President to increase the VAT collection does not render it
unconstitutional so long as there is a public purpose for which
the law was passed, which in this case, is mainly to raise
revenue. In fact, fiscal adequacy dictated the need for a raise
in revenue.
The principle of fiscal adequacy as a characteristic of a sound
tax system was originally stated by Adam Smith in his Canons
of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and
to keep out of the pockets of the people as little as possible
over and above what it brings into the public treasury of the
state.63
It simply means that sources of revenues must be adequate to
meet government expenditures and their variations.64
The dire need for revenue cannot be ignored. Our country is
in a quagmire of financial woe. During the Bicameral
Conference Committee hearing, then Finance Secretary
Purisima bluntly depicted the country’s gloomy state of
economic affairs, thus:
First, let me explain the position that the Philippines finds
itself in right now. We are in a position where 90 percent of
our revenue is used for debt service. So, for every peso of
revenue that we currently raise, 90 goes to debt service.
That’s interest plus amortization of our debt. So clearly, this is
not a sustainable situation. That’s the first fact.
The second fact is that our debt to GDP level is way out of line
compared to other peer countries that borrow money from
that international financial markets. Our debt to GDP is
approximately equal to our GDP. Again, that shows you that
this is not a sustainable situation.
The third thing that I’d like to point out is the environment
that we are presently operating in is not as benign as what it
used to be the past five years.
What do I mean by that?
In the past five years, we’ve been lucky because we were
operating in a period of basically global growth and low
interest rates. The past few months, we have seen an inching
up, in fact, a rapid increase in the interest rates in the leading
economies of the world. And, therefore, our ability to borrow
at reasonable prices is going to be challenged. In fact,
ultimately, the question is our ability to access the financial
markets.
When the President made her speech in July last year, the
environment was not as bad as it is now, at least based on the
forecast of most financial institutions. So, we were assuming
that raising 80 billion would put us in a position where we can
then convince them to improve our ability to borrow at lower
rates. But conditions have changed on us because the interest
rates have gone up. In fact, just within this room, we tried to
access the market for a billion dollars because for this year
alone, the Philippines will have to borrow 4 billion dollars. Of
that amount, we have borrowed 1.5 billion. We issued last
January a 25-year bond at 9.7 percent cost. We were trying to
access last week and the market was not as favorable and up
to now we have not accessed and we might pull back because
the conditions are not very good.
So given this situation, we at the Department of Finance
believe that we really need to front-end our deficit reduction.
Because it is deficit that is causing the increase of the debt
and we are in what we call a debt spiral. The more debt you
have, the more deficit you have because interest and debt
service eats and eats more of your revenue. We need to get
out of this debt spiral. And the only way, I think, we can get
out of this debt spiral is really have a front-end adjustment in
our revenue base.65
The image portrayed is chilling. Congress passed the law
hoping for rescue from an inevitable catastrophe. Whether
the law is indeed sufficient to answer the state’s economic
dilemma is not for the Court to judge. In the Fariñas case, the
Court refused to consider the various arguments raised
therein that dwelt on the wisdom of Section 14 of R.A. No.
9006 (The Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the Court.
Government policy is within the exclusive dominion of the
political branches of the government. It is not for this Court to
look into the wisdom or propriety of legislative determination.
Indeed, whether an enactment is wise or unwise, whether it is
based on sound economic theory, whether it is the best
means to achieve the desired results, whether, in short, the
legislative discretion within its prescribed limits should be
exercised in a particular manner are matters for the judgment
of the legislature, and the serious conflict of opinions does not
suffice to bring them within the range of judicial cognizance.66
Page 13
In the same vein, the Court in this case will not dawdle on the
purpose of Congress or the executive policy, given that it is
not for the judiciary to "pass upon questions of wisdom,
justice or expediency of legislation."67
II.
Whether Section 8 of R.A. No. 9337, amending Sections
110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No.
9337, amending Section 114(C) of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et
al. argue that Section 8 of R.A. No. 9337, amending Sections
110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending
Section 114 (C) of the NIRC are arbitrary, oppressive,
excessive and confiscatory. Their argument is premised on the
constitutional right against deprivation of life, liberty of
property without due process of law, as embodied in Article
III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the
constitutional guarantee of equal protection of the law.
The doctrine is that where the due process and equal
protection clauses are invoked, considering that they are not
fixed rules but rather broad standards, there is a need for
proof of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of
validity must prevail.68
Section 8 of R.A. No. 9337, amending Section 110(B) of the
NIRC imposes a limitation on the amount of input tax that
may be credited against the output tax. It states, in part:
"[P]rovided, that the input tax inclusive of the input VAT
carried over from the previous quarter that may be credited in
every quarter shall not exceed seventy percent (70%) of the
output VAT: …"
Input Tax is defined under Section 110(A) of the NIRC, as
amended, as the value-added tax due from or paid by a VAT-
registered person on the importation of goods or local
TAX 2 | VAT CASES
purchase of good and services, including lease or use of
property, in the course of trade or business, from a VAT-
registered person, and Output Tax is the value-added
tax due on the sale or lease of taxable goods or properties or
services by any person registered or required to register
under the law.
Petitioners claim that the contested sections impose
limitations on the amount of input tax that may be claimed. In
effect, a portion of the input tax that has already been paid
cannot now be credited against the output tax.
Petitioners’ argument is not absolute. It assumes that the
input tax exceeds 70% of the output tax, and therefore, the
input tax in excess of 70% remains uncredited. However, to
the extent that the input tax is less than 70% of the output
tax, then 100% of such input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a
business’s books of accounts and remains creditable in the
succeeding quarter/s. This is explicitly allowed by Section
110(B), which provides that "if the input tax exceeds the
output tax, the excess shall be carried over to the succeeding
quarter or quarters." In addition, Section 112(B) allows a VAT-
registered person to apply for the issuance of a tax credit
certificate or refund for any unused input taxes, to the extent
that such input taxes have not been applied against the
output taxes. Such unused input tax may be used in payment
of his other internal revenue taxes.
The non-application of the unutilized input tax in a given
quarter is not ad infinitum, as petitioners exaggeratedly
contend. Their analysis of the effect of the 70% limitation is
incomplete and one-sided. It ends at the net effect that there
will be unapplied/unutilized inputs VAT for a given quarter. It
does not proceed further to the fact that such
unapplied/unutilized input tax may be credited in the
subsequent periods as allowed by the carry-over provision of
Section 110(B) or that it may later on be refunded through a
tax credit certificate under Section 112(B).
Therefore, petitioners’ argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to
comprehend the operation of the 70% limitation on the input
tax. According to petitioner, the limitation on the creditable
input tax in effect allows VAT-registered establishments to
retain a portion of the taxes they collect, which violates the
principle that tax collection and revenue should be for public
purposes and expenditures
As earlier stated, the input tax is the tax paid by a person,
passed on to him by the seller, when he buys goods. Output
tax meanwhile is the tax due to the person when he sells
goods. In computing the VAT payable, three possible scenarios
may arise:
First, if at the end of a taxable quarter the output taxes
charged by the seller are equal to the input taxes that he paid
and passed on by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the
person shall be liable for the excess, which has to be paid to
the Bureau of Internal Revenue (BIR);69 and
Third, if the input taxes exceed the output taxes, the excess
shall be carried over to the succeeding quarter or quarters.
Should the input taxes result from zero-rated or effectively
zero-rated transactions, any excess over the output taxes shall
instead be refunded to the taxpayer or credited against other
internal revenue taxes, at the taxpayer’s option.70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation
on the input tax. Thus, a person can credit his input tax only
up to the extent of 70% of the output tax. In layman’s term,
the value-added taxes that a person/taxpayer paid and passed
on to him by a seller can only be credited up to 70% of the
value-added taxes that is due to him on a taxable transaction.
There is no retention of any tax collection because the
person/taxpayer has already previously paid the input tax to a
seller, and the seller will subsequently remit such input tax to
the BIR. The party directly liable for the payment of the tax is
the seller.71 What only needs to be done is for the
person/taxpayer to apply or credit these input taxes, as
evidenced by receipts, against his output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et
al. also argue that the input tax partakes the nature of a
property that may not be confiscated, appropriated, or
limited without due process of law.
The input tax is not a property or a property right within the
constitutional purview of the due process clause. A VAT-
registered person’s entitlement to the creditable input tax is a
mere statutory privilege.
Page 14
The distinction between statutory privileges and vested rights
must be borne in mind for persons have no vested rights in
statutory privileges. The state may change or take away rights,
which were created by the law of the state, although it may
not take away property, which was vested by virtue of such
rights.72
Under the previous system of single-stage taxation, taxes paid
at every level of distribution are not recoverable from the
taxes payable, although it becomes part of the cost, which is
deductible from the gross revenue. When Pres. Aquino issued
E.O. No. 273 imposing a 10% multi-stage tax on all sales, it
was then that the crediting of the input tax paid on purchase
or importation of goods and services by VAT-registered
persons against the output tax was introduced.73 This was
adopted by the Expanded VAT Law (R.A. No. 7716),74 and The
Tax Reform Act of 1997 (R.A. No. 8424).75 The right to credit
input tax as against the output tax is clearly a privilege created
by law, a privilege that also the law can remove, or in this
case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and
confiscatory, Section 8 of R.A. No. 9337, amending Section
110(A) of the NIRC, which provides:
SEC. 110. Tax Credits. –
(A) Creditable Input Tax. – …
Provided, That the input tax on goods purchased or imported
in a calendar month for use in trade or business for which
deduction for depreciation is allowed under this Code, shall be
spread evenly over the month of acquisition and the fifty-nine
(59) succeeding months if the aggregate acquisition cost for
such goods, excluding the VAT component thereof, exceeds
One million pesos (₱1,000,000.00): Provided, however, That if
the estimated useful life of the capital goods is less than five
(5) years, as used for depreciation purposes, then the input
VAT shall be spread over such a shorter
period: Provided, finally, That in the case of purchase of
services, lease or use of properties, the input tax shall be
creditable to the purchaser, lessee or license upon payment of
the compensation, rental, royalty or fee.
The foregoing section imposes a 60-month period within
which to amortize the creditable input tax on purchase or
importation of capital goods with acquisition cost of ₱1
Million pesos, exclusive of the VAT component. Such spread
out only poses a delay in the crediting of the input tax.
TAX 2 | VAT CASES
Petitioners’ argument is without basis because the taxpayer is
not permanently deprived of his privilege to credit the input
tax.
It is worth mentioning that Congress admitted that the
spread-out of the creditable input tax in this case amounts to
a 4-year interest-free loan to the government.76 In the same
breath, Congress also justified its move by saying that the
provision was designed to raise an annual revenue of 22.6
billion.77 The legislature also dispelled the fear that the
provision will fend off foreign investments, saying that foreign
investors have other tax incentives provided by law, and citing
the case of China, where despite a 17.5% non-creditable VAT,
foreign investments were not deterred.78 Again, for whatever
is the purpose of the 60-month amortization, this involves
executive economic policy and legislative wisdom in which the
Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on
payments made by the government for taxable transactions,
Section 12 of R.A. No. 9337, which amended Section 114 of
the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax. –
(C) Withholding of Value-added Tax. – The Government or any
of its political subdivisions, instrumentalities or agencies,
including government-owned or controlled corporations
(GOCCs) shall, before making payment on account of each
purchase of goods and services which are subject to the value-
added tax imposed in Sections 106 and 108 of this Code,
deduct and withhold a final value-added tax at the rate of five
percent (5%) of the gross payment thereof: Provided, That the
payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For purposes of this
Section, the payor or person in control of the payment shall
be considered as the withholding agent.
The value-added tax withheld under this Section shall be
remitted within ten (10) days following the end of the month
the withholding was made.
Section 114(C) merely provides a method of collection, or as
stated by respondents, a more simplified VAT withholding
system. The government in this case is constituted as a
withholding agent with respect to their payments for goods
and services.
Prior to its amendment, Section 114(C) provided for different
rates of value-added taxes to be withheld -- 3% on gross
payments for purchases of goods; 6% on gross payments for
services supplied by contractors other than by public works
contractors; 8.5% on gross payments for services supplied by
public work contractors; or 10% on payment for the lease or
use of properties or property rights to nonresident owners.
Under the present Section 114(C), these different rates,
except for the 10% on lease or property rights payment to
nonresidents, were deleted, and a uniform rate of 5% is
applied.
The Court observes, however, that the law the used the
word final. In tax usage, final, as opposed to creditable, means
full. Thus, it is provided in Section 114(C): "final value-added
tax at the rate of five percent (5%)."
In Revenue Regulations No. 02-98, implementing R.A. No.
8424 (The Tax Reform Act of 1997), the concept of final
withholding tax on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. – Under the final withholding tax
system the amount of income tax withheld by the withholding
agent is constituted as full and final payment of the income
tax due from the payee on the said income. The liability for
payment of the tax rests primarily on the payor as a
withholding agent. Thus, in case of his failure to withhold the
tax or in case of underwithholding, the deficiency tax shall be
collected from the payor/withholding agent. …
(B) Creditable Withholding Tax. – Under the creditable
withholding tax system, taxes withheld on certain income
payments are intended to equal or at least approximate the
tax due of the payee on said income. … Taxes withheld on
income payments covered by the expanded withholding tax
(referred to in Sec. 2.57.2 of these regulations) and
compensation income (referred to in Sec. 2.78 also of these
regulations) are creditable in nature.
As applied to value-added tax, this means that taxable
transactions with the government are subject to a 5% rate,
which constitutes as full payment of the tax payable on the
transaction. This represents the net VAT payable of the seller.
The other 5% effectively accounts for the standard input VAT
(deemed input VAT), in lieu of the actual input VAT directly or
attributable to the taxable transaction.79
Page 15
The Court need not explore the rationale behind the
provision. It is clear that Congress intended to treat differently
taxable transactions with the government.80 This is supported
by the fact that under the old provision, the 5% tax withheld
by the government remains creditable against the tax liability
of the seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax. –
(C) Withholding of Creditable Value-added Tax. – The
Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or
controlled corporations (GOCCs) shall, before making
payment on account of each purchase of goods from sellers
and services rendered by contractors which are subject to the
value-added tax imposed in Sections 106 and 108 of this Code,
deduct and withhold the value-added tax due at the rate of
three percent (3%) of the gross payment for the purchase of
goods and six percent (6%) on gross receipts for services
rendered by contractors on every sale or installment payment
which shall be creditable against the value-added tax liability
of the seller or contractor: Provided, however, That in the
case of government public works contractors, the withholding
rate shall be eight and one-half percent (8.5%): Provided,
further, That the payment for lease or use of properties or
property rights to nonresident owners shall be subject to ten
percent (10%) withholding tax at the time of payment. For this
purpose, the payor or person in control of the payment shall
be considered as the withholding agent.
The valued-added tax withheld under this Section shall be
remitted within ten (10) days following the end of the month
the withholding was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the
word creditable exhibits Congress’s intention to treat
transactions with the government differently. Since it has not
been shown that the class subject to the 5% final withholding
tax has been unreasonably narrowed, there is no reason to
invalidate the provision. Petitioners, as petroleum dealers, are
not the only ones subjected to the 5% final withholding tax. It
applies to all those who deal with the government.
Moreover, the actual input tax is not totally lost or
uncreditable, as petitioners believe. Revenue Regulations No.
14-2005 or the Consolidated Value-Added Tax Regulations
2005 issued by the BIR, provides that should the actual input
tax exceed 5% of gross payments, the excess may form part of
TAX 2 | VAT CASES
the cost. Equally, should the actual input tax be less than 5%,
the difference is treated as income.81
Petitioners also argue that by imposing a limitation on the
creditable input tax, the government gets to tax a profit or
value-added even if there is no profit or value-added.
Petitioners’ stance is purely hypothetical, argumentative, and
again, one-sided. The Court will not engage in a legal joust
where premises are what ifs, arguments, theoretical and facts,
uncertain. Any disquisition by the Court on this point will only
be, as Shakespeare describes life in Macbeth,82 "full of sound
and fury, signifying nothing."
What’s more, petitioners’ contention assumes the proposition
that there is no profit or value-added. It need not take an
astute businessman to know that it is a matter of exception
that a business will sell goods or services without profit or
value-added. It cannot be overstressed that a business is
created precisely for profit.
The equal protection clause under the Constitution means
that "no person or class of persons shall be deprived of the
same protection of laws which is enjoyed by other persons or
other classes in the same place and in like circumstances."83
The power of the State to make reasonable and natural
classifications for the purposes of taxation has long been
established. Whether it relates to the subject of taxation, the
kind of property, the rates to be levied, or the amounts to be
raised, the methods of assessment, valuation and collection,
the State’s power is entitled to presumption of validity. As a
rule, the judiciary will not interfere with such power absent a
clear showing of unreasonableness, discrimination, or
arbitrariness.84
Petitioners point out that the limitation on the creditable
input tax if the entity has a high ratio of input tax, or invests in
capital equipment, or has several transactions with the
government, is not based on real and substantial differences
to meet a valid classification.
The argument is pedantic, if not outright baseless. The law
does not make any classification in the subject of taxation, the
kind of property, the rates to be levied or the amounts to be
raised, the methods of assessment, valuation and collection.
Petitioners’ alleged distinctions are based on variables that
bear different consequences. While the implementation of
the law may yield varying end results depending on one’s
profit margin and value-added, the Court cannot go beyond
what the legislature has laid down and interfere with the
affairs of business.
The equal protection clause does not require the universal
application of the laws on all persons or things without
distinction. This might in fact sometimes result in unequal
protection. What the clause requires is equality among equals
as determined according to a valid classification. By
classification is meant the grouping of persons or things
similar to each other in certain particulars and different from
all others in these same particulars.85
Petitioners brought to the Court’s attention the introduction
of Senate Bill No. 2038 by Sens. S.R. Osmeña III and Ma. Ana
Consuelo A.S. – Madrigal on June 6, 2005, and House Bill No.
4493 by Rep. Eric D. Singson. The proposed legislation seeks
to amend the 70% limitation by increasing the same to 90%.
This, according to petitioners, supports their stance that the
70% limitation is arbitrary and confiscatory. On this score,
suffice it to say that these are still proposed legislations. Until
Congress amends the law, and absent any unequivocal basis
for its unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds
of property of the same class shall be taxed at the same rate.
Different articles may be taxed at different amounts provided
that the rate is uniform on the same class everywhere with all
people at all times.86
In this case, the tax law is uniform as it provides a standard
rate of 0% or 10% (or 12%) on all goods and services. Sections
4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and
108, respectively, of the NIRC, provide for a rate of 10% (or
12%) on sale of goods and properties, importation of goods,
and sale of services and use or lease of properties. These
same sections also provide for a 0% rate on certain sales and
transaction.
Neither does the law make any distinction as to the type of
industry or trade that will bear the 70% limitation on the
Page 16
creditable input tax, 5-year amortization of input tax paid on
purchase of capital goods or the 5% final withholding tax by
the government. It must be stressed that the rule of uniform
taxation does not deprive Congress of the power to classify
subjects of taxation, and only demands uniformity within the
particular class.87
R.A. No. 9337 is also equitable. The law is equipped with a
threshold margin. The VAT rate of 0% or 10% (or 12%) does
not apply to sales of goods or services with gross annual sales
or receipts not exceeding ₱1,500,000.00.88Also, basic marine
and agricultural food products in their original state are still
not subject to the tax,89 thus ensuring that prices at the
grassroots level will remain accessible. As was stated
in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas,
Inc. vs. Tan:90
The disputed sales tax is also equitable. It is imposed only on
sales of goods or services by persons engaged in business with
an aggregate gross annual sales exceeding ₱200,000.00. Small
corner sari-sari stores are consequently exempt from its
application. Likewise exempt from the tax are sales of farm
and marine products, so that the costs of basic food and other
necessities, spared as they are from the incidence of the VAT,
are expected to be relatively lower and within the reach of the
general public.
It is admitted that R.A. No. 9337 puts a premium on
businesses with low profit margins, and unduly favors those
with high profit margins. Congress was not oblivious to this.
Thus, to equalize the weighty burden the law entails, the law,
under Section 116, imposed a 3% percentage tax on VAT-
exempt persons under Section 109(v), i.e., transactions with
gross annual sales and/or receipts not exceeding ₱1.5 Million.
This acts as a equalizer because in effect, bigger businesses
that qualify for VAT coverage and VAT-exempt taxpayers
stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion
the impact of the imposition of the tax on those previously
exempt. Excise taxes on petroleum products91 and natural
gas92 were reduced. Percentage tax on domestic carriers was
removed.93 Power producers are now exempt from paying
franchise tax.94
Aside from these, Congress also increased the income tax
rates of corporations, in order to distribute the burden of
taxation. Domestic, foreign, and non-resident corporations
are now subject to a 35% income tax rate, from a previous
TAX 2 | VAT CASES
32%.95 Intercorporate dividends of non-resident foreign
corporations are still subject to 15% final withholding tax but
the tax credit allowed on the corporation’s domicile was
increased to 20%.96 The Philippine Amusement and Gaming
Corporation (PAGCOR) is not exempt from income taxes
anymore.97 Even the sale by an artist of his works or services
performed for the production of such works was not spared.
All these were designed to ease, as well as spread out, the
burden of taxation, which would otherwise rest largely on the
consumers. It cannot therefore be gainsaid that R.A. No. 9337
is equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the
creditable input tax is anything but regressive. It is the smaller
business with higher input tax-output tax ratio that will suffer
the consequences.
Progressive taxation is built on the principle of the taxpayer’s
ability to pay. This principle was also lifted from Adam
Smith’s Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the
support of the government, as nearly as possible, in
proportion to their respective abilities; that is, in proportion
to the revenue which they respectively enjoy under the
protection of the state.
Taxation is progressive when its rate goes up depending on
the resources of the person affected.98
The VAT is an antithesis of progressive taxation. By its very
nature, it is regressive. The principle of progressive taxation
has no relation with the VAT system inasmuch as the VAT paid
by the consumer or business for every goods bought or
services enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an
income, whether big or small. The disparity lies in the income
earned by a person or profit margin marked by a business,
such that the higher the income or profit margin, the smaller
the portion of the income or profit that is eaten by VAT. A
converso, the lower the income or profit margin, the bigger
the part that the VAT eats away. At the end of the day, it is
really the lower income group or businesses with low-profit
margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the
imposition of indirect taxes, like the VAT. What it simply
provides is that Congress shall "evolve a progressive system of
taxation." The Court stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of
indirect taxes which, like the VAT, are regressive. What it
simply provides is that Congress shall ‘evolve a progressive
system of taxation.’ The constitutional provision has been
interpreted to mean simply that ‘direct taxes are . . . to be
preferred [and] as much as possible, indirect taxes should be
minimized.’ (E. FERNANDO, THE CONSTITUTION OF THE
PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to
Congress is not to prescribe, but to evolve, a progressive tax
system. Otherwise, sales taxes, which perhaps are the oldest
form of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, §17 (1) of the 1973 Constitution
from which the present Art. VI, §28 (1) was taken. Sales taxes
are also regressive.
Resort to indirect taxes should be minimized but not avoided
entirely because it is difficult, if not impossible, to avoid them
by imposing such taxes according to the taxpayers' ability to
pay. In the case of the VAT, the law minimizes the regressive
effects of this imposition by providing for zero rating of
certain transactions (R.A. No. 7716, §3, amending §102 (b) of
the NIRC), while granting exemptions to other transactions.
(R.A. No. 7716, §4 amending §103 of the NIRC)99
CONCLUSION
It has been said that taxes are the lifeblood of the
government. In this case, it is just an enema, a first-aid
measure to resuscitate an economy in distress. The Court is
neither blind nor is it turning a deaf ear on the plight of the
masses. But it does not have the panacea for the malady that
the law seeks to remedy. As in other cases, the Court cannot
strike down a law as unconstitutional simply because of its
yokes.
Let us not be overly influenced by the plea that for every
wrong there is a remedy, and that the judiciary should stand
ready to afford relief. There are undoubtedly many wrongs
the judicature may not correct, for instance, those involving
political questions. . . .
Let us likewise disabuse our minds from the notion that the
judiciary is the repository of remedies for all political or social
ills; We should not forget that the Constitution has judiciously
Page 17
allocated the powers of government to three distinct and
separate compartments; and that judicial interpretation has
tended to the preservation of the independence of the three,
and a zealous regard of the prerogatives of each, knowing full
well that one is not the guardian of the others and that, for
official wrong-doing, each may be brought to account, either
by impeachment, trial or by the ballot box.100

The words of the Court in Vera vs. Avelino101 holds true then,
as it still holds true now. All things considered, there is
no raison d'être for the unconstitutionality of R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being

unconstitutional, the petitions in G.R. Nos. 168056, 168207,
168461, 168463, and 168730, are hereby DISMISSED.

There being no constitutional impediment to the full

enforcement and implementation of R.A. No. 9337, the
temporary restraining order issued by the Court on July 1,
2005 is LIFTED upon finality of herein decision.

SO ORDERED.

TAX 2 | VAT CASES Page 18

G.R. No. L-10854 January 27, 1960 Wherefore, the decision appealed from is affirmed, without
costs. So ordered.
MANILA POLO CLUB, plaintiff-appelle,
vs. Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador,
BIBIANO L. MEER, ETC, defendant and appellant. Concepcion, Reyes, J.B.L., Endencia, Barrera, and Gutierrez
David, JJ., concur.
PARAS, C.J.:

The appellee, a non-stock corporation organized to promote

social intercourse among its members, has established within
its premises a restaurant and bar which serves food and drinks
to its members and their families and friends. In view of the
ruling of the appellant exempting the Baguio Country Club
from the fixed and percentage taxes imposed under Sections
182 and 191 of the National Internal Revenue Code, as
amended, the appellee filed on November 25, 1949, a claim
for refund of the percentage taxes amounting to P6,792.60 it
paid for the period covering the 4th quarter of 1947 to the 3rd
quarter of 1949. Upon denial of the claim, the appellee filed
the present action in the Court of First Instance of Manila,
which after hearing, ordered that the taxes be refunded. The
decision is sought to be reversed by the appellant in this
Court.

It is admitted by appellant that appellee is a social club, and

that it would be exempt from the payment of the fixed and
percentage taxes in question should it be able to prove that
the sales in its restaurant and bar were made strictly on the
"cost-plus-expenses-basis". By this formula is meant that the
appellee should have charged its patrons for only the
procurement costs of the food and drink served, plus an
amount merely sufficient to cover the expenses for the
operation of its bar and restaurant. Since it has been shown
that this method of operation had been pursued by the
appellee, it cannot be considered as engaged in business as a
keeper of restaurant and bar, and is not therefore subject to
the fixed and percentage taxes imposed by Sections 182 and
191 of the National Internal Revenue Code, as amended.

Inasmuch as the record also show that appellant admits that

the appellee, as a club, has for its objective the promotion of
the game of polo, other athletic sport and outdoor
recreations, and to give opportunity for social intercourse to
its members, and that the establishment or operation of the
bar and restaurant is only incidental to the alleged objectives
of appellee's existence as a polo club, we hold that the
appellee is not a commercial concern, run for profit.1

TAX 2 | VAT CASES Page 19

CIR v. Magsaysay Lines, G.R. No. 146984, July 28, 2006
DECISION
TINGA, J.:
The issue in this present petition is whether the sale by the
National Development Company (NDC) of five (5) of its vessels
to the private respondents is subject to value-added tax (VAT)
under the National Internal Revenue Code of 1986 (Tax Code)
then prevailing at the time of the sale. The Court of Tax
Appeals (CTA) and the Court of Appeals commonly ruled that
the sale is not subject to VAT. We affirm, though on a more
unequivocal rationale than that utilized by the rulings under
review. The fact that the sale was not in the course of the
trade or business of NDC is sufficient in itself to declare the
sale as outside the coverage of VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization,
NDC decided to sell to private enterprise all of its shares in its
wholly-owned subsidiary the National Marine Corporation
(NMC). The NDC decided to sell in one lot its NMC shares and
five (5) of its ships, which are 3,700 DWT Tween-Decker,
Kloeckner type vessels.[1] The vessels were constructed for the
NDC between 1981 and 1984, then initially leased to Luzon
Stevedoring Company, also its wholly-owned subsidiary.
Subsequently, the vessels were transferred and leased, on a
bareboat basis, to the NMC.[2]
The NMC shares and the vessels were offered for public
bidding. Among the stipulated terms and conditions for the
public auction was that the winning bidder was to pay a value
added tax of 10% on the value of the vessels.[3] On 3 June
1988, private respondent Magsaysay Lines, Inc. (Magsaysay
Lines) offered to buy the shares and the vessels
for P168,000,000.00. The bid was made by Magsaysay Lines,
purportedly for a new company still to be formed composed
of itself, Baliwag Navigation, Inc., and FIM Limited of the
Marden Group based in Hongkong (collectively, private
respondents).[4] The bid was approved by the Committee on
Privatization, and a Notice of Award dated 1 July 1988 was
issued to Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale
was executed between NDC, on one hand, and Magsaysay
Lines, Baliwag Navigation, and FIM Limited, on the other.
Paragraph 11.02 of the contract stipulated that [v]alue-added
tax, if any, shall be for the account of the PURCHASER. [5] Per
arrangement, an irrevocable confirmed Letter of Credit
previously filed as bidders bond was accepted by NDC as
TAX 2 | VAT CASES
security for the payment of VAT, if any. By this time, a formal
request for a ruling on whether or not the sale of the vessels
was subject to VAT had already been filed with the Bureau of
Internal Revenue (BIR) by the law firm of Sycip Salazar
Hernandez & Gatmaitan, presumably in behalf of private
respondents. Thus, the parties agreed that should no
favorable ruling be received from the BIR, NDC was authorized
to draw on the Letter of Credit upon written demand the
amount needed for the payment of the VAT on the stipulated
due date, 20 December 1988.[6]
In January of 1989, private respondents through counsel
received VAT Ruling No. 568-88 dated 14 December
1988 from the BIR, holding that the sale of the vessels was
subject to the 10% VAT. The ruling cited the fact that NDC was
a VAT-registered enterprise, and thus its transactions incident
to its normal VAT registered activity of leasing out personal
property including sale of its own assets that are movable,
tangible objects which are appropriable or transferable are
subject to the 10% [VAT].[7]
Private respondents moved for the reconsideration of VAT
Ruling No. 568-88, as well as VAT Ruling No. 395-88 (dated 18
August 1988), which made a similar ruling on the sale of the
same vessels in response to an inquiry from the Chairman of
the Senate Blue Ribbon Committee. Their motion was denied
when the BIR issued VAT Ruling Nos. 007-89 dated 24
February 1989, reiterating the earlier VAT rulings. At this
point, NDC drew on the Letter of Credit to pay for the VAT,
and the amount of P15,120,000.00 in taxes was paid on 16
March 1989.
On 10 April 1989, private respondents filed an Appeal and
Petition for Refund with the CTA, followed by a Supplemental
Petition for Review on 14 July 1989. They prayed for the
reversal of VAT Rulings No. 395-88, 568-88 and 007-89, as well
as the refund of the VAT payment made amounting
to P15,120,000.00.[8] The Commissioner of Internal Revenue
(CIR) opposed the petition, first arguing that private
respondents were not the real parties in interest as they were
not the transferors or sellers as contemplated in Sections 99
and 100 of the then Tax Code. The CIR also squarely defended
the VAT rulings holding the sale of the vessels liable for VAT,
especially citing Section 3 of Revenue Regulation No. 5-87
(R.R. No. 5-87), which provided that [VAT] is imposed on any
sale or transactions deemed sale of taxable goods (including
capital goods, irrespective of the date of acquisition). The CIR
argued that the sale of the vessels were among those
transactions deemed sale, as enumerated in Section 4 of R.R.
No. 5-87. It seems that the CIR particularly emphasized
Section 4(E)(i) of the Regulation, which classified change of
ownership of business as a circumstance that gave rise to a
transaction deemed sale.
In a Decision dated 27 April 1992, the CTA rejected the CIRs
arguments and granted the petition.[9] The CTA ruled that the
sale of a vessel was an isolated transaction, not done in the
ordinary course of NDCs business, and was thus not subject to
VAT, which under Section 99 of the Tax Code, was applied
only to sales in the course of trade or business. The CTA
further held that the sale of the vessels could not be deemed
sale, and thus subject to VAT, as the transaction did not fall
under the enumeration of transactions deemed sale as listed
either in Section 100(b) of the Tax Code, or Section 4 of R.R.
No. 5-87. Finally, the CTA ruled that any case of doubt should
be resolved in favor of private respondents since Section 99 of
the Tax Code which implemented VAT is not an exemption
provision, but a classification provision which warranted the
resolution of doubts in favor of the taxpayer.
The CIR appealed the CTA Decision to the Court of
Appeals,[10] which on 11 March 1997, rendered a Decision
reversing the CTA.[11] While the appellate court agreed that
the sale was an isolated transaction, not made in the course
of NDCs regular trade or business, it nonetheless found that
the transaction fell within the classification of those deemed
sale under R.R. No. 5-87, since the sale of the vessels together
with the NMC shares brought about a change of ownership in
NMC. The Court of Appeals also applied the principle
governing tax exemptions that such should be strictly
construed against the taxpayer, and liberally in favor of the
government.[12]
However, the Court of Appeals reversed itself upon
reconsidering the case, through a Resolution dated 5 February
2001.[13] This time, the appellate court ruled that the change
of ownership of business as contemplated in R.R. No. 5-87
must be a consequence of the retirement from or cessation of
business by the owner of the goods, as provided for in Section
100 of the Tax Code. The Court of Appeals also agreed with
the CTA that the classification of transactions deemed sale
was a classification statute, and not an exemption statute,
thus warranting the resolution of any doubt in favor of the
taxpayer.[14]
To the mind of the Court, the arguments raised in the present
petition have already been adequately discussed and refuted
in the rulings assailed before us. Evidently, the petition should
be denied. Yet the Court finds that Section 99 of the Tax Code
is sufficient reason for upholding the refund of VAT payments,
and the subsequent disquisitions by the lower courts on the
Page 20
applicability of Section 100 of the Tax Code and Section 4 of
R.R. No. 5-87 are ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in
order. VAT is ultimately a tax on consumption, even though it
is assessed on many levels of transactions on the basis of a
fixed percentage.[15] It is the end user of consumer goods or
services which ultimately shoulders the tax, as the liability
therefrom is passed on to the end users by the providers of
these goods or services[16] who in turn may credit their own
VAT liability (or input VAT) from the VAT payments they
receive from the final consumer (or output VAT).[17] The final
purchase by the end consumer represents the final link in a
production chain that itself involves several transactions and
several acts of consumption. The VAT system assures fiscal
adequacy through the collection of taxes on every level of
consumption,[18] yet assuages the manufacturers or providers
of goods and services by enabling them to pass on their
respective VAT liabilities to the next link of the chain until
finally the end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional
level. Its assessment bears direct relevance to the taxpayers
role or link in the production chain. Hence, as affirmed by
Section 99 of the Tax Code and its subsequent
incarnations,[19] the tax is levied only on the sale, barter or
exchange of goods or services by persons who engage in such
activities, in the course of trade or business. These
transactions outside the course of trade or business may
invariably contribute to the production chain, but they do so
only as a matter of accident or incident. As the sales of goods
or services do not occur within the course of trade or
business, the providers of such goods or services would
hardly, if at all, have the opportunity to appropriately credit
any VAT liability as against their own accumulated VAT
collections since the accumulation of output VAT arises in the
first place only through the ordinary course of trade or
business.
That the sale of the vessels was not in the ordinary course of
trade or business of NDC was appreciated by both the CTA
and the Court of Appeals, the latter doing so even in its first
decision which it eventually reconsidered.[20] We cite with
approval the CTAs explanation on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924,
September 30, 1955 (97 Phil. 992), the term carrying on
business does not mean the performance of a single
disconnected act, but means conducting, prosecuting and
continuing business by performing progressively all the acts
normally incident thereof; while doing business conveys the
TAX 2 | VAT CASES
idea of business being done, not from time to time, but all the
time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE
CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. Course of
business is what is usually done in the management of trade
or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135
Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited
jurisprudence, is that course of business or doing business
connotes regularity of activity. In the instant case, the sale
was an isolated transaction. The sale which was involuntary
and made pursuant to the declared policy of Government for
privatization could no longer be repeated or carried on with
regularity. It should be emphasized that the normal VAT-
registered activity of NDC is leasing personal property.[21]
This finding is confirmed by the Revised
Charter[22] of the NDC which bears no indication that the NDC
was created for the primary purpose of selling real
property.[23]
The conclusion that the sale was not in the course
of trade or business, which the CIR does not dispute before
this Court,[24] should have definitively settled the matter. Any
sale, barter or exchange of goods or services not in the course
of trade or business is not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section
4(E)(i) of R.R. No. 5-87 now relied upon by the CIR, is
captioned Value-added tax on sale of goods, and it expressly
states that [t]here shall be levied, assessed and collected on
every sale, barter or exchange of goods, a value added tax x x
x. Section 100 should be read in light of Section 99, which lays
down the general rule on which persons are liable for VAT in
the first place and on what transaction if at all. It may even be
noted that Section 99 is the very first provision in Title IV of
the Tax Code, the Title that covers VAT in the law. Before any
portion of Section 100, or the rest of the law for that matter,
may be applied in order to subject a transaction to VAT, it
must first be satisfied that the taxpayer and transaction
involved is liable for VAT in the first place under Section 99.
purported to define the phrase in the course of trade or
business as expressed in Section 99. If that were so, reference
to Section 100 would have been necessary as a means of
ascertaining whether the sale of the
vessels was in the course of trade or business, and thus
subject to
VAT. But that is not the case. What Section 100 and Section
4(E)(i) of R.R. No. 5-87 elaborate on is not the meaning of in
the course of trade or business, but instead the identification
of the transactions which may be deemed as sale. It would
become necessary to ascertain whether under those two
provisions the transaction may be deemed a sale, only if it is
settled that the transaction occurred in the course of trade or
business in the first place. If the transaction transpired outside
the course of trade or business, it would be irrelevant for the
purpose of determining VAT liability whether the transaction
may be deemed sale, since it anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding
that the transaction in question was not made in the course of
trade or business of the seller, NDC that is, the sale is not
subject to VAT pursuant to Section 99 of the Tax Code, no
matter how the said sale may hew to those transactions
deemed sale as defined under Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87
were to find application in this case, the Court finds the
discussions offered on this point by the CTA and the Court of
Appeals (in its subsequent Resolution) essentially correct.
Section 4 (E)(i) of R.R. No. 5-87 does classify as among the
transactions deemed sale those involving change of
ownership of business. However, Section 4(E) of R.R. No. 5-87,
reflecting Section 100 of the Tax Code, clarifies that such
change of ownership is only an attending circumstance to
retirement from or cessation of business[, ] with respect to all
goods on hand [as] of the date of such retirement or
cessation.[25] Indeed, Section 4(E) of R.R. No. 5-87 expressly
characterizes the change of ownership of business as only a
circumstance that attends those transactions deemed sale,
which are otherwise stated in the same section.[26]
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.
Page 21
Mindanao Geothermal Partnership v. CIR, G.R. Nos. 193301
and 194637, March 11, 2013
CARPIO, J.:
G.R. No. 193301 is a petition for review1 assailing the
Decision2 promulgated on 10 March 2010 as well as the
Resolution3 promulgated on 28 July 2010 by the Court of Tax
Appeals En Banc (CTA En Banc) in CTA EB No. 513. The CTA En
Banc affirmed the 22 September 2008 Decision4 as well as the
26 June 2009 Amended Decision5 of the First Division of the
Court of Tax Appeals (CTA First Division) in CTA Case Nos.
7227, 7287, and 7317. The CTA First Division denied
Mindanao II Geothermal Partnership’s (Mindanao II) claims
for refund or tax credit for the first and second quarters of
taxable year 2003 for being filed out of time (CTA Case Nos.
7227 and 7287). The CTA First Division, however, ordered the
Commissioner of Internal Revenue (CIR) to refund or credit to
Mindanao II unutilized input value-added tax (VAT) for the
third and fourth quarters of taxable year 2003 (CTA Case No.
7317).
review6
G.R. No. 194637 is a petition for assailing the
Decision7 promulgated on 31 May 2010 as well as the
Amended Decision8 promulgated on 24 November 2010 by
the CTA En Banc in CTA EB Nos. 476 and 483. In its Amended
Decision, the CTA En Banc reversed its 31 May 2010 Decision
and granted the CIR’s petition for review in CTA Case No. 476.
The CTA En Banc denied Mindanao I Geothermal Partnership’s
(Mindanao I) claims for refund or tax credit for the first (CTA
Case No. 7228), second (CTA Case No. 7286), third, and fourth
quarters (CTA Case No. 7318) of 2003.
Both Mindanao I and II are partnerships registered with the
Securities and Exchange Commission, value added taxpayers
registered with the Bureau of Internal Revenue (BIR), and
Block Power Production Facilities accredited by the
Department of Energy. Republic Act No. 9136, or the Electric
Power Industry Reform Act of 2000 (EPIRA), effectively
amended Republic Act No. 8424, or the Tax Reform Act of
1997 (1997 Tax Code),9 when it decreed that sales of power
by generation companies shall be subjected to a zero rate of
VAT.10 Pursuant to EPIRA, Mindanao I and II filed with the CIR
claims for refund or tax credit of accumulated unutilized
and/or excess input taxes due to VAT zero-rated sales in 2003.
Mindanao I and II filed their claims in 2005.
TAX 2 | VAT CASES
G.R. No. 193301 that it can use its accumulated input tax credits to offset its
Mindanao II v. CIR output tax liability. Considering, however that its only
revenue-generating activity is VAT zero-rated under RA No.
The Facts 9136, Mindanao II’s input tax credits remain unutilized.
G.R. No. 193301 covers three CTA First Division cases, CTA Thus, on the belief that its sales qualify for VAT zero-rating,
Case Nos. 7227, 7287, and 7317, which were consolidated as Mindanao II adopted the VAT zero-rating of the EPIRA in
CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317 claim a computing for its VAT payable when it filed its Quarterly VAT
tax refund or credit of Mindanao II’s alleged excess or Returns on the following dates:
unutilized input taxes due to VAT zero-rated sales. In CTA Case
No. 7227, Mindanao II claims a tax refund or credit of CTA Case Period Date of Filing
₱3,160,984.69 for the first quarter of 2003. In CTA Case No. No. Covered
7287, Mindanao II claims a tax refund or credit of (2003) Original Amended
₱1,562,085.33 for the second quarter of 2003. In CTA Case Return Return
No. 7317, Mindanao II claims a tax refund or credit of
₱3,521,129.50 for the third and fourth quarters of 2003. 7227 1st Quarter April 23, July 3, 2002
2003 (sic),
April 1, 2004 &
The CTA First Division’s narration of the pertinent facts is as
October 22,
follows:
2004
xxxx 7287 2nd Quarter July 22, 2003 April 1, 2004
7317 3rd Quarter Oct. 27, 2003 April 1, 2004
On March 11, 1997, [Mindanao II] allegedly entered into a
Built (sic)-Operate-Transfer (BOT) contract with the Philippine 7317 4th Quarter Jan. 26, 2004 April 1, 2204
National Oil Corporation – Energy Development Company
(PNOC-EDC) for finance, engineering, supply, installation,
testing, commissioning, operation, and maintenance of a Considering that it has accumulated unutilized creditable
48.25 megawatt geothermal power plant, provided that input taxes from its only income-generating activity,
PNOC-EDC shall supply and deliver steam to Mindanao II at no Mindanao II filed an application for refund and/or issuance of
cost. In turn, Mindanao II shall convert the steam into electric tax credit certificate with the BIR’s Revenue District Office at
capacity and energy for PNOC-EDC and shall deliver the same Kidapawan City on April 13, 2005 for the four quarters of
to the National Power Corporation (NPC) for and in behalf of 2003.
PNOC-EDC. Mindanao II alleges that its sale of generated
power and delivery of electric capacity and energy of To date (September 22, 2008), the application for refund by
Mindanao II to NPC for and in behalf of PNOC-EDC is its only Mindanao II remains unacted upon by the CIR. Hence, these
revenue-generating activity which is in the ambit of VAT zero- three petitions filed on April 22, 2005 covering the 1st quarter
rated sales under the EPIRA Law, x x x. of 2003; July 7, 2005 for the 2nd quarter of 2003; and
September 9, 2005 for the 3rd and 4th quarters of 2003. At
xxxx the instance of Mindanao II, these petitions were
consolidated on March 15, 2006 as they involve the same
parties and the same subject matter. The only difference lies
Hence, the amendment of the NIRC of 1997 modified the VAT with the taxable periods involved in each petition.11
rate applicable to sales of generated power by generation
companies from ten (10%) percent to zero (0%) percent.
The Court of Tax Appeals’ Ruling: Division
In the course of its operation, Mindanao II makes domestic
purchases of goods and services and accumulates therefrom In its 22 September 2008 Decision,12 the CTA First Division
creditable input taxes. Pursuant to the provisions of the found that Mindanao II satisfied the twin requirements for
National Internal Revenue Code (NIRC), Mindanao II alleges VAT zero rating under EPIRA: (1) it is a generation company,
and (2) it derived sales from power generation. The CTA First
Page 22
Division also stated that Mindanao II complied with five 7 Quarter 2004 2004 200515 must be claimed within two years reckoned from the close of
requirements to be entitled to a refund: the taxable quarter when the relevant sales were made
regardless of whether said tax was paid.
1. There must be zero-rated or effectively zero- Thus, counting from 23 April 2003, 22 July 2003, 25 October
rated sales; 2003, and 26 January 2004, when Mindanao II filed its VAT The CTA First Division denied Mindanao II’s motion for partial
returns, its administrative claim filed on 13 April 2005 and reconsideration, found the CIR’s motion for partial
judicial claims filed on 22 April 2005, 7 July 2005, and 9 reconsideration partly meritorious, and rendered an Amended
2. That input taxes were incurred or paid; September 2005 were timely filed in accordance with Atlas. Decision20 on 26 June 2009. The CTA First Division stated that
the claim for refund or credit with the BIR and the subsequent
3. That such input VAT payments are directly The CTA First Division found that Mindanao II is entitled to a appeal to the CTA must be filed within the two-year period
attributable to zero-rated sales or effectively zero- refund in the modified amount of ₱7,703,957.79, after prescribed under Section 229. The two-year prescriptive
rated sales; disallowing ₱522,059.91 from input VAT16 and deducting period in Section 229 was denominated as a mandatory
₱18,181.82 from Mindanao II’s sale of a fully depreciated statute of limitations. Therefore, Mindanao II’s claims for
4. That the input VAT payments were not applied ₱200,000.00 Nissan Patrol. The input taxes amounting to refund for the first and second quarters of 2003 had already
against any output VAT liability; and ₱522,059.91 were disallowed for failure to meet invoicing prescribed.
requirements, while the input VAT on the sale of the Nissan
5. That the claim for refund was filed within the Patrol was reduced by ₱18,181.82 because the output VAT for The CTA First Division found that the records of Mindanao II’s
two-year prescriptive period.13 the sale was not included in the VAT declarations. case are bereft of evidence that the sale of the Nissan Patrol is
not incidental to Mindanao II’s VAT zero-rated operations.
With respect to the fifth requirement, the CTA First Division The dispositive portion of the CTA First Division’s 22 Moreover, Mindanao II’s submitted documents failed to
tabulated the dates of filing of Mindanao II’s return as well as September 2008 Decision reads: substantiate the requisites for the refund or credit claims.
its administrative and judicial claims, and concluded that
Mindanao II’s administrative and judicial claims were timely WHEREFORE, the Petition for Review is hereby PARTIALLY The CTA First Division modified its 22 September 2008
filed in compliance with this Court’s ruling in Atlas GRANTED. Accordingly, the CIR is hereby ORDERED to REFUND Decision to read as follows:
Consolidated Mining and Development Corporation v. or to ISSUE A TAX CREDIT CERTIFICATE in the modified
Commissioner of Internal Revenue (Atlas).14 The CTA First amount of SEVEN MILLION SEVEN HUNDRED THREE WHEREFORE, the Petition for Review is hereby PARTIALLY
Division declared that the two-year prescriptive period for THOUSAND NINE HUNDRED FIFTY SEVEN AND 79/100 PESOS GRANTED. Accordingly, the CIR is hereby ORDERED to REFUND
filing a VAT refund claim should not be counted from the close (₱7,703,957.79) representing its unutilized input VAT for the or to ISSUE A TAX CREDIT CERTIFICATE to Mindanao II
of the quarter but from the date of the filing of the VAT four (4) quarters of the taxable year 2003. Geothermal Partnership in the modified amount of TWO
return. As ruled in Atlas, VAT liability or entitlement to a MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT HUNDRED
refund can only be determined upon the filing of the quarterly SO ORDERED.17 EIGHTY SEVEN AND 77/100 PESOS (₱2,980,887.77)
VAT return. representing its unutilized input VAT for the third and fourth
quarters of the taxable year 2003.
Mindanao II filed a motion for partial reconsideration.18 It
CTA Period Date Filing stated that the sale of the fully depreciated Nissan Patrol is a
Case Covere one-time transaction and is not incidental to its VAT zero- SO ORDERED.21
No. d Origina Amende Administrativ Judicia rated operations. Moreover, the disallowed input taxes
(2003) l d e l Claim substantially complied with the requirements for refund or tax Mindanao II filed a Petition for Review,22 docketed as CTA EB
Return Return Return credit. No. 513, before the CTA En Banc.
722 1st 23 1 April 13 April 2005 22
7 Quarter April 2004 April The CIR also filed a motion for partial reconsideration. It The Court of Tax Appeals’ Ruling: En Banc
2003 2005 argued that the judicial claims for the first and second
quarters of 2003 were filed beyond the period allowed by law,
728 2nd 22 July 1 April 13 April 2005 7 July as stated in Section 112(A) of the 1997 Tax Code. The CIR On 10 March 2010, the CTA En Banc rendered its Decision23 in
7 Quarter 2003 2004 2005 further stated that Section 229 is a general provision, and CTA EB No. 513 and denied Mindanao II’s petition. The CTA En
governs cases not covered by Section 112(A). The CIR Banc ruled that (1) Section 112(A) clearly provides that the
731 3rd 25 Oct. 1 April 13 April 2005 9 Sept. reckoning of the two-year prescriptive period for filing the
countered the CTA First Division’s 22 September 2008
7 Quarter 2003 2004 2005 application for refund or credit of input VAT attributable to
decision by citing this Court’s ruling in Commisioner of
Internal Revenue v. Mirant Pagbilao Corporation zero-rated sales or effectively zero-rated sales shall be
731 4th 26 Jan. 1 April 13 April 2005 9 Sept. counted from the close of the taxable quarter when the sales
(Mirant),19 which stated that unutilized input VAT payments

TAX 2 | VAT CASES Page 23

were made; (2) the Atlas and Mirant cases applied different
tax codes: Atlas applied the 1977 Tax Code while Mirant
applied the 1997 Tax Code; (3) the sale of the fully-
depreciated Nissan Patrol is incidental to Mindanao II’s VAT
zero-rated transactions pursuant to Section 105; (4) Mindanao
II failed to comply with the substantiation requirements
provided under Section 113(A) in relation to Section 237 of
the 1997 Tax Code as implemented by Section 4.104-1, 4.104-
5, and 4.108-1 of Revenue Regulation No. 7-95; and (5) the
doctrine of strictissimi juris on tax exemptions cannot be
relaxed in the present case.
The dispositive portion of the CTA En Banc’s 10 March 2010
Decision reads:
WHEREFORE, on the basis of the foregoing considerations, the
Petition for Review en banc is DISMISSED for lack of merit.
Accordingly, the Decision dated September 22, 2008 and the
Amended Decision dated June 26, 2009 issued by the First
Division are AFFIRMED.
SO ORDERED.24
The CTA En Banc issued a Resolution25 on 28 July 2010
denying for lack of merit Mindanao II’s Motion for
Reconsideration.26 The CTA En Banc highlighted the following
bases of their previous ruling:
1. The Supreme Court has long decided that the claim for
refund of unutilized input VAT must be filed within two (2)
years after the close of the taxable quarter when such sales
were made.
2. The Supreme Court is the ultimate arbiter whose decisions
all other courts should take bearings.
3. The words of the law are clear, plain, and free from
ambiguity; hence, it must be given its literal meaning and
applied without any interpretation.27
G.R. No. 194637
Mindanao I v. CIR
The Facts
G.R. No. 194637 covers two cases consolidated by the CTA EB:
CTA EB Case Nos. 476 and 483. Both CTA EB cases consolidate
three cases from the CTA Second Division: CTA Case Nos.
TAX 2 | VAT CASES
7228, 7286, and 7318. CTA Case Nos. 7228, 7286, and 7318
claim a tax refund or credit of Mindanao I’s accumulated
unutilized and/or excess input taxes due to VAT zero-rated
sales. In CTA Case No. 7228, Mindanao I claims a tax refund or
credit of ₱3,893,566.14 for the first quarter of 2003. In CTA
Case No. 7286, Mindanao I claims a tax refund or credit of
₱2,351,000.83 for the second quarter of 2003. In CTA Case
No. 7318, Mindanao I claims a tax refund or credit of
₱7,940,727.83 for the third and fourth quarters of 2003.
Mindanao I is similarly situated as Mindanao II. The CTA
Second Division’s narration of the pertinent facts is as follows:
xxxx
In December 1994, Mindanao I entered into a contract of
Build-Operate-Transfer (BOT) with the Philippine National Oil
Corporation – Energy Development Corporation (PNOC-EDC)
for the finance, design, construction, testing, commissioning,
operation, maintenance and repair of a 47-megawatt
geothermal power plant. Under the said BOT contract, PNOC-
EDC shall supply and deliver steam to Mindanao I at no cost.
In turn, Mindanao I will convert the steam into electric
capacity and energy for PNOC-EDC and shall subsequently
supply and deliver the same to the National Power
Corporation (NPC), for and in behalf of PNOC-EDC.
Mindanao I’s 47-megawatt geothermal power plant project
has been accredited by the Department of Energy (DOE) as a
Private Sector Generation Facility, pursuant to the provision of
Executive Order No. 215, wherein Certificate of Accreditation
No. 95-037 was issued.
On June 26, 2001, Republic Act (R.A.) No. 9136 took effect,
and the relevant provisions of the National Internal Revenue
Code (NIRC) of 1997 were deemed modified. R.A. No. 9136,
also known as the "Electric Power Industry Reform Act of
2001 (EPIRA), was enacted by Congress to ordain reforms in
the electric power industry, highlighting, among others, the
importance of ensuring the reliability, security and
affordability of the supply of electric power to end users.
Under the provisions of this Republic Act and its implementing
rules and regulations, the delivery and supply of electric
energy by generation companies became VAT zero-rated,
which previously were subject to ten percent (10%) VAT.
xxxx
The amendment of the NIRC of 1997 modified the VAT rate
applicable to sales of generated power by generation
companies from ten (10%) percent to zero percent (0%). Thus,
Mindanao I adopted the VAT zero-rating of the EPIRA in
computing for its VAT payable when it filed its VAT Returns,
on the belief that its sales qualify for VAT zero-rating.
Mindanao I reported its unutilized or excess creditable input
taxes in its Quarterly VAT Returns for the first, second, third,
and fourth quarters of taxable year 2003, which were
subsequently amended and filed with the BIR.
On April 4, 2005, Mindanao I filed with the BIR separate
administrative claims for the issuance of tax credit certificate
on its alleged unutilized or excess input taxes for taxable year
2003, in the accumulated amount of ₱14,185, 294.80.
Alleging inaction on the part of CIR, Mindanao I elevated its
claims before this Court on April 22, 2005, July 7, 2005, and
September 9, 2005 docketed as CTA Case Nos. 7228, 7286,
and 7318, respectively. However, on October 10, 2005,
Mindanao I received a copy of the letter dated September 30,
2003 (sic) of the BIR denying its application for tax
credit/refund.28
The Court of Tax Appeals’ Ruling: Division
On 24 October 2008, the CTA Second Division rendered its
Decision29 in CTA Case Nos. 7228, 7286, and 7318. The CTA
Second Division found that (1) pursuant to Section 112(A),
Mindanao I can only claim 90.27% of the amount of
substantiated excess input VAT because a portion was not
reported in its quarterly VAT returns; (2) out of the
₱14,185,294.80 excess input VAT applied for refund, only
₱11,657,447.14 can be considered substantiated excess input
VAT due to disallowances by the Independent Certified Public
Accountant, adjustment on the disallowances per the CTA
Second Division’s further verification, and additional
disallowances per the CTA Second Division’s further
verification;
(3) Mindanao I’s accumulated excess input VAT for the second
quarter of 2003 that was carried over to the third quarter of
2003 is net of the claimed input VAT for the first quarter of
2003, and the same procedure was done for the second, third,
and fourth quarters of 2003; and (4) Mindanao I’s
administrative claims were filed within the two-year
prescriptive period reckoned from the respective dates of
filing of the quarterly VAT returns.
Page 24
The dispositive portion of the CTA Second Division’s 24
October 2008 Decision reads:
WHEREFORE, premises considered, the consolidated Petitions
for Review are hereby PARTIALLY GRANTED. Accordingly, the
CIR is hereby ORDERED TO ISSUE A TAX CREDIT CERTIFICATE in
favor of Mindanao I in the reduced amount of TEN MILLION
FIVE HUNDRED TWENTY THREE THOUSAND ONE HUNDRED
SEVENTY SEVEN PESOS AND 53/100 (₱10,523,177.53)
representing Mindanao I’s unutilized input VAT for the four
quarters of the taxable year 2003.
SO ORDERED.30
Mindanao I filed a motion for partial reconsideration with
motion for Clarification31 on 11 November 2008. It claimed
that the CTA Second Division should not have allocated
proportionately Mindanao I’s unutilized creditable input taxes
for the taxable year 2003, because the proportionate
allocation of the amount of creditable taxes in Section 112(A)
applies only when the creditable input taxes due cannot be
directly and entirely attributed to any of the zero-rated or
effectively zero-rated sales. Mindanao I claims that its
unreported collection is directly attributable to its VAT zero-
rated sales. The CTA Second Division denied Mindanao I’s
motion and maintained the proportionate allocation because
there was a portion of the gross receipts that was undeclared
in Mindanao I’s gross receipts.
The CIR also filed a motion for partial reconsideration32 on 11
November 2008. It claimed that Mindanao I failed to exhaust
administrative remedies before it filed its petition for review.
The CTA Second Division denied the CIR’s motion, and cited
Atlas33 as the basis for ruling that it is more practical and
reasonable to count the two-year prescriptive period for filing
a claim for refund or credit of input VAT on zero-rated sales
from the date of filing of the return and payment of the tax
due.
The dispositive portion of the CTA Second Division’s 10 March
2009 Resolution reads:
WHEREFORE, premises considered, the CIR’s Motion for
Partial Reconsideration and Mindanao I’s Motion for Partial
Reconsideration with Motion for Clarification are hereby
DENIED for lack of merit.
SO ORDERED.34
TAX 2 | VAT CASES
The Ruling of the Court of Tax Appeals: En Banc
On 31 May 2010, the CTA En Banc rendered its Decision35 in
CTA EB Case Nos. 476 and 483 and denied the petitions filed
by the CIR and Mindanao I. The CTA En Banc found no new
matters which have not yet been considered and passed upon
by the CTA Second Division in its assailed decision and
resolution.
The dispositive portion of the CTA En Banc’s 31 May 2010
Decision reads:
WHEREFORE, premises considered, the Petitions for Review
are hereby DISMISSED for lack of merit. Accordingly, the
October 24, 2008 Decision and March 10, 2009 Resolution of
the CTA Former Second Division in CTA Case Nos. 7228, 7286,
and 7318, entitled "Mindanao I Geothermal Partnership vs.
Commissioner of Internal Revenue" are hereby AFFIRMED in
toto.
SO ORDERED.36
Both the CIR and Mindanao I filed Motions for
Reconsideration of the CTA En Banc’s 31 May 2010 Decision.
In an Amended Decision promulgated on 24 November 2010,
the CTA En Banc agreed with the CIR’s claim that Section 229
of the NIRC of 1997 is inapplicable in light of this Court’s ruling
in Mirant. The CTA En Banc also ruled that the procedure
prescribed under Section 112(D) now 112(C)37 of the 1997 Tax
Code should be followed first before the CTA En Banc can act
on Mindanao I’s claim. The CTA En Banc reconsidered its 31
May 2010 Decision in light of this Court’s ruling in
Commissioner of Internal Revenue v. Aichi Forging Company
of Asia, Inc. (Aichi).38
The pertinent portions of the CTA En Banc’s 24 November
2010 Amended Decision read:
C.T.A. Case No. 7228:
(1) For calendar year 2003, Mindanao I filed with the BIR its
Quarterly VAT Returns for the First Quarter of 2003. Pursuant
to Section 112(A) of the NIRC of 1997, as amended, Mindanao
I has two years from March 31, 2003 or until March 31, 2005
within which to file its administrative claim for refund;
(2) On April 4, 2005, Mindanao I applied for an administrative
claim for refund of unutilized input VAT for the first quarter of
taxable year 2003 with the BIR, which is beyond the two-year
prescriptive period mentioned above.
C.T.A. Case No. 7286:
(1) For calendar year 2003, Mindanao I filed with the BIR its
Quarterly VAT Returns for the second quarter of 2003.
Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I
has two years from June 30, 2003, within which to file its
administrative claim for refund for the second quarter of
2003, or until June 30, 2005;
(2) On April 4, 2005, Mindanao I applied an administrative
claim for refund of unutilized input VAT for the second
quarter of taxable year 2003 with the BIR, which is within the
two-year prescriptive period, provided under Section 112 (A)
of the NIRC of 1997, as amended;
(3) The CIR has 120 days from April 4, 2005 (presumably the
date Mindanao I submitted the supporting documents
together with the application for refund) or until August 2,
2005, to decide the administrative claim for refund;
(4) Within 30 days from the lapse of the 120-day period or
from August 3, 2005 to September 1, 2005, Mindanao I should
have elevated its claim for refund to the CTA in Division;
(5) However, on July 7, 2005, Mindanao I filed its Petition for
Review with this Court, docketed as CTA Case No. 7286, even
before the 120-day period for the CIR to decide the claim for
refund had lapsed on August 2, 2005. The Petition for Review
was, therefore, prematurely filed and there was failure to
exhaust administrative remedies;
xxxx
C.T.A. Case No. 7318:
(1) For calendar year 2003, Mindanao I filed with the BIR its
Quarterly VAT Returns for the third and fourth quarters of
2003. Pursuant to Section 112(A) of the NIRC of 1997, as
amended, Mindanao I therefore, has two years from
September 30, 2003 and December 31, 2003, or until
September 30, 2005 and December 31, 2005, respectively,
within which to file its administrative claim for the third and
fourth quarters of 2003;
Page 25
(2) On April 4, 2005, Mindanao I applied an administrative
claim for refund of unutilized input VAT for the third and
fourth quarters of taxable year 2003 with the BIR, which is
well within the two-year prescriptive period, provided under
Section 112(A) of the NIRC of 1997, as amended;
(3) From April 4, 2005, which is also presumably the date
Mindanao I submitted supporting documents, together with
the aforesaid application for refund, the CIR has 120 days or
until August 2, 2005, to decide the claim;
(4) Within thirty (30) days from the lapse of the 120-day
period or from August 3, 2005 until September 1, 2005
Mindanao I should have elevated its claim for refund to the
CTA;
(5) However, Mindanao I filed its Petition for Review with the
CTA in Division only on September 9, 2005, which is 8 days
beyond the 30-day period to appeal to the CTA.
Evidently, the Petition for Review was filed way beyond the
30-day prescribed period. Thus, the Petition for Review should
have been dismissed for being filed late.
In recapitulation:
(1) C.T.A. Case No. 7228
Claim for the first quarter of 2003 had already prescribed for
having been filed beyond the two-year prescriptive period;
(2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be dismissed for
Mindanao I’s failure to comply with a condition precedent
when it failed to exhaust administrative remedies by filing its
Petition for Review even before the lapse of the 120-day
period for the CIR to decide the administrative claim;
(3) C.T.A. Case No. 7318
Petition for Review was filed beyond the 30-day prescribed
period to appeal to the CTA.
xxxx
TAX 2 | VAT CASES
IN VIEW OF THE FOREGOING, the Commissioner of Internal
Revenue’s Motion for Reconsideration is hereby GRANTED;
Mindanao I’s Motion for Partial Reconsideration is hereby
DENIED for lack of merit.
The May 31, 2010 Decision of this Court En Banc is hereby
REVERSED.
Accordingly, the Petition for Review of the Commissioner of
Internal Revenue in CTA EB No. 476 is hereby GRANTED and
the entire claim of Mindanao I Geothermal Partnership for the
first, second, third and fourth quarters of 2003 is hereby
DENIED.
SO ORDERED.39
The Issues
G.R. No. 193301
Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for
Review:
I. The Honorable Court of Tax Appeals erred in holding that
the claim of Mindanao II for the 1st and 2nd quarters of year
2003 has already prescribed pursuant to the Mirant case.
A. The Atlas case and Mirant case have conflicting
interpretations of the law as to the reckoning date of the two
year prescriptive period for filing claims for VAT refund.
B. The Atlas case was not and cannot be superseded by the
Mirant case in light of Section 4(3), Article VIII of the 1987
Constitution.
C. The ruling of the Mirant case, which uses the close of the
taxable quarter when the sales were made as the reckoning
date in counting the two-year prescriptive period cannot be
applied retroactively in the case of Mindanao II.
II. The Honorable Court of Tax Appeals erred in interpreting
Section 105 of the 1997 Tax Code, as amended in that the sale
of the fully depreciated Nissan Patrol is a one-time transaction
and is not incidental to the VAT zero-rated operation of
Mindanao II.
III. The Honorable Court of Tax Appeals erred in denying the
amount disallowed by the Independent Certified Public
Accountant as Mindanao II substantially complied with the
requisites of the 1997 Tax Code, as amended, for refund/tax
credit.
A. The amount of ₱2,090.16 was brought about by the timing
difference in the recording of the foreign currency deposit
transaction.
B. The amount of ₱2,752.00 arose from the out-of-pocket
expenses reimbursed to SGV & Company which is
substantially suppoerted [sic] by an official receipt.
C. The amount of ₱487,355.93 was unapplied and/or was not
included in Mindanao II’s claim for refund or tax credit for the
year 2004 subject matter of CTA Case No. 7507.
IV. The doctrine of strictissimi juris on tax exemptions should
be relaxed in the present case.40
G.R. No. 194637
Mindanao I v. CIR
Mindanao I raised the following grounds in its Petition for
Review:
I. The administrative claim and judicial claim in CTA Case No.
7228 were timely filed pursuant to the case of Atlas
Consolidated Mining and Development Corporation vs.
Commissioner of Internal Revenue, which was then the
controlling ruling at the time of filing.
A. The recent ruling in the Commissioner of Internal Revenue
vs. Mirant Pagbilao Corporation, which uses the end of the
taxable quarter when the sales were made as the reckoning
date in counting the two-year prescriptive period, cannot be
applied retroactively in the case of Mindanao I.
B. The Atlas case promulgated by the Third Division of this
Honorable Court on June 8, 2007 was not and cannot be
superseded by the Mirant Pagbilao case promulgated by the
Second Division of this Honorable Court on September 12,
2008 in light of the explicit provision of Section 4(3), Article
VIII of the 1987 Constitution.
II. Likewise, the recent ruling of this Honorable Court in
Commissioner of Internal Revenue vs. Aichi Forging Company
Page 26
of Asia, Inc., cannot be applied retroactively to Mindanao I in it shall be allocated proportionately on the basis of the 85.33 2005
the present case.41 volume of sales.
73 3rd and 30 30 13 April 12 9
In a Resolution dated 14 December 2011,42 this Court resolved xxxx 17 4th Septe Septe 2005 Septe Septe
to consolidate G.R. Nos. 193301 and 194637 to avoid Quarters mber mber mber mber
conflicting rulings in related cases. , 2003 2005 2005 2005
(D) Period within which Refund or Tax Credit of Input Taxes ₱3,521,1
shall be Made. - In proper cases, the Commissioner shall grant 29.50 31 2
The Court’s Ruling a refund or issue the tax credit certificate for creditable input Dece Januar
taxes within one hundred twenty (120) days from the date of mber y
Determination of Prescriptive Period submission of complete documents in support of the 2003 2006
application filed in accordance with Subsections (A) and (B) (31
hereof. Decem
G.R. Nos. 193301 and 194637 both raise the question of the ber
determination of the prescriptive period, or the interpretation
In case of full or partial denial of the claim for tax refund or 2005
of Section 112 of the 1997 Tax Code, in light of our rulings in being
Atlas and Mirant. tax credit, or the failure on the part of the Commissioner to
act on the application within the period prescribed above, the a
taxpayer affected may, within thirty (30) days from the receipt Saturd
Mindanao II’s unutilized input VAT tax credit for the first and of the decision denying the claim or after the expiration of the ay)
second quarters of 2003, in the amounts of ₱3,160,984.69 one hundred twenty day-period, appeal the decision or the
and ₱1,562,085.33, respectively, are covered by G.R. No. unacted claim with the Court of Tax Appeals.
193301, while Mindanao I’s unutilized input VAT tax credit for The relevant dates for G.R. No. 194637 (Minadanao I) are:
the first, second, third, and fourth quarters of 2003, in the
amounts of ₱3,893,566.14, ₱2,351,000.83, and x x x x 43 (Underscoring supplied)
CT Period Close Last Actual Last Actual
₱7,940,727.83, respectively, are covered by G.R. No. 194637.
A covered of day date of day Date
The relevant dates for G.R. No. 193301 (Mindanao II) are:
Ca by quarte for filing for of
Section 112 of the 1997 Tax Code se VAT r filing applicati filing filing
CT Period Close Last Actual Last Actual No Sales in when applic on for case case
The pertinent sections of the 1997 Tax Code, the law A covered of day date of day Date . 2003 sales ation tax with with
applicable at the time of Mindanao II’s and Mindanao I’s Ca by quarte for filing for of and were of tax refund/ CTA47 CTA
administrative and judicial claims, provide: se VAT r filing applicati filing filing amount made refund credit (judici
No Sales in when applic on for case case /tax with the al
. 2003 sales ation tax with with credit CIR claim)
SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated
and were of tax refund/ CTA45 CTA certific (administ
or Effectively Zero-rated Sales. - Any VAT-registered person,
amount made refund credit (judici ate rative
whose sales are zero-rated or effectively zero-rated may,
/tax with the al with claim)46
within two (2) years after the close of the taxable quarter
credit CIR claim) the
when the sales were made, apply for the issuance of a tax
certific (administ CIR
credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the ate rative
72 1st 31 31 4 April 1 22
extent that such input tax has not been applied against output with claim)44
27 Quarter, March March 2005 Septe April
tax: Provided, however, That in the case of zero-rated sales the
₱3,893,5 2003 2005 mber 2005
under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 CIR
66.14 2005
(B)(1) and (2), the acceptable foreign currency exchange 72 1st 31 31 13 April 12 22
proceeds thereof had been duly accounted for in accordance 72 2nd 30 30 4 April 1 7 July
27 Quarter, March March 2005 Septe April
with the rules and regulations of the Bangko Sentral ng 87 Quarter, June June 2005 Septe 2005
₱3,160,9 2003 2005 mber 2005
Pilipinas (BSP): Provided, further, That where the taxpayer is ₱2,351,0 2003 2005 mber
84.69 2005
engaged in zero-rated or effectively zero-rated sale and also in 00.83 2005
taxable or exempt sale of goods or properties or services, and 72 2nd 30 30 13 April 12 7 July
the amount of creditable input tax due or paid cannot be 73 3rd 30 30 4 April 1 9
87 Quarter, June June 2005 Septe 2005
directly and entirely attributed to any one of the transactions, 17 and 4th Septe Septe 2005 Septe Septe
₱1,562,0 2003 2005 mber

TAX 2 | VAT CASES Page 27

 Quarters mber mber mber mber
, 2003 2005 2005 2005
₱7,940,7
27.83 31 2 revenue taxes." When a taxpayer prematurely files a judicial
Dece Januar
mber y the decision of the Commissioner, there is no "decision" of
2003 2006
(31
Decem
ber
2005
being
a Commissioner’s decision, or inaction "deemed a denial," that
Saturd
ay)
When Mindanao II and Mindanao I filed their respective
administrative and judicial claims in 2005, neither Atlas nor
Mirant has been promulgated. Atlas was promulgated on 8
June 2007, while Mirant was promulgated on 12 September
2008. It is therefore misleading to state that Atlas was the
controlling doctrine at the time of filing of the claims. The
1997 Tax Code, which took effect on 1 January 1998, was the
applicable law at the time of filing of the claims in issue. As
this Court explained in the recent consolidated cases of
Commissioner of Internal Revenue v. San Roque Power
Corporation, Taganito Mining Corporation v. Commissioner of
Internal Revenue, and Philex Mining Corporation v.
Commissioner of Internal Revenue (San Roque):48
Clearly, San Roque failed to comply with the 120-day waiting
period, the time expressly given by law to the Commissioner
to decide whether to grant or deny San Roque’s application
for tax refund or credit. It is indisputable that compliance with
the 120-day waiting period is mandatory and jurisdictional.
The waiting period, originally fixed at 60 days only, was part of
the provisions of the first VAT law, Executive Order No. 273,
which took effect on 1 January 1988. The waiting period was
extended to 120 days effective 1 January 1998 under RA 8424
or the Tax Reform Act of 1997. Thus, the waiting period has
been in our statute books for more than fifteen (15) years
before San Roque filed its judicial claim.
Failure to comply with the 120-day waiting period violates a
mandatory provision of law. It violates the doctrine of
exhaustion of administrative remedies and renders the
petition premature and thus without a cause of action, with
the effect that the CTA does not acquire jurisdiction over the
taxpayer’s petition. Philippine jurisprudence is replete with
cases upholding and reiterating these doctrinal principles.
TAX 2 | VAT CASES
The charter of the CTA expressly provides that its jurisdiction
is to review on appeal "decisions of the Commissioner of
Internal Revenue in cases involving x x x refunds of internal
claim for tax refund or credit with the CTA without waiting for
the Commissioner to review and thus the CTA as a court of
special jurisdiction has no jurisdiction over the appeal. The
charter of the CTA also expressly provides that if the
Commissioner fails to decide within "a specific period"
required by law, such "inaction shall be deemed a denial" of
the application for tax refund or credit. It is the
the taxpayer can take to the CTA for review. Without a
decision or an "inaction x x x deemed a denial" of the
Commissioner, the CTA has no jurisdiction over a petition for
review.
San Roque’s failure to comply with the 120-day mandatory
period renders its petition for review with the CTA void.
Article 5 of the Civil Code provides, "Acts executed against
provisions of mandatory or prohibitory laws shall be void,
except when the law itself authorizes their validity." San
Roque’s void petition for review cannot be legitimized by the
CTA or this Court because Article 5 of the Civil Code states
that such void petition cannot be legitimized "except when
the law itself authorizes its validity." There is no law
authorizing the petition’s validity.
It is hornbook doctrine that a person committing a void act
contrary to a mandatory provision of law cannot claim or
acquire any right from his void act. A right cannot spring in
favor of a person from his own void or illegal act. This doctrine
is repeated in Article 2254 of the Civil Code, which states, "No
vested or acquired right can arise from acts or omissions
which are against the law or which infringe upon the rights of
others." For violating a mandatory provision of law in filing its
petition with the CTA, San Roque cannot claim any right
arising from such void petition. Thus, San Roque’s petition
with the CTA is a mere scrap of paper.
This Court cannot brush aside the grave issue of the
mandatory and jurisdictional nature of the 120-day period just
because the Commissioner merely asserts that the case was
prematurely filed with the CTA and does not question the
entitlement of San Roque to the refund. The mere fact that a
taxpayer has undisputed excess input VAT, or that the tax was
admittedly illegally, erroneously or excessively collected from
him, does not entitle him as a matter of right to a tax refund
or credit. Strict compliance with the mandatory and
jurisdictional conditions prescribed by law to claim such tax
refund or credit is essential and necessary for such claim to
prosper. Well-settled is the rule that tax refunds or credits,
just like tax exemptions, are strictly construed against the
taxpayer.
The burden is on the taxpayer to show that he has strictly
complied with the conditions for the grant of the tax refund or
credit.
This Court cannot disregard mandatory and jurisdictional
conditions mandated by law simply because the
Commissioner chose not to contest the numerical correctness
of the claim for tax refund or credit of the taxpayer. Non-
compliance with mandatory periods, non-observance of
prescriptive periods, and non-adherence to exhaustion of
administrative remedies bar a taxpayer’s claim for tax refund
or credit, whether or not the Commissioner questions the
numerical correctness of the claim of the taxpayer. This Court
should not establish the precedent that non-compliance with
mandatory and jurisdictional conditions can be excused if the
claim is otherwise meritorious, particularly in claims for tax
refunds or credit. Such precedent will render meaningless
compliance with mandatory and jurisdictional requirements,
for then every tax refund case will have to be decided on the
numerical correctness of the amounts claimed, regardless of
non-compliance with mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or
confused by the Atlas doctrine because San Roque filed its
petition for review with the CTA more than four years before
Atlas was promulgated. The Atlas doctrine did not exist at the
time San Roque failed to comply with the 120-day period.
Thus, San Roque cannot invoke the Atlas doctrine as an
excuse for its failure to wait for the 120-day period to lapse. In
any event, the Atlas doctrine merely stated that the two-year
prescriptive period should be counted from the date of
payment of the output VAT, not from the close of the taxable
quarter when the sales involving the input VAT were made.
The Atlas doctrine does not interpret, expressly or impliedly,
the 120+30 day periods.49 (Emphases in the original; citations
omitted)
Prescriptive Period for
the Filing of Administrative Claims
In determining whether the administrative claims of
Mindanao I and Mindanao II for 2003 have prescribed, we see
no need to rely on either Atlas or Mirant. Section 112(A) of
Page 28
the 1997 Tax Code is clear: "Any VAT-registered person,
whose sales are zero-rated or effectively zero-rated may,
within two (2) years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid
attributable to such sales x x x."
We rule on Mindanao I and II’s administrative claims for the
first, second, third, and fourth quarters of 2003 as follows:
(1) The last day for filing an application for tax refund or credit
with the CIR for the first quarter of 2003 was on 31 March
2005. Mindanao II filed its administrative claim before the CIR
on 13 April 2005, while Mindanao I filed its administrative
claim before the CIR on 4 April 2005. Both claims have
prescribed, pursuant to Section 112(A) of the 1997 Tax Code.
(2) The last day for filing an application for tax refund or credit
with the CIR for the second quarter of 2003 was on 30 June
2005. Mindanao II filed its administrative claim before the CIR
on 13 April 2005, while Mindanao I filed its administrative
claim before the CIR on 4 April 2005. Both claims were filed on
time, pursuant to Section 112(A) of the 1997 Tax Code.
(3) The last day for filing an application for tax refund or credit
with the CIR for the third quarter of 2003 was on 30
September 2005. Mindanao II filed its administrative claim
before the CIR on 13 April 2005, while Mindanao I filed its
administrative claim before the CIR on 4 April 2005. Both
claims were filed on time, pursuant to Section 112(A) of the
1997 Tax Code.
(4) The last day for filing an application for tax refund or credit
with the CIR for the fourth quarter of 2003 was on 2 January
2006. Mindanao II filed its administrative claim before the CIR
on 13 April 2005, while Mindanao I filed its administrative
claim before the CIR on 4 April 2005. Both claims were filed on
time, pursuant to Section 112(A) of the 1997 Tax Code.
Prescriptive Period for
the Filing of Judicial Claims
In determining whether the claims for the second, third and
fourth quarters of 2003 have been properly appealed, we still
see no need to refer to either Atlas or Mirant, or even to
Section 229 of the 1997 Tax Code. The second paragraph of
Section 112(C) of the 1997 Tax Code is clear: "In case of full or
partial denial of the claim for tax refund or tax credit, or the
failure on the part of the Commissioner to act on the
TAX 2 | VAT CASES
application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day
periods was explained in San Roque:
At the time San Roque filed its petition for review with the
CTA, the 120+30 day mandatory periods were already in the
law. Section 112(C) expressly grants the Commissioner 120
days within which to decide the taxpayer’s claim. The law is
clear, plain, and unequivocal: "x x x the Commissioner shall
grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from the
date of submission of complete documents." Following the
verba legis doctrine, this law must be applied exactly as
worded since it is clear, plain, and unequivocal. The taxpayer
cannot simply file a petition with the CTA without waiting for
the Commissioner’s decision within the 120-day mandatory
and jurisdictional period. The CTA will have no jurisdiction
because there will be no "decision" or "deemed a denial"
decision of the Commissioner for the CTA to review. In San
Roque’s case, it filed its petition with the CTA a mere 13 days
after it filed its administrative claim with the Commissioner.
Indisputably, San Roque knowingly violated the mandatory
120-day period, and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day
period to appeal to the CTA the decision or inaction of the
Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from
the receipt of the decision denying the claim or after the
expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals.
(Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-
settled verba legis doctrine, this law should be applied exactly
as worded since it is clear, plain, and unequivocal. As this law
states, the taxpayer may, if he wishes, appeal the decision of
the Commissioner to the CTA within 30 days from receipt of
the Commissioner’s decision, or if the Commissioner does not
act on the taxpayer’s claim within the 120-day period, the
taxpayer may appeal to the CTA within 30 days from the
expiration of the 120-day period.
xxxx
There are three compelling reasons why the 30-day period
need not necessarily fall within the two-year prescriptive
period, as long as the administrative claim is filed within the
two-year prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally
provides that the taxpayer "may, within two (2) years after
the close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund of
the creditable input tax due or paid to such sales." In short,
the law states that the taxpayer may apply with the
Commissioner for a refund or credit "within two (2) years,"
which means at anytime within two years. Thus, the
application for refund or credit may be filed by the taxpayer
with the Commissioner on the last day of the two-year
prescriptive period and it will still strictly comply with the law.
The two-year prescriptive period is a grace period in favor of
the taxpayer and he can avail of the full period before his right
to apply for a tax refund or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall
decide the application for refund or credit "within one
hundred twenty (120) days from the date of submission of
complete documents in support of the application filed in
accordance with Subsection (A)." The reference in Section
112(C) of the submission of documents "in support of the
application filed in accordance with Subsection A" means that
the application in Section 112(A) is the administrative claim
that the Commissioner must decide within the 120-day
period. In short, the two-year prescriptive period in Section
112(A) refers to the period within which the taxpayer can file
an administrative claim for tax refund or credit. Stated
otherwise, the two-year prescriptive period does not refer to
the filing of the judicial claim with the CTA but to the filing of
the administrative claim with the Commissioner. As held in
Aichi, the "phrase ‘within two years x x x apply for the
issuance of a tax credit or refund’ refers to applications for
refund/credit with the CIR and not to appeals made to the
CTA."
Third, if the 30-day period, or any part of it, is required to fall
within the two-year prescriptive period (equivalent to 730
days), then the taxpayer must file his administrative claim for
refund or credit within the first 610 days of the two-year
prescriptive period. Otherwise, the filing of the administrative
claim beyond the first 610 days will result in the appeal to the
CTA being filed beyond the two-year prescriptive period. Thus,
if the taxpayer files his administrative claim on the 611th day,
Page 29
the Commissioner, with his 120-day period, will have until the
731st day to decide the claim. If the Commissioner decides
only on the 731st day, or does not decide at all, the taxpayer
can no longer file his judicial claim with the CTA because the
two-year prescriptive period (equivalent to 730 days) has
lapsed. The 30-day period granted by law to the taxpayer to
file an appeal before the CTA becomes utterly useless, even if
the taxpayer complied with the law by filing his administrative
claim within the two-year prescriptive period.
The theory that the 30-day period must fall within the two-
year prescriptive period adds a condition that is not found in
the law. It results in truncating 120 days from the 730 days
that the law grants the taxpayer for filing his administrative
claim with the Commissioner. This Court cannot interpret a
law to defeat, wholly or even partly, a remedy that the law
expressly grants in clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its
clear, plain, and unequivocal language. The taxpayer can file
his administrative claim for refund or credit at anytime within
the two-year prescriptive period. If he files his claim on the
last day of the two-year prescriptive
period, his claim is still filed on time. The Commissioner will
have 120 days from such filing to decide the claim. If the
Commissioner decides the claim on the 120th day, or does not
decide it on that day, the taxpayer still has 30 days to file his
judicial claim with the CTA. This is not only the plain meaning
but also the only logical interpretation of Section 112(A) and
(C).50 (Emphases in the original; citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on
BIR Ruling No. DA-489-03 from the time of its issuance on 10
December 2003 up to its reversal in Aichi on 6 October 2010,
where this Court held that the 120+30 day periods are
mandatory and jurisdictional."51 We shall discuss later the
effect of San Roque’s recognition of BIR Ruling No. DA-489-03
on claims filed between 10 December 2003 and 6 October
2010. Mindanao I and II filed their claims within this period.
We rule on Mindanao I and II’s judicial claims for the second,
third, and fourth quarters of 2003 as follows:
G.R. No. 193301
Mindanao II v. CIR
Mindanao II filed its administrative claims for the second,
third, and fourth quarters of 2003 on 13 April 2005. Counting
TAX 2 | VAT CASES
120 days after filing of the administrative claim with the CIR
(11 August 2005) and 30 days after the CIR’s denial by
inaction, the last day for filing a judicial claim with the CTA for
the second, third, and fourth quarters of 2003 was on 12
September 2005. However, the judicial claim cannot be filed
earlier than 11 August 2005, which is the expiration of the
120-day period for the Commissioner to act on the claim.
(1) Mindanao II filed its judicial claim for the second quarter of
2003 before the CTA on 7 July 2005, before the expiration of
the 120-day period. Pursuant to Section 112(C) of the 1997
Tax Code, Mindanao II’s judicial claim for the second quarter
of 2003 was prematurely filed.
However, pursuant to San Roque’s recognition of the effect of
BIR Ruling No. DA-489-03, we rule that Mindanao II’s judicial
claim for the second quarter of 2003 qualifies under the
exception to the strict application of the 120+30 day periods.
(2) Mindanao II filed its judicial claim for the third quarter of
2003 before the CTA on 9 September 2005. Mindanao II’s
judicial claim for the third quarter of 2003 was thus filed on
time, pursuant to Section 112(C) of the 1997 Tax Code.
(3) Mindanao II filed its judicial claim for the fourth quarter of
2003 before the CTA on 9 September 2005. Mindanao II’s
judicial claim for the fourth quarter of 2003 was thus filed on
time, pursuant to Section 112(C) of the 1997 Tax Code.
G.R. No. 194637
Mindanao I v. CIR
Mindanao I filed its administrative claims for the second,
third, and fourth quarters of 2003 on 4 April 2005. Counting
120 days after filing of the administrative claim with the CIR (2
August 2005) and 30 days after the CIR’s denial by
inaction,52 the last day for filing a judicial claim with the CTA
for the second, third, and fourth quarters of 2003 was on 1
September 2005. However, the judicial claim cannot be filed
earlier than 2 August 2005, which is the expiration of the 120-
day period for the Commissioner to act on the claim.
(1) Mindanao I filed its judicial claim for the second quarter of
2003 before the CTA on 7 July 2005, before the expiration of
the 120-day period. Pursuant to Section 112(C) of the 1997
Tax Code, Mindanao I’s judicial claim for the second quarter of
2003 was prematurely filed. However, pursuant to San
Roque’s recognition of the effect of BIR Ruling No. DA-489-03,
we rule that Mindanao I’s judicial claim for the second quarter
of 2003 qualifies under the exception to the strict application
of the 120+30 day periods.
(2) Mindanao I filed its judicial claim for the third quarter of
2003 before the CTA on 9 September 2005. Mindanao I’s
judicial claim for the third quarter of 2003 was thus filed after
the prescriptive period, pursuant to Section 112(C) of the
1997 Tax Code.
(3) Mindanao I filed its judicial claim for the fourth quarter of
2003 before the CTA on 9 September 2005. Mindanao I’s
judicial claim for the fourth quarter of 2003 was thus filed
after the prescriptive period, pursuant to Section 112(C) of
the 1997 Tax Code.
San Roque: Recognition of BIR Ruling No. DA-489-03
In the consolidated cases of San Roque, the Court En
Banc53 examined and ruled on the different claims for tax
refund or credit of three different companies. In San Roque,
we reiterated that "following the verba legis doctrine, Section
112(C) must be applied exactly as worded since it is clear,
plain, and unequivocal. The taxpayer cannot simply file a
petition with the CTA without waiting for the Commissioner’s
decision within the 120-day mandatory and jurisdictional
period. The CTA will have no jurisdiction because there will be
no ‘decision’ or ‘deemed a denial decision’ of the
Commissioner for the CTA to review."
Notwithstanding a strict construction of any claim for tax
exemption or refund, the Court in San Roque recognized that
BIR Ruling No. DA-489-03 constitutes equitable estoppel54 in
favor of taxpayers. BIR Ruling No. DA-489-03 expressly states
that the "taxpayer-claimant need not wait for the lapse of the
120-day period before it could seek judicial relief with the CTA
by way of Petition for Review." This Court discussed BIR Ruling
No. DA-489-03 and its effect on taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous
interpretation by the Commissioner, particularly on a difficult
question of law. The abandonment of the Atlas doctrine by
Mirant and Aichi is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a
difficult question of law. The abandonment of the Atlas
doctrine did not result in Atlas, or other taxpayers similarly
situated, being made to return the tax refund or credit they
received or could have received under Atlas prior to its
abandonment. This Court is applying Mirant and Aichi
prospectively. Absent fraud, bad faith or misrepresentation,
Page 30
the reversal by this Court of a general interpretative rule Administrative Judicial Action on Claim 2003 Section 112(C)
issued by the Commissioner, like the reversal of a specific BIR Claim Claim of the
ruling under Section 246, should also apply prospectively. x x 1997 Tax Code
x. 1st Quarter, Filed late -- Deny, pursuant
2003 to
xxxx Section 112(A) Summary of Rules on Prescriptive Periods Involving VAT
of the
1997 Tax Code We summarize the rules on the determination of the
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a
general interpretative rule applicable to all taxpayers or a 2nd Filed on time Prematurely Grant, pursuant prescriptive period for filing a tax refund or credit of
specific ruling applicable only to a particular taxpayer. Quarter, filed to unutilized input VAT as provided in Section 112 of the 1997
2003 BIR Ruling No. Tax Code, as follows:
BIR Ruling No. DA-489-03 is a general interpretative rule DA-489-03
because it was a response to a query made, not by a particular (1) An administrative claim must be filed with the CIR within
3rd Filed on time Filed on Grant, pursuant two years after the close of the taxable quarter when the
taxpayer, but by a government agency tasked with processing
Quarter, time to zero-rated or effectively zero-rated sales were made.
tax refunds and credits, that is, the One Stop Shop Inter-
2003 Section 112(C)
Agency Tax Credit and Drawback Center of the Department of
of the
Finance. This government agency is also the addressee, or the (2) The CIR has 120 days from the date of submission of
1997 Tax Code
entity responded to, in BIR Ruling No. DA-489-03. Thus, while complete documents in support of the administrative claim
this government agency mentions in its query to the 4th Filed on time Filed on Grant, pursuant within which to decide whether to grant a refund or issue a
Commissioner the administrative claim of Lazi Bay Resources Quarter, time to tax credit certificate. The 120-day period may extend beyond
Development, Inc., the agency was in fact asking the 2003 Section 112(C) the two-year period from the filing of the administrative claim
Commissioner what to do in cases like the tax claim of Lazi of the if the claim is filed in the later part of the two-year period. If
Bay Resources Development, Inc., where the taxpayer did not 1997 Tax Code the 120-day period expires without any decision from the CIR,
wait for the lapse of the 120-day period. then the administrative claim may be considered to be denied
by inaction.
G.R. No. 194637
Clearly, BIR Ruling No. DA-489-03 is a general interpretative
Mindanao I v. CIR
rule. Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 (3) A judicial claim must be filed with the CTA within 30 days
from the time of its issuance on 10 December 2003 up to its from the receipt of the CIR’s decision denying the
reversal by this Court in Aichi on 6 October 2010, where this Administrative Judicial Action on Claim administrative claim or from the expiration of the 120-day
Court held that the 120+30 day periods are mandatory and Claim Claim period without any action from the CIR.
jurisdictional.
1st Quarter, Filed late -- Deny, pursuant
(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-
xxxx 2003 to
03 from the time of its issuance on 10 December 2003 up to
Section 112(A)
its reversal by this Court in Aichi on 6 October 2010, as an
of the
Taganito, however, filed its judicial claim with the CTA on 14 exception to the mandatory and jurisdictional 120+30 day
1997 Tax Code
February 2007, after the issuance of BIR Ruling No. DA-489-03 periods.
on 10 December 2003. Truly, Taganito can claim that in filing 2nd Filed on time Prematurely Grant, pursuant
its judicial claim prematurely without waiting for the 120-day Quarter, filed to "Incidental" Transaction
period to expire, it was misled by BIR Ruling No. DA-489-03. 2003 BIR Ruling No.
Thus, Taganito can claim the benefit of BIR Ruling No. DA-489- DA-489-03 Mindanao II asserts that the sale of a fully depreciated Nissan
03, which shields the filing of its judicial claim from the vice of
3rd Filed on time Filed late Grant, pursuant Patrol is not an incidental transaction in the course of its
prematurity. (Emphasis in the original)
Quarter, to business; hence, it is an isolated transaction that should not
2003 Section 112(C) have been subject to 10% VAT.
Summary of Administrative and Judicial Claims of the
1997 Tax Code Section 105 of the 1997 Tax Code does not support Mindanao
G.R. No. 193301 II’s position:
Mindanao II v. CIR 4th Filed on time Filed late Grant, pursuant
Quarter, to

TAX 2 | VAT CASES Page 31

SEC. 105. Persons Liable. - Any person who, in the course of
trade or business, sells barters, exchanges, leases goods or
properties, renders services, and any person who imports
goods shall be subject to the value-added tax (VAT) imposed
in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax
may be shifted or passed on to the buyer, transferee or lessee
of the goods, properties or services. This rule shall likewise
apply to existing contracts of sale or lease of goods, properties
or services at the time of the effectivity of Republic Act No.
7716.
The phrase "in the course of trade or business" means the
regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any
person regardless of whether or not the person engaged
therein is a nonstock, nonprofit private organization
(irrespective of the disposition of its net income and whether
or not it sells exclusively to members or their guests), or
government entity.
The rule of regularity, to the contrary notwithstanding,
services as defined in this Code rendered in the Philippines by
nonresident foreign persons shall be considered as being
rendered in the course of trade or business. (Emphasis
supplied)
Mindanao II relies on Commissioner of Internal Revenue v.
Magsaysay Lines, Inc. (Magsaysay)55 and Imperial v. Collector
of Internal Revenue (Imperial)56 to justify its position.
Magsaysay, decided under the NIRC of 1986, involved the sale
of vessels of the National Development Company (NDC) to
Magsaysay Lines, Inc. We ruled that the sale of vessels was
not in the course of NDC’s trade or business as it was
involuntary and made pursuant to the Government’s policy
for privatization. Magsaysay, in quoting from the CTA’s
decision, imputed upon Imperial the definition of "carrying on
business." Imperial, however, is an unreported case that
merely stated that "‘to engage’ is to embark in a business or
to employ oneself therein."57
Mindanao II’s sale of the Nissan Patrol is said to be an isolated
transaction.1âwphi1 However, it does not follow that an
isolated transaction cannot be an incidental transaction for
purposes of VAT liability. Indeed, a reading of Section 105 of
the 1997 Tax Code would show that a transaction "in the
course of trade or business" includes "transactions incidental
thereto."
TAX 2 | VAT CASES
Mindanao II’s business is to convert the steam supplied to it
by PNOC-EDC into electricity and to deliver the electricity to
NPC. In the course of its business, Mindanao II bought and
eventually sold a Nissan Patrol. Prior to the sale, the Nissan
Patrol was part of Mindanao II’s property, plant, and
equipment. Therefore, the sale of the Nissan Patrol is an
incidental transaction made in the course of Mindanao II’s
business which should be liable for VAT.
Substantiation Requirements
Mindanao II claims that the CTA’s disallowance of a total
amount of ₱492,198.09 is improper as it has substantially
complied with the substantiation requirements of Section
113(A)58 in relation to Section 23759 of the 1997 Tax Code, as
implemented by Section 4.104-1, 4.104-5 and 4.108-1 of
Revenue Regulation No. 7-95.60
We are constrained to state that Mindanao II’s compliance
with the substantiation requirements is a finding of fact. The
CTA En Banc evaluated the records of the case and found that
the transactions in question are purchases for services and
that Mindanao II failed to comply with the substantiation
requirements. We affirm the CTA En Banc’s finding of fact,
which in turn affirmed the finding of the CTA First Division.
We see no reason to overturn their findings.
WHEREFORE, we PARTIALLY GRANT the petitions. The
Decision of the Court of Tax Appeals En Bane in CT A EB No.
513 promulgated on 10 March 2010, as well as the Resolution
promulgated on 28 July 2010, and the Decision of the Court of
Tax Appeals En Bane in CTA EB Nos. 476 and 483 promulgated
on 31 May 2010, as well as the Amended Decision
promulgated on 24 November 2010, are AFFIRMED with
MODIFICATION.
For G.R. No. 193301, the claim of Mindanao II Geothermal
Partnership for the first quarter of 2003 is DENIED while its
claims for the second, third, and fourth quarters of 2003 are
GRANTED. For G.R. No. 19463 7, the claims of Mindanao I
Geothermal Partnership for the first, third, and fourth
quarters of 2003 are DENIED while its claim for the second
quarter of 2003 is GRANTED.
SO ORDERED.
Page 32
 [G.R. No. 149073. February 16, 2005]
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.
TAX 2 | VAT CASES
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.
Initially, the CTA denied the petition for insufficiency of
evidence.[8] The tax court 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 P4,439,827.21
Claimed by
respondent
Less: Exceptions
made by SGV
a.) 1996 P651,256.17
b.) 1997 104,129.13 755,385.30
Validly Supported P3,684,441.91
Page 33
 Input Taxes
Allocation:
Verified Zero-Rated
Sales
a.) Toyo Lens Y274,043,858.00
Corporation
b.) MEPZ Enterprises 136,473,908.05 Y410,517,766.05
Divided by Total Y700,654,606.15
Zero-Rated Sales
Quotient 0.5859
Multiply by P3,684,441.91
Allowable Input Tax
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
TAX 2 | VAT CASES
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 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
Page 34
Income Tax Returns, where respondent specified that it was
availing of the tax relief under E.O. No. 226. Hence,
respondent is not exempt from VAT and it correctly registered
itself as a VAT taxpayer. In fine, it is engaged in taxable rather
than exempt transactions.
Taxable transactions are those transactions which are
subject to value-added tax either at the rate of ten percent
(10%) or zero percent (0%). In taxable transactions, the seller
shall be entitled to tax credit for the value-added tax paid on
purchases and leases of goods, properties or services.[23]
An exemption means that the sale of goods, properties
or services and the use or lease of properties is not subject to
VAT (output tax) and the seller is not allowed any tax credit on
VAT (input tax) previously paid. The person making the
exempt sale of goods, properties or services shall not bill any
output tax to his customers because the said transaction is
not subject to VAT. Thus, a VAT-registered purchaser of
goods, properties or services that are VAT-exempt, is not
entitled to any input tax on such purchases despite the
issuance of a VAT invoice or receipt.[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
TAX 2 | VAT CASES
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 findafter
recomputationshould 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 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.
WHEREFORE, the petition is DENIED for lack of merit.
The assailed Decision dated July 6, 2001 of the Court of
Appeals, in CA-G.R. SP No. 60304 is AFFIRMED with very slight
modification. Petitioner is hereby ORDERED to REFUND or, in
the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of
respondent in the amount of P2,158,714.52 representing
unutilized input tax payments. No pronouncement as to costs.
SO ORDERED.
Page 35
 [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
TAX 2 | VAT CASES
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.
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
Page 36
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]
TAX 2 | VAT CASES
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 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]
Page 37
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
TAX 2 | VAT CASES
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.
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.
Page 38
 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]
TAX 2 | VAT CASES
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.
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]
Page 39
 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
TAX 2 | VAT CASES
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.
Tax Refund or
Credit in Order
Having determined that respondents purchase
transactions are subject to a zero VAT rate, the tax refund or
credit is in order.
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.
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
Page 40
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
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:
TAX 2 | VAT CASES
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.
xxxxxxxxx
MR. DEL MAR. x x x To advance its cause in encouraging
investments and creating an environment conducive for
investors, the bill offers incentives such as the exemption
from local and national taxes, x x x tax credits for locally
sourced inputs x x x.[153]
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
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.
Page 41
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
TAX 2 | VAT CASES
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:
[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
Page 42
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
TAX 2 | VAT CASES
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);
(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)
Page 43

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
TAX 2 | VAT CASES
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 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.
Page 44

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.
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.

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

TAX 2 | VAT CASES Page 45

COMMISSIONER OF G.R. No. 152609 Quoting the CTA, the CA narrated the undisputed qtr
INTERNAL REVENUE, facts as follows L 67,99 6,79 25,231, 13,080, 1,308,
Petitioner, Present: 4th 4.30 9.43 225.22 822.10 082.21
Panganiban, J., [Respondent] is a Philippine branch of American qtr
Chairman, Express International, Inc., a corporation duly organized and
Sandoval-Gutierrez, existing under and by virtue of the laws of the State of To P247, P24, P80,30 P37,63 P3,763
- versus - Corona, Delaware, U.S.A., with office in the Philippines at the Ground tal 045.3 704. 9,633.2 0,604.3 ,060.4
Carpio Morales, and Floor, ACE Building, corner Rada and de la Rosa Streets, 0 53 0 0 3
Garcia, JJ Legaspi Village, Makati City. It is a servicing unit of American On April 13, 1999, [respondent] filed with the BIR a letter-
AMERICAN EXPRESS Express International, Inc. - Hongkong Branch (Amex-HK) and request for the refund of its 1997 excess input taxes in the
INTERNATIONAL, INC. Promulgated: is engaged primarily to facilitate the collections of Amex-HK amount of P3,751,067.04, which amount was arrived at after
(PHILIPPINE BRANCH), receivables from card members situated in the Philippines and deducting from its total input VAT paid of P3,763,060.43 its
Respondent. June 29, 2005 payment to service establishments in the Philippines. applied output VAT liabilities only for the third and fourth
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x quarters of 1997 amounting to P5,193.66 and P6,799.43,
Amex Philippines registered itself with the Bureau respectively. [Respondent] cites as basis therefor, Section
of Internal Revenue (BIR), Revenue District Office No. 47 (East 110 (B) of the 1997 Tax Code, to state:
DECISION Makati) as a value-added tax (VAT) taxpayer effective March
1988 and was issued VAT Registration Certificate No. 088445 Section 110. Tax Credits. –
bearing VAT Registration No. 32A-3-004868. For the period xxxxxxxxx
PANGANIBAN, J.: January 1, 1997 to December 31, 1997, [respondent] filed
with the BIR its quarterly VAT returns as follows: (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
A s a general rule, the value-added tax (VAT) system uses Exhibit Period Covered Date Filed exceeds the output tax, the excess shall be carried over to
the destination principle. However, our VAT law itself provides the succeeding quarter or quarters. Any input tax
for a clear exception, under which the supply of service shall D 1997 1st Qtr. April 18, 1997 attributable to the purchase of capital goods or to zero-rated
be zero-rated when the following requirements are met: (1) F 2nd Qtr. July 21, 1997 sales by a VAT-registered person may at his option be
the service is performed in the Philippines; (2) the service falls G 3rd Qtr. October 2, 1997 refunded or credited against other internal revenue taxes,
under any of the categories provided in Section 102(b) of the H 4th Qtr. January 20, 1998 subject to the provisions of Section 112.
Tax Code; and (3) it is paid for in acceptable foreign currency
that is accounted for in accordance with the regulations of the There being no immediate action on the part of the
Bangko Sentral ng Pilipinas. Since respondents services meet On March 23, 1999, however, [petitioner], [respondents] petition was filed on April 15,
these requirements, they are zero-rated. Petitioners Revenue [respondent] amended the aforesaid 1999.
Regulations that alter or revoke the above requirements returns and declared the following:
are ultra vires and invalid. In support of its Petition for Review, the following arguments
were raised by [respondent]:
The Case Taxab Outp Zero- Domes Input
Ex le ut rated tic VAT A. Export sales by a VAT-registered person, the consideration
h Sales VAT Sales Purcha for which is paid for in acceptable foreign currency inwardly
Before us is a Petition for Review[1] under Rule 45 of 19 ses remitted to the Philippines and accounted for in accordance
the Rules of Court, assailing the February 28, 2002 97 with existing regulations of the Bangko Sentral ng Pilipinas,
Decision[2] of the Court of Appeals (CA) in CA-GR SP No. are subject to [VAT] at zero percent (0%). According to
62727. The assailed Decision disposed as follows: I P59,5 P5,9 P17,51 P6,778, P677,8 [respondent], being a VAT-registered entity, it is subject to
1st 97.20 59.7 3,801.1 182.30 18.23 the VAT imposed under Title IV of the Tax Code, to wit:
WHEREFORE, premises considered, the petition is qtr 2 1
hereby DISMISSED for lack of merit. The assailed decision of J 67,51 6,75 17,937, 9,333,2 933,32 Section 102.(sic) Value-added tax on sale of services.-
the Court of Tax Appeals (CTA) is AFFIRMED in toto.[3] 2nd 7.20 1.72 361.51 42.90 4.29 (a) Rate and base of tax. - There shall be levied, assessed
qt and collected, a value-added tax equivalent to 10% percent
The Facts r of gross receipts derived by any person engaged in the sale
K 51,93 5,19 19,627, 8,438,3 843,83 of services. The phrase sale of services means the
3rd 6.60 3.66 245.36 57.00 5.70 performance of all kinds of services for others for a fee,

TAX 2 | VAT CASES Page 46

 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
TAX 2 | VAT CASES
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 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
Page 47
 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
TAX 2 | VAT CASES
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, 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]
Page 48
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
TAX 2 | VAT CASES
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
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.
Page 49
 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
TAX 2 | VAT CASES
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 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
Page 50
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
TAX 2 | VAT CASES
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 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.
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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.
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."[90]
Legislative Approval By Reenactment
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.

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.
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]

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.
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

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