REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

SECOND DIVISION

ZMG WARD HOWELL, CTA Case No. 9004

INC.,
Petitioner,
Members:

CASTANEDA, JR., Chairperson,

CASANOVA, and
MANAHAN, JJ.

-versus-

COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondent. SEP 1 8 2017/
r7 7:.ro 4 ·~ .
x----------------------------------------------------------------------------------x

DECISION

CASTANEDA, JR., J.:

THE CASE

This is a Petition for Review 1 filed by petitioner ZMG Ward

Howell, Inc. on March 4, 2015, pursuant to Section 228 of the
National Internal Revenue Code of 1997, as amended (1997 NIRC) in
relation to Section 11 of Republic Act (RA) No. 1125, as amended by
RA No. 9282, praying that judgment be rendered ordering the
cancellation and setting aside of respondent Commissioner of
Internal Revenue's assessment for alleged deficiency value-added tax
(VAT) for the period January 1, 2012 to June 30, 2012 inclusive of ~

1 Petition for Review, Docket, Vol. I, pp. 7-17.

DECISION
CfA Case No. 9004
Page 2 of 27

interest, in the aggregate amount of THREE MILLION NINE

HUNDRED EIGHTY ONE THOUSAND THREE HUNDRED THIRTY ONE
AND 99/100 PESOS (P3,981,331.99).

THE FACTS

Petitioner ZMG Ward Howell, Inc. is a corporation duly

organized and existing under the laws of the Republic of the
Philippines with principal place of business at the 5th Floor, The
Athenaeum Building, 160 Leviste [formerly Alfaro] Street, Salcedo
Village, Makati City, Metro Manila. 2 Petitioner was incorporated with
the following primary purpose:

"To act as managers or managing agents of

persons, firms, associations, corporations, partnerships
and other entities; to provide management, investment
and technical advice for commercial, industrial,
manufacturing and other kinds of enterprises; and to
undertake, carry on, assist or participate in the
promotion, organization, management, liquidation or
reorganization of corporations, partnerships and other
entities, except the management of funds, securities,
portfolio or similar assets of the managed entities or
corporations. '13

On the other hand, respondent is the duly appointed

Commissioner of Internal Revenue (CIR), vested under the
appropriate laws with the authority to carry out the functions, duties,
and responsibilities of said office including, inter alia, the power to
issue assessments, decide disputed assessments, and cancel and
abate tax liabilities, pursuant to the provisions of the 1997 NIRC, and
other tax laws, rules, and regulations. 4

On March 19, 2013, petitioner received the Preliminary

Assessment Notice (PAN) dated March 19, 2013 from the Assessment
Division -VAT Audit Team of the Bureau of Internal Revenue (BIR)
Revenue Region No. 8 - Makati covering the alleged deficiency VAT
for the period January 1, 2012 to June 30, 2012 in the amount of
Php4,377,195.51. 5 ~
2 Par. 1, Stipulation of Facts, Joint Stipulation of Facts and Issues (JSFI), Docket, Vol. II, p. 830.
3 Exhibit "P-1".
4
Par. 2, Stipulation of Facts, JSFI, Docket, Vol. II, p. 830.
5 Exhibit "P-3".
 DECISION
CTA case No. 9004
Page 3 of 27

On April 3, 2013, petitioner filed its written Reply to the PAN

with the Assessment Division - VAT Audit Team of BIR Revenue
Region No. 8. 6

On July 17, 2014, petitioner received a copy of the Final

Assessment Notice (FAN) dated July 15, 2014 from the Assessment
Division - VAT Audit Team of BIR Revenue Region No. 8 for alleged
deficiency VAT for the period January 1, 2012 to June 30, 2012 in the
amount of Php3,805,429.85.7

On August 15, 2014, petitioner filed its Protest Letter against

the FAN with the Assessment Division - VAT Audit Team of BIR
Revenue Region No. 8. 8

On February 2, 2015, petitioner received the Final Decision on

Disputed Assessment (FDDA) dated January 30, 2015 issued by the
BIR Revenue Region No. 8 ordering petitioner to pay its alleged
deficiency VAT for the period January 1, 2012 to June 30, 2012 in the
total amount of PHp3,981,331.99, inclusive of interest, computed as
follows: 9

VALUE-ADDED TAX
VATable receipts per VAT returns P38,001,329.54
Gross Receipts not subjected
Add: to VAT P2,252.29
Unqualified Zero-rated Sale
of Services 21,764,368.89 21,766,621.18
Gross Receipts subject to VAT P59,767,950.72

Output tax due P7,172,154.09

Less: Creditable input tax
Input Tax on Current
Purchases P2,754,636.46
Input Tax carried over from
Previous Quarter 112,206.47
Total Input Tax claimed per
VAT Returns P2,866,842.93
Overclaimed Input
Less: Tax P24,924.87 ~

6 Exhibit "P-4".
7 Exhibit "P-6".
8 Par. 6, Stipulation of Facts, JSFI, Docket, Vol. II, p. 831.
9 Par. 7, Stipulation of Facts, JSFI, Docket, Vol. II, pp. 831-832.
 DECISION
CTA case No. 9004
Page 4 of 27

Input Tax Carried

over to Succeeding
Quarter 26,339.21 51,264.08 2,815,578.85
VAT Payable P4,356,575.24
Less: Tax payments 1,719,656.00
Basic Tax Due P2,636,919.24
Less: Basic tax paid per re[tur]n 25,154.01
Remaining Basic VAT deficiency P2,611,765.23
Add: Interest (07.26.12 to 03.09.15) 1,369,566.76
Total Amount Due P3,981,331.99

On March 4, 2015, petitioner filed the present Petition for

Review.

On April 25, 2015, respondent filed her Answer10 wherein she

interposed the following Special and Affirmative Defenses:

"SPECIAL AND AFFIRMATIVE DEFENSES

4. She reiterates and repleads the preceding

paragraphs of this [A]nswer as part of her Special and
Affirmative Defenses.

5. Petitioner was assessed for deficiency value-

added tax (VAT) for taxable period covering January 1,
2012 to June 30, 2012, for the reason that during the
administrative investigation of its tax case by the
respondent CIR, petitioner failed to substantiate or
controvert by substantial evidence the BIR factual
findings, as stated and shown under the Details of
Discrepancies attached to the Preliminary Assessment
Notice (PAN) dated March 19, 2013 and Formal
Assessment Notice (FAN) and Letter of Demand dated
July 15, 2014, as well as, the Details of Discrepancies
attached to the Final Decision on Disputed Assessment
(FDDA) dated January 30, 2015, which are briefly
discussed hereunder, viz:

a.) Petitioner was found to have understated

its gross receipt not subjected to VAT in the
amount of Php2,252.29 for taxable period covering jh-

10 Docket, Vol. I, pp. 84-89.

DECISION
CTA Case No. 9004
Page 5 of 27

January 1, 2012 to June 30, 2012 as reflected in

the computerized matching conducted by the BIR
on the information/data provided by its customers
(i.e. Geisermaclang Marketing Communications,
Inc. and Merck Sharp Dohme La) against the total
receipts declared in its VAT returns;

b.) Petitioner was found that (sic) as an

executive search firm engaged to search for senior
and mid-level executives in various industries,
petitioner conducts its applicants' testing and
interviews within its office premises and/or some
private hotels and restaurants within Metro Manila
and not within any ECOZONE. Moreover,
petitioner's sale of services was found to have (sic)
mainly consist of placing candidates and sending
warm bodies for (sic) the clients to choose the
qualified executives and right people for the jobs.
The sending of pre-qualified applicants to the
clients is a kind of service activity which is not
directly involved in the manufacture, assembly or
production of the final goods or services of
petitioner, and the services being provided by
petitioner do not directly vary with the changes in
revenue or some other measure of the registered
activities of the PEZA-registered entities.
Accordingly, such sale of services of petitioner in
the amount of Php21,764,368.89 for the taxable
period covering January 1, 2012 to June 30, 2012
are unqualified as zero-rated VAT, and thus,
assessed and subjected to 12°/o VAT under Section
108(A) of the 1997 Tax Code, following the BIR
Ruling No. DA-202-08 dated March 28, 2008, which
held that:

'From the foregoing, it is evident that

sales of services by VAT-registered entities
from the Customs Territory to PEZA-
registered enterprises are entitled to avail of
effective VAT zero-rating. The basis of VAT
zero-rating is the fact that under R.A. 7916,
as amended (PEZA Law), ECOZONEs are
declared as separate customs territories
which by legal fiction are considered foreign ;t-
DECISION
CTA Case No. 9004
Page 6 of 27

soil. In BIR Ruling No. DA-344-2003 dated

October 7, 2003, this Office held that the
special tax incentives only apply with respect
to the registered enterprise's operations
within the ECOZONE. The Philippine VAT
System is premised on 'destination principle',
thus, imports are subject to VAT and exports
are free of VAT. Where the supplier of
services is a VAT-registered taxpayer, sale of
services to a PEZA-registered enterprises
(sic) shall be subject to VAT at zero percent
(0°/o), provided that the services are
rendered within the ECOZONE, and provided
further, that the services are rendered in
connection with the registered activity/ies of
the buyers, i.e., PEZA-registered entities.
Conversely, if the service is rendered within
the customs territory, such sale of service by
a VAT-registered person shall be subject to
the 12°/o VAT irrespective of the status of
the buyer as ECOZONE registered
enterprise.

This is in consideration that (sic) the situs

of VAT for sale of services is the place where
the service is rendered. Thus, where the
service by a VAT-registered person from
customs territory is rendered within the
ECOZONE, such sale of service shall
effectively be subject to zero percent (0°/o)
VAT.

It is clear from the foregoing then that

even if Peninsula Manila's clients are PEZA-
registered enterprises, in order to avail of
VAT zero-rating, the services rendered to
such clients should be made with respect to
their operations within the Ecozone. In the
present case, the food and accommodation
services which Peninsula Manila renders to
its PEZA-registered clients are made at the
former's premises in Makati City and not
within any Ecozone. Thus, there is no basis
for the aforementioned clients to claim that ~
DECISION
CTA Case No. 9004
Page 7 of 27

such services are entitled to VAT zero-rating

and accordingly, these services are subject
to 12°/o VAT under Section 108 (A) of the
Tax Code of 1997, as amended by R.A.
9337.'

c.) Petitioner was found to have overclaimed

its input VAT in the amount of Php24,924.87 for
taxable period covering January 1, 2012 to June
30, 2012 as reflected in the computerized matching
conducted by the BIR on the information/data
provided by its customers (i.e. Assessment
Analytics, Inc., Brothers Venture Trading Corp.,
and Saringan Hernan Dela Cruz) against the total
purchases declared in its VAT returns;

d.) Petitioner was found to have an excess

input tax on capital goods exceeding P1Million
carried over to the succeeding period/years in the
total amount of P26,339.21, and the same was
deducted from the total tax credit since the same
shall be carried over and credited against the
output tax due of the succeeding quarters/years
pursuant to Section 110 (B) of the NIRC of 1997.

6. Respondent fully complied with the due

process requirements mandated under Section 228 of the
1997 Tax Code, as implemented by Revenue Regulations
No. 12-99, when the Preliminary Assessment Notice
(PAN) dated March 19, 2013, Formal Assessment Notice
(FAN) and Letter of Demand dated July 15, 2014, as well
as, the Final Decision on Disputed Assessment (FDDA)
dated January 30, 2015 were issued to herein petitioner.
Records clearly show that petitioner was duly afforded an
opportunity to controvert the factual findings of the
respondent CIR involving its deficiency VAT for taxable
period covering January 1, 2012 to June 30, 2012, and
was duly appraised by the respondent of the factual and
legal basis on how and why she (respondent) arrived [at]
such as deficiency value-added tax assessment through
the issuance of the Details of Discrepancies attached to
the said Formal Assessment Notice (FAN) and Letter of
Demand, Preliminary Assessment Notice (PAN), Notice of ft-
DECISION
CTA Case No. 9004
Page 8 of 27

Informal Conference, as well as the Final Decision on

Disputed Assessment (FDDA). In fact, records clearly
show that petitioner was able to file a letter protest
against the said PAN and FAN.

7. This Honorable Court in the case of IDS

LOGISTICS (PHILS.), INC., vs. CIR, C.T.A. CASE
NO. 7540. May 20, 2010, citing the ruling in Bank of
the Philippine Islands vs. Commissioner of Internal
Revenue, C.T.A. CASE NO. 7397, April 9, 2008,
thoroughly discussed the due process rule in taxation,
as follows:

'Revenue Regulations No. 12-85 provides for

the procedure covering the Administrative Protests
on Assessments of the BIR. Under the said
Revenue Regulation, a post-reporting notice is sent
to the taxpayer for an informal conference when
there are findings of deficiency taxes. Subsequent
to this notice is the issuance of the pre-assessment
notice upon findings of the Commissioner that an
assessment for deficiency taxes should be issued.
However, such pre-assessment notice may or may
not be protested by the taxpayer. In fact, Section 5
of the same Revenue Regulation provides that 'In
the event that the taxpayer fails to respond to the
pre-assessment notice within the prescribed period .
. . he should be informed of such fact and the
report of investigation shall be given due course.'

The essential elements of due process are

notice and opportunity to present one's side. To
begin with, petitioner had knowledge of the
investigation being conducted by the BIRon its tax
liabilities for the taxable years 1982-1986, as
evidenced by the letter of respondent addressed to
petitioner dated September 25, 1986 and received
by petitioner on September 26, 1986. The said
letter, in fact, requested for an informal conference
on the matter and requested further that petitioner
submits documentary evidence to support its
stand.p
DECISION
CTA Case No. 9004
Page 9 of 27

As the facts would demonstrate, petitioner

was never deprived of due process as it was
fully appraised of the legal and factual bases
of the assessment issued against it; which
enabled petitioner to substantially protest
the arguments and issues raised. It is
sufficient that there is notice to the taxpayer
of the legal and factual bases of the
assessment; and to the Court, this is
substantial compliance of what is mandated
by Section 228 of the NIRC. Thus, so long as
the parties are given the opportunity to
explain their side, the requirements of due
process are satisfactorily complied with.'
(Emphasis supplied)

8. The assessments issued against petitioner for

deficiency value-added tax (VAT) for taxable period
covering January 1, 2012 to June 30, 2012 was made in
accordance with law and regulations.

9. The deficiency VAT assessments issued by the

respondent CIR to herein petitioner is prima facie
presumed correct and made in good faith. Petitioner has
the duty of proving otherwise. In the absence of proof of
any irregularities in the performance of official duties, the
said VAT assessment will not be disturbed. Hence, all
presumptions are in favor of the correctness of the
subject tax assessment issued by the respondent.
(Interprovincial Autobus Co., Inc. vs. Collector of Internal
Revenue, 98 Phil. 290; Sy Po vs. CTA, G.R. No. 81446,
August 18, 1988; Dayrit, vs. Cruz, L-39910, September
26, 1988; Cagayan Robina Sugar Milling Co., vs. CA, G.R.
No. 122451, October 12, 2000). Failure to present proof
of error in the assessment will justify judicial affirmation
of said assessment (Delta Motors Co., vs. CIR, CAT (sic)
Case No. 3782, May 21, 1986; CIR vs. CA, G.R. Nos.
104151 and 105563, March 10, 1995)."

The Pre-Trial Conference11 was held on July 23, 2015.

Petitioner's Pre-Trial Brief12 was filed on June 22, 2015 while~

11 Minutes of the Hearing dated July 23, 2015, Docket, Vol. II, p. 824.
12
Docket, Vol. I, pp. 96-113.
DECISION
CTA case No. 9004
Page 10 of 27

respondent's Pre-Trial Brief13 was filed on July 15, 2015. On July 16,
2015, petitioner filed its Amended Pre-Trial Brief. 14

The parties filed their Joint Stipulation of Facts and Issues 15 on

August 12, 2015, which was approved by the Court upon issuance of
the Pre-Trial Order16 on August 20, 2015.

During trial, petitioner presented its lone witness, Mr. Hernan C.

Saringan 17 - petitioner's Vice-President for Finance and Admin.

On October 12, 2015, petitioner filed its Formal Offer of

Evidence (FOE). 18 Respondent failed to file Comment on petitioner's
FOE as per the Records Verification Report issued by this Court's
Judicial Records Division dated January 12, 2016. 19

On March 1, 2016, the Court issued a Resolution 20 admitting as

petitioner's evidence all of the documentary exhibits offered in
petitioner's FOE dated October 12, 2015.

On the other hand, respondent presented the following

witnesses: (1) Mr. Renan A. Plata 21 - Group Supervisor, Revenue
Region No. 8; and (2) Ms. Pauline Lydia M. Reyes22 - Revenue
Officer, Revenue Region No.8.

Respondent filed her Formal Offer of Evidence23 via registered

mail on May 13, 2016 while petitioner's Comment (To Respondent's
Formal Offer of Evidence)24 was filed on May 30, 2016. In a
Resolution 25 dated July 22, 2016, this Court admitted Exhibits "R-2",
"R-2-b", "R-3", "R-3-a", "R-3-b", "R-4", "R-4-a", "R-4-b", "R-4-c", "R-
5", "R-5-a", "R-5-b", "R-6", "R-6-a" of respondent's FOE. However,
this Court denied Exhibit "R-1" for failure to submit the duly marked
exhibit. In the same Resolution, the Court ordered the parties to file ~

13 Docket, Vol. II, pp. 587-590.

14 Id, pp. 591-608.
15 Docket, Vol. II, pp. 830-847.
16
Id, pp. 849-852.
17 Minutes of the Hearing dated September 9, 2015, Docket, Vol. II, p. 869.
18 Docket, Vol. II, pp. 878-897.
19 Id, p. 1086.
20 Id, pp. 1088-1089.
21
Minutes of the Hearing dated April 18, 2016, Docket, Vol. II, p. 1090.
22 Id
23
Docket, Vol. II, pp. 1094-1097.
24 Id, pp. 1099-1103.
25 Id, pp. 1105-1106.
DECISION
CTA Case No. 9004
Page 11 of 27

their Memoranda within a period of thirty (30) days from receipt

thereof.

On October 10, 2016, petitioner filed its Memorandum. 26 On the

other hand, respondent filed on September 7, 2016 a Manifestation
and Motion for Leave27 stating that she is adopting all factual and
legal arguments raised in her Answer as well as documentary and
testimonial evidence found in the case records as her Memorandum.
This Court noted and granted the said Manifestation and Motion for
Leave in a Resolution 28 dated September 16, 2016. Accordingly, the
case was declared submitted for decision on October 13, 2016. 29

THE ISSUES

The parties submitted the issues30 stated below for the Court's
resolution:

A. WHETHER OR NOT PETITIONER'S SALES OF

SERVICES QUALIFY AS ZERO-RATED SALES.

B. WHETHER OR NOT SALES OF SERVICES TO

PEZA-REGISTERED ENTERPRISES SHOULD BE
RENDERED WITHIN THE ECOZONE AND BE
DIRECTLY CONNECTED TO THE ACTIVITY/IES
OF PEZA-REGISTERED ENTERPRISES TO BE
COVERED BY VAT-ZERO RATING.

C. WHETHER OR NOT PETITIONER IS LIABLE FOR

DEFICIENCY VAT ON ITS SALE OF SERVICES IN
THE AMOUNT OF PHP3,981,331.99
(INCLUSIVE OF SURCHARGES AND INTEREST)
FOR TAXABLE PERIOD COVERING JANUARY 1,
2012 TO JUNE 30, 2012. J'-

26 lei., pp. 1120-1140.

27 Id., pp. 1111-1113.
28 /d, p. 1115.
29 !d., p. 1141.
30 JSFI, Docket, Vol. II, p. 838.
DECISION
CTA Case No. 9004
Page 12 of 27

THE COURT'S RULING

Timeliness of the Petition

The Court shall determine first whether or not the Petition for
Review was timely filed.

Section 228 of the 1997 NIRC provides:

"SEC. 228. Protesting of Assessment - When the

Commissioner or his duly authorized representative finds
that proper taxes should be assessed, he shall first notify
the taxpayer of his findings: Providect however, That a
preassessment notice shall not be required in the
following cases:

XXX XXX XXX

The taxpayers shall be informed in writing of the

law and the facts on which the assessment is made;
otherwise, the assessment shall be void.

Within a period to be prescribed by implementing

rules and regulations, the taxpayer shall be required to
respond to said notice. If the taxpayer fails to respond,
the Commissioner or his duly authorized representative
shall issue an assessment based on his findings.

Such assessment may be protested administratively

by filing a request for reconsideration or reinvestigation
within thirty (30) days from receipt of the assessment in
such form and manner as may be prescribed by
implementing rules and regulations. Within sixty (60)
days from filing of the protest, all relevant supporting
documents shall have been submitted; otherwise, the
assessment shall become final.

If the protest is denied in whole or in part, or is not

acted upon within one hundred eighty (180) days from
submission of documents, the taxpayer adversely affected ~
DECISION
CTA Case No. 9004
Page 13 of 27

by the decision or inaction may appeal to the Court of Tax

Appeals within thirty (30) days from receipt of the said
decision, or from the lapse of the one hundred eighty
(180)-day period; otherwise, the decision shall become
final, executory and demandable."

Based on the above cited provision, petitioner had thirty (30)

days from receipt of the denial of the protest within which to file an
appeal before this Court. Considering that petitioner received the
FDDA on February 2, 2015 31 , petitioner had until March 4, 2015
within which to appeal the said FDDA.

Given that the instant Petition for Review was filed on March 4,
2015, the filing thereof is well within the 30-day reglementary period
provided in Section 228 of the 1997 NIRC.

Zero rating of sale of services

to PEZA-registered entities

The crux of the controversy in the present case relates to the

proper interpretation of Section 108(B)(3) of the 1997 NIRC, which
reads as follows:

"SEC. 108. Value-added Tax on Sale of Services

and Use or Lease of Properties. -

XXX XXX XXX

(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°/o) rate:

XXX XXX XXX

(3) Services rendered to persons or entities

whose exemption under special laws or international
agreements to which the Philippines is a signatory jk-

31
Supra, note 9.
DECISION
CTA Case No. 9004
Page 14 of 27

effectively subjects the supply of such services to zero

percent (0°/o) rate;" (Emphasis supplied)

Petitioner argues that sale of services to enterprises registered

with the Philippine Economic Zone Authority (PEZA) are considered
as effectively zero-rated sales. 32 It further claims that in treating such
sale of services as effectively zero-rated, the law does not make any
qualification as to the place where the services should be rendered
and the condition for such services. 33 For petitioner, all sales of goods
and services by a VAT-registered supplier from the Customs Territory
to any PEZA-registered enterprise should be treated as zero-rated
sales pursuant to Section 108(8)(3) of the 1997 NIRC and the Cross
Border Doctrine. 34 Petitioner likewise contends that it is not necessary
that the services are rendered entirely within the Economic Zone
(ECOZONE) so long as the services will benefit the PEZA-registered
enterprise located within the ECOZONE. 35 Petitioner avers that it is
sufficient that the services should be ultimately and finally consumed
by the PEZA-registered enterprise within the ECOZONE. 36

On the other hand, respondent posits that sale of services to

PEZA-registered enterprises shall be subject to VAT at zero percent
(0°/o), provided that the services are rendered within the ECOZONE
and provided further, that the services are rendered in connection
with the registered activitiy/ies of the PEZA-registered entities. 37
According to respondent, these requirements are provided for in
consideration of the alleged rule that the situs of VAT for sale of
services is the place where the service is rendered. 38

Section 108(8)(3) of the 1997 NIRC is clear. Even a cursory

reading of the said provision would reveal that a sale of service by a
VAT-registered person to a VAT-exempt person or entity performed
in the Philippines is subject to zero-rating. To qualify for VAT zero-
rating, the above quoted provision requires that a sale of service
must satisfy the following:

1. Sale of service is performed in the Philippines; ~

32 Docket, Vol. II, p. 1132.

33 Id.
34 Id.
35 Id., p. 1138.
36 Id.
37 Docket, Vol. I, pp. 85-86.
38 Id.
DECISION
CTA case No. 9004
Page 15 of 27

2. Service is performed by a VAT-registered person; and

3. Service is rendered to persons or entities exempted under

special laws or international agreement to which the
Philippines is a signatory.

Revenue Regulations (RR) No. 16-05, as amended, issued by

the Secretary of Finance to implement the VAT provisions of the 1997
NIRC, echoes the wording of Section 108(8)(3) of the 1997 NIRC as
it also provides that effectively zero-rated sale of services shall be
performed in the Philippines. Section 4.108-5 of the said Revenue
Regulations, in part, reads:

"SECTION 4.108-5. Zero-Rated Sale ofServices. -

(a) In general - A zero-rated sale of service

(by a VAT-registered person) is a taxable transaction for
VAT purposes, but shall not result in any output tax.
However, the input tax on 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) Transactions Subject to Zero Percent

(0%) VAT Rate.- The following services performed in
the Philippines by a VAT-registered person shall be
subject to zero percent (0°/o) VAT rate:

XXX XXX XXX

(3) Services rendered to persons or entities

whose exemption under special laws or international
agreements to which the Philippines is a signatory
effectively subjects the supply of such services to zero
percent (0°/o) rate;" (Underscoring supplied)

RR No. 16-05, as amended, further provides the definition of an

"effectively zero-rated sale of service" as follows:

"SECTION 4.108-6. Effectively Zero-Rated Sale of

Services. The term 'effectively zero-rated sales of services' ~
DECISION
CTA Case No. 9004
Page 16 of 27

shall refer to the local sale of services by a VAT-registered person to

a person or entity who was granted indirect tax exemption under
special laws or international agreement." (Underscoring supplied)

The Philippine VAT system adheres to two interrelated

principles: (1) cross border doctrine; and (2) destination principle.
According to the Destination Principle, goods and services are taxed
only in the country where they are consumed. 39 Thus, exports are
zero-rated while imports are taxed. Similarly, the Cross Border
Doctrine mandates that no VAT shall be imposed to form part of the
cost of the goods destined for consumption outside the territorial
border of the taxing authority. 40

Consistent with the foregoing principles, the Supreme Court

ruled in Commissioner of Internal Revenue v. Toshiba Information
Equipment (Phils.), Inc., 41 that by virtue of Section 8 of RA No. 7916,
as amended, PEZA-registered enterprises located within an ECOZONE
are considered VAT-exempt entities. The exemption of these entities
from the imposition of VAT flows from the legal fiction established in
the said law that deemed ECOZONEs as foreign territories.
Accordingly, sales made by suppliers from a customs territory to a
purchaser located within an ECOZONE will be considered as
exportations. 42 As explained by the Supreme Court:

"This Court agrees, however, that PEZA-

registered enterprises, which would necessarily be
located within ECOZONES, are VAT-exempt
entities, not because of Section 24 of Rep. Act No. 7916,
as amended, which imposes the five percent (5°/o)
preferential tax rate on gross income of PEZA-registered
enterprises, in lieu of all taxes; but, rather, because of
Section 8 of the same statute which establishes
the fiction that ECOZONES are foreign territory.

It is important to note herein that respondent

Toshiba is located within an ECOZONE. An ECOZONE or a
Special Economic Zone has been described as Jt---

39 Atlas Consolidated Mining and Development Corp. v. Commissioner of Internal Revenue, G.R.
Nos. 141104 & 148763, June 8, 2007, 524 SCRA 102, 103.
40 lei.
41
G.R. No. 150154, August 9, 2005, 466 SCRA 224 ("Toshiba").
42 Coral Bay Nickel Corporation v. Commissioner of Internal Revenue, G.R. No. 190506, June 13,

2016, 793 SCRA 198.

DECISION
CTA Case No. 9004
Page 17 of 27

... [S]elected areas with highly developed or

which have the potential to be developed into
agro-industrial, industrial, tourist, recreational,
commercial, banking, investment and financial
centers whose metes and bounds are fixed or
delimited by Presidential Proclamations. An
ECOZONE may contain any or all of the
following: industrial estates (IEs), export
processing zones (EPZs), free trade zones and
tourist/recreational centers.

The national territory of the Philippines outside of

the proclaimed borders of the ECOZONE shall be referred
to as the Customs Territory.

Section 8 of Rep. Act No. 7916, as amended,

mandates that the PEZA shall manage and operate
the ECOZONES as a separate customs
territory; thus, creating the fiction that the
ECOZONE is a foreign territory. As a result, sales
made by a supplier in the Customs Territory to a
purchaser in the ECOZONE shall be treated as an
exportation from the Customs Territory. Conversely,
sales made by a supplier from the ECOZONE to a
purchaser in the Customs Territory shall be considered as
an importation into the Customs Territory." (Emphasis
and underscoring supplied and citations omitted)

In a similar vein, in the case of Commissioner of Internal

Revenue v. Sekisui Jushi Philippines, Inc., 43 the Supreme Court held
as follows:

"Notably, while an ecozone is geographically within

the Philippines, it is deemed a separate customs territory
and is regarded in law as foreign soil. Sales by suppliers
from outside the borders of the ecozone to this separate
customs territory are deemed as exports and treated as
export sales. These sales are zero-rated or subject to a
tax rate of zero percent." (Citations omitted) Jz-

43
G.R. No. 149671, July 21, 2006, 496 SCRA 214.
DECISION
CTA case No. 9004
Page 18 of 27

It also bears stressing that in Toshiba, the Supreme Court had

noted and discussed the SIR's issuance of Revenue Memorandum
Circular (RMC) No. 74-99 on 15 October 1999 which clearly
established from said date the rule that any sale by a VAT-registered
supplier from the Customs Territory to a PEZA-registered enterprise
shall be considered an export sale and subject to zero percent (0°/o)
VAT. The said revenue issuance explicitly took into account the Cross
Border Doctrine. The relevant portions of Toshiba read as follows:

"The Philippine VAT system adheres to the Cross

Border Doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing
authority. Hence, actual export of goods and services
from the Philippines to a foreign country must be free of
VAT; while, those destined for use or consumption within
the Philippines shall be imposed with ten percent (10°/o)44
VAT.

Applying said doctrine to the sale of goods,

properties, and services to and from the
ECOZONES, the BIR issued Revenue Memorandum
Circular (RMC) No. 74-99, on 15 October 1999. Of
particular interest to the present Petition is Section 3
thereof, which reads:

SECTION 3. Tax Treatment Of Sales

Made By a VAT Registered Supplier from
The Customs Territory, To a PEZA
Registered Enterprise.

(1) If the Buyer is a PEZA registered

enterprise which is subject to the 5°/o special
tax regime, in lieu of all taxes, except real
property tax, pursuant to R.A. No. 7916, as
amended:

(a) Sale of goods (i.e.,

merchandise). This shall be treated as
indirect export hence, considered subject to
zero percent (0°/o) VAT, pursuant to Sec. ~

44
Now twelve percent (12%).
DECISION
erA case No. 9004
Page 19 of 27

106(A)(2)(a)(S), NIRC and Sec. 23 of R.A. No.

7916, in relation to ART. 77(2) of the
Omnibus Investments Code.

(b) Sale of service. This shall be

treated subject to zero percent (0°1o) VAT
under the cross border doctrine of the VAT
System, pursuant to VAT Ruling No. 032-98
dated Nov. S, 1998.

(2) If Buyer is a PEZA registered

enterprise which is not embraced by the S01o
special tax regime, hence, subject to taxes
under the NIRC, e.g., Service Establishments
which are subject to taxes under the NIRC
rather than the S01o special tax regime:

(a) Sale of goods (i.e.,

merchandise). This shall be treated as
indirect export hence, considered subject to
zero percent (0°1o) VAT, pursuant to Sec.
106(A)(2)(a)(S), NIRC and Sec. 23 of R.A. No.
7916 in relation to ART. 77(2) of the Omnibus
Investments Code.

(b) Sale of Service. This shall be

treated subject to zero percent (0°1o) VAT
under the cross border doctrineof the VAT
System, pursuant to VAT Ruling No. 032-98
dated Nov. S, 1998.

(3) In the final analysis, any sale of

goods, property or services made by a
VAT registered supplier from the
Customs Territory to any registered
enterprise operating in the ecozone,
regardless of the class or type of the
latter's PEZA registration, is actually
qualified and thus legally entitled to the
zero percent (0°1o) VAT. Accordingly, all
sales of goods or property to such enterprise
made by a VAT registered supplier from the
Customs Territory shall be treated subject t o r
DECISION
CTA Case No. 9004
Page 20 of 27

0°/o VAT, pursuant to Sec. 106(A)(2)(a)(5),

NIRC, in relation to ART. 77(2) of the
Omnibus Investments Code, while all sales
of services to the said enterprises, made
by VAT registered suppliers from the
Customs Territory, shall be treated
effectively subject to the 0°/o VAT,
pursuant to Section 108(8)(3), NIRC, in
relation to the provisions of R.A. No.
7916 and the Cross Border Doctrine of
the VAT system.

This Circular shall serve as a

sufficient basis to entitle such supplier
of goods, property or services to the
benefit of the zero percent (0°/o) VAT for
sales made to the aforementioned
ECOZONE enterprises and shall serve as
sufficient compliance to the requirement for
prior approval of zero-rating imposed by
Revenue Regulations No. 7-95 effective as of
the date of the issuance of this Circular.

Indubitably, no output VAT may be passed on

to an ECOZONE enterprise since it is a VAT-exempt
entity. The VAT treatment of sales to it, however,
varies depending on whether the supplier from the
Customs Territory is VAT-registered or not.

Sales of goods, properties and services by a

VAT -registered supplier from the Customs
Territory to an ECOZONE enterprise shall be
treated as export sales. If such sales are made by
a VAT-registered supplier, they shall be subject to
VAT at zero percent (0°/o). In zero-rated transactions,
the VAT-registered supplier shall not pass on any output
VAT to the ECOZONE enterprise, and at the same time,
shall be entitled to claim tax credit/refund of its input VAT
attributable to such sales. Zero-rating of export sales
primarily intends to benefit the exporter (i.e., the supplier
from the Customs Territory), who is directly and legally
liable for the VAT, making it internationally competitive by ~
DECISION
CTA case No. 9004
Page 21 of 27

allowing it to credit/refund the input VAT attributable to

its export sales.

Meanwhile, sales to an ECOZONE enterprise

made by a non-VAT or unregistered supplier would
only be exempt from VAT and the supplier shall
not be able to claim credit/refund of its input VAT.

XXX XXX XXX

The rule that any sale by a VAT-registered

supplier from the Customs Territory to a PEZA-
registered enterprise shall be considered an export
sale and subject to zero percent (0°/o) VAT was
clearly established only on 15 October 1999, upon
the issuance of RMC No. 74-99. Prior to the said date,
however, whether or not a PEZA-registered enterprise
was VAT-exempt depended on the type of fiscal
incentives availed of by the said enterprise. This old rule
on VAT-exemption or liability of PEZA-registered
enterprises, followed by the BIR, also recognized and
affirmed by the CTA, the Court of Appeals, and even this
Court, cannot be lightly disregarded considering the great
number of PEZA-registered enterprises which did rely on
it to determine its tax liabilities, as well as, its privileges.

According to the old rule, Section 23 of Rep. Act No.

7916, as amended, gives the PEZA-registered enterprise
the option to choose between two sets of fiscal
incentives: (a) The five percent (5°/o) preferential tax rate
on its gross income under Rep. Act No. 7916, as
amended; and (b) the income tax holiday provided under
Executive Order No. 226, otherwise known as the
Omnibus Investment Code of 1987, as amended.

XXX XXX XXX

This old rule clearly did not take into

consideration the Cross Border Doctrine essential
to the VAT system or the fiction of the ECOZONE as
a foreign territory. It relied totally on the choice of
fiscal incentives of the PEZA-registered enterprise. Again, it-
DECISION
CfA Case No. 9004
Page 22 of 27

for emphasis, the old VAT rule for PEZA-registered

enterprises was based on their choice of fiscal incentives:
( 1) If the PEZA-registered enterprise chose the five
percent (5°/o) preferential tax on its gross income, in lieu
of all taxes, as provided by Rep. Act No. 7916, as
amended, then it would be VAT-exempt; (2) If the PEZA-
registered enterprise availed of the income tax holiday
under Exec. Order No. 226, as amended, it shall be
subject to VAT at ten percent (10°/o). Such distinction
was abolished by RMC No. 74-99, which
categorically declared that all sales of goods,
properties, and services made by a VAT-registered
supplier from the Customs Territory to an
ECOZONE enterprise shall be subject to VAT, at
zero percent (0°/o) rate, regardless of the latter's
type or class of PEZA registration; and, thus,
affirming the nature of a PEZA-registered or an
ECOZONE enterprise as a VAT-exempt entity.
(Emphasis and underscoring supplied and citations
omitted)

In light of the foregoing, this Court holds that sale of services

by VAT-registered person performed within the Philippines to PEZA-
registered entities operating within an ECOZONE shall be subject to
zero percent (0°/o) VAT. Respondent's position stating that a sale of
service by VAT-registered persons should be rendered within the
ECOZONE and should be directly connected to the activities of PEZA-
registered enterprises to qualify for VAT zero-rating is untenable.
Such position is not only contrary to the plain wording of the law but
also to established jurisprudence, and even to respondent's own
revenue issuance.

In his Answer, respondent alleges that the conditions that a

sale of service should be rendered within the ECOZONE and should
be directly connected to the registered activity/ies of PEZA-registered
enterprises to qualify for VAT zero-rating are in consideration of the
situs of VAT for sale of services which refers to the place where the
service is rendered. 45

This Court acknowledges that in Commissioner of Internal

Revenue v. American Express Internationa~ Inc. (Philippine 1r-

45 Supra, Note 37.

DECISION
CfA Case No. 9004
Page 23 of 27

Branch), 46 the Supreme Court had stated that the tax situs of a zero-
rated service is the place where the service is rendered. For proper
frame of reference, the relevant portion of the said Decision is
quoted below:

" 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 to
impose the VAT. Performed in the Philippines, such
service is necessarily subject to its jurisdiction, for
the State necessarily has to have 'a substantial
connection' to it, in order to enforce a zero
rate. The place of payment is immaterial; much less is
the place where the output of the service will be further
or ultimately used." (Emphasis and underscoring supplied
and citations omitted)

Note that the said Decision discussed the situs of "zero-rated"

service and not situs of VAT for a sale of service, contrary to
respondent's assertion. The import of the above discussion is that the
service must be performed within the Philippines in order for the
latter to acquire jurisdiction to subject the sale transaction to VAT. It
does not mean that the place where the service is rendered will
determine whether to impose VAT on the sale of service at zero
percent (0°/o) or at the regular rate of twelve percent (12°/o). In other
words, it is for the purpose of acquiring jurisdiction to impose VAT
that Section 108(8) of the 1997 NIRC requires the performance of
service by VAT-registered persons be done in the Philippines before
such transaction may qualify for VAT zero-rating.

As regards the other condition, i.e., that the sale of service

should be directly connected to the registered activity/ies of PEZA-
registered enterprises, this Court reiterates that the VAT exemption
of PEZA-registered enterprises flows from the legal fiction
establishing ECOZONEs as foreign territories under Section 8 of the
RA No. 7916, as amended, and not by virtue of the special tax
incentives granted to them under Section 24 of the same law. As
such, there is no need to prove that the sale of services to PEZA- ?
46 G.R. No. 152609, June 29, 2005, 462 SCRA 219.
DECISION
CTA case No. 9004
Page 24 of 27

registered enterprises are directly connected to their registered

activities. What is important is that the PEZA-registered enterprise
availing the services is located and operating within the ECOZONE.
Bear in mind that effective zero-rating of goods and service is
intended to benefit the purchaser who, not being directly and legally
liable for the payment of VAT, will ultimately bear the burden of the
tax shifted by the buyers. 47 Accordingly, for as long as the PEZA-
registered purchaser is located and operating within the ECOZONE,
sellers from the Customs Territory cannot pass on any output VAT to
it for any sale of goods or services destined for consumption within
the ECOZONE.

Liability for deficiency VAT

As stated above, a sale of service shall be subject to VAT zero-

rating under Section 108(B)(3) of the 1997 NIRC provided the
following requirements are met:

1. Sale of service is performed in the Philippines;

2. Service is performed by a VAT-registered person; and

3. Service is rendered to persons or entities exempted under

special laws or international agreement to which the
Philippines is a signatory.

In the present case, a close scrutiny of the documentary

evidence presented by petitioner shows that it failed to present its
BIR Certificate of Registration to prove its VAT registration. It goes
without saying that such failure is fatal to petitioner's case. By failing
to prove that it is a VAT-registered entity, petitioner failed to
discharge its burden of proving that its sales of services subject of
the assessment clearly qualify for VAT zero-rating under Section
108(B)(3) of the 1997 NIRC.

Under Section 8 of RA No. 1125, as amended, the Court of Tax

Appeals {CTA) is categorically described as a court of record. 48 As a ~

47
Commissioner of Internal Revenue v. Seagate Technology (Philippines), G.R. No. 153866,
February 11, 2005, 451 SCRA 144.
48
Dizon v. Court of Tax Appeals et. a!., G.R. No. 140944, April 30, 2008, 576 Phil. 111, 128
C'Dizorf'); Commissioner of Internal Revenue v. United Salvage and Towage (Phils.}, Inc.,
G.R. No. 197515, July 2, 2014, 729 SCRA 113;
DECISION
CTA Case No. 9004
Page 25 of 27

court of record, cases filed before the CTA are litigated de novo and
as such, party-litigants must prove every minute aspect of their
cases. 49 By appealing before the CTA, the parties are expected to
adduce evidence in support of their respective positions. Stated
differently, the parties must present their evidence accordingly if they
desire the CTA to take such evidence into consideration.

In assessment cases, the burden of proof is on the taxpayer

contesting the validity or correctness of an assessment to prove not
only that the CIR is wrong but the taxpayer is right; otherwise, the
presumption in favor of the correctness of tax assessment stands. As
aptly explained by the Supreme Court in Sy Po v. Court of Tax
Appeals, 5° to wit:

"Where the taxpayer is appealing to the tax court

on the ground that the Collector's51 assessment is
erroneous, it is incumbent upon him to prove there what
is the correct and just liability by a full and fair disclosure
of all pertinent data in his possession. OtheiWise, if the
taxpayer confines himself to proving that the tax
assessment is wrong, the tax court proceedings
would settle nothing, and the way would be left
open for subsequent assessments and appeals in
interminable succession." (Emphasis supplied)

In fine, this Court finds that petitioner failed to establish that it

is a VAT-registered entity. Absent this requisite, discussion on the
other requirements is unnecessary.

WHEREFORE, the present Petition for Review is DENIED.

SO ORDERED. 9t-

49
Commissioner of Internal Revenue v. Philippine National Bank, G.R. No. 180290, September
29, 2014, 736 SCRA 621-622; Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue, G.R. No. 145526, March 16, 2007, 547 Phil. 332, 339;
Commissioner of Internal Revenue v. Manila Mining Corporation, G.R. No. 153204, August 31,
2005, 505 Phil. 650, 664.
50
G.R. No. 81446, August 18, 1988, 164 SCRA 530 citing Collector of Internal Revenue v. Reyes,
104 Phil. 1061 (1958) Unrep., Nos. L-11534 and L-11558, November 25, 1958.
51 Now Commissioner of Internal Revenue.
DECISION
CTA Case No. 9004
Page 26 of 27

Ck~hC.~,Sl
JUAN ITO C. CASTANE«A; .JR.
Associate Justice

WE CONCUR:

~
CAESAR A. CASANOVA
~~1'-/11~
CATHERINET.MANAHAN
Associate Justice Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were

reached in consultation before the case was assigned to the writer of
the opinion of the Court's Division.

~~~c.~~~9..
iUANITO c. CASTANEDK, JR.
Associate Justice
Chairperson
DECISION
CTA Case No. 9004
Page 27 of 27

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the

Division Chairperson's Attestation, it is hereby certified that the
conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the
Court.

Presiding Justice