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VALUE-ADDED TAXII. Nature, Characteristic, and Purpose of VAT

TOLENTINO V. SECRETARY OF FINANCE [Cary]

FACTS:

Petitioners (Tolentino, Kilosbayan, Inc., Philippine

Airlines, Roco, and Chamber of Real Estate and Builders

Association) seek reconsideration of the Courts previous ruling

dismissing the petitions filed for the declaration of

unconstitutionality of R.A. No. 7716, the Expanded Value-Added

Tax Law. Petitioners contend that the R.A. did not originate

exclusively in the HoR as required by Article 6, Section 24 of the

Constitution. The Senate allegedly did not pass it on second andthird readings, instead passing its own version. Petitioners

contend that it should have amended the House bill by striking

out the text of the bill and substituting it with the text of its own

bill, so as to conform with the Constitution.

ISSUE: Whether the R.A. is unconstitutional for having

originated from the Senate, and not the HoR.

HELD:Petition is unmeritorious. The enactment of the Senate

bill has not been the first instance where the Senate, in the

exercise of its power to propose amendments to bills (required to

originate in the House), passed its own version. An amendment

by substitution (striking out the text and substituting it), as urged

by petitioners, concerns a mere matter of form, and considering

the petitioner has not shown what substantial difference it would

make if Senate applied such substitution in the case, it cannot be

applied to the case at bar. While the aforementioned

Constitutional provision states that bills must originate

exclusively in the HoR, it also adds, but the Senate may

propose or concur with amendments. The Senate may thenpropose an entirely new bill as a substitute measure. Petitioners

erred in assuming the Senate version to be an independent and

distinct bill. Without the House bill, Senate could not have

enacted the Senate bill, as the latter was a mere amendment of the

former. As such, it did not have to pass the Senate on second and

third readings.

Petitioners question the signing of the President on both

bills, to support their contention that such are separate and

distinct. The President certified the bills separately only becausethe certification had to be made of the version of the same

revenue bill which AT THE MOMENT was being considered.

Petitioners question the power of the Conference

Committee to insert new provisions. The jurisdiction of the

conference committee is not limited to resolving differences

between the Senate and the House. It may propose an entirely

new provision, given that such are germane to the subject of the

conference, and that the respective houses of Congress

subsequently approve its report.

Petitioner PAL contends that the amendment of its franchise by

the withdrawal of its exemption from VAT is not expressed in

the title of the law, thereby violating the Constitution. The Court

believes that the title of the R.A. satisfies the Constitutional

Requirement.

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Petitioners claim that the R.A. violates their press

freedom and religious liberty, having removed them from the

exemption to pay VAT. Suffice it to say that since the law granted

the press a privilege, the law could take back the privilege anytime

without offense to the Constitution. By granting exemptions, theState does not forever waive the exercise of its sovereign

prerogative.

Lastly, petitioners contend that the R.A. violates dueprocess, equal protection and contract clauses and the rule ontaxation. Petitioners fail to take into consideration the fact thatthe VAT was already provided for in E.O. No. 273 long beforethe R.A. was enacted. The latter merely EXPANDS the base ofthe tax. Equality and uniformity in taxation means that all taxablearticles or kinds of property of the same class be taxed at thesame rate, the taxing power having authority to make reasonableand natural classifications for purposes of taxation. It is enoughthat the statute applies equally to all persons, forms andcorporations placed in s similar situation.

ABAKADA GURO PARTYLIST V. ERMITA

Several actions were filed by different petitioners assailing the

validity of R.A. No. 9337 (increasing VAT to 12%) for beingunconstitutional, as it violates Art 6, Section 28, w/c providesthat The rule of taxation shall be uniform and equitable. TheCongress shall evolve a progressive system of taxation.

In particular, SHELL, etc. assailed Section 8, amending Section110 (B) of the NIRC, imposing a 70% limit on the amountof input tax to be credited against the output tax,makingit REGRESSIVE and unconstitutional.

Specific provision: If at the end of any taxable

quarter the output tax exceeds the input tax, the

excess shall be paid by the VAT-registered

person. If the input tax exceeds the output tax, the

excess shall be carried over to the succeedingquarter or quarters: PROVIDED that the input

tax inclusive of input VAT carried over from

the previous quarter that may be credited in

every quarter shall not exceed 70% of the

output VAT: PROVIDED, HOWEVER, THAT

any input tax attributable to zero-rated sales by a

VAT-registered person may at his option be

refunded or credited against other internal revenue

taxes. . .

I: W/n RA 9337 is unconstitutional for violatinguniformity, equitability and progressiveness oftaxationNo, it is VALID.

TAX IS UNIFORM.

Uniformity in taxation means that all taxable articlesor kinds of property of the same class shall be taxedat the same rate.

The rule of uniform taxation does not depriveCongress of the power to classify subjects of taxation,and only demands uniformity within the particularclass.

In this case, the tax law is uniform because:o 1) it provides a standard rate of 0% or

10% (or 12%) on all goods and services;o ) it does not make any distinction as to the

type of industry or trade that will bear the70% limitation on the creditable input tax,

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5-year amortization of input tax paid onpurchase of capital goods or the 5% finalwithholding tax by the government.

TAX IS EQUITABLE. (Taxes should equally

burden all individualsor entities in similar economiccircumstances.)

The law is equipped with a threshold margin. The VAT rateof 0% or 10% (or 12%) does not apply to sales of goods orservices with gross annual sales or receipts not exceedingP1.5M.

Also, basic marine and agricultural food products in theiroriginal state are still NOT subject to the tax, thus ensuringthat prices at the grassroots level will remain accessible.

Although the law outs a premium on businesses with low

profit margins, and unduly favors those with high profitmargins, Congress equalized the burden the law by likewiseimposing a 3% percentage tax on VAT-exempt personsunder Section 109(v), i.e., transactions with gross annual salesand/or receipts not exceeding P1.5 Million.

This acts as an equalizer because in effect, bigger businessesthat qualify for VAT coverage and VAT-exempt taxpayersstand on equal-footing.

Moreover, Congress provided under mitigating measures toease, as well as spread out, the burden of taxation, which

would otherwise rest largely on the consumers:o Excise taxes on petroleum products and natural gas were

reduced. Percentage tax on domestic carriers wasremoved. Power producers are now exempt from payingfranchise tax.

o Income tax rates of corporations, in order to distributethe burden of taxation, were increased

o Domestic, foreign, and non-resident corporations arenow subject to a 35% income tax rate, from a previous32%.

o Intercorporate dividends of non-resident foreign

corporations are still subject to 15% final withholding taxbut the tax credit allowed on the corporations domicilewas increased to 20%.

o PAGCOR is not exempt from income taxes anymore.o Even the sale by an artist of his works or services

performed for the production of such works was notspared.

On the INPUT TAX LIMIT*(ITO ata yung impt)

Petitioner (Shell) assumes that the input tax exceeds 70% ofthe output tax, and therefore, the input tax in excess of 70%remains uncredited. However, to the extent that the input taxis less than 70% of the output tax, then 100% of such inputtax is still creditable.

More importantly, the excess input tax, if any, is retained in abusinesss books of accounts and remains creditable in thesucceeding quarter/s. This is explicitly allowed by Section110(B), which provides that if the input tax exceeds theoutput tax, the excess shall be carried over to the succeedingquarter or quarters.

In addition, Section 112(B) allows a VAT-registered personto apply for the issuance of a tax credit certificate or refundfor any unused input taxes, to the extent that such input taxeshave not been applied against the output taxes. Such unusedinput tax may be used in payment of his other internalrevenue taxes.

The non-application of the unutilized input tax in a givenquarter is not ad infinitum, as petitioners exaggeratedlycontend.

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On the other hand, it appears that petitioner Garcia failed tocomprehend the operation of the 70% limitation on the inputtax. According to petitioner, the limitation on the creditableinput tax in effect allows VAT-registered establishments to

retain a portion of the taxes they collect, which violates theprinciple that tax collection and revenue should be for publicpurposes and expenditures.

As earlier stated, the input tax is the tax paid by a person,passed on to him by the seller, when he buys goods.Output tax meanwhile is the tax due to the person whenhe sells goods. In computing the VAT payable, threepossible scenarios may arise:

o If output tax = input tax = no paymento If output tax > input tax = person liable for

excess, to be paid to BIRo If input tax > output tax = excess shall be carried

over to the succeeding quarter or quarters.o IF input tax results from zero-rated or effectively

zero-rated transactions, any excess over theoutput taxes shall be REFUNDED to thetaxpayer / credited against other internal revenuetaxes, at the taxpayers option.

Section 8 of R.A. No. 9337 however, imposed a 70%limitation on the input tax. Thus, a person can credit hisinput tax only up to the extent of 70% of the output tax.

There is no retention of any tax collection because thetaxpayer has already previously paid the input tax to aseller, and the seller will subsequently remit such inputtax to the BIR. The party directly liable for the payment ofthe tax is the seller. What only needs to be done is for theperson/taxpayer to apply or credit these input taxes, asevidenced by receipts, against his output taxes.

TAX IS REGRESSIVE, BUT IT IS NOT INVALID.

Taxation is PROGRESSIVE when its rate goes up dependingon the resources of the person affected. The Constitutiondoes not really prohibit the imposition of indirect taxes,like the VAT. What it simply provides is that Congress

shall "evolve a progressive system of taxation."

*NOTE the distinction made by the court:

VAT - A tax on spending or consumption. It is levied on the

sale, barter, exchange or lease of goods or properties and services.

Being an indirect tax on expenditure, the seller of goods or

services may pass on the amount of tax paid to the buyer, with

the seller acting merely as a tax collector. The burden of VAT is

intended to fall on the immediate buyers and ultimately, the end-consumers.

Direct taxis a tax for which a taxpayer is directly liable on the

transaction or business it engages in, without transferring the

burden to someone else. Examples are individual and corporate

income taxes, transfer taxes, and residence taxes.

ABAKADA v. Ermita (Oct 18, 2005)

This case is about the Resolution of the Motion forReconsideration filed by herein petitioners based on thedecision rendered by the court on Sept. 1, 2005, upholdingthe constitutionality of RA 9337 or the VAT Reform Act.

Relevant issues are as follows:1. MR of Escudero, et al.: W/N there was grave abuse of

discretion amounting to lack or excess of jurisdiction on

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the part of the Bicameral Committee when the No Pass-On Provisions for the sale of petroleum products andpower generation services were deleted.

2. MR of Bataan Governor Garcia, Jr.: W/N the VAT law isunconstitutional for being arbitrary, oppressive andinequitable because it burdens the consumers because ofthe price increase.

3. MR of Association of Pilipinas Shell Dealers: W/N theCourt erred in upholding the constitutionality ofSection 110(A)(2) and Section 110(B) of the NIRC asamended by the EVAT Law imposing limitations onthe amount of input VAT that may be claimed as acredit against the output VAT; Section 114(C) of theNIRC as amended by the EVAT Law, requiring thegovernment or any of its instrumentalities to

withhold a 5% final withholding tax on their grosspayments on purchases of goods and services; forfinding that the EVAT Law is not arbitrary, oppressiveand confiscatory as to amount a deprivation of propertywithout due process of law; that it did not violate theequal protection clause.

R:MRs are DENIED. TRO is lifted.

Escudero, et al. argues that the bicameral committee shouldnot have touched on the No Pass-On Provisions sinceboth the Senate and the House of Representatives were in

agreement that such provision should be passed where noVAT Burden shall be passed to the end-consumer andinstead will be shouldered by the sellers.

HOWEVER, the deletion of the No Pass-OnProvision made the present VAT law more inconsonance with the very nature of VAT which is a taxon spending or consumption, thus, the burden thereof isultimately borne by the end-consumer.

As to the contention that the right to credit input tax hasalready evolved into a vested right, the Court finds that theright to credit the same is a mere creation of law.Prior tothe enactment of multi-stage sales taxation, the sales taxes

paid at every level of distribution are not recoverable fromthe taxes payable. With the advent of EO 273 imposing a10% multi-stage tax on all sales, it was only then that thecrediting of the input tax paid on purchase or importation ofgoods and services by VAT-registered persons against theoutput tax was established. This continued with theExpanded VAT Law (R.A. No. 7716), and The Tax ReformAct of 1997 (R.A. No. 8424). The right to credit input taxas against the output tax is clearly a privilege created bylaw, a privilege that also the law can limit. It should bestressed that a person has no vested right in statutoryprivileges.

The impact of the 70% limitation on the creditable input taxwill ultimately depend on how one manages and operates itsbusiness. Market forces, strategy and acumen will dictate theirmoves. With or without these VAT provisions, anentrepreneur who does not have the ken to adapt toeconomic variables will surely perish in the competition. Thearguments posed are within the realm of business, and thesolution lies also in business.

VATIII. Persons Liable

CIR V. MAGSAYSAY LINES INC. [Alfie]

FACTS:1. Pursuant to a government program of privatization, the

National Development Company (NDC) decided to sell

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to private enterprises all of its shares in its wholly-ownedsubsidiary the National Marine Corporation;

2. Included in this sale were 5 ships which are 3,700 DWTTween-Decker Kloeckner type vessels.

ISSUE:Whether the sale of these vessels is subject to VAT.

HELD: NO. NOT SUBJECT TO VAT.VAT is ultimately a tax on consumption, even though it is

assessed on many levels of transactions on the basis of a fixedpercentage. It is the end user of consumer goods or serviceswhich ultimately shoulders the tax, as liability therefrom is passedon to end users by the providers of these goods or services whoin turn may credit their own VAT liability or input VAT from theVAT payments they receive from the final consumer. In this case,

NDC according to its Revised Charter bears no indication thatNDC was created for the primary purpose of selling realproperty. The conclusion that the sale was not in the course oftrade or business, which the CIR does not dispute, should havedefinitively settled the matter. Any sale, barter or exchange ofgoods or services not in the course of trade or business is notsubject to VAT.

MINDANAO II GEOTHERMAL PARTNERSHIP V. CIR

FACTS:1. Mindanao I and II (Mindanao) are value-added taxpayers, andBlock Power Production Facilities accredited by the Departmentof Energy.2. They had a Build-Operate-Transfer contract with thePhilippine National Oil CorporationEnergyDevelopmentCompany (PNOC-EDC), whereby Mindanao converts steamsupplied to it by PNOC-EDC into electricity, and then delivers

the electricity to the National Power Corporation (NPC) in behalfof PNOC-EDC.3. The Electric Power Industry Reform Act of 2000 (EPIRA, RA9136), amended the Tax Reform Act of 1997 (RA 8424), when itdecreed that sales of power by generation companies shall besubjected to a zero rate of VAT.4. Pursuant to EPIRA, Mindanao I and II filed their claims forthe issuance of tax credit certificates on unutilized or excess inputtaxes from their sales of generated power and delivery of electriccapacity and energy to NPC.5. The CTA En Banc denied Mindanao IIs claims for refund taxcredit for the first and second quarters of 2003, and Mindanao Isclaims for refund/tax credit for the first, second, third, andfourth quarters of 2003, for being filed out of time.

ISSUE:Whether the sale of the fully-depreciated Nissan Patrol isa one-time transaction not incidental to the VAT zero-ratedoperation of Mindanao II, thus not VATable?

HELD:NO.Mindanao II asserts that the sale of a fully depreciated

Nissan Patrol is not an incidental transaction in the course of itsbusiness but an isolated transaction that should not have beensubject to 10% VAT.

It does not follow that an isolated transaction cannot be

an incidental transaction for purposes of VAT liability. Indeed, areading ofSection 105 would show that a transaction in the course of tradeor business includes transactions incidental thereto.

In the course of its business, Mindanao II bought andeventually sold a Nissan Patrol. Prior to the sale, the NissanPatrol was part of Mindanao IIs property, plant, and equipment.Therefore, the sale of the Nissan Patrol is an incidental

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transaction made in the course of Mindanao IIs business whichshould be liable for VAT.

VAT

III. E.3. Meaning of Sale or Exchange of Services

CIR v. CA and Commonwealth Management and Services

Corporation

Commonwealth Management and Services Corporation(COMASERCO), is a Phil corp w/c is an affiliate ofPHILAMLIFE organized by the latter to perform collection,consultative and other technical services, including

functioning as an internal auditor, of Philamlife and its otheraffiliates.

BIR issued an assessment to private respondentCOMASERCO for deficiency VAT amounting to P351k+for taxable year 1988.

COMASERCO filed with the BIR, a letter-protest objectingto the latter's finding of deficiency VAT, but the CIR sent acollection letter to COMASERCO demanding payment ofthe deficiency VAT.

Thus COMASERCO file with the CTA a petition for review

wherein they averred that it was NOT engaged in thebusiness of providing services to Philamlife and its affiliates.

COMASERCO was established to ensure operationalorderliness and administrative efficiency of Philamlife and itsaffiliates, and NOT in the sale of services. COMASERCOstressed that it was not profit-motivated, thus not engaged inbusiness. Thus, it is not liable to pay VAT.

I: W/n COMASERCO was engaged in the sale of services,and thus liable to pay VAT thereon

R: YES, COMASERCO is liable to pay VAT (reversing CAsdecision and reinstating the decision of the Tax Appeal infavor of the Commissioner)

CIR avers that to "engage in business" and to "engage in the

sale of services" are two different things. SC agreed w/ CIR in saying that the services rendered by

COMASERCO to Philamlife and its affiliates, for a fee orconsideration, are subject to VAT. VAT is a tax on the valueadded by the performance of the service. It is immaterialwhether profit is derived from rendering the service.

Sec 99 of the NIRC provides that any person who, in thecourse of trade or business, sells, barters or exchanges goods,renders services, or engages in similar transactions and anyperson who imports goods shall be subject to the VAT

imposed in Sections 100 to 102 of this Code." COMASERCO contends that the term "in the course of

trade or business" requires that the "business" is carried onwith a view to profit or livelihood. It avers that the activitiesof the entity must be profit- oriented.

COMASERCO submits that it is not motivated by profit, asdefined by its primary purpose in the articles ofincorporation, stating that it is operating "only onreimbursement-of-cost basis, without any profit."

HOWEVER, the EVAT Law clarifies that even a non-stock,

non-profit, organization or government entity, is liable to payVAT on the sale of goods or services.

VAT is a tax on transactions, imposed at every stage of thedistribution process on the sale, barter, exchange of goods orproperty, and on the performance of services, even in theabsence of profit attributable thereto. The term "in the courseof trade or business" requires the regular conduct or pursuitof a commercial or an economic activity, regardless ofwhether or not the entity is profit-oriented.

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The definition of the term "in the course of trade orbusiness" incorporated in the present law applies to alltransactions even to those made prior to its enactment.Executive Order No. 273 stated that any person who, in the

course of trade or business, sells, barters or exchanges goodsand services, was already liable to pay VAT. The present lawmerely stresses that even a nonstock, nonprofit organizationor government entity is liable to pay VAT for the sale ofgoods and services.

Section 108 of the NIRC defines the phrase "sale of services"as the "performance of all kinds of services for others for afee, remuneration or consideration." It includes "the supplyof technical advice, assistance or services rendered inconnection with technical management or administration ofany scientific, industrial or commercial undertaking orproject."

It is immaterial whether the primary purpose of a corporationindicates that it receives payments for services rendered to itsaffiliates on a reimbursement-on-cost basis only, without realizingprofit, for purposes of determining liability for VAT on servicesrendered. As long as the entity provides service for a fee,remuneration or consideration, then the service rendered issubject to VAT.

CIR v SM Primeholdings Inc.

SM Prime and First Asia are both engaged in the business ofoperating cinema houses, among others.

BIR sent them both preliminary assessment notices for VATdeficiency on cinema ticket sales.

Both protested, but BIR denied their protests, arguing thatthe list of enumerated services under Sec. 108 of theNIRC is not exhaustive because it covers all sales of

services. Also, the deficiency assessments were based onRevenue Memorandum Circular No. 28-2001.

CTA ruled that the activity of showing cinematographic filmswas NOT subject to VAT, and should instead be subject to

an amusement tax. CTA en banc affirmed this, saying that section 108 of the

NIRC actually sets forth an exhaustive enumeration of whatservices are intended to be subject to VAT, w/c does NOTinclude the showing films and motion pictures.

I: W/n the gross receipts derived from admission tickets bycinema/theater operators or proprietors are subject to VAT

R: NO, it is not subject to VAT.

The enumeration of services subject to VAT under Sec. 108of the NIRC is not exhaustive. It is up to the court to

determine if showing of films and motion pictures fall underthe phrase similar services of Sec. 108 by ascertaining theintent of the legislature.

Based on various amendments to the VAT coverage, nonepertain to cinema/theater operators or proprietors. In fact,the activity of showing films and motion pictures has alwaysbeen considered as a form of entertainment subject toamusement tax.

At present, only lessors or distributors ofcinematographic films are subject to VAT,while persons

subject to amusement tax are exempt from the coverageof VAT.

It is therefore clear that the legislature never intended tosubject this kind of activity to VAT. To hold otherwisewould impose an unreasonable burden oncinema/theater houses operators or proprietors, whowould be paying an additional 10% VAT on top of the30% amusement tax imposed by Sec. 140 of the LocalGovt. Code, or a total of 40% tax.

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Such imposition would result in injustice, as persons taxedunder the NIRC of 1997 would be in a better position thanthose taxed under the LGC of 1991.

The repeal of the Local Tax Code by the LGC of 1991 is not

a legal basis for the imposition of VAT on the gross receiptsof cinema/theater operators or proprietors derived fromadmission tickets. The removal of the prohibition under theLocal Tax Code did not grant nor restore to the nationalgovernment the power to impose amusement tax oncinema/theater operators or proprietors.

Neither did it expand the coverage of VAT. Since theimposition of a tax is a burden on the taxpayer, it cannot bepresumed nor can it be extended by implication. As it is, thepower to impose amusement tax on cinema/theater operators

or proprietors remains with the local government. Considering that there is no provision of law imposing VAT

on the gross receipts of cinema/theater operators orproprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on the gross receipts fromadmission to cinema houses is therefore invalid.

The rule on tax exemptions should be construed strictlyagainst the taxpayer does not apply in this case. SMPrimeholdings and First Asia need not prove that they areexempted from the coverage of VAT. Such rule presupposesthat the taxpayer is clearly subject to the tax being leviedagainst him.

The reason is obvious: it is both illogical and impractical todetermine who are exempted without first determining whoare covered by the provision. Thus, unless a statute imposes atax clearly, expressly and unambiguously, what applies is theequally well-settled rule that the imposition of a tax cannotbe presumed. In fact, in case of doubt, tax laws must be

construed strictly against the government and in favor of thetaxpayer.

DIAZ AND TIMBOL V. CIR [Jongko]

FACTS:Petitioners Diaz and Timbol filed a petition for

declaratory relief assaili ng the validit y o f t he imposi tion ofVAT by BIR on the collections of the tollway operators. Theyclaim that VAT would result in increased toll fees. That theCongress in enacting the Tax Code, did intend to not include tollfees within the meaning of sale of services that aresubject to VAT; that toll fee is a users tax, not a sale ofservices; that to impose VAT on toll fees would amount to atax on public service. The OSG, on the other hand, stated

that the Tax Code imposes VAT on all kinds ofservic es of franch ise grantee s, includ ing tollway operations,except where the law provides otherwise.

ISSUE:ARE TOLLWAY OPERATORS COVERED BY VAT? Ruling:YES, BECAUSE THEY RENDER SERVICES FOR AFEE. THEYARE JUST LIKE LESSORS, WAREHOUSEOPERATORS , ANDOTHER GROUPS EXPRESSLYMENTIONED IN THE LAW.

ISSUE:

Now, do tollway operators render services for a fee?Presidential Decree (P.D.) 1112 or the Toll Operation Decreeestablishes the legal basis for the services that tollway operatorsrender. Essentially, tollway operators construct, maintain, andoperate expressways, also called tollways, at the operatorsexpense. Tollways serve as alternatives to regular public highwaysthat meander through populated areas and branch out to localroads. Traffic in the regular public highways is for this reasonslow-moving. In consideration for constructing tollways at their

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expense, the operators are allowed to collect government-approved fees from motorists using the tollways until suchoperators could fully recover their expenses and earn reasonablereturns from their investments. When a tollway operator takes atoll fee from a motorist, the fee is in effect for the latters use ofthe tollway facilities over which the operator enjoys privateproprietary rightsthat its contract and the law recognize. In thissense, the tollway operator is no different from the followingservice providers under Section108 who allow others to use theirproperties or facilities for a fee:

1. Lessors of property, whether personal or real;2. Warehousing service operators;3. Lessors or distributors of cinematographic films;4. Proprietors, operators or keepers of hotels, motels,resthouses, pension houses, inns, resorts;

5. Lending investors (for use of money);6. Transportation contractors on their transport of goodsor cargoes, including persons who transport goods orcargoes for hire and other domestic common carriers byland relative to their transport of goods or cargoes; and7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in thePhilippines to another place in the Philippines.It does not help petitioners causethat Section 108

subjects to VAT all kinds of services rendered for afee

regardless ofwhether or not the performance thereof calls forthe exercise or use of the physical or mental faculties.Thismeans that services to be subject to VAT neednot fall underthe traditional concept of services, the personal or professionalkinds that require the use of human knowledge and skills.

COMMISSIONER OF INTERNAL REVENUE vs.

PLACER DOME TECHNICAL SERVICES (PHILS.),

INC.

FACTS: At the San Antonio Mines in Marinduque owned by

Marcopper Mining Corporation (Marcopper), mine tailings from

the Taipan Pit started to escape through the Makulapnit Tunneland Boac Rivers, causing the cessation of mining and milling

operations, and causing potential environmental damage. To

contain the damage and prevent the further spread of the tailing

leak, Placer Dome, Inc. (PDI), the owner of 39.9% of

Marcopper, undertook to perform the clean-up and rehabilitation

of the Makalupnit and Boac Rivers, through a subsidiary. To

accomplish this, PDI engaged Placer Dome Technical Services

Limited (PDTSL), a non-resident foreign corporation with office

in Canada, to carry out the project. In turn, PDTSL engaged theservices of Placer Dome Technical Services (Philippines), Inc.

(respondent), a domestic corporation and registered Value-Added

Tax (VAT) entity, to implement the project in the Philippines.

PDTSL and respondent thus entered into an Implementation

Agreement. Due to the urgency and potentially significant

damage to the environment, respondent had agreed to

immediately implement the project, and the Implementation

Agreement stipulated that all implementation services renderedby respondent even prior to the agreements signing shall be

deemed to have been provided pursuant to the said Agreement.

The Agreement further stipulated that PDTSL was to pay

respondent "an amount of money, in U.S. funds, equal to all

Costs incurred for Implementation Services as well as a fee

agreed to one percent (1%) of such Costs."

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Respondent amended its quarterly VAT returns. In the amended

returns, respondent declared a total input VAT payment of

P43,015,461.98 for the said quarters, and P42,837,933.60 as its

total excess input VAT for the same period. Then respondent

filed an administrative claim for the refund of its reported totalinput VAT payments in relation to the project it had contracted

from PDTSL, amounting to P43,015,461.98. Respondent argued

that the revenues it derived from services rendered to PDTSL,

pursuant to the Agreement, qualified as zero-rated sales under

Section 102(b)(2) of the then Tax Code, since it was paid in

foreign currency inwardly remitted to the Philippines. When the

CIR did not act on this claim, respondent duly filed a Petition for

Review with the CTA, praying for the refund. CIR merely

invoked the presumption that taxes are collected in accordancewith law, and that claims for refund of taxes are construed strictly

against claimants.

CTA ruled in favor of respondent but only the resulting input

VAT of P17,178,373.12 could be refunded.

The rulings of the CTA were elevated by petitioner to the CA on

Petition for Review. CA affirmed the CTA ruling.

ISSUE: Whether Placer is entitled to the refund as the revenues

qualified as zero-rated sales

HELD: Yes

Section 102. Value-Added Tax on Sale of Services and Use or Lease of

Properties.

(b) Transactions Subject to Zero Percent (0%) Rate. The following

services performed in the Philippines by VAT-registered persons

shall be subject to zero percent (0%) rate:

(1) Processing, manufacturing or repacking goods for otherpersons doing business outside the Philippines which goods are

subsequently exported, where the services are paid for in

acceptable foreign currency and accounted for in accordance with

the rules and regulations of the Bangko Sentral ng Pilipinas

(BSP);

(2) Services other than those mentioned in the preceding

subparagraph, the consideration for which is paid for in

acceptable foreign currency and accounted for in accordance withthe rules and regulations of the [BSP].

It is Section 102(b)(2) which finds special relevance to this case.

The VAT is a tax on consumption "expressed as a percentage of

the value added to goods or services" purchased by the producer

or taxpayer. As an indirect tax on services, its main object is the

transaction itself or, more concretely, the performance of all

kinds of services conducted in the course of trade or business inthe Philippines. These services must be regularly conducted in

this country; undertaken in "pursuit of a commercial or an

economic activity;" for a valuable consideration; and not exempt

under the Tax Code, other special laws, or any international

agreement.

Yet even as services may be subject to VAT, our tax laws extend

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the benefit of zero-rating the VAT due on certain services.

The law is very clear. Under the last paragraph [of Section

102(b)], services performed by VAT-registered persons in the

Philippines (other than the processing, manufacturing orrepacking of goods for persons doing business outside the

Philippines), when paid in acceptable foreign currency and

accounted for in accordance with the rules and regulations of the

BSP, are zero-rated.

Petitioner presently invokes the "destination principle," citing

that [r]espondents services, while rendered to a non-resident

foreign corporation, are not destined to be consumed abroad.

Hence, the onus of taxation of the revenue arising therefrom, forVAT purposes, is also within the Philippines. Yet the Court in

American Expressdebunked this argument:

As a general rule, the VAT system uses the destination principle

as a basis for the jurisdictional reach of the tax. Goods and

services are taxed only in the country where they are consumed.

Thus, exports are zero-rated, while imports are taxed.

Confusion in zero rating arises because petitioner equates theperformance of a particular type of service with the consumption

of its output abroad. The consumption contemplated by law,

contrary to petitioner's administrative interpretation, does not

imply that the service be done abroad in order to be zero-rated.

Consumption is "the use of a thing in a way that thereby exhausts

it." Applied to services, the term means the performance or

"successful completion of a contractual duty, usually resulting in

the performer's release from any past or future liability x x x" Its

services, having been performed in the Philippines, are therefore

also consumed in the Philippines.

Unlike goods, services cannot be physically used in or bound for

a specific place when their destination is determined. Instead,

there can only be a "predetermined end of a course" when

determining the service "location or position x x x for legal

purposes."

However, the law clearly provides for an exception to the

destination principle; that is, for a zero percent VAT rate for

services that are performed in the Philippines, "paid for inacceptable foreign currency and accounted for in accordance with

the rules and regulations of the [BSP]." x x x x

Again, contrary to petitioner's stand, for the cost of respondent's

service to be zero-rated, it need not be tacked in as part of the

cost of goods exported. The law neither imposes such

requirement nor associates services with exported goods. It

simply states that the services performed by VAT-registered

persons in the Philippinesservices other than the processing,manufacturing or repacking of goods for persons doing business

outside this countryif paid in acceptable foreign currency and

accounted for in accordance with the rules and regulations of the

BSP, are zero-rated. The service rendered by respondent is clearly

different from the product that arises from the rendition of such

service. The activity that creates the income must not be

confused with the main business in the course of which that

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income is realized.

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 thejurisdiction 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.

ACCENTURE V. CIR

FACTS:Accenture is a VAT-registered taxpayer engaged in the

business of providing management consulting, business strategiesdevelopment, and selling and/or licensing of software. For thetaxable year 2002, Accentures monthly and quarterly VATreturns show that, notwithstanding its application of the inputVAT credits earned from its zero-rated transactions against itsoutput VAT liabilities, it still had excess or unutilized input VATcredits.

Thus, on 1 July 2004, Accenture filed with DOF an

administrative claim for the refund or the issuance of a TaxCredit Certificate (TCC). There was no action from DOF. On 31August 2004, Accenture filed a Petition for Review CTA Divisionpraying for the issuance of a TCC in its favor in the amount of

35,178,844.21.The CTA Division ruled that Accenture had failed to

present evidence to prove that the foreign clients to which theformer rendered services did business outside the Philippines,thus not zero-ratable.

Accenture appealed to the CTA En Banc. It argued thatprior to the amendment introduced by Republic Act No. (R.A.)9337, 25 there was no requirement that the services must berendered to a person engaged in business conducted outside thePhilippines to qualify for zero-rating. The CTA En Banc howeverfound that as Section 108(B)(2) of the 1997 Tax Code was a merereenactment of Section 102(b)(2) of the 1977 Tax Code, therequirement of proof that the services must be rendered to aperson engaged in business conducted outside the Philippineswas still applicable. The CTA En Banc concluded that Accenturefailed to discharge the burden of proving the latters allegationthat its clients were foreign-based.

ISSUE:WON the recipient/s of the services must be doing business

outside the Philippines, for the transaction to be zero-ratedunder Section 108(B)(2) of the 1997 Tax Code?

HELD: YESAfter briefly tracing the history of the related NIRC

provisions and revisions, E.O.s, and IRRs, the SC ruled that therecipient of the service must be doing business outside thePhilippines for the transaction to qualify for zero-rating underSection 108(B) of the Tax Code. The SC accepted the CTA EnBancs position: because Section 108(B) of the 1997 Tax Code is

a verbatim copy of Section 102(b) of the 1977 Tax Code, anyinterpretation of the latter holds true for the former.

The SC corrected Accentures interpretation of the Amexcase. Said the SC: We ruled in Amex that Section 102 of the1977 Tax Code does not require that the services be consumedabroad to be zero-rated. However, nowhere in that case did thisCourt discuss the necessary qualification of the recipient of theservice, as this matter was never put in question. In fact, therecipient of the service in Amex is a nonresident foreign client.

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The SC emphasized that Congress had already clarifiedthe intent behind Sections 102(b)(2) of the 1977 Tax Code and108(B)(2) of the 1997 Tax Code amending the earlier provision.R.A. 9337 added the following phrase:

rendered to a person engaged in businessconducted outside the Philippines or to anonresident person not engaged inbusiness who is outside the Philippineswhen the services are performed.

The SC found that the evidence presented by Accenturemay have established that its clients are foreign. This fact doesnot automatically mean, however, that these clients were doingbusiness outside the Philippines.WHEREFORE, the instant Petition is DENIED. The CTA EnBanc decision and resolution dismissing the Petition for the

refund of the excess or unutilized input VAT credits ofAccenture are AFFIRMED.

ATLAS CONSOLIDATED V. CIR

FACTS:1. Petitioner is engaged in the business of mining, production andsale of various mineral products, consisting principally of copperconcentrates and gold and duly registered with the BIR [Bureau

of Internal Revenue] as a VAT [Value Added Tax] enterprise perits Registration No. 32-A-6-002224. Respondent [BIR] dulyapproved petitioners application for VAT zero-rating of thefollowing sales:

a. Gold to the Central Bank (CB) [now referred to as theBangko Sentral ng Pilipinas;]b. Copper concentrates to the Philippines Smelting andRefining Corp. (PASAR); and

c. Pyrite [concentrated] to Philippine Phosphates, Inc.(Philphos).The BIRs approval of sales to CB and PASAR was dated

April 21, 1988 while zero-rating of sales to PHILPHOS wasapproved effective June 1, 1988.2. PASAR and Philphos are both Board of Investments (BOI)and Export Processing Zone Authority (EPZA) registeredexport-oriented enterprises located in an EPZA zone.3. On April 20, 1990, petitioner filed a VAT return with the BIRfor the first quarter of 1990 whereby it declared its salesdescribed in par. 3 hereof, i.e., to the CB, PASAR and Philphos,as zero-rated sales and therefore not subject to any output VAT .4. On or about July 24, 1990, petitioner filed a claim withrespondent for refund/credit of VAT input taxes on its purchaseof goods and services for the first quarter of 1990 in the total

amount of P40,078,267.81.5. On or about September 2, 1992, petitioner filed an AmendedApplication for tax credit/refund in the amount ofP35,522,056.58.6. On September 9, 1992, respondent resolved petitioners claimfor VAT refund/credit by allowing only P2,518,122.32 asrefundable/creditable while disallowing P33,003,934.26.7. A supplemental report of investigation was submitted by theBIR examiners on October 15, 1992 recommending the increasein allowable input tax credit from P 2,518,122.32 to

P12,101,569.11 or an increment of P9,583,446.79 due topetitioners submission of BOI certifications on the sales toPASAR which brought down the deduction of P12,404,150.65 toP2,518,122.32.8. The parties further stipulated that the issues to be resolved isthe applicability of Revenue Regulation 2-88 in that it requires thepurchaser to export more than 70% of its total sales for thesupplier, such as petitioner to be 100% zero-rated.

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9. On November 8, 1993, the [Court of Tax Appeals] rendered adecision . . . The petitioner moved for reconsideration of thedecision, which motion the respondent court denied.10. The CA ruled that the parties were bound by the above-quoted Joint Stipulation of Facts which it was powerless tomodify, the Court of Appeals held:" [I]t is beyond cavil that thepetitioner is registered with the BIR as a VAT enterprise effectiveAugust 15, 1990." It upheld VAT Ruling No. 008-92 regardingthe schedule of taxes to be imposed on VAT-registered entities,explaining that the "zero-percent rating" of BOI-registeredenterprises shall be set in proportion to the amount of its actualexports; and that EPZA and BOI registrations were bythemselves not enough for zero-rating to apply.11. On August 24, 1998, the present Petition was filed.

ISSUE: Whether or not the court a quo erred in not holding thatthe totality of sales to EPZA-registered enterprises should bezero-rated, not merely the proportion which such sales have tothe actual exports of the enterprise.

RULING:The Petition is partly meritorious.On VAT Exemption of Sales to Export-Oriented Enterprises

Petitioner criticizes the respondent commissioner, as itssales to PASAR and Philphos both registered with the BOI(Board of Investments) and EPZA (Export Processing Zone

Authority) as export-oriented entities were zero-rated only inproportion to the actual exports made by the two, and not to theentirety of petitioners sales to them.

Respondent, on the other hand, maintains that beforezero-rating can be applied, petitioner must first show that theentities to which the raw materials have been sold are export-oriented, and that their export sales exceed 70 percent of theirtotal annual production. Should these conditions be met, zero-

rating would apply, but only in proportion to the exports actuallymade.

The Joint Stipulation of Facts expressly states thatpetitioners sales of raw materials have been approved for zero-rating. Verily, the commissioner has already conceded thatPASAR and Philphos qualify as export-oriented enterpriseswhose export sales exceed 70 percent of their total annualproduction, and that petitioners sales to them thus qualify forzero-rating.

Finding that the respondent commissioner had indeedalready approved the zero-rating of petitioners past sales toPASAR and Philphos, the CA ruled:

"Indeed, the BIR has already recognizedand admitted that said transactions arezero-rated. Said stance is demonstrated in

the following acts of the BIR:a. the grant of petitioners

applications for zero-rating of sales toPASAR AND PHILPHOS;

b. Revenue Regulation No. 2-88,wherein it recognized sales to BOI-registered enterprises which export over70% of its sales as zero-rated, subject tocertain;

c. VAT Ruling No. 271-88 (dated

June 24, 1988), wherein it was recognizedthat sales to PHILPHOS are zero-rated;d. Letter dated April 18, 1988,

whereby it recognized that sales of copperconcentrates to PASAR are zero-rated;and

e. VAT Ruling No. 008-92, whichstates that the sale of raw materials to

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BOI-registered enterprises can qualify forzero-rating.

Finally, an examination of Section 4.100.2 of RevenueRegulation 7-95 14 in relation to Section 102 (b) of the Tax Codeshows that sales to an export-oriented enterprise whose exportsales exceed 70 percent of its annual production are to be zero-rated, provided the seller complies with other requirements, likeregistration with the BOI and the EPZA. The said Regulationdoes not even hint, much less expressly mention, that only apercentage of the sales would be zero-rated. The internal revenuecommissioner cannot, by administrative fiat, amend the law bymaking compliance therewith more burdensome.

VAT

III.F. Exempt Transactions

CIR V. CEBU TOYOFacts:

Cebu Toyo Corp. (Cebu) is a domestic subsidiary of ToyoLens Corporation Japan, engaged in the manufacture oflenses and various optical components used in TV set,cameras, CDs, etc.

Its principal office is located at the Mactan ExportProcessing Zone (MEPZ) as a zone export enterpriseregistered with the PEZA.

It is also registered with the BIR as a VAT taxpayer.

Cebu sells 80% of its products to its mother corporation,pursuant to an Agreement of Offsetting.

The rest are sold to various enterprises doing business inthe MEPZ.

On March 30, 1998, it filed an application for taxcredit/refund of VAT paid for the period April 1996 toDecember 1997 amounting to about P4.4 millionrepresenting excess VAT input payments.

Cebu argues that as a VAT-registered exporter of goods,it is subject to VAT at the rate of 0% on its exportsales that do not result in any output tax.

Hence, the unutilized VAT input taxes on its purchases ofgoods and services related to such zero-rated activities areavailable as tax credits or refund.

The BIR opposed this on the following grounds: It failedto show that the tax was erroneously or illegally collected;the taxes paid and collected are presumed to have beenmade in accordance with law; and that claims for refund

are strictly construed against the claimant. The CTA ruled that not the entire amount claimed for

refund by Toyo were actually offset against its relatedaccounts.

It determined that the refund/credit amounted only toP2.1M. The same was affirmed by the CA.

ISSUE:Whether the CA erred in affirming the CTA granting a refund

representing unutilized input VAT on goods and services.

HELD:The petition is denied.

Cebu is entitled to the P2.1M tax refund/credit.

Petitionerscontention that respondent is not entitled torefund for being exempt form VAT is untenable.

This argument turns a blind eye to the fiscal incentivesgiven to PEZA registered enterprises under RA 7916.

Under this statute, Cebu has two options withrespect to its tax burden.

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o It could avail of an income tax holiday pursuant toEO 226, thus exempting it from income taxes fora number of years (in this case, 4 years) but notfrom other internal revenue taxes such as VAT;

o Or it could avail of the tax exemption on all taxes,including VAT under PD 66 and pay only thepreferential rate of 5% under RA 7916.

Thus, availing of the first option, respondent is notexempt from VAT and it correctly registered itself asa VAT taxpayer.

In fine, it is engaged in a taxable rather than exempttransactions.

In taxable transactions, the seller (Cebu) shall be entitledto tax credit for the VAT paid on purchases and leases ofgoods properties or services.

Under the VAT system, a zero-rate sale by a VAT-registered person, which is a taxable transaction for VATpurposes, shall not result in any output tax.

However, input tax on his purchase of goods, propertiesor services related to such zero-related sale shall beavailable as a tax credit or refund.

While a zero rating and exemption are computationallythe same, they actually differ in several aspects, to wit:

A)

A zero-rated sale is a taxable transaction but does not

result in an output tax while an exempted transaction isnot subject to the output tax;B)The input VAT on the purchases of VAT-registered

person with zero-rated sales may be allowed as taxcredits or refunded while the seller in an exempttransaction is not entitled to any output tax on hispurchases despite the issuance of a VAT invoice orreceipt;

C)Persons engaged in transactions which are zero-rated,being subject to VAT, are required to register whileregistration is optional for VAT-exempt persons.

Since Cebu did not have any output tax against which said inputtax may be offset, it had the option to file a claim for taxrefund/credit of its unutilized input taxes.

TOSHIBA INFORMATION EQUIPMENT (PHILS.),

INC. V. CIR

FACTSIn this Petition for Review on Certiorari under Rule 45 of

the Rules of Court, petitioner Toshiba Information Equipment(Philippines), Inc. (Toshiba) seeks the reversal and setting asideof (1) the Decision dated August 29, 2002 of the Court ofAppeals in CA-G.R. SP No. 63047, which found that Toshibawas not entitled to the credit/refund of its unutilized inputValue-Added Tax (VAT) payments attributable to its export sales,because it was a tax-exempt entity and its export sales were VAT-exempt transactions; and (2) the Resolution dated February 19,2003 of the appellate court in the same case, which denied theMotion for Reconsideration of Toshiba. The herein assailedjudgment of the Court of Appeals reversed and set aside theDecision dated October 16, 2000 of the Court of Tax Appeals(CTA) in CTA Case No. 5762 granting the claim for

credit/refund of Toshiba in the amount of P1,385,282.08.Toshiba is a domestic corporation principally engaged in

the business of manufacturing and exporting of electricmachinery, equipment systems, accessories, parts, components,materials and goods of all kinds, including those relating to officeautomation and information technology and all types ofcomputer hardware and software, such as but not limited toHDD-CD-ROM and personal computer printed circuit board. Itis registered with the Philippine Economic Zone Authority

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(PEZA) as an Economic Zone (ECOZONE) export enterprisein the Laguna Technopark, Inc. In its VAT returns for the firstand second quarters of 1997, filed on April 14, 1997 and July 21,1997, respectively, Toshiba declared input VAT payments on itsdomestic purchases of taxable goods and services in the aggregatesum of P3,875,139.65, with no zero-rated sales. Toshibasubsequently submitted to the BIR on July 23, 1997 its amendedVAT returns for the first and second quarters of 1997, reportingthe same amount of input VAT payments but, this time, withzero-rated sales totalingP7,494,677,000.00

The CIR contended that under Section 24 of RepublicAct No. 7916, a special law, all businesses and establishmentswithin the ECOZONE were to remit to the government fivepercent (5%) of their gross income earned within the zone, in lieuof all taxes, including VAT. This placed Toshiba within the ambit

of Section 103(q) of the Tax Code of 1977, as amended, whichexempted from VAT the transactions that were exempted underspecial laws. Following Section 4.103-1(A) of RevenueRegulations No. 7-95, the VAT-exemption of Toshiba meant thatits sale of goods was not subject to output VAT and Toshiba asseller was not allowed any tax credit on the input VAT it hadpreviously paid. Toshiba filed a Motion for Reconsideration ofthe aforementioned Decision, anchored on the followingarguments: (a) the CIR never raised as an issue before the CTAthat Toshiba was tax-exempt under Section 24 of Republic Act

No. 7916; (b) Section 24 of Republic Act No. 7916, subjectingthe gross income earned by a PEZA-registered enterprise withinthe ECOZONE to a preferential rate of five percent (5%), in lieuof all taxes, did not apply to Toshiba, which availed itself of theincome tax holiday under Section 23 of the same statute; (c) theconclusion of the CTA that the export sales of Toshiba werezero-rated was supported by substantial evidence, other than theadmission of the CIR in the Joint Stipulation of Facts and Issues;and (d) the judgment of the CTA granting the refund of the input

VAT payments was supported by substantial evidence and shouldnot have been set aside by the Court of Appeals. In a Resolutiondated February 19, 2003, the Court of Appeals denied the Motionfor Reconsideration of Toshiba since the arguments presentedtherein were mere reiterations of those already passed upon andfound to be without merit by the appellate court in its earlierDecision. The Court of Appeals, however, mentioned that it wasincorrect for Toshiba to say that the issue of the applicability ofSection 24 of Republic Act No. 7916 was only raised for the firsttime on appeal before the appellate court. The said issue wasadequately raised by the CIR in his Motion for Reconsiderationbefore the CTA and was even ruled upon by the tax court.

In the case at bar, the CIR, in the Joint Stipulation ofFacts and Issues, admitted that Toshiba was a registered VATentity and that it was subject to 0% VAT on its export sales.

Later, in his Motion for Reconsideration of the adverse Court ofTax Appeals decision, the CIR would argue that Toshiba was notentitled to its claim for tax refund/credit because it was VAT-exempt and its export sales were VAT-exempt transactions (CIRargued this way because if the export sales were VAT exempt,then it would be entitled to claim any credit from input tax)

HELD:The Supreme Court ruled that Toshiba was a registered

VAT entity and its export sales were subject to 0% VAT.

Court of Tax Appeals; issues not raised.Failure by the Commissioner of Internal Revenue (CIR)

to timely plead and prove before the CTA the defenses thatToshiba was VAT-exempt under Republic Act No. 7916 and thatits export sales were VAT-exempt under the Tax Code is deemeda waiver of such defenses.

CTA; judicial admissions.

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An admission made in a stipulation of facts at pre-trial bythe parties is considered a judicial admission and, under the Rulesof Court, requires no proof. Such admission may be controvertedonly by a showing that it was made through a palpable mistake orthat no such admission was made.

Value-added tax (VAT); exemption.Prior to the issuance by the BIR of Revenue

Memorandum Circular No. 74-99, whether a PEZA-registeredenterprise was exempt from VAT or subject to VAT dependedon the type of fiscal incentive availed of by said enterprise. If theenterprise availed itself of 5% gross income taxation underRepublic Act No. 7916, it was exempt from VAT. If it availeditself of income tax holiday under the Omnibus InvestmentsCode, it was subject to VAT.

Value-added tax (VAT); exemption.Prior to the issuance by the BIR of Revenue

Memorandum Circular No. 74-99, whether a PEZA-registeredenterprise was exempt from VAT or subject to VAT dependedon the type of fiscal incentive availed of by said enterprise. If theenterprise availed itself of 5% gross income taxation underRepublic Act No. 7916, it was exempt from VAT. If it availeditself of income tax holiday under the Omnibus InvestmentsCode, it was subject to VAT.

VAT; zero-rating.Upon issuance of RMC 74-99, the rule was clearly

established that following the cross-border doctrine, based on thefiction that ecozones are foreign territory, a sale by a supplier inthe customs territory to a PEZA-registered enterprise isconsidered an export sale and therefore subject to zero VAT.

MISAMIS ORIENTAL ASSOC. OF COCO TRADERS V.

DOF SEC. ET AL.

Tax Exemptions: In interpreting 103(a) and (b) of the NIRC, theCommissioner of Internal Revenue gave it a strict construction consistent withthe rule that tax exemptions must be strictly construed against the taxpayerand liberally in favor of the state.

FACTS:Petitioner Misamis Oriental Association of Coco Traders,

Inc. is a domestic corporation whose members, individually orcollectively, are engaged in the buying and selling of copra inMisamis Oriental. The petitioner alleges that prior to the issuanceof Revenue Memorandum Circular 47-91 on June 11, 1991,

which implemented VAT Ruling 190-90, copra was classified asagricultural food product under $ 103(b) of the National InternalRevenue Code and, therefore, exempt from VAT at all stages ofproduction or distribution.

Respondent Commissioner of Internal Revenue issuedthe circular in question, classifying copra as an agricultural non-food product and declaring it "exempt from VAT only if the saleis made by the primary producer pursuant to Section 103(a) ofthe Tax Code, as amended."

The reclassification had the effect of denying to the

petitioner the exemption it previously enjoyed when copra wasclassified as an agricultural food product under 103(b) of theNIRC. Petitioner challenges RMC No. 47-91 on various grounds.

ISSUES:1. Whether or not the Bureau of Food and Drug of the

Department of Health (BFAD), and not the BIR, is thecompetent government agency to determine the properclassification of food products.

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2. Whether or not Petitioner was denied due process because itwas not heard before the ruling was made.

3. Whether or not RMC No. 47-91 is discriminatory andviolative of the equal protection clause of the Constitutionbecause while coconut farmers and copra producers areexempt, traders and dealers are not, although both sell coprain its original state.

4. Whether or not RMC No. 47-91 is counterproductive becausetraders and dealers would be forced to buy copra fromcoconut farmers who are exempt from the VAT and that tothe extent that prices are reduced the government would loserevenues as the 10% tax base is correspondingly diminished.

HELD:1. NO, the BIR, and not BFAD, is the competent government

agency to determine the proper classification of foodproducts. In interpreting 103(a) and (b) of the NIRC, theCommissioner of Internal Revenue gave it a strictconstruction consistent with the rule that tax exemptionsmust be strictly construed against the taxpayer and liberally infavor of the state. Moreover, as the government agencycharged with the enforcement of the law, the opinion of theCommissioner of Internal Revenue, in the absence of anyshowing that it is plainly wrong, is entitled to great weight.Indeed, the ruling was made by the Commissioner of Internal

Revenue in the exercise of his power under 245 of theNIRC to "make rulings or opinions in connection with theimplementation of the provisions of internal revenue laws,including rulings on the classification of articles for sales taxand similar purposes."

2. NO, petitioner was not denied due process because thecircular in question is a mere interpretative rule, which aredesigned to provide guidelines to the law which the

administrative agency is in charge of enforcing. In the case ofan interpretative rule, the inquiry is not into the validity butinto the correctness or propriety of the rule. As a matter ofpower a court, when confronted with an interpretative rule, isfree to (i) give the force of law to the rule; (ii) go to theopposite extreme and substitute its judgment; or (iii) givesome intermediate degree of authoritative weight to theinterpretative rule. In the case at bar, the court found noreason for holding that respondent Commissioner erred innot considering copra as an "agricultural food product" withinthe meaning of 103(b) of the NIRC.

3.

NO, RMC No. 47-91 is not discriminatory and violative ofthe equal protection clause of the Constitution. There is amaterial or substantial difference between coconut farmers

and copra producers, on the one hand, and copra traders anddealers, on the other. The former produce and sell copra, thelatter merely sell copra. The Constitution does not forbid thedifferential treatment of persons so long as there is areasonable basis for classifying them differently.

4. No, RMC No. 47-91 is not counterproductive. The sale ofagricultural non-food products is exempt from VAT onlywhen made by the primary producer or owner of the landfrom which the same is produced, but in the case of

agricultural food products their sale in their original state isexempt at all stages of production or distribution. At any rate,the argument that the classification of copra as agriculturalnon-food product is counterproductive is a question ofwisdom or policy which should be addressed to respondentofficials and to Congress.

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WHEREFORE, the reclassification is valid because copra isfound as a non-food product for purposes of the provision of theNIRC. The petition was DISMISSED.

Hermano (San Miguel) Febres Cordero MedicalFoundation, Inc. v. CIR

FACTS:

Hermano is seeking the cancellation of Final Assessment

Notice (FAN) issued by the BIR for VAT deficiency amounting

to P2,607,933.07, arising from its sale of pharmacy items to its in-

patients, in line with its rendering of hospital services.

Hermanos grounds are: (1) The FAN is void for theymerely showed a mathematical computation of petitioner's tax

liability without stating the factual and legal bases of the same; (2)

CIR failed to take into consideration that its sales of pharmacy

items to its in-patients are exempt from VAT pursuant to Section

109(L).

ISSUE: Whether the FAN is void.

HELD:The FAN is not void based in the first ground.

Section 228 provides that in the assessment, 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 to ensure that taxpayers are duly apprised of the basis of

the tax assessments against them.

Here, in the "Details of Discrepancies", attached to the

assessment, the details contained therein showed that the factual

basis for assessing petitioner for deficiency VAT was the

discrepancy from RELIEF and Third-Party Matching. In a long

line of cases, the SC has ruled that the requirement of the law toinform the taxpayer of the basis of the assessment does not

necessarily mean that it be a full narration of the facts and laws

on which the assessment is based. Here, Hermano was able to

intelligently make its protest by stating that its sales of

pharmaceutical items in favor of its in-patients are exempt from

VAT. This circumstance proves that petitioner was sufficiently

informed of the facts and the law as to why the assessment has

been issued against it.

However, the assessment of VAT deficiency wasincorrect. As held in Perpetual Succour Hospital vs. CIR and St.Luke's Medical Center v. CTA & CIR, hospital services includesnot only the services of the doctors, nurses and allied medicalpersonnel, but also the necessary laboratory services, and makingavailable the medicines, drugs and pharmaceutical items that arenecessary in the diagnosis, treatment and care of patients. Sale ofdrugs or pharmaceutical items to inpatients of the hospital are,therefore, considered part of the hospital services covered bySection 109 (l) of the NIRC of 1997, as amended.

CIR V. PHIL HEALTH CARE PROVIDERS, INC.

The Philippine Health Care Providers (PHCPI), a health careorganization for sick and disabled persons enrolled in a healthcare plan, wrote BIR inquiring whether the services itprovides are exempt from the payment of the VAT.

BIR issued a ruling, confirmed by the BIR Regional Director,

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stating that PHCPI was exempt from the VAT coverage.

BIR then sent PHCPI 2 notices for deficiency in its paymentof the VAT and documentary stamp taxes (DST) f P224M+for taxable years 1996 and 1997.

PHCPI protested, but BIR did not take any action, so PHCPIfiled with the CTA a petition for review.

CTA ordered PHCPI to pay a reduced deficiency VAT anddeclared the BIR ruling void, saying that PHCPI is a servicecontractor subject to VATsince it does not actually rendermedical service but merely acts as a conduit between themembers and petitioner's accredited and recognized hospitalsand clinics.

However, after a careful review of the facts of the case, theCTA resolved to grant petitioner's "Motion for PartialReconsideration relying on Sec.246 of the 1977 Tax codewhich provides that in the absence of showing of bad faith,the retroactive revocation of the BIR Ruling will beprejudicial to PHCPI. Accordingly, the VAT assessmentissued against PHCPI for the taxable years 1996 and 1997was WITHDRAWN and SET ASIDE.

I: 1. W/n PHCPI's services are subject to VAT

R: YES. HOWEVER, because of the VAT ruling exemptingPHCPI from VAT, it cannot be retroactively revoked andtherefore, PHCPI is still exempt.

1) Section 102 of the NIRC as amended provides that thereshall be levied a VAT equivalent to 12% of gross receiptsderived from the sale or exchange of services Thephrase "sale or exchange of service" means the performanceof all kinds of services in the Philippines for consideration.

Section 103 of the same Code specifies the exempttransactions from the provision, which includes medical,dental, hospital and veterinary services except those renderedby professionals.

It can be seen from PHCPIs letter to BIR that its servicesthat it is not actually rendering medical service butmerely acting as a conduit between the members andtheir accredited and recognized hospitals and clinics.

Thus, it does NOT fall under VAT-exempt transactions. 2) Section 246 of the 1997 Tax Code, as amended, provides

that rulings, circulars, rules and regulations promulgated bythe CIR have no retroactive application if to apply themwould prejudice the taxpayer.

The exceptions to this rule are:o (1) where the taxpayer deliberately misstates or

omits material facts from his return or in anydocument required of him by the BIR

o (2) where the facts subsequently gathered by theBIR are materially different from the facts onwhich the ruling is based, or

o (3) where the taxpayer acted in bad faith.

PHCPI did not fall under any of these exceptions.

PHCPI's failure to refer to itself as a health maintenanceorganization is not an indication of bad faith or a deliberateattempt to make false representations.

The term "health maintenance organization" was firstrecorded in the Philippine statute books only upon thepassage of "The National Health Insurance Act of 1995"

which defines a "health maintenance org" as one of theclasses of a "health care provider."

Thus, the VAT Ruling was issued in PHCPI's favor, and theterm "health maintenance organization" was yet unknown orhad no significance for taxation purposes. PHCPI therefore,believed in good faith that it was VAT exempt for the taxableyears 1996 and 1997 on the basis of the VAT Ruling.

CIR is precluded from adopting a position contrary to onepreviously taken where injustice would result to the taxpayer.