Lecture Notes in Taxation 2

8/13/2019 Lecture Notes in Taxation 2

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VALUE ADDED TAX (AS AMENDED)Taxable transactions

1. Persons liable

Any personwho, in the course of trade or business, sells, barters, exchanges, leases goods or properties, rendersservices, and any person who imports goods shall be subject to the value added tax (VA! imposed in "ections 1#$ to 1#%of this code.

&. 'ature of the tax

Value added tax is an indirect taxand the amount of tax may be shifted or passed on to the buyer, transferree or lessee ofthe goods, properties or services. his rule shall liewise apply to existing contracts of sale or lease of goods, propertiesor services at the time of the effectivity of )epublic Act **1$.

+. n the course of trade or business

his means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidentalthereto, by any person regardless of whether or not the person engaged therein is a non-stoc, non-profit privateorganiation (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their

guests!, or government entity.

"ervice as defined in this /ode rendered in the Philippines by non-resident foreign persons shall be considered as beingrendered in the course of trade or business.

0. "ale of oods or Properties

here shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value added taxe2uivalent to ten percent (1#3! of the gross selling price or gross value in money of goods or properties sold, bartered orexchange, such tax to be paid by the seller or transferor4 Provided, that the president, upon recommendation of theSecretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to t!elve percent "12#$, after anyof the follo!ing conditions has %een satisfied&

a' (alue Added )ax collection as a percentage of *ross +omestic Product "*+P$ of the previous year exceeds t!o andfourfifth percent "2 -.#$/ or

b. ational government deficit as a percentage of *+P of the previous year exceeds one and onehalf percent "1 #$'(As amended by REPUBLIC ACT NO. 9337!.

5. oods or Properties6"ale or exchange of "ervices

he terms oods or properties shall mean all tangible and intangible objects which are capable of pecuniary estimationand shall include4

eal properties held primarily for sale to customers or held for lease in the ordinary course of trade or %usiness

(subject to the exemption under "ection 1#7(w! 8 (x!!9 -

(1! "ale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade orbusiness

(&! or real property utilied for low-cost housing as defined by )epublic Act 'o. *&*7, otherwise nown as the :rban;evelopment and illion pesos (P1,###,###.##!and below4 Provided, that not later than ?anuary +1 stof the calendar year subse2uent to the effectivity of this Act andshall be adjusted to its present value using the /onsumer Price ndex, as published by the 'ational "tatistic =ffice('"=!4


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(0! @ease of residential unit with a monthly rental not exceeding ight housand Pesos (P%,###.##! provided that notlater than ?anuary +1stof the calendar year subse2uent to the effectivity of this Act and shall be adjusted to itspresent value using the /onsumer Price ndex, as published by the 'ational "tatistic =ffice ('"=!

)he right or the privilege to use patent, copyright, design or model plan, secret formula or process, good!ill,

trademar3, trade %rand or other li3e property or right

)he right or privilege to use in the Philippines of any industrial, commercial or scientific e4uipment

)he right or privilege to use motion picture films, films, tapes and discs/ and

adio, television, satellite, transmission and ca%le television time

he phrase Bsale or exchange of servicesC means the performance of all inds of services in the Philippines for others for afee, remuneration or consideration, including those performed or rendered by4

o /onstruction and service contractors9o "toc, real estate, commercial, customs and immigration broers9o @essors of property, whether personal or real9

o Darehousing services9o @essors or distributors of cinematographic films9o Persons engaged in milling, processing, manufacturing or repacing goods for others9o Proprietors, operators or eepers of hotels, motels, resthouses, pension houses, inns, resorts9o Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs

and caterers9o ;ealers in securities9o @ending investors9o ransportation contractors on their transport of goods or cargoes, including persons who transport goods or

cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes9o /ommon carriers by air and sea relative to their transport of passengers, goods or cargoes from one place

in the Philippines to another place in the Philippines9o "ales of electricity by generation companies, transmission, and distribution companies9o "ervices of franchise grantees of electric utilities, telephone and telegraph, radio and television

broadcasting and all other franchise grantees except those under "ection 117 of this /ode ando 'on-life insurance companies (except their crop insurance! including surety, fidelity, indemnity and bonding

companies9o and similar services regardless of whether or not the performance thereof calls for the exercise or use of

the physical or mental faculties.

he phrase Bsale or exchange of servicesC shall liewise include4

o he lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secretformula or process, goodwill, trademar, trade brand or other lie property or right9

o he lease or the use of, or the right to use of any industrial, commercial or scientific e2uipment9o he supply of scientific, technical, industrial or commercial nowledge or information9o he supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the

application or enjoyment of any such property, or right as is mentioned in subparagraph (&! or any suchnowledge or information as is mentioned in subparagraph (+!9

o he supply of services by a nonresident person or his employee in connection with the use of property orrights belonging to, or the installation or operation of any brand, machinery or other apparatus purchasedfrom such nonresident person9

o he supply of technical advice, assistance or services rendered in connection with technical managementor administration of any scientific, industrial or commercial undertaing, venture, project or scheme9

o he lease of motion picture films, films, tapes and discs9 ando he lease or the use of or the right to use radio, television, satellite transmission and cable television time.

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@ease of properties shall be subject to the tax herein imposed irrespective of the place where the contractof lease or licensing agreement was executed if the property is leased or used in the Philippines.

The term GROSS RECEIPTS E means the total amount of money or its e2uivalent representing the contract price, compensationor service fee, re!t"# $r r$%"#t%& including the amount charged for materials supplied with the services and deposits or advancepayments actually or constructively received during the taxable 2uarter for the services performed or to be performed for anotherperson, excluding Value-added tax.

$. ross "elling Price (ax Fase!

>eans the total amount of money or its e2uivalent which the purchaser pays or is obligated to pay to the seller inconsideration of the sale, barter or exchange of the goods or properties, excluding the value added tax. The excise tax,if any, on such goods or properties shall form part of the gross selling price .

*. nvoicing )e2uirements (nvoicing of sale!

A VA- )egistered person shall, for every sale, issue an invoice or receipt. n addition to the information re2uired under"ection &+*, the following information shall be indicated in the invoice or receipt

A statement that the seller is a VA-registered person, followed by his taxpayerCs identification no. ('!9

he total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amountincludes the value-added tax.

%. ax Gormula

he tax shall be computed by multiplying the total amount indicated in the =fficial receipt by one-eleventh (1611! (hisprovision which used to be 1#$ (;! (1! was not touched by REPUBLIC ACT NO. 9337!

"ales )eturns, Allowances and "ales ;iscounts E he value of goods or properties sold and subse2uently returned or forwhich allowances were granted by a VA-registered person may be deducted from the gross sales or receipts for the2uarter in which a refund is made or a credit memorandum or refund is issued. "ale discount granted and indicated in theinvoice at the time of sale and the grant of which does not depend upon the happening of a future event maybe excluded

from the gross sales within the same 2uarter it was given.

f the taxpayer is not registered and has not been collecting VA but is re2uired by law to collect VA the formula shall bethe gross amount indicated in the =fficial receipt by 1#3

7. nput tax formula

nput tax is computed by multiplying the gross receipted amount by 1611 of a purchase made by a buyer. nput tax is Vatfor the buyer and it is prepayment of tax to the buyer.

1#. =utput tax formula

=utput tax is computed by multiplying the gross receipted amount by 1611 of a sale made by a seller. =utput tax is Vat for

the seller and the same is a liability.

11. Hero percent (# 3! rate VA sale

here are two groups of ero rated sales and the same are (a! export sales (b! and Goreign /urrency ;enominated sales.


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"ale of raw materialsorpackaging materialto a nonresident buyerfor delivery to a resident local exportorientedenterpriseto be used in manufacturing, processing, pacing or repacing in the Philippines of the said buyerCs goodsandpaid for in acceptable foreign currency and accounted for in accordance with the rules and regulation ofthe Banko Sentral ng Pilipinas(F"P!

"ale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed

seventy percent !"#$ of total amount production9

"ale ofgold to the Banko Sentral ng Pilipinas(F"P!

hose considered export sales under %xecutive &rder 'o( ))* , otherwise nown as the =mnibus nvestment/ode of 17%*, and other special laws+ and

The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or

international air transport operations( (As amended by REPUBLIC ACT NO. 9337!.

*$re+,! -rre!-% /e!$m+!"te/sales means sale to a nonresidentof goods, except those mentioned in "ections 107(automobiles! and 15# (non-essential goods!, assembled or manufactured in the Philippines for delivery to a resident inthe Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of

the F"P.

S"#e t$ er$! $r e!t+t+e 0h$e e'emt+$! !/er e-+"# #"0 $r +!ter!"t+$!"# ",reeme!t to which thePhilippines is a signatory effectively subjects such sales to ero rate.

1er$ er-e!t (2 ) r"te VAT "#e $r e'-h"!,e $4 er5+-e

Processing, manufacturing or repacing goods for other persons doing business outside the Philippines which goodsare subse2uently exported, where the services are paid for in acceptable foreign currency and accounted for inaccordance with the rules and regulations of the F"P9

"ervices other than those mentioned in the preceding paragraph rendered to a person engaged in businessconducted outside of the Philippines or to a nonresident person not engaged in business who is outside of the

Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currencyand accounted for in accordance with the rules and regulation of the F"P9

"ervices rendered to persons or entities who exemption under special laws or international agreements to which thePhilippines is a signatory effectively subjects the supply of such services to ero percent (#3! rate9

"ervices rendered to persons engaged in international shipping or international air transport operations, includingleases of property for use thereof9

"ervice performed by subcontractors and6or contractors in processing, converting, or manufacturing goods for anenterprise whose export sales exceeds seventy percent (*#3! of total amount production9

ransport of passengers and cargo by air or sea vessels from the Philippines to a foreign country9

"ale of power or fuel generated through renewable sources of energy such as, but not limited to biomass, solar,wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies, such as fuelcells and hydrogen fuels9

1&. ransitional nput ax

his exists when a person who becomes liable to value-added tax or any person who elects to be a VA-registeredperson shall, subject to the filing of an inventory according to rules and regulations prescribed by the "ecretary ofGinance, upon recommendation of the /ommissioner, be allowed input tax on his beginning inventoryof goods,materials and supplies equivalent to two percent )#$ of the value of such inventory$rthe actual value-added tax

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paid onsuch goods, materials and supplies whichever is higher, which shall be creditable against the output tax. (Asamended!

1+. Presumptive nput ax

his VA rule is only applicable to the following persons or firms engaged in the processing of

"ardines >acerel >il

And those that are engaged in the manufacturing of

)efined "ugar /ooing oil and paced noodle-based instant meals

Presumptive input tax is e2uivalent to four percent (03! of the gross value in money of their purchases of primaryagricultural products which are used as inputs to their production . (As amended!

And those who are public wors contractors shall be allowed a presumptive input tax e2uivalent to one and one-halfpercent (1-16&3! of the contract price with respect to government contracts only in lieu of actual input taxestherefrom.

10. Processing

>eanpasteuriation, canning and activities which through physical or chemical process alter the exterior textureor form or inner substance of a productin such manner as to prepare it for special use to which it could not have beenput in its original form or condition.

15. Primarily agricultural products

A)/:@:)A@ P)=;:/"I ;G';. J Ihe common parlance of the country, and the common practice of the

country have been to consider all those things as farming products or agricultural products which and the situs of theirproduction upon the farm, and which were brought into condition for the uses of society by the labor of those engaged inagricultural pursuits, as contra-distinguished from manufacturing or other industrial pursuits.I (;istrict of /olumbia vs.=yster K1%%5L, 50 Am )ep., &*5.! he term Iagricultural productsI has been held to include swine, horses, meat, cattle,sheep, manure, cord wood, hay, poultry, vegetables, fruit, eggs, mil, butter, and lard J but no fish.

;9 ;. J Gish are not an agricultural product. (>olina vs. )afferty E ) @-117%% #+* Phil 505

1$. )ecording of value added taxes in the boos of accounts

All persons subject to the value-added tax under "ections 1#$ and 1#% shall, in addition to the regular accounting recordsre2uired, maintain a subsidiary sales journal and subsidiary purchase journal on which the daily sales and purchases arerecorded. he subsidiary journals shall contain such information as maybe re2uired by the "ecretary of Ginance.

1*. )eturn and payment

eneral )ule4 very person liable to pay the value-added tax imposed under this title shall file a 2uarterly return of theamount of his gross sales or receipts within twenty-five (&5! days following the close of each taxable 2uarter prescribed foreach taxpayer4 Provided, however, hat VA-registered persons shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with "ection &+$ shall file a return and pay the tax duethereon within twenty-five (&5! days from the date of cancellation of registration4 Provided, hat only one consolidatedreturn shall be filed by the taxpayer for his principal place of business or head office and all branches.

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1%. Dhere to f ile the return and pay the tax

xcept as the /ommissioner otherwise permits, the return shall be filed with and the tax paid to an authoried agent ban,)evenue /ollection =fficer or duly authoried city or municipal treasurer in the Philippines located within the revenuedistrict where the taxpayer is registered or re2uired to register.

17. ransactions ;eemed "ale

he following transactions shall be deemed sale4

ransfer, use or consumption not in the course of business of goods or properties originally intended for sale or foruse in the course of business

;istribution or transfer to

o "hareholders or investors as share in the profits of the VA-registered personso /reditors in payment of debt

/onsignment of goods if actual sale is not made within sixty ($#! days following the date such goods were consigned

)etirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirementor cessation.

. @ease of properties

@ease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease orlicensing agreement was executed if the property is leased or used in the Philippines

&1. ross receipts

s the total amount of money or its e2uivalent representing the

/ontract price

/ompensation "ervice fee )ental or royalty

ncluding the amount charged for

materials supplied with the services deposits advanced payments

actually or constructively received during the taxable 2uarter for the services performed or to be performed for anotherperson excluding value added tax

&&. nput tax

>eans the value added tax due from or paid by a VA-registered person in the course of his trade or business onimportation of goods or local purchase of goods or services, including lease or use of property, from a VA-registeredperson. t shall also include the transitional input tax determined in accordance with "ection 111 of this /ode

&+. =utput tax

>eans the value-added tax due on the sale or lease of taxable goods or properties or services by any person registeredor re2uired to register under "ection &+$ of this /ode

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&0. ;etermination of /reditable nput tax

xcess =utput or nput ax. J f at the end of any taxable 2uarter the output tax exceeds the input tax, the excess shallbe paid by the VA-registered person. f the input tax exceeds the output tax, the excess shall be carried over to thesucceeding 2uarter or 2uarters4 Provided, That the input tax inclusive of input .T carried over from the previousquarter that may be credited in every quarter shall not exceed seventy percent !"#$ of the output .T4 Provided,however, hat any input tax attributable to ero-rated sales by a VA-registered person may at his option be refunded orcredited against other internal revenue taxes, subject to the provisions of "ection 11&.

;etermination of /reditable nput ax. J he sum of the excess input tax carried over from the preceding month or2uarter and the input tax creditable to a VA-registered person during the taxable month or 2uarter shall be reduced bythe amount of claim for refund or tax credit for value-added tax and other adjustments, such as purchase returns orallowances and input tax attributable to exempt sale.

he claim for tax credit referred to in the foregoing paragraph shall include not only those filed with the Fureau of nternal)evenue but also those filed with other government agencies, such as the Foard of nvestments and the Fureau of/ustoms.I

&5. Value Added ax on mportation of oods.

Fase Amount shall be computed by multiplying 1#3 to the sum of the following4

otal Value used by the Fureau of /ustoms in determining tariff and customs duties /ustoms duties xcise taxes, if any And other charges, such tax to be paid by the importer prior to the release of such goods from customs custody9 Provided, that where the customs duties are determined on the basis of the 2uantity or volume of the goods, the

value added tax shall be based on4o he landed cost plus excise taxes, if any

Provided, further, that the President, upon recommendation of the Secretary of Finance, shall, effective January 1, 2006,raise the rate of valueadded tax to t!elve percent "12#$, after any of the follo!ing conditions has %een satisfied&

a. (alue Added )ax collection as a percentage of *ross +omestic Product "*+P$ of the previous year exceeds t!o andfourfifth percent "2 -.#$/ or

b. ational government deficit as a percentage of *+P of the previous year exceeds one and onehalf percent "1 #$'(As amended by REPUBLIC ACT NO. 9337!.

ransfer of oods by ax-exempt Persons.

n the case of tax-free importation of goods into the Philippines by persons, entities or agencies exempt from tax wheresuch goods are subse2uently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, thepurchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenuetax on such importation. he tax due on such importation shall constitute a lien on the goods superior to all charges orliens on the goods, irrespective of the possessor thereof.

&$. xempt transactions under VA ("ection 1#7! E "ubject to the provisions of subsection (&! hereof, the following

transactions shall be exempt from the value-added tax4

IA! "ale or importation of agricultural and marine food products in their original state, livestoc andpoultry of a ind generally used as, or yielding or producing foods for human consumption+ andbreeding stock and genetic materialstherefor.

IProducts classified under this paragraph shall be considered in their original state even if they haveundergone the simple processes of preparation or preservation for the mar3et, such as freeing,drying, salting, broiling, roasting, smoing or stripping. Polished and6or hused rice, corn grits, rawcane sugar and molasses, ordinary salt, and copra shall be considered in their original state9

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I(F! Sale or importationof fertiliers9 seeds, seedlings and fingerlings9 fish, prawn, livestoc and poultryfeeds, including ingredients, !hether locally produced or imported, used in the manufacture offinished feeds(except specialty feeds for race horses, fighting cocs, a2uarium fish, oo animalsand other animals generally considered as pets!9

I(/! mportation of personal and household effects belonging to the residents of the Philippines returningfrom abroad and nonresident citiens coming to resettle in the Philippines4 Provided, That such

goods are exempt from customs duties under the Tariff and /ustoms /ode of thePhilippines9

I(;! mportation of professional instruments and implements, wearing apparel, domestic animals, andpersonal household effects (except any vehicle, vessel, aircraft, machinery, other goods for use inthe manufacture and merchandise of any ind in commercial 2uantity! belonging to persons comingto settle in the Philippines, for their own use and not for sale, barter or exchange, accompanyingsuch persons, or arriving within ninety (7#! days before or after their arrival, upon the production ofevidence satisfactory to the /ommissioner, that such persons are actually coming to settle in thePhilippines and that the change of residence is bona fide9

I(! "ervices subject to percentage tax under itle V9

I(G! "ervices by agricultural contract growers and milling for others of palay into rice, corn into grits andsugar cane into raw sugar9

I(! >edical, dental, hospital and veterinary services except those rendered by professionals9

I(

I(! "ervices rendered by individuals pursuant to an employer-employee relationship9

I(?! "ervices rendered by regional or area headquartersestablished in the Philippines %y multinational

corporations which act as supervisory, communications and coordinating centers for theiraffiliates, subsidiaries or branches in the Asia-Pacific )egion and do not earn or derive incomefrom the Philippines9

I(M! ransactions which are exempt under international agreements to which the Philippines is asignatory or under special laws, except those under Presidential ;ecree 'o. 5&79

I(@! S"#e 6% ",r+-#tr"# -$$er"t+5e /#% re,+tere/ 0+th the C$$er"t+5e De5e#$me!tAth$r+t% to their mem%ers as !ell as sale of their produce , whether in its original state or

processed form, to non-members9 the+r +m$rt"t+$! $4 /+re-t 4"rm +!t& m"-h+!er+e "!/e+me!t& +!-#/+!, "re "rt there$4, to be used directly and exclusively in the

production and1or processing of their produce9

I(>! ross receipts from lending activities by credit or multi-purpose cooperatives duly registered withthe /ooperative ;evelopment Authority9

I('! "ales by non-agricultural, non-electric and non-credit cooperatives duly registered with the/ooperative ;evelopment Authority4 Provided, That the share capital contribution of eachmember does not exceed 2ifteen thousand pesos P34,"""$ and regardless of the aggregatecapital and net surplus ratably distributed among the members4

I(=! %xport sales by persons who are not .T-registered9

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I(/! Period within which )efund or ax /redit of nput axes shall be >ade. J n proper cases, the/ommissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within onehundred twenty 3)"$ days from the date of submission of complete documents in support of theapplicationfiled in accordance with "ubsection (A! hereof.

I9n case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the:ommissioner to act on the application !ithin the period prescri%ed a%ove , the t"'"%er "44e-te/ m"%& 0+th+!th+rt% (32) /"% 4r$m the re-e+t $4 the /e-++$! /e!%+!, the -#"+m or "4ter the e'+r"t+$! $4 the $!eh!/re/ t0e!t% /"%8er+$/& "e"# the /e-++$! $r the !"-te/ -#"+m 0+th the C$rt $4 T"' Ae"#.

I(;! >anner of iving )efund. J 5efunds shall be made upon warrants drawn by the /ommissioneror by his duly authoried representative without the necessity of being countersigned by the /hairman,/ommission on .udit, the provisions of the Administrative /ode of 17%* to the contrary notwithstanding4Provided, hat refunds under this paragraph shall be subject to post audit by the /ommission on Audit.I

Applicable /ases4

/&'T%6 /&5P&5.T7&', petitioner, vs( 8&'( /&997SS7&'%5 &2 7'T%5'.: 5%%';%, respondent(ay 0, 1777, filed another application for tax refund6credit, this timedirectly with Atty. Alberto Pagabao, the regional director of F) )evenue )egion 'o. 0. he second lettersought a refund or issuance of a tax credit certificate in the amount of P1,1#%,+#*.*&, representingerroneously paid input VA for the period ?anuary 1, 177* to 'ovember +#, 177%.

Dhen no response was forthcoming from the F) )egional ;irector, petitioner then elevated the matter to the/ourt of ax Appeals, in a petition for review doceted as /A /ase 'o. 5%75. Petitioner stressed that"ection 11&(A! if read in relation to "ection 1#$(A!(&!(a! of the 'ational nternal )evenue /ode, as amendedand "ection 1&(b! and (c! of )ep. Act 'o. *&&* would show that it was not liable in any way for any value-added tax.

n opposing the claim for tax refund or tax credit, the F) ased the /A to apply the rule that claims forrefund are strictly construed against the taxpayer. "ince petitioner failed to establish both its right to a taxrefund or tax credit and its compliance with the rules on tax refund as provided for in "ections and &&7 ofthe ax /ode, its claim should be denied, according to the F).

A. D A@@ @=/A@ A'; 'A='A@ ')'A@ )V': A"P)=V;; ' )P:F@/ A/ '=. *&&* /=V)"


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F. Ds %usiness or nonretail customers. t is for this reason that a sharp distinction must bemade between ero-rating and exemption in designating a value-added tax.

Apropos, the petitionerOs claim to VA exemption in the instant case for its purchases of supplies and rawmaterials is founded mainly on "ection 1&(b! and (c! of )ep. Act 'o. *&&*, which basically exempts them fromall national and local internal revenue taxes, including VA and "ection 0(A!(a! of F) )evenue )egulations'o. 1-75.

O! th+ $+!t& et+t+$!er r+,ht#% -#"+m th"t +t + +!/ee/ VAT8E'emt "!/ th+ 4"-t + !$t -$!tr$5erte/ 6%the re$!/e!t. I! 4"-t& et+t+$!er + re,+tere/ " " NON8VAT t"'"%er er Cert+4+-"te $4 Re,+tr"t+$!+e/ 6% the BIR. A -h& +t + e'emt 4r$m VAT $! "## +t "#e "!/ +m$rt"t+$! $4 ,$$/ "!/er5+-e.

Pet+t+$!er -#"+m& h$0e5er& 4$r e'emt+$! 4r$m VAT 4$r +t r-h"e $4 #+e "!/ r"0 m"ter+"# ++!-$!,r$ 0+th +t -#"+m th"t +t + VAT8E'emt& 4$r $!#% VAT8Re,+tere/ e!t+t+e -"! -#"+m I!t VATCre/+t:Re4!/.

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)he point of contention here is !hether or not the petitioner may claim a refund on the 9nput (A) erroneouslypassed on to it %y its suppliers'

Dhile it is true that the petitioner should not have been liable for the VA inadvertently passed on to it by itssupplier since such is a =erorated sale on the part of the supplier, the et+t+$!er + !$t the r$er "rt% t$-#"+m -h VAT re4!/.

"ection 0.1##-& of F)Os )evenue )egulations *-75, as amended, or the I/onsolidated Value-Added ax)egulationsI provide4

"ec. 0.1##-&. Hero-rated "ales. J . ero-rated saleby a VA-registered person, which is a taxabletransaction for VA purposes, shall not result in any output tax. etropolitan Authority ("F>A! and /lar ;evelopment Authority(/;A!, ).A. 'o. *71$, Philippine conomic Hone Authority (PHA!, or international agreements, e.g. Asian;evelopment Fan (A;F!, nternational )ice )esearch nstitute ())!, etc. to which the Philippines is asignatory effectively subject such sales to ero-rate.I

Since the transaction is deemed a ero-rated sale, petitionerEs supplier may claim an 7nput .T creditwith no corresponding &utput .T liability( /ongruently, no &utput .T may be passed on to the

petitioner(

=n the second issue, it may not be amiss to re-emphasie that the petitioner is registered as a '='-VAtaxpayer and thus, is exempt from VA. As an exempt VA taxpayer, it is not allowed any tax credit on VA(input tax! previously paid. n fine, even if we are to assume that exemption from the burden of VA onpetitionerOs purchases did exist, petitioner is still not entitled to any tax credit or refund on the input taxpreviously paid as petitioner is an exempt VA taxpayer.

5ather, it is the petitionerEs suppliers who are the proper parties to claim the tax credit andaccordingly refund the petitioner of the .T erroneously passed on to the latter(

Accordingly, we find that the /ourt of Appeals did not commit any reversible error of law in holding thatpetitionerOs VA exemption under )ep. Act 'o. *&&* is limited to the VA on which it is directly liable as aseller and hence, it cannot claim any refund or exemption for any input VA it paid, if any, on its purchases ofraw materials and supplies.

/A"" =' VA4/&997SS7&'%5 &2 7'T%5'.: 5%%';%, petitioner, vs( S%.=.T% T%/8'&:&=F P87:7PP7'%S$,respondent(


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liable for the VA. )espondent, a VA-registered enterprise, has complied with all re2uisites for claiming atax refund of or credit for the input VA it paid on capital goods it purchased. hus, the /ourt of axAppeals and the /ourt of Appeals did not err in ruling that it is entitled to such refund or credit.

Gacts4

1. K)espondentL is a resident foreign corporation duly registered with the "ecurities and xchange/ommission to do business in the Philippines, with principal office address at the new /ebu ownship =ne,"pecial conomic Hone, Farangay /antao-an, 'aga, /ebu9

&. KPetitionerL is sued in his official capacity, having been duly appointed and empowered to perform theduties of his office, including, among others, the duty to act and approve claims for refund or tax credit9

+. K)espondentL is registered with the Philippine xport Hone Authority (PHA! and has been issuedPHA /ertificate 'o. 7*-#00 pursuant to Presidential ;ecree 'o. $$, as amended, to engage in themanufacture of recording components primarily used in computers for export. "uch registration was madeon $ ?une 177*9

0. K)espondentL is VA K(Value Added ax!L-registered entity as evidenced by VA )egistration/ertification 'o. 7*-#%+-###$##-V issued on & April 177*9

5. VA returns for the period 1 April 177% to +# ?une 1777 have been filed by KrespondentL9

$. An administrative claim for refund of VA input taxes in the amount of P&%,+$7,&&$.+% with supportingdocuments (inclusive of the P1&,&$*,7%1.#0 VA input taxes subject of this Petition for )eview!, was filedon 0 =ctober 1777 with )evenue ;istrict =ffice 'o. %+, alisay /ebu9

*. 'o final action has been received by KrespondentL from KpetitionerL on KrespondentOsL claim for VArefund.

Ihe administrative claim for refund by the KrespondentL on =ctober 0, 1777 was not acted upon by theKpetitionerL prompting the KrespondentL to elevate the case to Kthe /AL on ?uly &1, ## by way of Petitionfor )eview in order to toll the running of the two-year prescriptive period.

IGor his part, KpetitionerL . . . raised the following "pecial and Affirmative ;efenses, to wit4

1. K)espondentOsL alleged claim for tax refund6credit is subject to administrative routinaryinvestigation6examination by KpetitionerOsL Fureau9

&. "ince Otaxes are presumed to have been collected in accordance with laws and regulations,O theKrespondentL has the burden of proof that the taxes sought to be refunded were erroneously or illegallycollected . . .9

+. n /itiban, '.A. vs. /ourt of Appeals, &%# "/)A 057 (177*!, the "upreme /ourt ruled that4IA claimant has the burden of proof to establish the factual basis of his or her claim for tax credit6refund.I

0. /laims for tax refund6tax credit are construed in Ostrictissimi jurisO against the taxpayer. his is due tothe fact that claims for refund6credit Kpartae ofL the nature of an exemption from tax. hus, it is incumbentupon the KrespondentL to prove that it is indeed entitled to the refund6credit sought. Gailure on the part of theKrespondentL to prove the same is fatal to its claim for tax credit.


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pursuant to "ection 0.1#$.1 of )evenue )egulations 'o. (K))L!*-75, and of input taxes on servicespursuant to "ection 0.1#+ of said regulations.

$. K)espondentL must show compliance with the provisions of "ection (/! and &&7 of the 177* ax/ode on filing of a written claim for refund within two (&! years from the date of payment of tax.O

I=n ?uly 17, #1, the ax /ourt rendered a decision granting the claim for refund.I

"ole ssue

Petitioner submits this sole issue for our consideration4

IDhether or not respondent is entitled to the refund or issuance of ax /redit /ertificate in the amount ofP1&,1&&,7&&.$$ representing alleged unutilied input VA paid on capital goods purchased for the periodApril 1, 177% to ?une +#, 1777.I

he /ourtOs )ulinghe Petition is unmeritorious.

"ole ssue4

ntitlement of a VA-)egistered PHA nterprise to a )efund of or /redit for nput VA.

'o doubt, as a PHA-registered enterprise within a special economic one, respondent is entitled to thefiscal incentives and benefits provided for in either P; $$ or = &&$. t shall, moreover, enjoy all privileges,benefits, advantages or exemptions under both )epublic Act 'os. ()A! *&&* 11 and *%00.

Preferential ax reatment:nder "pecial @aws

f it avails itself of P; $$, notwithstanding the provisions of other laws to the contrary, respondent shall notbe subject to internal revenue laws and regulations for raw materials, supplies, articles, e2uipment,machineries, spare parts and wares, except those prohibited by law, brought into the one to be stored,

broen up, repaced, assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated,manufactured, mixed or used directly or indirectly in such activities. ven so, respondent would enjoy a net-operating loss carry over9 accelerated depreciation9 foreign exchange and financial assistance9 andexemption from export taxes, local taxes and licenses.

/omparatively, the same exemption from internal revenue laws and regulations applies if = &&$ ischosen. :nder this law, respondent shall further be entitled to an income tax holiday9 additional deductionfor labor expense9 simplification of customs procedure9 unrestricted use of consigned e2uipment9 access toa bonded manufacturing warehouse system9 privileges for foreign nationals employed9 tax credits ondomestic capital e2uipment, as well as for taxes and duties on raw materials9 and exemption fromcontractorsO taxes, wharfage dues, taxes and duties on imported capital e2uipment and spare parts, exporttaxes, duties, imposts and fees, 1$ local taxes and licenses, and real property taxes.A privilege available to respondent under the provision in )A *&&* on tax and duty-free importation of rawmaterials, capital and e2uipment J is, ipso facto, also accorded to the one under )A *71$. Gurthermore,the latter law J notwithstanding other existing laws, rules and regulations to the contrary J extends to thatone the provision stating that no local or national taxes shall be imposed therein. 'o exchange controlpolicy shall be applied9 and free marets for foreign exchange, gold, securities and future shall be allowedand maintained. Faning and finance shall also be liberalied under minimum Fango "entral regulationwith the establishment of foreign currency depository units of local commercial bans and offshore baningunits of foreign bans.

Page 1 of .2


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n the same vein, respondent benefits under )A *%00 from negotiable tax credits for locally-producedmaterials used as inputs. Aside from the other incentives possibly already granted to it by the Foard ofnvestments, it also enjoys preferential credit facilities and exemption from P; 1%5+.2rom the above-cited laws, it is immediately clear that petitioner enDoys preferential tax treatment( tis not subject to internal revenue laws and regulations and is even entitled to tax credits. he VA on capitalgoods is an internal revenue tax from which petitioner as an entity is exempt. Although the transactionsinvolving such tax are not exempt, petitioner as a VA-registered person, however, is entitled to theircredits.

'ature of the VA andthe ax /redit >ethod

Viewed broadly, the VA is a uniform tax ranging, at present, from # percent to 1# percent levied on everyimportation of goods, whether or not in the course of trade or business, or imposed on each sale, barter,exchange or lease of goods or properties or on each rendition of services in the course of trade or businessas they pass along the production and distribution chain, the tax being limited only to the value added tosuch goods, properties or services by the seller, transferor or lessor. t is an indirect tax that may be shiftedor passed on to the buyer, transferee or lessee of the goods, properties or services. As such, it should beunderstood not in the context of the person or entity that is primarily, directly and legally liable for itspayment, but in terms of its nature as a tax on consumption. n either case, though, the same conclusion is

arrived at.

he law that originally imposed the VA in the country, as well as the subse2uent amendments of that law,has been drawn from the tax credit method. "uch method adopted the mechanics and self-enforcementfeatures of the VA as first implemented and practiced in urope and subse2uently adopted in 'ewHealand and /anada. :nder the present method that relies on invoices, an entity can credit against orsubtract from the VA charged on its sales or outputs the VA paid on its purchases, inputs and imports.f at the end of a taxable 2uarter the output taxes charged by a seller are e2ual to the input taxes passed onby the suppliers, no payment is re2uired. t is when the output taxes exceed the input taxes that the excesshas to be paid. f, however, the input taxes exceed the output taxes, the excess shall be carried over to thesucceeding 2uarter or 2uarters. "hould the input taxes result from ero-rated or effectively ero-ratedtransactions or from the ac2uisition of capital goods, any excess over the output taxes shall instead be

refunded to the taxpayer or credited against other internal revenue taxes.

Hero-)ated and ffectivelyHero-)ated ransactions

.lthough both are taxable and similar in effect, ero-rated transactions differ from effectively ero-rated transactions as to their source(

1er$8r"te/ tr"!"-t+$!generally refer to the export sale of goods and supply of services . he tax rate isset at ero. Dhen applied to the tax base, such rate obviously results in no tax chargeable against thepurchaser. The seller of such transactions charges no output tax, but can claim a refund of or a taxcredit certificate for the .T previously charged by suppliers.

E44e-t+5e#% ;er$8r"te/ tr"!"-t+$!, however, refer to the sale of goods or supply of services to personsor entities !hose exemption under special la!s or international agreements to !hich the Philippines is asignatory effectively su%?ects such transactions to a =ero rate . Again, as applied to the tax base, such ratedoes not yield any tax chargeable against the purchaser. The seller who charges ero output tax onsuch transactions can also claim a refund of or a tax credit certificate for the .T previouslycharged by suppliers(

Hero )ating andxemption

Page 1. of .2


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n terms of the VA computation, ero rating and exemption are the same, but the extent of relief thatresults from either one of them is not.

Applying the destination principle to the exportation of goods, "t$m"t+- ;er$ r"t+!,is primarily intendedto be enDoyed by the seller who is directly and legally liable for the .T, making such sellerinternationally competitive by allowing the refund or credit of input taxes that are attributable toexport sales. E44e-t+5e ;er$ r"t+!,, on the contrary, is intended to benefit the purchaser who, notbeing directly and legally liable for the payment of the .T, will ultimately bear the burden of the tax

shifted by the suppliers(

n both instances of ero rating, there is total relief for the purchaser from the burden of the tax. Fut in anexemption there is only partial relief, because the purchaser is not allowed any tax refund of or credit forinput taxes paid.xempt ransactionand xempt Party

he object of exemption from the VA may either be the transaction itself or any of the parties to thetransaction.

An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically

listed in and expressly exempted from the VA under the ax /ode, without regard to the tax status JVA-exempt or not J of the party to the transaction. ndeed, such transaction is not subject to the VA, butthe seller is not allowed any tax refund of or credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VA exemption under the ax /ode, aspecial law or an international agreement to which the Philippines is a signatory, and by virtue of which itstaxable transactions become exempt from the VA. "uch party is also not subject to the VA, but may beallowed a tax refund of or credit for input taxes paid, depending on its registration as a VA or non-VAtaxpayer.

As mentioned earlier, the VA is a tax on consumption, the amount of which may be shifted or passed onby the seller to the purchaser of the goods, properties or services. Dhile the liability is imposed on oneperson, the burden may be passed on to another. herefore, if a special law merely exempts a party as a

seller from its direct liability for payment of the VA, but does not relieve the same party as a purchaserfrom its indirect burden of the VA shifted to it by its VA-registered suppliers, the purchase transaction isnot exempt. Applying this principle to the case at bar, the purchase transactions entered into by respondentare not VA-exempt.

"pecial laws may certainly exempt transactions from the VA.


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taxing authority. f exports of goods and services from the Philippines to a foreign country are free of theVA, then the same rule holds for such exports from the national territory J except specifically declaredareas J to an ecoone.

"ales made by a VA-registered person in the customs territory to a PHA-registered entity are consideredexports to a foreign country9 conversely, sales by a PHA-registered entity to a VA-registered person inthe customs territory are deemed imports from a foreign country. An ecoone J indubitably a geographicalterritory of the Philippines J is, however, regarded in law as foreign soil. his legal fiction is necessary togive meaningful effect to the policies of the special law creating the one. f respondent is located in anexport processing one within that ecoone, sales to the export processing one, even without beingactually exported, shall in fact be viewed as constructively exported under = &&$. /onsidered as exportsales, such purchase transactions by respondent would indeed be subject to a ero rate.

ax xemptionsFroad and xpress

Applying the special laws we have earlier discussed, respondent as an entity is exempt from internalrevenue laws and regulations.

his exemption covers both direct and indirect taxes, stemming from the very nature of the VA as a tax onconsumption, for which the direct liability is imposed on one person but the indirect burden is passed on to

another. 5espondent, as an exempt entity, can neither be directly charged for the .T on its salesnor indirectly made to bear, as added cost to such sales, the equivalent .T on its purchases( @%ilex non distinguit, nec nos distinguere de%emus . Dhere the law does not distinguish, we ought not todistinguish.

>oreover, the exemption is both express and pervasive for the following reasons4

Girst, )A *71$ states that Ino taxes, local and national, shall be imposed on business establishmentsoperating within the ecoone.I %1 "ince this law does not exclude the VA from the prohibition, it is deemedincluded. xceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases notexcepted9 that is, a thing not being excepted must be regarded as coming within the purview of the generalrule.

>oreover, even though the VA is not imposed on the entity but on the transaction, it may still be passedon and, therefore, indirectly imposed on the same entity J a patent circumvention of the law. hat no VAshall be imposed directly upon business establishments operating within the ecoone under )A *71$ alsomeans that no VA may be passed on and imposed indirectly. Nuando ali2uid prohibetur ex directoprohibetur et per obli2uum. Dhen anything is prohibited directly, it is also prohibited indirectly.

"econd, when )A %*0% was enacted to amend )A *71$, the same prohibition applied, except for realproperty taxes that presently are imposed on land owned by developers. his similar and repeatedprohibition is an unambiguous ratification of the lawOs intent in not imposing local or national taxes onbusiness enterprises within the ecoone.

hird, foreign and domestic merchandise, raw materials, e2uipment and the lie Ishall not be subject to . . .internal revenue laws and regulationsI under P; $$ J the original charter of PHA (then PHA! that waslater amended by )A *71$. 'o provisions in the latter law modify such exemption.

Although this exemption puts the government at an ini tial disadvantage, the reduced tax collectionultimately redounds to the benefit of the national economy by enticing more business investments andcreating more employment opportunities.

Gourth, even the rules implementing the PHA law clearly reiterate that merchandise J except thoseprohibited by law J Ishall not be subject to . . . internal revenue laws and regulations . . .I if brought to theecooneOs restricted area for manufacturing by registered export enterprises, of which respondent is one.hese rules also apply to all enterprises registered with the PHA prior to the effectivity of such rules.

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Gifth, export processing one enterprises registered with the Foard of nvestments (F=! under = &&$patently enjoy exemption from national internal revenue taxes on imported capital e2uipment reasonablyneeded and exclusively used for the manufacture of their products9 on re2uired supplies and spare part forconsigned e2uipment9 and on foreign and domestic merchandise, raw materials, e2uipment and the lie Jexcept those prohibited by law J brought into the one for manufacturing. n addition, they are givencredits for the value of the national internal revenue taxes imposed on domestic capital e2uipment alsoreasonably needed and exclusively used for the manufacture of their products, as well as for the value ofsuch taxes imposed on domestic raw materials and supplies that are used in the manufacture of their exportproducts and that form part thereof."ixth, the exemption from local and national taxes granted under )A *&&* are ipso facto accorded toecoones. n case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in favorof the ecoone.

And seventh, the tax credits under )A *%00 J given for imported raw materials primarily used in theproduction of export goods, and for locally produced raw materials, capital e2uipment and spare parts usedby exporters of non-traditional products J shall also be continuously enjoyed by similar exporters within theecoone. ndeed, the latter exporters are liewise entitled to such tax exemptions and credits.

ax )efund asax xemption

o be sure, statutes that grant tax exemptions are construed strictissimi juris against the taxpayer andliberally in favor of the taxing authority.

ax refunds are in the nature of such exemptions. Accordingly, the claimants of those refunds bear theburden of proving the factual basis of their claims9 and of showing, by words too plain to be mistaen, thatthe legislature intended to exempt them. n the present case, all the cited legal provisions are teeming withlife with respect to the grant of tax exemptions too vivid to pass unnoticed. n addition, respondent easilymeets the challenge.

)espondent, which as an entity is exempt, is different from its transactions which are not exempt. he endresult, however, is that it is not subject to the VA. he non-taxability of transactions that are otherwisetaxable is merely a necessary incident to the tax exemption conferred by law upon it as an entity, not upon

the transactions themselves. 'onetheless, its exemption as an entity and the non-exemption of itstransactions lead to the same result for the following considerations4

Girst, the contemporaneous construction of our tax laws by F) authorities who are called upon to executeor administer such laws will have to be adopted. heir prior tax issuances have held inconsistent positionsbrought about by their probable failure to comprehend and fully appreciate the nature of the VA as a taxon consumption and the application of the destination principle. )evenue >emorandum /ircular 'o. ()>/!*0-77, however, now clearly and correctly provides that any VA-registered supplierOs sale of goods,property or services from the customs territory to any registered enterprise operating in the ecoone Jregardless of the class or type of the latterOs PHA registration J is legally entitled to a ero rate."econd, the policies of the law should prevail. )atio legis est anima. he reason for the law is its very soul.

n P; $$, the urgent creation of the PHA which preceded the PHA, as well as the establishment of exportprocessing ones, sees Ito encourage and promote foreign commerce as a means of . . . strengtheningour export trade and foreign exchange position, of hastening industrialiation, of reducing domesticunemployment, and of accelerating the development of the country.I

)A *71$, as amended by )A %*0%, declared that by creating the PHA and integrating the specialeconomic ones, Ithe government shall actively encourage, promote, induce and accelerate a sound andbalanced industrial, economic and social development of the country . . . through the establishment, amongothers, of special economic ones . . . that shall effectively attract legitimate and productive foreigninvestments.I

Page 17 of .2


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:nder = &&$, the I"tate shall encourage . . . foreign investments in industry . . . which shall . . meet thetests of international competitivenessK,L accelerate development of less developed regions of the countryK,Land result in increased volume and value of exports for the economy.I Giscal incentives that are cost-efficient and simple to administer shall be devised and extended to significant projects Ito compensate formaret imperfections, to reward performance contributing to economic development,I and Ito stimulate theestablishment and assist initial operations of the enterprise.I

Disely accorded to ecoones created under )A *71$ was the governmentOs policy J spelled out earlier in)A *&&* J of converting into alternative productive uses the former military reservations and theirextensions, as well as of providing them incentives to enhance the benefits that would be derived from themin promoting economic and social development.

Ginally, under )A *%00, the "tate declares the need Ito evolve export development into a national effortI inorder to win international marets. Fy providing many export and tax incentives, the "tate is able to drivehome the point that exporting is indeed Ithe ey to national survival and the means through which theeconomic goals of increased employment and enhanced incomes can most expeditiously be achieved.Ihe ax /ode itself sees to Ipromote sustainable economic growth . . .9 . . . increase economic activity9and . . . create a robust environment for business to enable firms to compete better in the regional as wellas the global maret.I After all, international competitiveness re2uires economic and tax incentives to lowerthe cost of goods produced for export. "tate actions that affect global competition need to be specific and

selective in the pricing of particular goods or services.All these statutory policies are congruent to the constitutional mandates of providing incentives to neededinvestments, 1&% as well as of promoting the preferential use of domestic materials and locally producedgoods and adopting measures to help mae these competitive. 1&7 ax credits for domestic inputsstrengthen bacward linages. )ightly so, Ithe rule of law and the existence of credible and efficient publicinstitutions are essential prere2uisites for sustainable economic development.I

VA )egistration, 'ot Applicationfor ffective Hero )ating,ndispensable to VA )efund

)egistration is an indispensable re2uirement under our VA law. Petitioner alleges that respondent did

register for VA purposes with the appropriate )evenue ;istrict =ffice. oreover, the facts have already been determined by the lower courts.


20/52

Girst, a mere administrative issuance, lie a F) regulation, cannot amend the law9 the former cannotpurport to do any more than interpret the latter. he courts will not countenance one that overrides thestatute it sees to apply and implement.

=ther than the general registration of a taxpayer the VA status of which is aptly determined, no provisionunder our VA law re2uires an additional application to be made for such taxpayerOs transactions to beconsidered effectively ero-rated. An effectively ero-rated transaction does not and cannot become exemptsimply because an application therefor was not made or, if made, was denied. o allow the additionalre2uirement is to give unfettered discretion to those officials or agents who, without fluid consideration, arebent on denying a valid application. >oreover, the "tate can never be estopped by the omissions, mistaesor errors of its officials or agents."econd, grantia argumenti that such an application is re2uired by law, there is still the presumption ofregularity in the performance of official duty. )espondentOs registration carries with it the presumption that,in the absence of contradictory evidence, an application for effective ero rating was also filed and approvalthereof given. Fesides, it is also presumed that the law has been obeyed by both the administrative officialsand the applicant.

hird, even though such an application was not made, all the special laws we have tacled exemptrespondent not only from internal revenue laws but also from the regulations issued pursuant thereto.

@eniency in the implementation of the VA in ecoones is an imperative, precisely to spur economic growthin the country and attain global competitiveness as envisioned in those laws.

A VA-registered status, as well as compliance with the invoicing re2uirements, is sufficient for the effectiveero rating of the transactions of a taxpayer. he nature of its business and transactions can easily beperused from, as already clearly indicated in, its VA registration papers and photocopied documentsattached thereto.


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are not necessarily so. he VA payments made in excess of the ero rate that is imposable may certainlybe refunded or credited.

/ompliance with All )e2uisitesfor VA )efund or /redit

As further enunciated by the ax /ourt, respondent complied with all the re2uisites for claiming a VArefund or credit.

Girst, respondent is a VA-registered entity. his fact alone distinguishes the present case from /ontex, inwhich this /ourt held that the petitioner therein was registered as a non-VA taxpayer. 7. Ar+# @?& @22>.CALAMBA STEEL CENTER& INC. (4$rmer#% S STEEL CORPORATION)& et+t+$!er& 5.COMMISSIONER O* INTERNAL REVENUE& re$!/e!t.

; / " = '

Page 21 of .2


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PA'A'FA', ? p4

A tax refund may be claimed even beyond the taxable year following that in which the tax credit arises.""; and the assailed ;ecision and)esolution are AGG)>;. /osts against Petitioner.I

he Gacts

Nuoting the /ourt of ax Appeals (/A!, the /A narrated the antecedents as follows4

IPetitioner is a domestic corporation engaged in the manufacture of steel blans for use by manufacturersof automotive, electrical, electronics in industrial and household appliances.

IPetitioner filed an Amended /orporate Annual ncome ax )eturn on ?une 0, 177$ declaring a net taxableincome of P7,0$1,57*.##, tax credits of P$,0*1,&0$.## and tax due in the amount of P+,+11,557.##.

IPetitioner also reported 2uarterly payments for the second and third 2uarters of 1775 in the amounts ofP&,+&%,*0*.&$ and P1,#%&,1#%.##, respectively.

It is the proposition of the KpLetitioner that for the year 1775, several of its clients withheld taxes from theirincome payments to KpLetitioner and remitted the same to the Fureau of nternal )evenue (F)! in the sum

of P+,157,$%*.##. Petitioner further alleged that due to its income6loss positions for the three 2uarters of177$, it was unable to use the excess tax paid for and in its behalf by the withholding agents.

Ihus, an administrative claim was filed by the KpLetitioner on April 1#, 177* for the refund of P+,157,$%*.##representing excess or unused creditable withholding taxes for the year 1775. he instant petition wassubse2uently filed on April 1%, 177*.

I)espondent, in his Answer, averred, among others, that4

O1! Petitioner has no cause of action9O&! Petitioner failed to comply with the procedural re2uirements set out in "ection 5 of )evenue)egulations 'o. K())!L 1&-709O+! t is incumbent upon KpLetitioner to prove by competent and sufficient evidence that the tax refund ortax credit being sought is allowed under the 'ational nternal )evenue /ode and its implementing rules andregulations9 andO0! /laims for tax refund or tax credit are construed strictly against the taxpayer as they partae the natureof tax exemption.

Io buttress its claim, KpLetitioner presented documentary and testimonial evidence. )espondent, on theother hand, presented the KrLevenue KoLfficer who conducted the examination of KpLetitionerOs claim andfound petitioner liable for deficiency value added tax. Petitioner also presented rebuttal evidence.

Ihe sole issue submitted for KoLur determination is whether or not KpLetitioner is entitled to the refund ofP+,157,$%*.## representing excess or overpaid income tax for the taxable year 1775.I

Page 22 of .2


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"ucceeding axable Qear

Girst, a tax refund may be claimed even beyond the taxable year following that in which the tax credit arises.'o provision in our tax law limits the entitlement to such a refund, other than the re2uirement that the filingof the administrative claim for it be made by the taxpayer within a two-year prescriptive period. "ection(+! of the ')/ states that no refund of taxes Ishall be allowed unless the taxpayer files in writing withthe /ommissioner KtheL claim for . . . refund within two years after the payment of the tax.I

Applying the afore2uoted legal provisions, if the excess income taxes paid in a given taxable year have notbeen entirely used by a taxable corporation against its 2uarterly income tax liabilities for the next taxableyear, the unused amount of the excess may still be refunded, provided that the claim for such a refund ismade within two years after payment of the tax. Petitioner filed its claim in 177* J well within the two-yearprescriptive period. hus, its unused tax credits in 1775 may still be refunded.

ven the phrase Isucceeding taxable yearI in the second paragraph of the said "ection $7 is a limitationthat applies only to a tax credit, not a tax refund. Petitioner herein does not claim a tax credit, but a taxrefund. herefore, the statutory limitation does not apply.

ncome Payments >erely;eclared Part of ross ncome

"econd, to be able to claim a tax refund, a taxpayer only needs to declare the income payments it receivedas part of its gross income and to establish the fact of withholding.

"ection 5 of )) 1&-70 % states4

xxx xxx xxx

I(a! /laims for ax /redit or )efund of income tax deducted and withheld on income payments shall begiven due course only when it is shown on the return that the income payment received has been declaredas part of the gross income and the fact of withholding is established by a copy of the Dithholding ax"tatement duly issued by the payor to the payee showing the amount paid and the amount of tax withheldtherefrom.

I(b! xcess /redits. J A taxpayerOs excess expanded withholding tax credits for the taxable2uarter6taxable year shall automatically be allowed as a credit for purposes of filing his income tax return forthe taxable 2uarter6taxable year immediately succeeding the taxable 2uarter6taxable year in which theaforesaid excess credit arose, provided, however, he submits with his income tax return a copy of hisincome tax return for the aforesaid previous taxable period showing the amount of his aforementionedexcess withholding tax credits.

If the taxpayer, in lieu of the aforesaid automatic application of his excess credit, wants a cash refund or atax credit certificate for use in payment of his other national internal tax liabilities, he shall mae a writtenre2uest therefor. :pon filing of his re2uest, the taxpayerOs income tax return showing the excess expandedwithholding tax credits shall be examined. he excess expanded withholding tax, if any, shall be determinedand refunded6credited to the taxpayer-applicant. he refund6credit shall be made within a period of sixty($#! days from date of the taxpayerOs re2uest provided, however, that the taxpayer-applicant submitted foraudit all his pertinent accounting records and that the aforesaid records established the veracity of his claimfor a refund6credit of his excess expanded withholding tax credits.I

hat petitioner filed its amended 1775 income tax return in 177$ is uncontested. n addition, the resultinginvestigation by the F) on August 15, 177*, reveals that the income accounts were Icorrectly declaredbased on the existing supporting documents.I 7 herefore, there is no need for petitioner to show again theincome payments it received in 1775 as part of its gross income in 177$.

hat petitioner filed its 177$ final adjustment return in 177* is the crux of the controversy.


25/52

ax )efund Provisions4Nuestion of @aw

hird, it is a cardinal rule that Ionly legal issues may be raisedI 1# in petitions for review under )ule 05.

he proper interpretation of the provisions on tax refund is a 2uestion of law that Idoes not call for anexamination of the probative value of the evidence presented by the parties-litigants.I


26/52

Gurthermore, there was no objection raised to the inclusion of the said 177$ final adjustment return inpetitionerOs )eply to /omment before the /A. ;espite clear reference to that return, a reference made withthe nowledge of respondent, the latter still failed to controvert petitionerOs claim. he appellate court shouldhave cast aside strict technicalities and decided the case on the basis of such uncontested return. Verily, ithad the authority to Itae judicial notice of its records and of the facts KthatL the record establishes.I

"ection & of )ule 1&7 provides that courts Imay tae judicial notice of matters . . . ought to be nown tojudges because of their judicial functions.I f the lower courts really believed that petitioner was not entitledto a tax refund, they could have easily re2uired respondent to ascertain its veracity and accuracy and toprove that petitioner did not suffer any net loss in 177$.

/ontrary to the contention of petitioner, FP-Gamily "avings Fan v. /A (on which it rests its entirearguments! is not on all fours with the facts of this case.

Dhile the petitioner in that case also filed a written claim for a tax refund, and liewise failed to present its177# corporate annual income tax return, it nonetheless offered in evidence its top-raning officialOstestimony and certification pertaining to only two taxable years (17%7 and 177#!. he said return wasattached only to its >otion for )econsideration before the /A.

Petitioner in this case offered documentary and testimonial evidence that extended beyond two taxableyears, because the excess credits in the first (1775! taxable year had not been used up during the second

(177$! taxable year, and because the claim for the refund of those credits had been filed during the third(177*! taxable year. ts final adjustment return was instead attached to its )eply to /omment filed beforethe /A.

>oreover, in FP-Gamily "avings Fan, petitioner was able to show Ithe undisputed fact4 that petitioner hadsuffered a net loss in 177# . . .I n the instant case, there is no such Iundisputed factI as yet. he mereadmission into the records of petitionerOs 177$ final adjustment return is not a sufficient proof of the truth ofthe contents of or entries in that return.

n addition, the F) in FP-Gamily "avings Fan did not controvert the veracity of the return or file anopposition to the >otion and the return. ;espite the fact that the return was ignored by both the /A and the/A, the latter even declared in another case (/A /ase 'o. 0%7*! that petitioner had suffered a net lossfor taxable year 177#. Dhen attached to the Petition for )eview filed before this /ourt, that ;ecision was

not at all claimed by the F) to be fraudulent or nonexistent. he Fureau merely contended that this /ourtshould not tae judicial notice of the said ;ecision.

n this case, however, the F) has not been given the chance to challenge the veracity of petitionerOs finaladjustment return. 'either has the /A decided any other case categorically declaring a net loss forpetitioner in taxable year 177$. After this return was attached to petitionerOs )eply to /omment before the/A, the appellate court should have re2uired the filing of other responsive pleadings from respondent, aswas necessary and proper for it to rule upon the return.

Admissibility Versus Deight

ndeed, IKaLdmissibility . . . is one thing, weight is another.I Io admit evidence and not to believe it are notincompatible with each other . . .I >ere allegations by petitioner of the figures in its 177$ final adjustmentreturn are not a sufficient proof of the amount of its refund entitlement. hey do not even constituteevidence adverse to respondent, against whom they are being presented.

Dhile it seems that the IKnon-productionL of a document which courts almost invariably expect will beproduced Ounavoidably throws a suspicion over the cause,OI this is not really the conclusion to be arrived athere. Dhen petitioner purportedly filed its administrative claim for a tax refund on April 1#, 177*, thedeadline for filing the 177$ final adjustment return was not yet over.


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the KrLulesI by giving it a blanet approval of the total refund it claims. IDhile in certain instances, we allow arelaxation in the application of the rules, we never intend to forge a weapon for erring litigants to violate therules with impunity. he liberal interpretation and application of rules apply only in proper cases ofdemonstrable merit and under justifiable causes and circumstances.I

t would not be proper to allow petitioner to simply prevail and compel a refund in the amount it claims,without affording the government a reasonable opportunity to contest the formerOs allegations. 'egligenceconsisting of the unexplained failure to offer the exhibit should not be rewarded with undeserved leniency.Petitioner still bears the burden of proving the amount of its claim for tax refund. After all, IKtLax refunds arein the nature of tax exemptionsI and are to be construed strictissimi juris against the taxpayer.

Ginally, even in the absence of a final adjustment return or any claim for a tax refund, respondent isauthoried by law to examine any boo, paper, record or other data that may be relevant or material to suchin2uiry. Gailure to mae an assessment of petitionerOs proper tax liability or to contest the return could beerrors or omissions of administrative officers that should never be allowed to jeopardie the governmentOsfinancial position.

Verily, Ithe officers of the Fureau of nternal )evenue should receive the support of the courts when theseofficers attempt to perform in a conscientious and lawful manner the duties imposed upon them by law.I=nly after it is shown that Iif something is received when there is no right to demand it, and it was dulydelivered through mistae, the obligation to return it arises.I

n brief, we hold that petitioner is entitled to a refund9 however, the amount must still be proved in properproceedings before the /A.

Other Per-e!t",e T"'e

PERCENTAGE TAX /e4+!e/A tax imposed on a fixed ratio between the gross sales or receipts and the burden imposed upon the taxpayer.

'=4 here are in addition to income and other taxes paid, unless specifically excepted. :nder the presentprovisions of the ')/, almost all taxes are percentage taxes.


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b. transportation contractors, including persons who transport passengers for hirec. other domestic carriers by land, air, water, for the transport of passengersd. except owners of bancas and owners of animal-drawn two wheeled vehiclese. eepers of garagesf. shall pay a tax e2uivalent to +3 of their 2uarterly gross receipts

OTEL NOT A COMMON CARRIERA hotel is not engaged in business as a common carrier just because it transports its hotel guests.

)A"='4 t is engaged in the hotel business and not in the business or transporting passengers. =n theoccasion when it extends transportation services lie providing limousine service and the lie, it does so only forits hotel guest and not to the public in general.

PERCENTAGE TAX ON INTERNATIONAL CARRIERS.a. nternational air carriers doing business n the Philippines shall pay a tax of +3 of their 2uarterly gross

receipts.b. nternational shipping carriers doing business in the Philippines shall pay a tax of +3 of their 2uarterly gross

receipts.

TAX ON *RANCISESa. any provision of general or special law to the contrary notwithstanding

b. there shall be levied, assessed and collected in respect to all franchisesc. on radio and6or television broadcasting companies

1. whose annual gross receipts of the preceding year do not exceed P1# million.&. A tax of +3 on the gross receipts derived from the business covered by the law granting the

franchise.d. on electric, gas, and water utilities

1. a tax of &3 on the gross receipts derived from the business covered by the law granting thefranchise.

OPTION *OR RADIO:TV *RANCISE

a. radio and television broadcasting companies shall have an option to be registered as value-added tax payerand pay the tax thereon

b. provided, that once the option is exercised, it shall not be revoed

TAX ON OVERSEAS DISPATC& MESSAGE OR CONVERSATION ORIGINATING *ROM TE PILIPPINES.

a. there shall be collected upon every overseas dispatch, message or conversationb. transmitted from the Philippinesc. by telephone, telegraph, telewriter exchange, wireless and other communication serviced. a tax of 1#3 on the amount paid for such services

PERSON LIABLE *OR TE ABOVE COMMUNICATION TAX.

a. the person paying the service renderedb. shall be paid to the person rendering the servicesc. who is re2uired to collect and pay the tax within twenty (! days after the end of each 2uarter

ENTITIES FOSES COMMUNICATIONS ARE EXEMPTED *ROM TE TAX

a. overnment. Amounts paid for messages transmitted by the overnment of the )epublic of the Philippines orany of its political subdivisions or instrumentalities

b. ;iplomatic "ervices. Amounts paid for messages transmitted by an embassy and consular offices of foreigngovernment.

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b. S it may be stated generally that a mutual insurance company is a cooperative enterprise, wherein the members areboth insurer and insured, the policy holders constituting the membership inter se, with a two-fold interest as bothinsurer and insured to contribute to payment of losses and entitled to payment of loss and to a proportionate share inthe profitsT

LI*E INSURANCE PREMIUMS NOT SUBECT TO TAX

a. premiums refunded within six($! months after payment on account of rejection of riss or returned or some otherreason in the taxable receipts

b. )einsurance premiums received by a company that has already paid the tax.c. Premiums received as a result of doing business outside the Philippines on account of any life insurance of the

insured who is nonresident, if any tax on such premiums is imposed by the foreign countryd. Premiums collected or received on account n any reinsurance of the insured, in case of personal insurance, resides

outside the Philippines, if any tax on such premium is imposed by the foreign country where the original insurancehas been issued of perfected.

e. he portion of the premiums collected or received by the insurance companies on variable contracts in excess of theamounts necessary to insure the lives of the variable contract worers

VARIABLE COTRACT /e4+!e/

Any policy or contract on either a group or on individual basis issued by an insurance companies providing for benefits of

other contractual payments or values thereunder to vary so as to reflect investment results of any segregated portfolio ofinvestments or of a designated separate account in which amounts received in connection with such contracts shall beenplaced and accounted for separately and apart from other investments or accounts.

TAX ON AGENTS O* *OREIGN INSURANCE COMPANIES

a. every fire, marine or miscellaneous insurance agentb. authoried under the insurance code to procure policies of insurance asc. he may have previously been authoried to transact on riss located in the Philippinesd. for companies not authoried to transact business in the Philippinese. shall pay a tax e2ual to twice the tax imposed in "ection 1&+

RIGT O* ASSURED TO SECURE INSURACE DIRECTL *ROM *OREIGN INSURER

he taxation of agents of foreign insurance companies shall not affect the right of an owner of property to apply for andobtain for himself policies in foreign companies in case where said owner does not mae use of the services of any agent,company or corporation residing in or doing business in the Philippines. n all cases where owners of property obtaininsurance directly with foreign companies.

AMUSEMENT TAX /e4+!e/A percentage tax collected from the proprietor, lessee or operator of duly designated places or activities for pleasurablediversion or entertainment.

PLACES AND ACTIVITIES SUBECT TO AMUSEM&ENT TAXhere shall be collected from the proprietor, lessee of operator of cocpits, cabarets, night or day clubs, boxing exhibitions,professional basetball games, ?ai-Alai and racetracs

CONDITIONS *OR EXEMPTION O* BOXING EXIBITIONSa. Foxing exhibitions wherein Dorld or =riental championships in any division is at staeb. At least one of the contenders for Dorld or =riental /hampionship is a citien of the Philippinesc. "aid exhibitions are promoted by citiens of the Philippines or by a corporation or association at least ($#3! of the

capital of which is owned by citiens

TAX ON FINNINGSa. very person who wins in horse races shall pay a tax e2uivalent to 1#3 of his winnings or SdividendsT, the tax to base

on actual amount paid to him for every winning ticet after deducting the cost of the ticet.b. Provided, that in the case of winnings from double, forecast62uinella and trifecta bets, the tax be 03

Page 50 of .2


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d. /onstructive ownership as actual ownership. "toc constructively owned by reason of the application of paragraph a,or c, above for purposes of applying paragraph a or b above shall be treated as actually owned by such person, F:stoc constructively owned by the individual by reason of the application of paragraph & shall not be treated as ownedby him by purposes of again in applying such paragraph in order to mae another the constructive owner of suchstoc.

A >P='

Any gain derived from the sale, barter, exchange or other disposition of shares of stoc listed and treated through the localstoc listed and traded through the local stoc exchange or through initial public offering shall be exempt from4

a. he tax imposed on capital gains from the sale of shares of stoc not traded in the stoc exchange, and fromb. he regular individual or corporate income tax.

/ases4EN BANC

K.). 'os. @-$5**+-*0. April +#, 17%*.L

/=>>""=') =G ')'A@ )V':, petitioner, vs. F)"< =V)"A" A)DAQ" /=)P=)A=' and/=:) =G A APPA@", respondents.

; / " = '

>@'/=-ay 17$%, petitioner /ommissioner of nternal )evenue (/), for brevity! assessed F=A/ the aggregateamount of P&,07%,+5%.5$ for deficiency income taxes covering the years 1757 to 17$+. his was protested by F=A/."ubse2uent investigation resulted in the issuance of a new assessment, dated 1$ ?anuary 17*# for the years 1757 to17$* in the amount of P%5%,+#*.*7. F=A/ paid this new assessment under protest.

=n * =ctober 17*#, F=A/ filed a claim for refund of the amount of P%5%,+#*.*7, which claim was denied by the /)on 1$ Gebruary 17*&. Fut before said denial, F=A/ had already filed a petition for review with the ax /ourt on &*?anuary 17*&, assailing the assessment and praying for the refund of the amount paid.

.). 'o. $5**0 (/A /ase 'o. &5$1, the "econd /ase!

Page 52 of .2


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=n 1* 'ovember 17*1, F=A/ was assessed deficiency income taxes, interests, and penalty for the fiscal years17$%617$7 to 17*#-17*1 in the aggregate amount of P507,+&*.0+, and the additional amounts of P1,###.## andP1,%##.## as compromise penalties for violation of "ection 0$ (re2uiring the filing of corporation returns! penaliedunder "ection *0 of the 'ational nternal )evenue /ode (')/!.

=n &5 'ovember 17*1, F=A/ re2uested that the assessment be countermanded and set aside. n a letter, dated 1$Gebruary 17*&, however, the /) not only denied the F=A/ re2uest for refund in the Girst /ase but also re-issued inthe "econd /ase the deficiency income tax assessment for P5+0,1+&.#% for the years 17$7 to 17*#-*1 plusP1,###.## as compromise penalty under "ection *0 of the ax /ode. F=A/Os re2uest for reconsideration was deniedby the /) on &0 August 17*+. his prompted F=A/ to file the "econd /ase before the ax /ourt praying that it beabsolved of liability for deficiency income tax for the years 17$7 to 17*1.

his case was subse2uently tried jointly with the Girst /ase.

=n &$ ?anuary 17%+, the ax /ourt rendered the assailed joint ;ecision reversing the /). he ax /ourt held thatthe proceeds of sales of F=A/ passage ticets in the Philippines by Darner Farnes and /ompany, @td., and later byNantas Airways, during the period in 2uestion, do not constitute F=A/ income from Philippine sources Isince noservice of carriage of passengers or freight was performed by F=A/ within the PhilippinesI and, therefore, saidincome is not subject to Philippine income tax. he /A position was that income from transportation is income fromservices so that the place where services are rendered determines the source. hus, in the dispositive portion of its;ecision, the ax /ourt ordered petitioner to credit F=A/ with the sum of P%5%,+#*.*7, and to cancel the deficiency

income tax assessments against F=A/ in the amount of P5+0,1+&.#% for the fiscal years 17$%-$7 to 17*#-*1.


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fare from the whole trip9 and (0! conse2uently allocating to the various airline companies on the basis of theirparticipation in the services rendered through the mode of interline settlement as prescribed by Article V of the)esolution 'o. %5# of the AA Agreement.I 0 hose activities were in exercise of the functions which are normallyincident to, and are in progressive pursuit of, the purpose and object of its organiation as an international air carrier.n fact, the regular sale of ticets, its main activity, is the very lifeblood of the airline business, the generation of salesbeing the paramount objective. here should be no doubt then that F=A/ was Iengaged inI business in thePhilippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreigncorporation subject to tax upon its total net income received in the preceding taxable year from all sources within thePhilippines.

I"ec. &0. )ates of tax on corporations. J . . .

I(b! ax on foreign corporations. J . . .

I(&! )esident corporations. J A corporation organied, authoried, or existing under the laws of any foreign country,except a foreign life insurance company, engaged in trade or business within the Philippines, shall be taxable asprovided in subsection (a! of this section upon the total net income received in the preceding taxable year from allsources within the Philippines. (mphasis ours!

'ext, we address ourselves to the issue of whether or not the revenue from sales of ticets by F=A/ in thePhilippines constitutes income from Philippine sources and, accordingly, taxable under our income tax laws.

he ax /ode defines Igross incomeI thus4

IOross incomeO includes gains, profits, and income derived from salaries, wages or compensation for personalservice of whatever ind and in whatever form paid, or from profession, vocations, trades, business, commerce,sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in suchproperty9 also from interests, rents, dividends, securities, or the transactions of any business carried on for gain orprofit or gains, profits, and income derived from any source whateverI ("ec. &7K+L9 mphasis supplied!

he definition is broad and comprehensive to include proceeds from sales of transport documents. Ihe wordsOincome from any source whateverO disclose a legislative policy to include all income not expressly exempted withinthe class of taxable income under our laws.I ncome means Icash received or its e2uivalentI9 it is the amount ofmoney coming to a person within a specific time . . .9 it means something distinct from principal or capital. Gor, while

capital is a fund, income is a flow. As used in our income tax law, IincomeI refers to the flow of wealth.

he records show that the Philippine gross income of F=A/ for the fiscal years 17$%-$7 to 17*#-*1 amounted toP1#,0&%,+$%.##.

;id such Iflow of wealthI come from Isources within the PhilippinesIR

he source of an income is the property, activity or service that produced the income. Gor the source of income to beconsidered as coming from the Philippines, it is sufficient that the income is derived from activity within thePhilippines. n F=A/Os case, the sale of ticets in the Philippines is the activity that produces the income. he ticetsexchanged hands here and payments for fares were also made here in Philippine currency. he situs of the source ofpayments is the Philippines. he flow of wealth proceeded from, and occurred within, Philippine territory, enjoying theprotection accorded by the Philippine government. n consideration of such protection, the flow of wealth should sharethe burden of supporting the government.

A transportation ticet is not a mere piece of paper. Dhen issued by a common carrier, it constitutes the contractbetween the ticet-holder and the carrier. t give

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Lecture Notes in Taxation 2

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