CIR V. SONY PHILIPPINES II.

AS TO RESPONDENT’S DEFICIENCY EXPANDED

WITHHOLDING TAX IN THE AMOUNT OF
On November 24, 1998, the CIR issued Letter of Authority authorizing certain PHP1,992,462.72:
revenue officers to examine Sony’s books of accounts and other accounting records
regarding revenue taxes for “the period 1997 and unverified prior years.” Thus, a A. THE CTA EN BANC ERRED IN RULING THAT THE
preliminary assessment for 1997 deficiency taxes and penalties was issued by the
COMMISSION EXPENSE IN THE AMOUNT OF
CIR which Sony protested. Thereafter, acting on the protest, the CIR issued final
PHP2,894,797.00 SHOULD BE SUBJECTED TO A
assessment notices, the formal letter of demand and the details of discrepancies. Said
details of the deficiency taxes (VAT, EWT) and penalties for late remittance of WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX
internal revenue taxes totaled to P15.8M. RATE.

Sony sought re-evaluation by filing a protest. Sony then filed for a petition for B. THE CTA EN BANC ERRED IN RULING THAT THE
review before CTA. ASSESSMENT WITH RESPECT TO THE 5% WITHHOLDING
TAX ON RENTAL DEPOSIT IN THE AMOUNT OF
CTA: CTA-First Division disallowed the deficiency VAT assessment PHP10,523,821.99 IS NOT PROPER.
because the subsidized advertising expense paid by Sony which was
duly covered by a VAT invoice resulted in an input VAT credit. As regards
III
the EWT, the CTA-First Division maintained the deficiency EWT
assessment on Sony’s motor vehicles and on professional fees paid to
general professional partnerships. It also assessed the amounts paid to III. THE CTA EN BANC ERRED IN RULING THAT THE FINAL
sales agents as commissions with five percent (5%) EWT pursuant to WITHHOLDING TAX ON ROYALTIES COVERING THE
Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, PERIOD JANUARY TO MARCH 1998 WAS FILED ON
however, disallowed the EWT assessment on rental expense since it TIME.12
found that the total rental deposit of ₱10,523,821.99 was incurred from
January to March 1998 which was again beyond the coverage of LOA Ruling: No.
19734. Except for the compromise penalties, the CTA-First Division also
upheld the penalties for the late payment of VAT on royalties, for late Procedural: CIR insists that LOA 19734, although it states "the period
remittance of final withholding tax on royalty as of December 1997 and 1997 and unverified prior years," should be understood to mean the fiscal
for the late remittance of EWT by some of Sony’s branches year ending in March 31, 1998.14 The Court cannot agree.

Accordingly, petitioner is DIRECTED to PAY the respondent the Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the
deficiency expanded withholding tax in the amount of ₱1,035,879.70 and authority given to the appropriate revenue officer assigned to perform
the following penalties for late remittance of internal revenue taxes in the assessment functions. It empowers or enables said revenue officer to
sum of ₱1,269,593.90 examine the books of account and other accounting records of a taxpayer
for the purpose of collecting the correct amount of tax.
CTA EB: Finding no cogent reason to reverse the decision of the CTA-
First Division, the CTA-EB dismissed CIR’s petition on May 17, 2007. As earlier stated, LOA 19734 covered "the period 1997 and unverified
CIR’s motion for reconsideration was denied by the CTA-EB on July 5, prior years." For said reason, the CIR acting through its revenue officers
2007. went beyond the scope of their authority because the deficiency VAT
assessment they arrived at was based on records from January to March
Issue: 1998 or using the fiscal year which ended in March 31, 1998. As pointed
out by the CTA-First Division in its April 28, 2005 Resolution, the CIR
I. THE CTA EN BANC ERRED IN RULING THAT knew which period should be covered by the investigation. Thus, if CIR
RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT IN wanted or intended the investigation to include the year 1998, it should
THE AMOUNT OF PHP11,141,014.41. have done so by including it in the LOA or issuing another LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734, dire or adverse economic conditions, and was only "equivalent to the
particularly the phrase "and unverified prior years," violated Section C of latter’s (Sony’s) advertising expenses."
Revenue Memorandum Order No. 43-90 dated September 20, 1990, the
pertinent portion of which reads: Section 106 of the Tax Code explains when VAT may be imposed or
exacted. Thus:
A Letter of Authority should cover a taxable period not exceeding one
taxable year. The practice of issuing L/As covering audit of "unverified
prior years is hereby prohibited. If the audit of a taxpayer shall include SEC. 106. Value-added Tax on Sale of Goods or Properties. –
more than one taxable period, the other periods or years shall be
specifically indicated in the L/A (A) Rate and Base of Tax. – There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties, value-
On this point alone, the deficiency VAT assessment should have added tax equivalent to ten percent (10%) of the gross selling price or
been disallowed. Be that as it may, the CIR’s argument, that Sony’s gross value in money of the goods or properties sold, bartered or
advertising expense could not be considered as an input VAT credit exchanged, such tax to be paid by the seller or transferor.
because the same was eventually reimbursed by Sony International
Singapore (SIS), is also erroneous. Thus, there must be a sale, barter or exchange of goods or properties
before any VAT may be levied. Certainly, there was no such sale, barter
VAT Related: The CIR contends that since Sony’s advertising or exchange in the subsidy given by SIS to Sony. It was but a dole out by
expense was reimbursed by SIS, the former never incurred any SIS and not in payment for goods or properties sold, bartered or
advertising expense. As a result, Sony is not entitled to a tax credit. exchanged by Sony.
At most, the CIR continues, the said advertising expense should be
for the account of SIS, and not Sony.17 Sony did not render any service to SIS at all. The services rendered by
the advertising companies, paid for by Sony using SIS dole-out, were for
The Court is not persuaded. As aptly found by the CTA-First Division and Sony and not SIS. SIS just gave assistance to Sony in the amount
later affirmed by the CTA-EB, Sony’s deficiency VAT assessment equivalent to the latter’s advertising expense but never received any
stemmed from the CIR’s disallowance of the input VAT credits that goods, properties or service from Sony.
should have been realized from the advertising expense of the latter. 18 It
is evident under Section 11019 of the 1997 Tax Code that an advertising II. EWT issue: The Court agrees with the CTA-EB when it affirmed the
expense duly covered by a VAT invoice is a legitimate business expense. CTA-First Division decision. Indeed, the applicable rule is Revenue
Regulations No. 6-85, as amended by Revenue Regulations No. 12-94,
The fact that due to adverse economic conditions, Sony-Singapore has which was the applicable rule during the subject period of examination
granted to our client a subsidy equivalent to the latter’s advertising and assessment as specified in the LOA. Revenue Regulations No. 2-98,
expenses will not affect the validity of the input taxes from such cited by the CIR, was only adopted in April 1998 and, therefore, cannot
expenses. Thus, at the most, this is an additional income of our client be applied in the present case. Besides, the withholding tax on brokers
subject to income tax. We submit further that our client is not subject to and agents was only increased to 10% much later or by the end of July
VAT on the subsidy income as this was not derived from the sale of 2001 under Revenue Regulations No. 6-2001.27 Until then, the rate was
goods or services.22 only 5%.

Insofar as the above-mentioned subsidy may be considered as income III. Royalties: Withal, Sony was to pay Sony-Japan royalty within two (2)
and, therefore, subject to income tax, the Court agrees. However, the months after every semi-annual period which ends in June 30 and
Court does not agree that the same subsidy should be subject to the 10% December 31. However, the CTA-First Division found that there was
VAT. To begin with, the said subsidy termed by the CIR as accrual of royalty by the end of December 1997 as well as by the end of
reimbursement was not even exclusively earmarked for Sony’s June 1998. Given this, the FWTs should have been paid or remitted by
advertising expense for it was but an assistance or aid in view of Sony’s Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was
correct for the CTA-First Division and the CTA-EB in ruling that the FWT power by generation companies from ten (10%) percent to zero (0%)
for the royalty from January to March 1998 was seasonably filed. percent.

G.R. No. 193301               March 11, 2013 In the course of its operation, Mindanao II makes domestic
purchases of goods and services and accumulates therefrom
MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner, creditable input taxes. Pursuant to the provisions of the National
vs. Internal Revenue Code (NIRC), Mindanao II alleges that it can use its
COMMISSIONER OF INTERNAL REVENUE, Respondent. accumulated input tax credits to offset its output tax liability.
Considering, however that its only revenue-generating activity is
x-----------------------x VAT zero-rated under RA No. 9136, Mindanao II’s input tax credits
remain unutilized.
G.R. No. 194637
n the belief that its sales qualify for VAT zero-rating, Mindanao II adopted
the VAT zero-rating of the EPIRA in computing for its VAT payable when
MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,
it filed its Quarterly VAT Returns on the following dates – years 2003-
vs.
2004. Considering that it has accumulated unutilized creditable input
COMMISSIONER OF INTERNAL REVENUE, Respondent.
taxes from its only income-generating activity, Mindanao II filed an
application for refund and/or issuance of tax credit certificate with the
Facts: G.R. No. 193301 covers three CTA First Division cases, CTA BIR’s Revenue District Office at Kidapawan City on April 13, 2005 for the
Case Nos. 7227, 7287, and 7317, which were consolidated as CTA EB four quarters of 2003.
No. 513. In CTA Case No. 7227, Mindanao II claims a tax refund or credit
of ₱3,160,984.69 for the first quarter of 2003. In CTA Case No. 7287, To date (September 22, 2008), the application for refund by Mindanao II
Mindanao II claims a tax refund or credit of ₱1,562,085.33 for the second remains unacted upon by the CIR.
quarter of 2003. In CTA Case No. 7317, Mindanao II claims a tax refund
or credit of ₱3,521,129.50 for the third and fourth quarters of 2003. CTA: CTA First Division found that Mindanao II satisfied the twin
requirements for VAT zero rating under EPIRA: (1) it is a generation
G.R. No. 193301 – MINDANAO II company, and (2) it derived sales from power generation. The CTA First
Division also stated that Mindanao II complied with five requirements to
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)- be entitled to a refund:
Operate-Transfer (BOT) contract with the Philippine National Oil
Corporation – Energy Development Company (PNOC-EDC) for finance, 1. There must be zero-rated or effectively zero-rated sales;
engineering, supply, installation, testing, commissioning, operation, and
maintenance of a 48.25 megawatt geothermal power plant, provided that 2. That input taxes were incurred or paid;
PNOC-EDC shall supply and deliver steam to Mindanao II at no cost. In
turn, Mindanao II shall convert the steam into electric capacity and 3. That such input VAT payments are directly attributable to zero-
energy for PNOC-EDC and shall deliver the same to the National Power rated sales or effectively zero-rated sales;
Corporation (NPC) for and in behalf of PNOC-EDC.
4. That the input VAT payments were not applied against any
Mindanao II alleges that its sale of generated power and delivery of output VAT liability; and
electric capacity and energy of Mindanao II to NPC for and in behalf of
PNOC-EDC is its only revenue-generating activity which is in the ambit of
VAT zero-rated sales under the EPIRA Law, x x x. the amendment of the 5. That the claim for refund was filed within the two-year
NIRC of 1997 modified the VAT rate applicable to sales of generated prescriptive period.13
The CTA First Division found that Mindanao II is entitled to a refund in the The amendment of the NIRC of 1997 modified the VAT rate applicable to
modified amount of ₱7,703,957.79, after disallowing ₱522,059.91 from sales of generated power by generation companies from ten (10%)
input VAT16 and deducting ₱18,181.82 from Mindanao II’s sale of a fully percent to zero percent (0%). Thus, Mindanao I adopted the VAT zero-
depreciated ₱200,000.00 Nissan Patrol. The input taxes amounting to rating of the EPIRA in computing for its VAT payable when it filed its VAT
₱522,059.91 were disallowed for failure to meet invoicing requirements, Returns, on the belief that its sales qualify for VAT zero-rating.
while the input VAT on the sale of the Nissan Patrol was reduced by
₱18,181.82 because the output VAT for the sale was not included in the On April 4, 2005, Mindanao I filed with the BIR separate administrative
VAT declarations. 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
Mindanao II filed a motion for partial reconsideration. 18 It stated that the ₱14,185, 294.80.
sale of the fully depreciated Nissan Patrol is a one-time transaction and is
not incidental to its VAT zero-rated operations.  CTA: On 24 October 2008, the CTA Second Division rendered its
Decision29 in CTA Case Nos. 7228, 7286, and 7318. The CTA Second
On motion: CTA First Division modified its 22 September 2008 Decision Division found that (1) pursuant to Section 112(A), Mindanao I can only
decreasing the amount to be refunded to 2.9M. 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
CTA en Banc: Affirm. ₱14,185,294.80 excess input VAT applied for refund, only
₱11,657,447.14 can be considered substantiated excess input VAT due
G.R. No. 194637 – MINDANAO I to disallowances by the Independent Certified Public
Accountant, however, only 10.5M was granted for refund.
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 CTA en Banc: affirmed CTA division in toto
from the CTA Second Division: In CTA Case No. 7228, Mindanao I
Both the CIR and Mindanao I filed Motions for Reconsideration of the
claims a tax refund or credit of ₱3,893,566.14 for the first quarter of 2003.
CTA En Banc’s 31 May 2010 Decision
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 In recapitulation:
and fourth quarters of 2003.
(1) C.T.A. Case No. 7228
Mindanao I is similarly situated as Mindanao II. 
Claim for the first quarter of 2003 had already prescribed for
In December 1994, Mindanao I entered into a contract of Build-Operate- having been filed beyond the two-year prescriptive period;
Transfer (BOT) with the Philippine National Oil Corporation – Energy
Development Corporation (PNOC-EDC) for the finance, design, (2) C.T.A. Case No. 7286
construction, testing, commissioning, operation, maintenance and repair
of a 47-megawatt geothermal power plant. Under the said BOT contract, Claim for the second quarter of 2003 should be dismissed for
PNOC-EDC shall supply and deliver steam to Mindanao I at no cost. In Mindanao I’s failure to comply with a condition precedent when it
turn, Mindanao I will convert the steam into electric capacity and energy failed to exhaust administrative remedies by filing its Petition for
for PNOC-EDC and shall subsequently supply and deliver the same to Review even before the lapse of the 120-day period for the CIR to
the National Power Corporation (NPC), for and in behalf of PNOC-EDC. decide the administrative claim;
Xxx
(3) C.T.A. Case No. 7318
 Petition for Review was filed beyond the 30-day prescribed period A. The recent ruling in the Commissioner of Internal
to appeal to the CTA. Revenue vs. Mirant Pagbilao Corporation, which uses the
end of the taxable quarter when the sales were made as
Issue: the reckoning date in counting the two-year prescriptive
period, cannot be applied retroactively in the case of
G.R. No. 193301 Mindanao I.
Mindanao II v. CIR
B. The Atlas case promulgated by the Third Division of
I. The Honorable Court of Tax Appeals erred in holding that the claim of this Honorable Court on June 8, 2007 was not and cannot
Mindanao II for the 1st and 2nd quarters of year 2003 has already be superseded by the Mirant Pagbilao case promulgated
prescribed pursuant to the Mirant case. by the Second Division of this Honorable Court on
September 12, 2008 in light of the explicit provision of
A. The Atlas case and Mirant case have conflicting interpretations Section 4(3), Article VIII of the 1987 Constitution.
of the law as to the reckoning date of the two year prescriptive
period for filing claims for VAT refund. Xxx

B. The Atlas case was not and cannot be superseded by the Ruling:
Mirant case in light of Section 4(3), Article VIII of the 1987
Constitution. G.R. Nos. 193301 and 194637 both raise the question of the
determination of the prescriptive period, or the interpretation of Section
C. The ruling of the Mirant case, which uses the close of the 112 of the 1997 Tax Code, in light of our rulings in Atlas and Mirant. (SEC
taxable quarter when the sales were made as the reckoning date 112 of the NIRC shall apply - Any VAT-registered person, whose sales
in counting the two-year prescriptive period cannot be applied are zero-rated or effectively zero-rated may, within two (2) years after the
retroactively in the case of Mindanao II. 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
II. The Honorable Court of Tax Appeals erred in interpreting Section 105 paid attributable to such sales, except transitional input tax, xxx)
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 (D) Period within which Refund or Tax Credit of Input Taxes shall be
to the VAT zero-rated operation of Mindanao II. Made. - In proper cases, the Commissioner shall grant a refund or issue
the tax credit certificate for creditable input taxes within one hundred
Xxx twenty (120) days from the date of submission of complete documents in
support of the application filed in accordance with Subsections (A) and
(B) hereof.
G.R. No. 194637
Mindanao I v. CIR
(Relevant dates of the filing in case just read)
Mindanao I raised the following grounds in its Petition for Review:
When Mindanao II and Mindanao I filed their respective administrative
and judicial claims in 2005, neither Atlas nor Mirant has been
I. The administrative claim and judicial claim in CTA Case No.
promulgated. Atlas was promulgated on 8 June 2007, while Mirant was
7228 were timely filed pursuant to the case of Atlas Consolidated
promulgated on 12 September 2008. It is therefore misleading to state
Mining and Development Corporation vs. Commissioner of
that Atlas was the controlling doctrine at the time of filing of the claims. 
Internal Revenue, which was then the controlling ruling at the
time of filing.
Failure to comply with the 120-day waiting period violates a mandatory April 2005, while Mindanao I filed its administrative claim before
provision of law. It violates the doctrine of exhaustion of administrative the CIR on 4 April 2005. Both claims have prescribed, pursuant to
remedies and renders the petition premature and thus without a cause of Section 112(A) of the 1997 Tax Code.
action, with the effect that the CTA does not acquire jurisdiction over the
taxpayer’s petition. Philippine jurisprudence is replete with cases (2) The last day for filing an application for tax refund or credit
upholding and reiterating these doctrinal principles. (The period is with the CIR for the second quarter of 2003 was on 30 June
MANDATORY and JURISDICTIONAL) 2005. Mindanao II filed its administrative claim before the CIR on
13 April 2005, while Mindanao I filed its administrative claim
San Roque case cited by the SC before the CIR on 4 April 2005. Both claims were filed on time,
pursuant to Section 112(A) of the 1997 Tax Code.
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 (3) The last day for filing an application for tax refund or credit
act. A right cannot spring in favor of a person from his own void or illegal with the CIR for the third quarter of 2003 was on 30 September
act. This doctrine is repeated in Article 2254 of the Civil Code, which 2005. Mindanao II filed its administrative claim before the CIR on
states, "No vested or acquired right can arise from acts or omissions 13 April 2005, while Mindanao I filed its administrative claim
which are against the law or which infringe upon the rights of others." For before the CIR on 4 April 2005. Both claims were filed on time,
violating a mandatory provision of law in filing its petition with the CTA, pursuant to Section 112(A) of the 1997 Tax Code.
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. (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
This Court cannot brush aside the grave issue of the mandatory and 2006. Mindanao II filed its administrative claim before the CIR on
jurisdictional nature of the 120-day period just because the Commissioner 13 April 2005, while Mindanao I filed its administrative claim
merely asserts that the case was prematurely filed with the CTA and before the CIR on 4 April 2005. Both claims were filed on time,
does not question the entitlement of San Roque to the refund. pursuant to Section 112(A) of the 1997 Tax Code.

The burden is on the taxpayer to show that he has strictly complied In determining whether the claims for the second, third and fourth
with the conditions for the grant of the tax refund or credit. quarters of 2003 have been properly appealed,

This Court cannot disregard mandatory and jurisdictional conditions The second paragraph of Section 112(C) of the 1997 Tax Code is
mandated by law simply because the Commissioner chose not to contest clear: "In case of full or partial denial of the claim for tax refund or
the numerical correctness of the claim for tax refund or credit of the tax credit, or the failure on the part of the Commissioner to act on
taxpayer. Non-compliance with mandatory periods, non-observance of the application within the period prescribed above, the taxpayer
prescriptive periods, and non-adherence to exhaustion of administrative affected may, within thirty (30) days from the receipt of the decision
remedies bar a taxpayer’s claim for tax refund or credit, whether or not denying the claim or after the expiration of the one hundred twenty
the Commissioner questions the numerical correctness of the claim of the day-period, appeal the decision or the unacted claim with the Court
taxpayer. of Tax Appeals."

We rule on Mindanao I and II’s administrative claims for the first, second, The mandatory and jurisdictional nature of the 120+30 day periods
third, and fourth quarters of 2003 as follows: was explained in San Roque:

(1) The last day for filing an application for tax refund or credit Following the verba legis doctrine, this law must be applied exactly as
with the CIR for the first quarter of 2003 was on 31 March 2005. worded since it is clear, plain, and unequivocal. The taxpayer cannot
Mindanao II filed its administrative claim before the CIR on 13 simply file a petition with the CTA without waiting for the Commissioner’s
decision within the 120-day mandatory and jurisdictional period. The CTA The theory that the 30-day period must fall within the two-year
will have no jurisdiction because there will be no "decision" or "deemed a prescriptive period adds a condition that is not found in the law. It results
denial" decision of the Commissioner for the CTA to review.  in truncating 120 days from the 730 days that the law grants the taxpayer
for filing his administrative claim with the Commissioner. This Court
There are three compelling reasons why the 30-day period need not cannot interpret a law to defeat, wholly or even partly, a remedy that the
necessarily fall within the two-year prescriptive period, as long as the law expressly grants in clear, plain, and unequivocal language.
administrative claim is filed within the two-year prescriptive period.
Xxx
First, Section 112(A) clearly, plainly, and unequivocally provides that the
taxpayer "may, within two (2) years after the close of the taxable quarter G.R. No. 193301
when the sales were made, apply for the issuance of a tax credit Mindanao II v. CIR
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 Mindanao II filed its administrative claims for the second, third, and fourth
Commissioner for a refund or credit "within two (2) years," which means quarters of 2003 on 13 April 2005. Counting 120 days after filing of the
at anytime within two years.  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
Second, Section 112(C) provides that the Commissioner shall decide the CTA for the second, third, and fourth quarters of 2003 was on 12
application for refund or credit "within one hundred twenty (120) days September 2005. However, the judicial claim cannot be filed earlier than
from the date of submission of complete documents in support of the 11 August 2005, which is the expiration of the 120-day period for the
application filed in accordance with Subsection (A)." The reference in Commissioner to act on the claim.
Section 112(C) of the submission of documents "in support of the
application filed in accordance with Subsection A" means that the (1) Mindanao II filed its judicial claim for the second quarter of
application in Section 112(A) is the administrative claim that the 2003 before the CTA on 7 July 2005, before the expiration of the
Commissioner must decide within the 120-day period. In short, the two- 120-day period. Pursuant to Section 112(C) of the 1997 Tax
year prescriptive period in Section 112(A) refers to the period within Code, Mindanao II’s judicial claim for the second quarter of 2003
which the taxpayer can file an administrative claim for tax refund or credit. was prematurely filed.

Third, if the 30-day period, or any part of it, is required to fall within the However, pursuant to San Roque’s recognition of the effect of
two-year prescriptive period (equivalent to 730 days), then the taxpayer BIR Ruling No. DA-489-03, we rule that Mindanao II’s judicial
must file his administrative claim for refund or credit within the first 610 claim for the second quarter of 2003 qualifies under the exception
days of the two-year prescriptive period. Otherwise, the filing of the to the strict application of the 120+30 day periods.
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 (2) Mindanao II filed its judicial claim for the third quarter of 2003
taxpayer files his administrative claim on the 611th day, the before the CTA on 9 September 2005. Mindanao II’s judicial claim
Commissioner, with his 120-day period, will have until the 731st day to for the third quarter of 2003 was thus filed on time, pursuant to
decide the claim. If the Commissioner decides only on the 731st day, or Section 112(C) of the 1997 Tax Code.
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
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003
days) has lapsed. The 30-day period granted by law to the taxpayer to file
before the CTA on 9 September 2005. Mindanao II’s judicial claim
an appeal before the CTA becomes utterly useless, even if the taxpayer
for the fourth quarter of 2003 was thus filed on time, pursuant to
complied with the law by filing his administrative claim within the two-year
Section 112(C) of the 1997 Tax Code.
prescriptive period.
G.R. No. 194637 Notwithstanding a strict construction of any claim for tax exemption or
Mindanao I v. CIR refund, the Court in San Roque recognized that BIR Ruling No. DA-489-
03 constitutes equitable estoppel54 in favor of taxpayers. BIR Ruling No.
Mindanao I filed its administrative claims for the second, third, and fourth DA-489-03 expressly states that the "taxpayer-claimant need not wait for
quarters of 2003 on 4 April 2005. Counting 120 days after filing of the the lapse of the 120-day period before it could seek judicial relief with the
administrative claim with the CIR (2 August 2005) and 30 days after the CTA by way of Petition for Review." This Court discussed BIR Ruling No.
CIR’s denial by inaction,52 the last day for filing a judicial claim with the DA-489-03 and its effect on taxpayers, thus:
CTA for the second, third, and fourth quarters of 2003 was on 1
September 2005. However, the judicial claim cannot be filed earlier than Taxpayers should not be prejudiced by an erroneous interpretation by the
2 August 2005, which is the expiration of the 120-day period for the Commissioner, particularly on a difficult question of law. The
Commissioner to act on the claim. 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
(1) Mindanao I filed its judicial claim for the second quarter of a difficult question of law. The abandonment of the Atlas doctrine did not
2003 before the CTA on 7 July 2005, before the expiration of the result in Atlas, or other taxpayers similarly situated, being made to return
120-day period. Pursuant to Section 112(C) of the 1997 Tax the tax refund or credit they received or could have received under Atlas
Code, Mindanao I’s judicial claim for the second quarter of 2003 prior to its abandonment. This Court is applying Mirant and Aichi
was prematurely filed. However, pursuant to San Roque’s prospectively. Absent fraud, bad faith or misrepresentation, the reversal
recognition of the effect of BIR Ruling No. DA-489-03, we rule by this Court of a general interpretative rule issued by the Commissioner,
that Mindanao I’s judicial claim for the second quarter of 2003 like the reversal of a specific BIR ruling under Section 246, should also
qualifies under the exception to the strict application of the apply prospectively. x x x.
120+30 day periods.
xxxx
(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 Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general
for the third quarter of 2003 was thus filed after the prescriptive interpretative rule applicable to all taxpayers or a specific ruling
period, pursuant to Section 112(C) of the 1997 Tax Code. applicable only to a particular taxpayer.

(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 BIR Ruling No. DA-489-03 is a general interpretative rule because it was
before the CTA on 9 September 2005. Mindanao I’s judicial claim a response to a query made, not by a particular taxpayer, but by a
for the fourth quarter of 2003 was thus filed after the prescriptive government agency tasked with processing tax refunds and credits, that
period, pursuant to Section 112(C) of the 1997 Tax Code. is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of
the Department of Finance. This government agency is also the
San Roque: Recognition of BIR Ruling No. DA-489-03 addressee, or the entity responded to, in BIR Ruling No. DA-489-03.
Thus, while this government agency mentions in its query to the
In the consolidated cases of San Roque, the Court En Banc 53 examined Commissioner the administrative claim of Lazi Bay Resources
and ruled on the different claims for tax refund or credit of three different Development, Inc., the agency was in fact asking the Commissioner what
companies. In San Roque, we reiterated that "following the verba legis to do in cases like the tax claim of Lazi Bay Resources Development,
doctrine, Section 112(C) must be applied exactly as worded since it is Inc., where the taxpayer did not wait for the lapse of the 120-day period.
clear, plain, and unequivocal. The taxpayer cannot simply file a petition
with the CTA without waiting for the Commissioner’s decision within the Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus,
120-day mandatory and jurisdictional period. The CTA will have no all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its
jurisdiction because there will be no ‘decision’ or ‘deemed a denial issuance on 10 December 2003 up to its reversal by this Court in Aichi on
decision’ of the Commissioner for the CTA to review."
6 October 2010, where this Court held that the 120+30 day periods are exception to the mandatory and jurisdictional 120+30 day
mandatory and jurisdictional. periods.

xxxx 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,
Taganito, however, filed its judicial claim with the CTA on 14 February third, and fourth quarters of 2003 are GRANTED. For G.R. No. 19463 7,
2007, after the issuance of BIR Ruling No. DA-489-03 on 10 December the claims of Mindanao I Geothermal Partnership for the first, third, and
2003. Truly, Taganito can claim that in filing its judicial claim prematurely fourth quarters of 2003 are DENIED while its claim for the second quarter
without waiting for the 120-day period to expire, it was misled by BIR of 2003 is GRANTED.
Ruling No. DA-489-03. Thus, Taganito can claim the benefit of BIR
Ruling No. DA-489-03, which shields the filing of its judicial claim from the COMMISSIONER OF INTERNAL REVENUE, petitioner,
vice of prematurity. (Emphasis in the original) vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM
MAY SUMMARY NAMAN PALA!!! punyeta LIMITED OF THE MARDEN GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY, respondents.
Summary of Rules on Prescriptive Periods Involving VAT
The issue in this present petition is whether the sale by the National
We summarize the rules on the determination of the prescriptive Development Company (NDC) of five (5) of its vessels to the private
period for filing a tax refund or credit of unutilized input VAT as respondents is subject to value-added tax (VAT) under the National
provided in Section 112 of the 1997 Tax Code, as follows: Internal Revenue Code of 1986 (Tax Code) then prevailing at the time of
the sale.
(1) An administrative claim must be filed with the CIR within
two years after the close of the taxable quarter when the Facts: Pursuant to a government program of privatization, NDC decided
zero-rated or effectively zero-rated sales were made. 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
(2) The CIR has 120 days from the date of submission of lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-
complete documents in support of the administrative claim Decker, "Kloeckner" type vessels.1 The vessels were constructed for the
within which to decide whether to grant a refund or issue a NDC between 1981 and 1984, then initially leased to Luzon Stevedoring
tax credit certificate. The 120-day period may extend beyond Company, also its wholly-owned subsidiary. Subsequently, the vessels
the two-year period from the filing of the administrative claim were transferred and leased, on a bareboat basis, to the NMC
if the claim is filed in the later part of the two-year period. If
the 120-day period expires without any decision from the The NMC shares and the vessels were offered for public bidding. Among
CIR, then the administrative claim may be considered to be the stipulated terms and conditions for the public auction was that the
denied by inaction. winning bidder was to pay "a value added tax of 10% on the value of the
vessels.
(3) A judicial claim must be filed with the CTA within 30 days
On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay
from the receipt of the CIR’s decision denying the
administrative claim or from the expiration of the 120-day Lines) offered to buy the shares and the vessels for P168,000,000.00.
period without any action from the CIR. The bid was made by Magsaysay Lines, purportedly for a new company
still to be formed composed of itself, Baliwag Navigation, Inc., and FIM
(4) All taxpayers, however, can rely on BIR Ruling No. DA- Limited of the Marden Group based in Hongkong (collectively, private
489-03 from the time of its issuance on 10 December 2003 up respondents).
to its reversal by this Court in Aichi on 6 October 2010, as an
On 28 September 1988, the implementing Contract of Sale was executed the "retirement from or cessation of business" by the owner of the goods,
between NDC, on one hand, and Magsaysay Lines, Baliwag Navigation, as provided for in Section 100 of the Tax Code. 
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 Issue: Whether or not the sale of the ship is subject to VAT
PURCHASER. Per arrangement, an irrevocable confirmed Letter of
Credit previously filed as bidders bond was accepted by NDC as security Ruling: No. A brief reiteration of the basic principles governing VAT is in
for the payment of VAT, if any.  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
In January of 1989, private respondents through counsel received the end user of consumer goods or services which ultimately shoulders
VAT Ruling No. 568-88 dated 14 December 1988 from the BIR, the tax, as the liability therefrom is passed on to the end users by the
holding that the sale of the vessels was subject to the 10% VAT.  providers of these goods or services16 who in turn may credit their own
VAT liability (or input VAT) from the VAT payments they receive from the
Private respondents moved for the reconsideration of VAT Ruling No. final consumer (or output VAT).17 The final purchase by the end consumer
568-88, as well as VAT Ruling No. 395-88 (dated 18 August 1988), which represents the final link in a production chain that itself involves several
made a similar ruling on the sale of the same vessels in response to an transactions and several acts of consumption. The VAT system assures
inquiry from the Chairman of the Senate Blue Ribbon Committee. Their fiscal adequacy through the collection of taxes on every level of
motion was denied. consumption,18 yet assuages the manufacturers or providers of goods
and services by enabling them to pass on their respective VAT liabilities
At this point, NDC drew on the Letter of Credit to pay for the VAT, and the to the next link of the chain until finally the end consumer shoulders the
amount of P15,120,000.00 in taxes was paid on 16 March 1989. entire tax liability.

On 10 April 1989, private respondents filed an Appeal and Petition for Yet VAT is not a singular-minded tax on every transactional level. Its
Refund with the CTA, followed by a Supplemental Petition for Review. assessment bears direct relevance to the taxpayer’s role or link in the
production chain. Hence, as affirmed by Section 99 of the Tax Code and
CTA: the sale of a vessel was an "isolated transaction," not done in the its subsequent incarnations,19 the tax is levied only on the sale, barter or
ordinary course of NDC’s business, and was thus not subject to VAT, exchange of goods or services by persons who engage in such
which under Section 99 of the Tax Code, was applied only to sales in the activities, in the course of trade or business. These transactions
course of trade or business. The CTA further held that the sale of the outside the course of trade or business may invariably contribute to the
vessels could not be "deemed sale," and thus subject to VAT, as the production chain, but they do so only as a matter of accident or incident.
transaction did not fall under the enumeration of transactions deemed As the sales of goods or services do not occur within the course of trade
sale as listed either in Section 100(b) of the Tax Code, or Section 4 of or business, the providers of such goods or services would hardly, if at
R.R. No. 5-87.  all, have the opportunity to appropriately credit any VAT liability as
against their own accumulated VAT collections since the accumulation of
CA (Hindi pa En banc nito): While the appellate court agreed that the sale output VAT arises in the first place only through the ordinary course of
was an isolated transaction, not made in the course of NDC’s regular trade or business.
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 The sale of the vessels was not in the ordinary course of trade or
of the vessels together with the NMC shares brought about a change of business of NDC was appreciated by both the CTA and the Court of
ownership in NMC. However, the Court of Appeals reversed itself upon Appeals, the latter doing so even in its first decision which it eventually
reconsidering the case, through a Resolution dated 5 February reconsidered.20 
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 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 CTA: Affirmed with Slight Modifications the assessment of CIR.
services not in the course of trade or business is not subject to VAT. Accordingly, petitioner is ordered to pay respondent Commissioner of
Internal Revenue the amount of P335,831.01 inclusive of the 25%
Accordingly, the Court rules that given the undisputed finding that the surcharge and interest plus 20% interest
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 CA: Reversed and set aside CTA. The Court of Appeals, in that case,
Section 99 of the Tax Code, no matter how the said sale may hew to reasoned that COMASERCO was not engaged in business of providing
those transactions deemed sale as defined under Section 100. services to Philamlife and its affiliates. In the same manner, the Court of
Appeals held that COMASERCO was not liable to pay VAT for it was not
COMMISSIONER OF INTERNAL REVENUE, petitioner, engaged in the business of selling services.
vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND Issue: Whether the transactions of COMASERCO with its affiliates are
SERVICES CORPORATION, respondents. VATable

Ruling: Yes. Petitioner maintains that the services rendered by

PARDO, J.: COMASERCO to Philamlife and its affiliates, for a fee or consideration,
are subject to VAT. VAT is a tax on the value added by the performance
Facts: Commonwealth Management and Services Corporation of the service. It is immaterial whether profit is derived from rendering the
(COMASERCO, for brevity), is a corporation duly organized and existing service.
under the laws of the Philippines. It is an affiliate of Philippine American
Life Insurance Co. (Philamlife), organized by the letter to perform
Sec. 99 of the National Internal Revenue Code of 1986, as amended by
collection, consultative and other technical services, including functioning Executive Order (E. O.) No. 273 in 1988, provides that:
as an internal auditor, of Philamlife and its other affiliates.
1âwphi1.nêt

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an Sec. 99. Persons liable. — Any person who, in the course of
assessment to private respondent COMASERCO for deficiency value- trade or business, sells, barters or exchanges goods, renders
added tax (VAT) amounting to P351,851.01, On August 20, 1992, the services, or engages in similar transactions and any person who,
imports goods shall be subject to the value-added tax (VAT)
Commissioner of Internal Revenue sent a collection letter to
imposed in Sections 100 to 102 of this Code.  9

COMASERCO demanding payment of the deficiency VAT.

On September 29, 1992, COMASERCO filed with the Court of Tax COMASERCO contends that the term "in the course of trade or business"
Appeals a petition for review contesting the Commissioner's assessment.
4  requires that the "business" is carried on with a view to profit or
COMASERCO asserted that the services it rendered to Philamlife and its livelihood. 
affiliates, relating to collections, consultative and other technical
assistance, including functioning as an internal auditor, were on a "no- We disagree.
profit, reimbursement-of-cost-only" basis. It averred that it was not
engaged in the business of providing services to Philamlife and its On May 28, 1994, Congress enacted Republic Act No. 7716, the
affiliates. COMASERCO was established to ensure operational Expanded VAT Law (EVAT), amending among other sections, Section 99
of the Tax Code. On January 1, 1998, Republic Act 8424, the National
orderliness and administrative efficiency of Philamlife and its affiliates,
Internal Revenue Code of 1997, took effect. The amended law provides
and not in the sale of services. COMASERCO stressed that it was not
that:
profit-motivated, thus not engaged in business. In fact, it did not generate
profit but suffered a net loss in taxable year 1988. COMASERCO averred
Sec. 105. Persons Liable. — Any person who, in the course of
that since it was not engaged in business, it was not liable to pay VAT. trade or business, sells, barters, exchanges, leases goods or
 properties, renders services, and any person who imports goods it is immaterial whether the primary purpose of a corporation indicates
shall be subject to the value-added tax (VAT) imposed in that it receives payments for services rendered to its affiliates on a
Sections 106 and 108 of this Code. reimbursement-on-cost basis only, without realizing profit, for purposes of
determining liability for VAT on services rendered. As long as the entity
The value-added tax is an indirect tax and the amount of tax may provides service for a fee, remuneration or consideration, then the
be shifted or passed on to the buyer, transferee or lessee of the service rendered is subject to VAT. 1awp++i1

goods, properties or services. This rule shall likewise apply to

existing sale or lease of goods, properties or services at the time Both the Commissioner of Internal Revenue and the Court of Tax
of the effectivity of Republic Act No. 7716. Appeals correctly ruled that the services rendered by COMASERCO to
Philamlife and its affiliates are subject to VAT. As pointed out by the
The phrase "in the course of trade or business" means the Commissioner, the performance of all kinds of services for others for a
regular conduct or pursuit of a commercial or an economic fee, remuneration or consideration is considered as sale of services
activity, including transactions incidental thereto, by any person subject to VAT. 
regardless of whether or not the person engaged therein is a
nonstock, nonprofit organization (irrespective of the disposition of REVERSED CA
its net income and whether or not it sells exclusively to members
of their guests), or government entity. COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
The rule of regularity, to the contrary notwithstanding, services as SEAGATE TECHNOLOGY (PHILIPPINES), respondent.
defined in this Code rendered in the Philippines by nonresident Business companies registered in and operating from the Special
foreign persons shall be considered as being rendered in the
Economic Zone in Naga, Cebu -- like herein respondent --
course of trade or business.
are entities exempt from all internal revenue taxes and the implementing
rules relevant thereto, including the value-added taxes or VAT. Although
Contrary to COMASERCO's contention the above provision clarifies that
even a non-stock, non-profit, organization or government entity, is liable export sales are not deemed exempt transactions, they are nonetheless
to pay VAT on the sale of goods or services. VAT is a tax on zero-rated. Hence, in the present case, the distinction between
transactions, imposed at every stage of the distribution process on the exempt entities and exempt transactions has little significance, because
sale, barter, exchange of goods or property, and on the performance of the net result is that the taxpayer is not liable for the VAT. 
services, even in the absence of profit attributable thereto. The term "in
Facts: [Respondent] is a resident foreign corporation duly registered with
the course of trade or business" requires the regular conduct or pursuit of
a commercial or an economic activity regardless of whether or not the the Securities and Exchange Commission to do business in the
entity is profit-oriented Philippines, with principal office address at the new Cebu Township One.

Respondent] is registered with the Philippine Export Zone Authority

The definition of the term "in the course of trade or business" present law (PEZA) and has been issued PEZA Certificate No. 97-044 pursuant to
applies to all transactions even to those made prior to its enactment. Sec. Presidential Decree No. 66, as amended, to engage in the manufacture
108 of the National Internal Revenue Code of 1997  defines the phrase
10 
of recording components primarily used in computers for export. Such
"sale of services" as the "performance of all kinds of services for others registration was made on 6 June 1997; [Petitioner] is sued in his official
for a fee, remuneration or consideration." It includes "the supply of capacity, having been duly appointed and empowered to perform the
technical advice, assistance or services rendered in connection with duties of his office, including, among others, 
technical management or administration of any scientific, industrial or
commercial undertaking or project."  Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced
by VAT Registration Certification No. 97-083-000600-V issued on 2 April
1997;
An administrative claim for refund of VAT input taxes in the amount Although the transactions involving such tax are not exempt, petitioner as
of P28,369,226.38 with supporting documents (inclusive of a VAT-registered person, however, is entitled to their credits.
28 

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 Nature of the VAT and the Tax Credit Method
Cebu;
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0
Granting, without admitting, that [respondent] is a Philippine Economic percent to 10 percent levied on every importation of goods, whether or
Zone Authority (PEZA) registered Ecozone Enterprise, then its business not in the course of trade or business, or imposed on each sale, barter,
is not subject to VAT pursuant to Section 24 of Republic Act No. ([RA]) exchange or lease of goods or properties or on each rendition of services
7916 in relation to Section 103 of the Tax Code, as amended. As in the course of trade or business as they pass along the production and
29 

[respondent’s] business is not subject to VAT, the capital goods and distribution chain, the tax being limited only to the value added to such 30 

services it alleged to have purchased are considered not used in VAT goods, properties or services by the seller, transferor or lessor. It is an 31 

taxable business. As such, [respondent] is not entitled to refund of input indirect tax that may be shifted or passed on to the buyer, transferee or
taxes on such capital goods pursuant to Section 4.106.1 of Revenue lessee of the goods, properties or services. As such, it should be
32 

Regulations No. ([RR])7-95, and of input taxes on services pursuant to understood not in the context of the person or entity that is primarily,
Section 4.103 of said regulations. directly and legally liable for its payment, but in terms of its nature as a
tax on consumption. In either case, though, the same conclusion is
33 

Petitioner] is sued in his official capacity, having been duly appointed and arrived at.
empowered to perform the duties of his office, including, among others,
the duty to act and approve claims for refund or tax credit; The law that originally imposed the VAT in the country, as well as the
34 

subsequent amendments of that law, has been drawn from the tax credit
CA: CA affirmed the Decision of the CTA granting the claim for refund or method. Such method adopted the mechanics and self-enforcement
35 

issuance of a tax credit certificate (TCC) in favor of respondent in the features of the VAT as first implemented and practiced in Europe and
reduced amount of P12,122,922.66. This sum represented the unutilized subsequently adopted in New Zealand and Canada. Under the present 36 

but substantiated input VAT paid on capital goods purchased for the method that relies on invoices, an entity can credit against or subtract
period covering April 1, 1998 to June 30, 1999. from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports. 37

Issue: Whether or not respondent is entitled to the refund or issuance of

Tax Credit Certificate in the amount of P12,122,922.66 representing If at the end of a taxable quarter the output taxes charged by a seller are
38  39 

alleged unutilized input VAT paid on capital goods purchased for the equal to the input taxes passed on by the suppliers, no payment is
40 

period April 1, 1998 to June 30, 1999 required. It is when the output taxes exceed the input taxes that the
excess has to be paid. If, however, the input taxes exceed the output
41 

Ruling: Yes: No doubt, as a PEZA-registered enterprise within a special taxes, the excess shall be carried over to the succeeding quarter or
economic zone, respondent is entitled to the fiscal incentives and
7 
quarters. Should the input taxes result from zero-rated or effectively
42 

benefits provided for in either PD 66 or EO 226.

8  9  10 
zero-rated transactions or from the acquisition of capital goods, any 43 

excess over the output taxes shall instead be refunded to the taxpayer or 44 

It shall, moreover, enjoy all privileges, benefits, advantages or

credited against other internal revenue taxes.
45  46

exemptions under both Republic Act Nos. (RA) 7227 and 7844.
11 

From the above-cited laws, it is immediately clear that petitioner enjoys Zero-Rated and Effectively Zero-Rated Transactions
preferential tax treatment. It is not subject to internal revenue laws and
27 

regulations and is even entitled to tax credits. The VAT on capital goods Although both are taxable and similar in effect, zero-rated transactions
is an internal revenue tax from which petitioner as an entity is exempt. differ from effectively zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and VAT-exempt or not -- of the party to the transaction. Indeed, such
60 

supply of services. The tax rate is set at zero. When applied to the tax
47  48 
transaction is not subject to the VAT, but the seller is not allowed any tax
base, such rate obviously results in no tax chargeable against the refund of or credit for any input taxes paid.
purchaser. The seller of such transactions charges no output tax, but can
49 

claim a refund of or a tax credit certificate for the VAT previously charged An exempt party, on the other hand, is a person or entity granted VAT
by suppliers. exemption under the Tax Code, a special law or an international
agreement to which the Philippines is a signatory, and by virtue of which
Effectively zero-rated transactions, however, refer to the sale of goods or
50 
its taxable transactions become exempt from the VAT. Such party is also
61 

supply of services to persons or entities whose exemption under special

51 
not subject to the VAT, but may be allowed a tax refund of or credit for
laws or international agreements to which the Philippines is a signatory input taxes paid, depending on its registration as a VAT or non-VAT
effectively subjects such transactions to a zero rate. Again, as applied to
52 
taxpayer.
the tax base, such rate does not yield any tax chargeable against the
purchaser. The seller who charges zero output tax on such transactions As mentioned earlier, the VAT is a tax on consumption, the amount of
can also claim a refund of or a tax credit certificate for the VAT previously which may be shifted or passed on by the seller to the purchaser of the
charged by suppliers. goods, properties or services. While the liability is imposed on one
62 

person, the burden may be passed on to another. Therefore, if a special

Zero Rating and Exemption 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
In terms of the VAT computation, zero rating and exemption are the indirect burden of the VAT shifted to it by its VAT-registered suppliers, the
same, but the extent of relief that results from either one of them is not. purchase transaction is not exempt. Applying this principle to the case at
bar, the purchase transactions entered into by respondent are not VAT-
Applying the destination principle to the exportation of goods, automatic
53  exempt.
zero rating is primarily intended to be enjoyed by the seller who is
54 

directly and legally liable for the VAT, making such seller internationally Special laws may certainly exempt transactions from the VAT. However,
63 

competitive by allowing the refund or credit of input taxes that are the Tax Code provides that those falling under PD 66 are not. PD 66 is
attributable to export sales. Effective zero rating, on the contrary, is
55  the precursor of RA 7916 -- the special law under which respondent was
intended to benefit the purchaser who, not being directly and legally liable registered. The purchase transactions it entered into are, therefore, not
for the payment of the VAT, will ultimately bear the burden of the tax VAT-exempt. These are subject to the VAT; respondent is required to
shifted by the suppliers. register.

In both instances of zero rating, there is total relief for the purchaser from Its sales transactions, however, will either be zero-rated or taxed at the
the burden of the tax. But in an exemption there is only partial
56  standard rate of 10 percent, depending again on the application of
64 

relief, because the purchaser is not allowed any tax refund of or credit for
57  the destination principle. 65

input taxes paid.58

If respondent enters into such sales transactions with a purchaser --

Exempt Transaction >and Exempt Party usually in a foreign country -- for use or consumption outside the
Philippines, these shall be subject to 0 percent. If entered into with a
66 

The object of exemption from the VAT may either be the transaction itself purchaser for use or consumption in the Philippines, then these shall be
or any of the parties to the transaction. 59 subject to 10 percent, unless the purchaser is exempt from the indirect
67 

burden of the VAT, in which case it shall also be zero-rated.

An exempt transaction, on the one hand, involves goods or services
which, by their nature, are specifically listed in and expressly exempted Since the purchases of respondent are not exempt from the VAT, the rate
from the VAT under the Tax Code, without regard to the tax status -- to be applied is zero. Its exemption under both PD 66 and RA 7916
effectively subjects such transactions to a zero rate, because the68 
First, RA 7916 states that "no taxes, local and national, shall be imposed
ecozone within which it is registered is managed and operated by the on business establishments operating within the ecozone." Since this law
81 

PEZA as a separate customs territory. This means that in such zone is

69 
does not exclude the VAT from the prohibition, it is deemed
created the legal fiction of foreign territory. Under the cross-border
70 
included. Exceptio firmat regulam in casibus non exceptis. An exception
principle of the VAT system being enforced by the Bureau of Internal
71 
confirms the rule in cases not excepted; that is, a thing not being
Revenue (BIR), no VAT shall be imposed to form part of the cost of
72 
excepted must be regarded as coming within the purview of the general
goods destined for consumption outside of the territorial border of the rule.
taxing authority. If exports of goods and services from the Philippines to a
foreign country are free of the VAT, then the same rule holds for such
73 
Moreover, even though the VAT is not imposed on the entity but on the
exports from the national territory -- except specifically declared areas -- transaction, it may still be passed on and, therefore, indirectly imposed on
to an ecozone. the same entity -- a patent circumvention of the law. That no VAT shall be
imposed directly upon business establishments operating within the
Sales made by a VAT-registered person in the customs territory to a ecozone under RA 7916 also means that no VAT may be passed on and
PEZA-registered entity are considered exports to a foreign country; imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per
conversely, sales by a PEZA-registered entity to a VAT-registered person obliquum. When anything is prohibited directly, it is also prohibited
in the customs territory are deemed imports from a foreign country. An 74 
indirectly.
ecozone -- indubitably a geographical territory of the Philippines -- is,
however, regarded in law as foreign soil. This legal fiction is necessary to
75 
Second, when RA 8748 was enacted to amend RA 7916, the same
give meaningful effect to the policies of the special law creating the prohibition applied, except for real property taxes that presently are
zone. If respondent is located in an export processing zone within that
76  77 
imposed on land owned by developers. This similar and repeated
82 

ecozone, sales to the export processing zone, even without being prohibition is an unambiguous ratification of the law’s intent in not
actually exported, shall in fact be viewed as constructively exported under imposing local or national taxes on business enterprises within the
EO 226. Considered as export sales, such purchase transactions by
78  79 
ecozone.
respondent would indeed be subject to a zero rate. 80

Third, foreign and domestic merchandise, raw materials, equipment and

Tax Exemptions Broad and Express the like "shall not be subject to x x x internal revenue laws and
regulations" under PD 66 -- the original charter of PEZA (then EPZA)
83 

Applying the special laws we have earlier discussed, respondent as an that was later amended by RA 7916. No provisions in the latter law
84 

entity is exempt from internal revenue laws and regulations. modify such exemption.

This exemption covers both direct and indirect taxes, stemming from the Although this exemption puts the government at an initial disadvantage,
very nature of the VAT as a tax on consumption, for which the the reduced tax collection ultimately redounds to the benefit of the
direct liability is imposed on one person but the indirect burden is passed national economy by enticing more business investments and creating
on to another. Respondent, as an exempt entity, can neither be directly more employment opportunities. 85

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 Fourth, even the rules implementing the PEZA law clearly reiterate that
distinguit, nec nos distinguere debemus. Where the law does not merchandise -- except those prohibited by law -- "shall not be subject to x
distinguish, we ought not to distinguish. x x internal revenue laws and regulations x x x" if brought to the
86 

ecozone’s restricted area for manufacturing by registered export

87 

Moreover, the exemption is both express and pervasive for the following enterprises, of which respondent is one. These rules also apply to all
88 

reasons: enterprises registered with the EPZA prior to the effectivity of such rules.
89
Fifth, export processing zone enterprises registered with the Board of
90 
conferred by law upon it as an entity, not upon the transactions
Investments (BOI) under EO 226 patently enjoy exemption from national themselves. Nonetheless, its exemption as an entity and the non-
108 

internal revenue taxes on imported capital equipment reasonably needed exemption of its transactions lead to the same result for the following
and exclusively used for the manufacture of their products; on required
91 
considerations:
supplies and spare part for consigned equipment; and on foreign and
92 

domestic merchandise, raw materials, equipment and the like -- except First, the contemporaneous construction of our tax laws by BIR
those prohibited by law -- brought into the zone for manufacturing. In 93 
authorities who are called upon to execute or administer such laws will
109 

addition, they are given credits for the value of the national internal have to be adopted. Their prior tax issuances have held inconsistent
revenue taxes imposed on domestic capital equipment also reasonably positions brought about by their probable failure to comprehend and fully
needed and exclusively used for the manufacture of their products, as 94 

appreciate the nature of the VAT as a tax on consumption and the

well as for the value of such taxes imposed on domestic raw materials
application of the destination principle.
and supplies that are used in the manufacture of their export products
and that form part thereof.95

Second, the policies of the law should prevail. Ratio legis est anima. The
Sixth, the exemption from local and national taxes granted under RA reason for the law is its very soul.
7227 are ipso facto accorded to ecozones. In case of doubt, conflicts
96  97 

with respect to such tax exemption privilege shall be resolved in favor of In PD 66, the urgent creation of the EPZA which preceded the PEZA, as
the ecozone. 98 well as the establishment of export processing zones, seeks "to
encourage and promote foreign commerce as a means of x x x
And seventh, the tax credits under RA 7844 -- given for imported raw strengthening our export trade and foreign exchange position, of
materials primarily used in the production of export goods, and for locally
99  hastening industrialization, of reducing domestic unemployment, and of
produced raw materials, capital equipment and spare parts used by accelerating the development of the country
exporters of non-traditional products -- shall also be continuously
100 

enjoyed by similar exporters within the ecozone.101 Indeed, the latter Xxx

exporters are likewise entitled to such tax exemptions and credits.
Finally, under RA 7844, the State declares the need "to evolve export
development into a national effort" in order to win international markets.
123 

Tax Refund as Tax Exemption

By providing many export and tax incentives, the State is able to drive
124 

home the point that exporting is indeed "the key to national survival and
To be sure, statutes that grant tax exemptions are construed strictissimi
the means through which the economic goals of increased employment
juris against the taxpayer and liberally in favor of the taxing authority.
102  103  104

and enhanced incomes can most expeditiously be achieved

Tax refunds are in the nature of such exemptions. Accordingly, the
105 

claimants of those refunds bear the burden of proving the factual basis of VAT Registration, Not Application for Effective Zero Rating,
their claims; and of showing, by words too plain to be mistaken, that the
106  Indispensable to VAT Refund
legislature intended to exempt them. In the present case, all the cited
107 

legal provisions are teeming with life with respect to the grant of tax Registration is an indispensable requirement under our VAT
exemptions too vivid to pass unnoticed. In addition, respondent easily law. Petitioner alleges that respondent did register for VAT purposes
131 

meets the challenge. 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, which as an entity is exempt, is different from its respondent, given the latter’s prior representation before the lower courts
transactions which are not exempt. The end result, however, is that it is and the mode of appeal taken by petitioner before this Court.
not subject to the VAT. The non-taxability of transactions that are
otherwise taxable is merely a necessary incident to the tax exemption
The BIR regulations additionally requiring an approved prior application Therefore, respondent can be considered exempt, not from the VAT, but
for effective zero rating cannot prevail over the clear VAT nature of
140 
only from the payment of income tax for a certain number of years,
respondent’s transactions. The scope of such regulations is not "within depending on its registration as a pioneer or a non-pioneer enterprise. 
the statutory authority x x x granted by the legislature.141

Compliance with All Requisites for VAT Refund or Credit

First, a mere administrative issuance, like a BIR regulation, cannot
amend the law; the former cannot purport to do any more than interpret As further enunciated by the Tax Court, respondent complied with all the
the latter. The courts will not countenance one that overrides the statute
142 
requisites for claiming a VAT refund or credit.150

it seeks to apply and implement. 143

First, respondent is a VAT-registered entity. This fact alone distinguishes

Second, grantia argumenti that such an application is required by law, the present case from Contex, in which this Court held that the petitioner
there is still the presumption of regularity in the performance of official therein was registered as a non-VAT taxpayer. Hence, for being merely
151 

duty. Respondent’s registration carries with it the presumption that, in

145 
VAT-exempt, the petitioner in that case cannot claim any VAT refund or
the absence of contradictory evidence, an application for effective zero credit.
rating was also filed and approval thereof given. Besides, it is also
presumed that the law has been obeyed by both the administrative
146 

Second, the input taxes paid on the capital goods of respondent are duly
officials and the applicant.
supported by VAT invoices and have not been offset against any output
taxes. Although enterprises registered with the BOI after December 31,
Third, even though such an application was not made, all the
special laws we have tackled exempt respondent not only from internal 1994 would no longer enjoy the tax credit incentives on domestic capital
revenue laws but also from the regulations issued pursuant thereto. equipment 
Leniency in the implementation of the VAT in ecozones is an imperative,
And third, no question as to either the filing of such claims within the
precisely to spur economic growth in the country and attain global
prescriptive period or the validity of the VAT returns has been raised.
competitiveness as envisioned in those laws.
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
A VAT-registered status, as well as compliance with the invoicing
of internal revenue laws, including prescription. 154

requirements, is sufficient for the effective zero rating of the transactions

147 

of a taxpayer. The nature of its business and transactions can easily be

perused from, as already clearly indicated in, its VAT registration papers Summary
and photocopied documents attached thereto. Hence, its transactions
cannot be exempted by its mere failure to apply for their effective zero To summarize, special laws expressly grant preferential tax treatment to
business establishments registered and operating within an ecozone,
rating. 
which by law is considered as a separate customs territory. As such,
respondent is exempt from all internal revenue taxes, including the VAT,
Tax Refund or Credit in Order 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
Having determined that respondent’s purchase transactions are subject law and procedure, its registration status entitling it to such tax holiday
to a zero VAT rate, the tax refund or credit is in order. can no longer be questioned. Its sales transactions intended for export
may not be exempt, but like its purchase transactions, they are zero-
As correctly held by both the CA and the Tax Court, respondent had rated. No prior application for the effective zero rating of its transactions
chosen the fiscal incentives in EO 226 over those in RA 7916 and PD 66. is necessary. Being VAT-registered and having satisfactorily complied
It opted for the income tax holiday regime instead of the 5 with all the requisites for claiming a tax refund of or credit for the input
percent preferential tax regime. VAT paid on capital goods purchased, respondent is entitled to such VAT
refund or credit.
Affirm CA