Part 2. Vat - Zarate

81 | P a g e VAT - Ella, Chat, Bernice, DC, Tin, Marge, Warren, Kyle Updatedby Rafi (for Atty. K Zarates Lecture/ Notes) SY. 2010-2011

III. VALUE-ADDED TAX I. APPLICABLE LAWS A. EO No. 273 Original VAT Law (1988) B. RA 7643 (1992) C. RA 7716 Expanded VAT Law (1996) D. RA 8241 Improved VAT Law (1997) E. RA 8424 Tax Reform Act (1998) F. RA 8761 (2000) G. RA 9010 (2001) H. RA 9238 (2004) I. RA 9337 (2005) J. RA 9361 (2006) K. Revenue Memorandum Circular No. 07-2006 Increasing VAT rate to 12% L. Revenue Regulations No. 16-05 Consolidated Value Added Tax Regulations M. RA No. 9994 Expanded Senior Citizens Act II. NATURE, CHARACTERISTIC AND PURPOSE OF VAT A. Tolentino v. Sec of Finance GR No. 115455 Oct 30, 1995

Facts: These are motions seeking reconsideration of our decision dismissing the petitions filed in these cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law. Now it is contended by the PPI that by removing the exemption of the press from the VAT while maintaining those granted to others, the law discriminates against the press. At any rate, it is averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional." Issue: Does sales tax on bible sales violative of religious freedom? Held: No. The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right. Hence, although its application to others, such those selling goods, is valid, its application to the press or to religious groups, such as the Jehovah's Witnesses, in connection with the latter's sale of religious books and pamphlets, is unconstitutional. As the U.S. Supreme Court put it, "it is one thing to impose a tax on income or property of a preacher. It is quite another thing to exact a tax on him for delivering a sermon." The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange of services and the lease of properties purely for revenue purposes. To subject the press to its payment is not to burden the exercise of its right any more than to make the press pay income tax or subject it to general regulation is not to violate its freedom under the Constitution B. CIR v. PLDT, G.R. No. 140230, December 15, 2005 PONENTE: J. GARCIA FACTS: A claim for tax refund was filed by PLDT with the BIR on the alleged over payment of taxes it made for the for the year 1994 based on the BIR ruling on the same year holding that PLDT is exempt from the paying VAT and all other taxes except those mentioned under the same law. To avoid the claim to prescribe upon BIRs denial of PLDTs refund, it filed a petition with the CTA seeking a refund of, or the issuance of a tax credit certificate representing compensating taxes, advance sales taxes, VAT and other internal revenue taxes alleged to have been erroneously paid on its importations from October 1992 to May 1994. CTA- ruled in favor of PLDT granting the refund. However, under the said decision is the dissent maintaining that the phrase 'in lieu of all taxes found in Section 12 of R.A. No. 7082, supra, refers to exemption from 'direct taxes only and does not cover 'indirect taxes', such as VAT, compensating tax and advance sales tax. BIR Commissioner then moved for a motion for reconsideration but the CTA denied. On appeal with the CA, it affirmed the decision of the CTA. Thus this instant case. ISSUE: Whether or not PLDT, given the tax component of its franchise under sec 12 of RA 7082, is exempt from paying VAT, compensating taxes, advance sales taxes and internal revenue taxes on its importations. RULING: The petition is partly granted.

JOHN ROBERT SAM JUAN





The clause 'in lieu of all taxes' in Section 12 of RA 7082 is immediately followed by the limiting or qualifying clause 'on this franchise or earnings thereof, suggesting that the exemption is limited to taxes imposed directly on PLDT since taxes' pertaining to PLDT's franchise or earnings are its direct liability. Accordingly, indirect taxes, not being taxes on PLDT's franchise or earnings, are outside the purview of the 'in lieu provision. Section 12 of RA 7082 operates as granting PLDT blanket exemption from payment of indirect taxes, which, in the ultimate analysis, are not taxes on its franchise or earnings. 'PLDT has not shown its eligibility for the desired exemption. None should be granted PLDT has not shown its eligibility for the desired exemption. None should be granted. As for the compensating tax and advance sales tax that was assessed and paid by PLDT, the court held that these are no longer collectible by virtue of Executive Order No. 273[41] which took effect on January 1, 1988, a multi-stage value-added tax was put into place to replace the tax on original and subsequent sales tax.[42] It stands to reason then, as urged by PLDT, that compensating tax and advance sales tax were no longer collectible internal revenue taxes under the NILRC when the Bureau of Customs made the assessments in question and collected the corresponding tax. Stated a bit differently, PLDT was no longer under legal obligation to pay compensating tax and advance sales tax on its importation from 1992 to 1994. The Court has stated that taxation is the rule, exemption is the exception. Accordingly, statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Those who claims a refund or exemption from tax payments rests the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted. References: RA 7082. Sec. 12. The grantee ' shall be liable to pay the same taxes on their real estate, buildings, and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee, ' shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee ' shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Sec. 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them; they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in. indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else. Indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods for sale or of raw materials to be processed into merchandise can shift the tax or, to borrow from Philippine Acetylene Co, Inc. vs. Commissioner of Internal Revenue,[26] lay the 'economic burden of the tax', on the purchaser, by subsequently adding the tax to the selling price of the imported article or finished product. Compensating tax also partakes of the nature of an excise tax payable by all persons who import articles, whether in the course of business or not.[27] The rationale for compensating tax is to place, for tax purposes, persons purchasing from merchants in the Philippines on a more or less equal basis with those who buy directly from foreign countries It is a well-settled rule or principle in taxation that a compensating tax ' is an excise tax ' one that is imposed on the performance of an act, the engaging in an occupation, or the enjoyment of a privilege. A tax levied upon property because of its ownership is a direct tax, whereas one levied upon property because of its use is an excise duty. DISPOSITIVE PORTION: WHEREFORE, the petition is partially GRANTED. The Decision of the Court of Appeals in CA-G.R. No. 47895 dated September 17, 1999 is MODIFIED. The Commissioner of Internal Revenue is ORDERED to issue a Tax Credit Certificate or to refund to PLDT only the of P94,673,422.00 advance sales tax and compensating tax erroneously collected by the Bureau of Customs from October 1, 1992 to May 31, 1994, less the VAT which may have been due on the importations in question, but have otherwise remained uncollected. SO ORDERED.

III. PERSONS LIABLE


A. 105 SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being course of trade or business. B. in the course of trade of business v. isolated transaction v. incidental to the main line of business 1. CIR v. Magsaysay Lines, Inc. et al., G.R. No. 146984, July 28, 2006

COMMISSIONER OF INTERNAL REVENUE vs MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP (HK) and NATIONAL DEVELOPMENT COMPANY FACTS:

x Pursuant to a government program of privatization, NDC decided to sell all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). o It sells to NMC shares and 5 of its ships. o The vessels were constructed for the NDC then initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary. o Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC.

x The NMC shares and the vessels were offered for public bidding. o Terms and conditions for the public auction: Winning bidder was to pay "a value added tax of 10% on the value of the vessels."

x On 3 June 1988, private respondent (Magsaysay Lines) offered to buy the shares and the vessels for P168,000,000.00. o Bid was made purportedly for a new company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong (collectively, private respondents). o Bid was approved by the Committee on Privatization, and a Notice of Award was issued to Magsaysay Lines.

x Sept. 1988: Implementing Contract of Sale was executed between NDC, on one hand, and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. o The contract stipulated that "[v]alue-added tax, if any, shall be for the account of the PURCHASER." o Per arrangement, an irrevocable confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as security for the payment of VAT, if any.

x Private respondents had already filed formal request to BIR on whether or not the sale of the vessels was subject to VAT. Thus, the parties agreed that should no favorable ruling be received from the BIR, NDC was authorized to draw on the Letter of Credit. x 1989: VAT Ruling was received by respondents.

o The sale of the vessels was subject to the 10% VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and thus its "transactions incident to its normal VAT registered activity of leasing out personal property including sale of its own assets that are movable, tangible objects which are appropriable or transferable are subject to the 10% [VAT]." x MR was filed by private respondents: DENIED x At this point, NDC drew on the Letter of Credit to pay for the VAT. x Respondents filed an Appeal and Petition for Refund with the CTA, praying reversal of VAT Ruling. x CIR: opposed the petition arguing that:

o Private respondents were not the real parties in interest as they were not the transferors or sellers as contemplated in Sections 99 and 100 of the then Tax Code. o The sale of the vessels liable for VAT, especially citing Section 3 of Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that "[VAT] is imposed on any sale or transactions 'deemed sale' of taxable goods


(including capital goods, irrespective of the date of acquisition)." The CIR argued that the sale of the vessels were among those transactions "deemed sale," because of the change of ownership of business. x CTA: rejected CIR ruling and granted the petition.

o The sale of a vessel was an "isolated transaction," not done in the ordinary course of NDC's business, and was thus not subject to VAT, which under Section 99 of the Tax Code, was applied only to sales in the course of trade or business.

o The CTA further held that the sale of the vessels could not be "deemed sale," and thus subject to VAT, as the transaction did not fall under the enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87. x CIR appealed before Court of Appeals and it reversed the decision of CTA holding that:

o The transaction fell within the classification of those "deemed sale" under R.R. No. 5-87, since the sale of the vessels together with the NMC shares brought about a change of ownership in NMC. o The Court of Appeals also applied the principle governing tax exemptions that such should be strictly construed against the taxpayer, and liberally in favor of the government.

x Upon reconsideration, CA reversed itself through a resolution: the "change of ownership of business" as contemplated in R.R. No. 5-87 must be a consequence of the "retirement from or cessation of business" by the owner of the goods, as provided for in Section 100 of the Tax Code. The Court of Appeals also agreed with the CTA that the classification of transactions "deemed sale" was a classification statute, and not an exemption statute, thus warranting the resolution of any doubt in favor of the taxpayer. ISSUE: WHETHER THE SALE IS SUBJECT TO VAT? RULING: NO. The sale of the vessels was not in the ordinary course of trade or business of NDC. VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayer's role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business. In the instant case, the sale was an isolated transaction. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property. Other important notes: VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the basis of a fixed percentage. It is the end user of consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the end users by the providers of these goods or services, who in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the final consumer (or output VAT).

C. OUTPUT TAX ON SALE OF GOODS OR PROPERTIES 1. Tax Rate and Tax Base 106(A), RMC 07-06 dated January 31, 2006 (Publishes the memorandum issued by Sec ERMITA increasing the VAT rate from 10% to 12%.) 2. Definition of Gross Selling Price 106(A)(1) The term "gross selling price" means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration 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. 3. Meaning of Goods or Properties 106(A)(1) (1) The term "goods" or "properties" shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;


(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment; (d) The right or the privilege to use motion picture films, tapes and discs; and (e) Radio, television, satellite transmission and cable television time. 4. Special Rules on Sale of Real Property (Cash Sales or Installment Sales) RR 16-05 5. Zero rated sale of goods or properties i. Export Sales 106(A)(2)(a) (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales. - The term "export sales" means: (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; (4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and (5) Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws; and (6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transportations. ii. Foreign Currency Denominated Sale 106(A)(2)(b) (b) Foreign Currency Denominated Sale. - The phrase "foreign currency denominated sale" means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). iii. Effectively Zero Rated Sales 106(A)(2)(c) (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. 6. Transactions Deemed Sales 106(B) (B) Transactions Deemed Sale. - The following transactions shall be deemed sale: (1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business; (2) Distribution or transfer to: (a) Shareholders or investors as share in the profits of the VAT-registered persons; or (b) Creditors in payment of debt;


(3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and (4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. 7. Changes in or Cessation of Status of a VAT-registered Person 106(C) (C) Changes in or Cessation of Status of a VAT-registered Person. - The tax imposed in Subsection (A) of this Section shall also apply to goods disposed of or existing as of a certain date if under circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a VAT-registered person changes or is terminated. 8. Sales Return, Allowances and Sales Discounts 106(D) (D) Determination of the Tax. - Sales Returns, Allowances and Sales Discounts. - The value of goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time of sale and the grant of which does not depend upon the happening of a future event may be excluded from the gross sales within the same quarter it was given. 9. Authority of CIR to Determine Appropriate Tax Base 106(E) (E) Authority of the Commissioner to Determine the Appropriate Tax Base. - The Commissioner shall, by rules and regulations prescribed by the Secretary of Finance, determine the appropriate tax base in cases where a transaction is deemed a sale, barter or exchange of goods or properties under Subsection (B) hereof, or where the gross selling price is unreasonably lower than the actual market value. D. VAT ON IMPORTATION 1. In General 107(A) SEC. 107. Value-Added Tax on Importation of Goods. - "(A) In General. - There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any: Provided, further, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: "(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or "(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). 2. Transfer by VAT exempt persons 107(B) "(B) Transfer of Goods by Tax-exempt Persons. - In the case of tax free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof." E. OUTPUT TAX ON SALE OF SERVICES


1. Tax Rate and Tax Base 108 (A) SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. - (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). "The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, rest-houses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation 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 cargoes; common 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 Philippines; sales of electricity by generation companies, transmission, and distribution companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include: "(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; "(2) The lease or the use of, or the right to use of any industrial, commercial or, scientific equipment; "(3) The supply of scientific, technical, industrial or commercial knowledge or information; "(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3); "(5) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; "(6) The supply of technicai advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; "(7) The lease of motion picture films, films, tapes and discs; and "(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time.


"Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. "The term 'gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax. 2. Definition of Gross Receipts 108(A) 3. Meaning of Sale or Exchange of Services 108(A) i. CIR v. Commonwealth Management and Services Corporation, GR No. 125355 Mar 30, 2000 PONENTE: J. PARDO FACTS: Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co. (Philamlife), organized by the letter to perform collection, consultative and other technical services, including functioning as an internal auditor, of Philamlife and its other affiliates. The BIR issued an assessment to private respondent COMASERCO for deficiency VAT amounting to P351,851.01, for taxable year 1988, however COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its operations in the amount of P6,077.00. Thus COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency VAT. But CIR sent a collection letter to COMASERCO demanding payment of the deficiency VAT. COMASERCO filed with the CTA a petition for review contesting the CIR's assessment. COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to collections, consultative and other technical assistance, including functioning as an internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing services to Philamlife and its affiliates. COMASERCO was established to ensure operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT. The CTA rendered decision in favor of the CIR. On appeal with the CA, it reversed the CTAs decision,where it was held that COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its affiliates. That COMASERCO was not engaged in business of providing services to Philamlife and its affiliates. CA held that COMASERCO was not liable to pay VAT for it was not engaged in the business of selling services. CIR filed with this Court a petition for review on certiorari assailing the decision of the CA. Where COMASERCO contends that the term "in the course of trade or business" requires that the "business" is carried on with a view to profit or livelihood. It avers that the activities of the entity must be profit- oriented. COMASERCO submits that it is not motivated by profit, as defined by its primary purpose in the articles of incorporation, stating that it is operating "only on reimbursement-of-cost basis, without any profit." Private respondent argues that profit motive is material in ascertaining who to tax for purposes of determining liability for VAT. ISSUE: Whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon. RULING: IT IS IMMATERIAL. As pointed out by Petitioner where it avers that to "engage in business" and to "engage in the sale of services" are two different things. Petitioner maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the value added by the performance of the service. It is immaterial whether profit is derived from rendering the service. Section 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E.O.) No. 273 in 1988, provides that: Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code."


On May 28, 1994, Congress enacted RA No. 7716, the EVAT, amending among other sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act 8424, the NIRC of 1997, took effect where Sec 105 provides: "SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 and 108 of this Code. "The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing sale or lease of goods, properties or services at the time of the effectivity of Republic Act No.7716. "The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or government entity. "The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business." Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit, organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity, regardless of whether or not the entity is profit-oriented. The definition of the term "in the course of trade or business" incorporated in the present law applies to all transactions 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 goods and services, was already liable to pay VAT. The present law merely stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and services. Section 108 of the NIRC of 1997 defines the phrase "sale of services" as the "performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking or project." On February 5, 1998, the CIR issued BIR Ruling No. 010-98[12] emphasizing that a domestic corporation that provided technical, research, management and technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without any intention of realizing profit, any income or profit generated by the entity in the conduct of its activities was subject to income tax. Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT.

DISPOSITIVE PORTION: WHEREFORE , the Court GRANTS the petition and REVERSES the decision of the Court of Appeals in CA-G. R. SP No. 37930. The Court hereby REINSTATES the decision of the Court of Tax Appeals in C. T. A. Case No. 4853. No costs. SO ORDERED. ii. CIR v. SM Prime Holdings, Inc. and First Asia Realty Development Corp. G.R. No. 183505, February 26, 2010 FACTS: Respondents SM Prime and First Asia are engaged in the business of operating cinema houses, among others. Consolidated Petitions


On September 26, 2003, the BIR sent SM Prime & First Asia (separately) a Preliminary Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales. The BIR denied the protest filed by SM Prime and ordered it to pay the VAT deficiency Accordingly, SM Prime & First Asia filed a Petition for Review before the CTA. Ruling of the CTA First Division On September 22, 2006, the First Division of the CTA rendered a Decision granting the Petition for Review. CTA First Division held that the House of Representatives resolved that there should only be one business tax applicable to theaters and movie houses, which is the 30% amusement tax imposed by cities and provinces under the LGC of 1991. Further, it held that consistent with the States policy to have a viable, sustainable and competitive theater and film industry, the national government should be precluded from imposing its own business tax in addition to that already imposed and collected by local government units. The CTA First Division likewise found that Revenue Memorandum Circular (RMC) No. 28-2001, which imposes VAT on gross receipts from admission to cinema houses, cannot be given force and effect because it failed to comply with the procedural due process for tax issuances under RMC No. 20-86.[31] Ruling of the CTA En Banc The CTA En Banc denied the Petition for Review and dismissed[37] as well petitioners Motion for Reconsideration. The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive enumeration of what services are intended to be subject to VAT. And since the showing or exhibition of motion pictures, films or movies by cinema operators or proprietors is not among the enumerated activities contemplated in the phrase sale or exchange of services, then gross receipts derived by cinema/ theater operators or proprietors from admission tickets in showing motion pictures, film or movie are not subject to VAT. It reiterated that the exhibition or showing of motion pictures, films, or movies is instead subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 28-2001, the CTA En Banc agreed with its First Division that the same cannot be given force and effect for failure to comply with RMC No. 20-86.

Petitioner argues that the enumeration of services subject to VAT in Section 108 of the NIRC is not exhaustive because it covers all sales of services unless exempted by law. He maintains that the exhibition of movies by cinema operators or proprietors to the paying public, being a sale of service, is subject to VAT. Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of 1997 shows that the gross receipts of proprietors or operators of cinemas/theaters derived from public admission are not among the services subject to VAT. Respondents insist that gross receipts from cinema/theater admission tickets were never intended to be subject to any tax imposed by the national government. According to them, the absence of gross receipts from cinema/theater admission tickets from the list of services which are subject to the national amusement tax under Section 125 of the NIRC of 1997 reinforces this legislative intent. Respondents also highlight the fact that RMC No. 28-2001 on which the deficiency assessments were based is an unpublished administrative ruling.

ISSUE: Whether or not the gross receipts derived by operators or proprietors of cinema/theater houses from admission tickets are subject to VAT. HELD: Petition is DENIED. The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive Section 108 of the NIRC of the 1997 reads: SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase sale or exchange of services means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic

films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts; proprietors or operators of restaurants,


refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land, air and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase sale or exchange of services shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; x x x x (7) The lease of motion picture films, films, tapes and discs; and (8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time. x x x x (Emphasis supplied) A cursory reading of the foregoing provision clearly shows that the enumeration of the sale or exchange of services subject to VAT is not exhaustive. The words, including, similar services, and shall likewise include, indicate that the enumeration is by way of example only. Since the activity of showing motion pictures, films or movies by cinema/ theater operators or proprietors is not included in

the enumeration, it is incumbent upon the court to the determine whether such activity falls under the phrase similar services. The intent of the legislature must therefore be ascertained. The legislature never intended operators or proprietors of cinema/theater houses to be covered by VAT These reveal the legislative intent not to impose VAT on persons already covered by the amusement tax. This holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law was intended to replace the percentage tax on certain services. The mere fact that they are taxed by the local government unit and not by the national government is immaterial. The Local Tax Code, in transferring the power to tax gross receipts derived by cinema/theater operators or proprietor from admission tickets to the local government, did not intend to treat cinema/theater houses as a separate class. No distinction must, therefore, be made between the places of amusement taxed by the national government and those taxed by the local government. To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or proprietors, who would be paying an additional 10% VAT on top of the 30% amusement tax imposed by Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in injustice, as persons taxed under the NIRC of 1997 would be in a better position than those taxed under the LGC of 1991. We need not belabor that a literal application of a law must be rejected if it will operate unjustly or lead to absurd results. Thus, we are convinced that the legislature never intended to include cinema/theater operators or proprietors in the coverage of VAT. 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 receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of the prohibition under the Local Tax Code did not grant nor restore to the national government the power to impose amusement tax on cinema/theater operators or proprietors. Neither did it expand the coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it be extended by implication. A law will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. As it is, the power to impose amusement tax on cinema/theater operators or proprietors remains with the local government. Revenue Memorandum Circular No. 28-2001 is invalid Considering that there is no provision of law imposing VAT on the gross receipts of cinema/theater operators or proprietors derived from admission tickets, RMC No. 28-2001 which imposes VAT on the gross receipts from admission to cinema houses must be


struck down. We cannot overemphasize that RMCs must not override, supplant, or modify the law, but must remain consistent and in harmony with, the law they seek to apply and implement. Rule on tax exemption does not apply Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption from the coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against him. The reason is obvious: it is both illogical and impractical to determine who are exempted without first determining who are covered by the provision. Thus, unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be presumed. In fact, in case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer. 4. Zero rated sale of services i. Export-Oriented services 108(B)(1) "(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: "(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); ii. Foreign Currency Denominated Sale 108(B)(2) "(2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); iii. Effectively Zero Rated Sales 108(B)(3) "(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; iv. International Shipping or Air Transport 108(B)(4) "(4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof; v. Contractors and Subcontractors for Export Enterprises 108(B)(5) "(5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production; (a) Atlas Consolidated Mining vs. CIR, G.R. No. 134467 Nov. 17, 1999

PONENTE: J. PANGANIBAN FACTS: Petitioner is engaged in the business of mining, production and sale of various mineral products, consisting principally of copper concentrates and gold and duly registered with the BIR as a VAT enterprise. BIR duly approved petitioner's application for VAT zero-rating of the following sales: a. Gold to the Central Bank (CB); b. Copper concentrates to the Philippines Smelting and Refining Corp. (PASAR); and c. Pyrite [concentrated] to Philippine Phosphates, Inc. (Philphos). The BIR's approval of sales to CB and PASAR was dated April 21, 1988 while zero-rating of sales to PHILPHOS was approved effective June 1, 1988. PASAR and Philphos are both BOI and Export Processing Zone Authority (EPZA) registered export-oriented enterprises located in an EPZA zone.


On April 1990, petitioner filed a VAT return with the BIR for the first quarter of 1990 whereby it declared its sales to the CB, PASAR and Philphos, as zero-rated sales and therefore not subject to any output VAT. July 1990, petitioner filed a claim with respondent for refund/credit of VAT input taxes on its purchase of goods and services for the first quarter of 1990 in the total amount of P40,078,267.81. September 1992, petitioner filed an Amended Application for tax credit/refund in the amount of P 35,522,056.58. Respondent resolved petitioner's claim for VAT refund/credit by allowing only P2,518,122.32 as refundable/creditable while disallowing P33,003,934.26. A supplemental report of investigation was submitted by the BIR examiners on October 1992 recommending the increase in allowable input tax credit from P 2,518,122.32 to P12,101,569.11 or an increment of P9,583,446.79 due to petitioner's submission of BOI certifications on the sales to PASAR which brought down the deduction of P12,404,150.65 to P2,518,122.32. The CTA rendered a decision, the petitioner moved for reconsideration of the decision, which however the respondent court denied. Hence, an appeal to the CA, which ruled "It is beyond cavil that the petitioner is registered with the BIR as a VAT enterprise effective August 15, 1990." It upheld VAT Ruling No. 008-92 regarding the schedule of taxes to be imposed on VAT-registered entities, explaining that the "zero-percent rating" of BOI-registered enterprises shall be set in proportion to the amount of its actual exports; and that EPZA and BOI registrations were by themselves not enough for zero-rating to apply. Finally, the CA ruled that the information which RR 5-87 required to be stated in VAT invoices and receipts, as such information had already been prescribed by Sections 108 (a) and 238 of the Tax Code and violations thereof were penalized under Sections 111 and 263 of the same Code. Thus this present Petition was filed. As the respondent commissioner did not appeal the CA Decision and Resolution, the Court shall take up in this review only the issues raised by Atlas Consolidated Mining and Development Corporation. ISSUES: Whether the totality of sales to EPZA-registered enterprises should be zero-rated, or not merely the proportion which such sales have to the actual exports of the enterprise. Whether or not Section 21 of Revenue Regulation 5-87 is valid. RULING: ISSUE 1: Petitioner criticizes the respondent commissioner, as its sales 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 in proportion to the actual exports made by the two, and not to the entirety of petitioner's sales to them. Respondent, on the other hand, maintains that before zero-rating can be applied, petitioner must first show that the entities to which the raw materials have been sold are export-oriented, and that their export sales exceed 70 percent of their total annual production. Should these conditions be met, zero-rating would apply, but only in proportion to the exports actually made. The Joint Stipulation of Facts expressly states that petitioner's sales of raw materials have been approved for zero-rating. Verily, the commissioner has already conceded that PASAR and Philphos qualify as export-oriented enterprises whose export sales exceed 70 percent of their total annual production, and that petitioner's sales to them thus qualify for zero-rating. Finding that the respondent commissioner had indeed already approved the zero-rating of petitioner's past sales to PASAR and Philphos, the CA ruled:

Indeed, the BIR has already recognized and admitted that said transactions are zero-rated (paragraph 3, pages 1-2 of the Joint Stipulation of Facts; page 40-41 of the CTA Records). Said stance is demonstrated in the following acts of the BIR:

a. the grant of petitioner's applications for zero-rating of sales to PASAR AND PHILPHOS (Annexes "A" and "B", Joint Stipulation of Facts; pages 56-57 of the CTA Record);


b. Revenue Regulation No. 2-88, wherein it recognized sales to BOI-registered enterprises which export over 70% of its sales as zero-rated, subject to certain conditions (Annex "H", Joint Stipulation of Facts; pages 70-71 of the CTA Record);

c. VAT Ruling No. 271-88 (dated June 24, 1988), wherein it was recognized that sales to PHILPHOS are zero-rated (Annex "I", Joint Stipulation of Facts; p. 72 of the CTA Record);

d. Letter dated April 18, 1988, whereby it recognized that sales of copper concentrates to PASAR are zero-rated (Annex "J", Joint Stipulation of Facts; page 73 of the CTA Record); and

e. VAT Ruling No. 008-92, which states that the sale of raw materials to BOI-registered enterprises can qualify for zero-rating (Annex "N", Joint Stipulation of Facts; pages 79-82 of the CTA Record). Finally, an examination of Section 4.100.2 of Revenue Regulation 7-95 in relation to Section 102 (b) of the Tax Code shows that sales to an export-oriented enterprise whose export sales exceed 70 percent of its annual production are to be zero-rated, provided the seller complies with other requirements, like registration with the BOI and the EPZA. The said Regulation does not even hint, much less expressly mention, that only a percentage of the sales would be zero-rated. The internal revenue commissioner cannot, by administrative fiat, amend the law by making compliance therewith more burdensome.

ISSUE 2: Validity of Section 21 of Revenue Regulation 5-87 Petitioner contends that Section 21 of Revenue Regulation 5-87 is invalid, because it effectively legislates something not provided for in Section 108 of the Tax Code. On the other hand, Section 21 of Revenue Regulation 5-87 states: Sec. 21. Invoicing Requirements. - (a) Invoice and/or receipts. - All VAT-registered persons who sell goods or services shall, for every sale, issue an invoice or receipt. The invoice should contain the information prescribed in Section 108(a) and 238. Only VAT-registered persons can print the VAT registration number in their invoice and receipt. Any invoice bearing the VAT registration number of the seller shall be considered as "VAT Invoice." Value-Added Tax, whether indicated as a separate item or not in the "VAT Invoice" shall be allowed as input tax credits to those liable to the value-added tax. All purchases covered by invoices other than "VAT Invoice" shall not be entitled to input taxes. Petitioner insists that while Section 108 of the Tax Code lists the information necessary for VAT Invoices, it is silent on the withholding of input tax credits for purchases that are not subjects to VAT. We disagree. It is clear that a VAT invoice can be used only for the sale of goods and services that are subject to VAT. The corresponding taxes thereon shall be allowed as input tax credits for those subject to VAT. Section 108 expressly provides the invoicing and accounting entries required from VAT-registered persons. On the other hand, Section 111 of the Tax Code empowers the commissioner to suspend the business operations of VAT-registered persons for the specific violations listed therein. Corollary thereto, punishment for other types of violations similar to but other than those listed in Section 111 are provided for in Section 263 of the Tax Code. A careful perusal of the violations specifically listed down in Sections 111 and 263 of the Tax Code shows that they do not encompass all possible types of violations of Section 108. Section 108 provides the guidelines and necessary requirements for VAT invoices; Sections 111 and 263 of the Tax Code provide penalties for different types of violations of Section 108; and Section 21 of RR 5-87 specifies the penalty for a specific violation of Section 108. Furthermore, we agree with respondent's position that the computation of the output VAT of the seller should be based on the selling price appearing on its own VAT invoice, not on the selling price appearing on that of the customer. Indeed, it is the duty of the seller to comply with the invoicing and accounting requirements laid down in, among others, Section 108 of the Tax Code. However, this Court's ruling on the validity of Section 21 of Revenue Regulation 5-87 must be taken in conjunction with its pronouncement regarding the zero-rating given to the sales which petitioner made to Philphos and PASAR. As explained above, such sales are subject to zero-rating, as that rating was definitely approved by the respondent


commissioner. His approval indubitably signified that petitioner had already complied with the requirements, invoicing or otherwise, necessary for the zero-rating of petitioner's sales of raw materials to Philphos and PASAR. DISPOSITIVE PORTION: WHEREFORE, the Petition is hereby partially GRANTED and the assailed Decision is MODIFIED as follows: (1) petitioner is deemed VAT-registered for the first quarter of 1990 and beyond; and (2) it is the totality of petitioner's sales to Philphos and PASAR that must be taken into account, not merely the proportion of such sales to the actual exports of the said enterprises. Other than the above modifications, the challenged Decision is AFFIRMED. SO ORDERED. vi. Air or Sea Transport to Foreign Country 108(B)(6) "(6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; and vii. Power through Renewable Sources of Energy 108(B)(7) "(7) Sale 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 fuel cells and hydrogen fuels. F. EXEMPT TRANSACTIONS 1. Meaning of Exempt Sales 2. Exempt vs. Zero Rated Sales i. CIR v. Cebu Toyo Corporation, GR No. 149073, February 17, 2005 Facts: Respondent Cebu Toyo Corporation is a domestic corporation engaged in the manufacture of lenses and various optical components used in television sets, cameras, compact discs and other similar devices. It is a subsidiary of Toyo Lens Corporation, a non-resident corporation organized under the laws of Japan. Respondent is a zone export enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to the provisions of Presidential Decree No. 66. 4 It is also registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer. As an export enterprise, respondent sells 80% of its products to its mother corporation, the Japan-based Toyo Lens Corporation, pursuant to an Agreement of Offsetting. The rest are sold to various enterprises doing business in the MEPZ. Inasmuch as both sales are considered export sales subject to Value-Added Tax (VAT) at 0% rate under Section 106(A)(2)(a) 6 of the National Internal Revenue Code, as amended, respondent filed its quarterly VAT returns from April 1, 1996 to December 31, 1997 showing a total input VAT of P4,462,412.63. And therefore is seeking refund or tax credit. (CTA ruled in favor of them) Petitioners Contention: RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA) AS AN ECOZONE EXPORT ENTERPRISE, ITS BUSINESS IS NOT SUBJECT TO VAT PURSUANT TO SECTION 24 OF REPUBLIC ACT NO. 7916 IN RELATION TO SECTION 103 OF THE TAX CODE, AS AMENDED BY RA NO. 7716 AND THEREFORE NOT ENTITLED TO REFUND OF INPUT TAXES PURSUANT TO SECTION 4.103-1 OF REVENUE REGULATIONS NO. 7-95. Respondent counters that it availed of the income tax holiday under E.O. No. 226 for four years from August 7, 1995 making it exempt from income tax but not from other taxes such as VAT. Hence, according to respondent, its export sales are not exempt from VAT, contrary to petitioner's claim, but its export sales is subject to 0% VAT. ISSUE: Whether or not petitioner is subject to 0% VAT. RULING: Petitioner's contention that respondent is not entitled to refund for being exempt from VAT is untenable. This argument turns a blind eye to the fiscal incentives granted to PEZA-registered enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute, the respondent had two options with respect to its tax burden. It could avail of an income tax holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes for a number of years but not from other internal revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes, including VAT under P.D. No. 66 and pay only the preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals and the Court of Tax Appeals found that respondent availed of the income tax holiday for four (4) years starting from August 7, 1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where respondent specified that it was availing of the tax relief under E.O. No. 226. Hence, respondent is not exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is engaged in taxable rather than exempt transactions.


Taxable transactions are those transactions which are subject to value-added tax either at the rate of ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax credit for the value-added tax paid on purchases and leases of goods, properties or services. An exemption means that the sale of goods, properties or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. generally, sale of goods and supply of services performed in the Philippines are taxable at the rate of 10%. However, export sales, or sales outside the Philippines, shall be subject to value-added tax at 0% if made by a VAT-registered person. 25 Under the value-added tax system, a zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchase of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund. Take note of the difference bet. Exemption from and Zero-rating with respect to VAT as mentioned in this case: (a) A zero-rated sale is a taxable transaction but does not result in an output tax while an exempted transaction is not subject to the output tax; (b) The input VAT on the purchases of a VAT-registered person with zero-rated sales may be allowed as tax credits or refunded while the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt. (c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register while registration is optional for VAT-exempt persons. ii. Toshiba Information Equipment (Phils) Inc. v. CIR, G.R. No. 157594, March 9, 2010 Facts: This is a Petition for Certiorari under Rule 45 on the decision CA reversing the decision of the CTA in declaring that Toshiba is not entitled to credit/ refund of its unutilized input value added tax attributable to its export sales because it was a tax exempt entity and its export sales were Vat exempt transactions. Toshiba is registered with PEZA. In 1997, it declared input VAT payments on its domestic purchases of taxable goods and services in the aggregate sum of P3,875,139.65 with no zero-rated sales. Toshiba subsequently submitted to the BIR on July 23, 1997 its amended VAT returns for the first and second quarters of 1997 reporting the same amount of input VAT payments but, this time, with zero-rated sales totaling P7,494,677,000.00. On March 30, 1999, Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (DOF One-Stop Shop) two separate applications for tax credit/refund12 of its unutilized input VAT payments for the first half of 1997 in the total amount of P3,685,446.73 March 31, 1999, Toshiba likewise filed with the CTA a Petition for Review to toll the running of the two-year prescriptive period. CTA ordered that CIR refund or issue a tax credit certificate in the amount of P3,875,139.65 representing unutilized input taxes paid on its purchase of taxable goods and services for the period January 1 to June 30, 1997. CIR opposed thus filed a Joint Stipulation of facts with Toshiba stating that:

x [Toshiba] is subject to zero percent (0%) value-added tax on its export sales in accordance with then Section 100(a)(2)(A) of the Tax Code, as amended and; x [Toshiba] is subject to zero percent (0%) value-added tax on its export sales. CTA ruled in favor of Toshiba and reasoned that: the CIR himself admitted that the export sales of Toshiba were subject to zero percent (0%) VAT based on Section 100(a)(2)(A)(i) of the Tax Code of 1977, as amended. Toshiba could then claim tax credit or refund of input VAT paid on its purchases of goods, properties, or services, directly attributable to such zero-rated sales, in accordance with Section 4.102-2 of Revenue Regulations No. 7-95. The CTA, though, reduced the amount to be credited or refunded to Toshiba toP1,385,292.02. CIR moved for reconsideration contending that Toshiba was not entitled to the credit/refund of its input VAT payments because as a PEZA-registered ECOZONE export enterprise, Toshiba was not subject to VAT. The CTA denied said motion. It pointed out that Toshiba availed itself of the income tax holiday under the Omnibus Investments Code of 1987, so Toshiba was exempt only from income tax but not from other taxes such as VAT. As a result,


Toshiba was liable for output VAT on its export sales, but at zero percent (0%) rate, and entitled to the credit/refund of the input VAT paid on its purchases of goods and services relative to such zero-rated export sales. CIR then filed a petition for review with the CA. CA ruled infavor of CIR. Toshiba then filed a MR. Denied. Hence this appeal. Issues: WON TOSHIBA, BEING A PEZA-REGISTERED ENTERPRISE, IS EXEMPT FROM VAT UNDER SECTION 24 OF R.A. 7916, AND FURTHER HOLDING THAT [TOSHIBAS] EXPORT SALES ARE EXEMPT TRANSACTIONS UNDER SECTION 109 OF THE TAX CODE Held: Yes. Toshiba is VAT-exempt entity and no VAT can be passed on to them. Being PEZA registered, the ECOZONE is considered a foreign territory. The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) VAT. Thus, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered enterprise the option to choose between two sets of fiscal incentives: (a) The five percent (5%) preferential tax rate on its gross income under Rep. Act No. 7916, as amended; and (b) the income tax holiday provided under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, as amended. The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is in lieu of all taxes. Except for real property taxes, no other national or local tax may be imposed on a PEZA-registered enterprise availing of this particular fiscal incentive, not even an indirect tax like VAT. *This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the five percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax holiday under Exec. Order No. 226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction was abolished by RMC No. 74-99, which categorically declared that all sales of goods, properties, and services made by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latters type or class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity. 3. Exempt Transactions 109(A) to (V) (22) SEC. 109. Exempt Transactions. - (1) Subject to the provisions of subsection (2) hereof, the following transactions shall be exempt from the value-added tax: "(A) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor. "Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state; "(B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets); "(C) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines;


"(D) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery, other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide; "(E) Services subject to percentage tax under Title V; "(F) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar; "(G) Medical, dental, hospital and veterinary services except those rendered by professionals; "(H) Educational services rendered by private educational institutions, duly accredited by the Department of Education (DEPED), the Commission on Higher Education (CHED), the Technical Education And Skills Development Authority (TESDA) and those rendered by government educational institutions; "(I) Services rendered by individuals pursuant to an employer-employee relationship; "(J) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines; "(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529; "(L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce; "(M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority; "(N) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members; "(O) Export sales by persons who are not VAT-registered; "(P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at One million five hundred thousand pesos (P1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P2,500,000) and below: Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO); "(Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P10,000)Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO); "(R) Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements;


"(S) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations; "(T) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; "(U) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries; and "(V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO); a. Sale or importation of agricultural and marine food products in their original state i. Misamis Oriental Coco Traders vs. Sec of Finance 238 SCRA 63 G.R. No. 108524 November 10, 1994 FACTS: On June 11, 1991, CIR issued the circular in question, classifying copra as an agricultural non-food product and declaring it "exempt from VAT only if the sale is made by the primary producer pursuant to Section 103(a) of the Tax Code, as amended." Petitioner is a domestic corporation whose members, individually or collectively, are engaged in the buying and selling of copra in Misamis Oriental. The petitioner alleges that prior to the issuance of Revenue Memorandum Circular 47-91 on June 11, 1991, which implemented VAT Ruling 190-90, copra was classified as agricultural food product under $ 103(b) of the National Internal Revenue Code and, therefore, exempt from VAT at all stages of production or distribution. The reclassification had the effect of denying to the petitioner the exemption it previously enjoyed when copra was classified as an agricultural food product under 103(b) of the NIRC. Petitioner challenges RMC No. 47-91 on various grounds respondent Commissioner did not consider copra as as an "agricultural food product" within the meaning of 103(b) of the NIRC. ISSUE: Whether copra is an agricultural food or non-food product for purposes of this provision of the NIRC? NO. In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering copra as an "agricultural food product" within the meaning of 103(b) of the NIRC. As the Solicitor General contends, "copra per se is not food, that is, it is not intended for human consumption. Simply stated, nobody eats copra for food." That previous Commissioners considered it so, is not reason for holding that the present interpretation is wrong. The Commissioner of Internal Revenue is not bound by the ruling of his predecessors. To the contrary, the overruling of decisions is inherent in the interpretation of laws. Petitioners Arguments:

1. cites the opinion of Dr. Quintin Kintanar of the Bureau of Food and Drug to the effect that copra should be considered "food" because it is produced from coconut which is food and 80% of coconut products are edible. >> SC: In interpreting 103(a) and (b) of the NIRC, the CIR gave it a strict construction consistent with the rule that tax exemptions must be strictly construed against the taxpayer and liberally in favor of the state. Indeed, even Dr. Kintanar said that his classification of copra as food was based on "the broader definition of food which includes agricultural commodities and other components used in the manufacture/processing of food." 2. Petitioner likewise claims that RMC No. 47-91 is discriminatory and violative of the equal protection clause of the Constitution because while coconut farmers and copra producers are exempt, traders and dealers are not, although both sell copra in its original state.


>> SC: There is a material or substantial difference between coconut farmers and copra producers, on the one hand, and copra traders and dealers, on the other. The copra farmers and producers produce and sell copra, while copra traders merely sell copra. There is a reasonable basis for classifying them differently. 3. It is finally argued that RMC No. 47-91 is counterproductive because traders and dealers would be forced to buy copra from coconut farmers who are exempt from the VAT and that to the extent that prices are reduced the government would lose revenues as the 10% tax base is correspondingly diminished. >> SC: The sale of agricultural non-food products is exempt from VAT only when made by the primary producer or owner of the land from which the same is produced, but in the case of agricultural food products their sale in their original state is exempt at all stages of production or distribution. At any rate, the argument that the classification of copra as agricultural non-food product is counterproductive is a question of wisdom or policy which should be addressed to respondent officials and to Congress.

XXX XXX XXX

MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC. vs. DEPARTMENT OF FINANCE SECRETARY, COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE (BIR), AND REVENUE DISTRICT OFFICER, BIR MISAMIS ORIENTAL G.R. No. 108524; November 10, 1994 FACTS:

x Petitioner is a domestic corporation whose members, individually or collectively, are engaged in the buying and selling of copra in Misamis Oriental. o It alleges that prior to the issuance of Revenue Memorandum Circular 47-91 on June 11, 1991, which implemented VAT Ruling 190-90, copra was classified as agricultural food product under $103(b) of the National Internal Revenue Code and, therefore, exempt from VAT at all stages of

production or distribution.

x The reclassification had the effect of denying to the petitioner the exemption it previously enjoyed when copra was classified as an agricultural food product under 103(b) of the NIRC. x Respondent Commissioner did not consider copra as as an "agricultural food product" within the meaning of 103(b) of the NIRC. Sec. 103. Exempt Transactions. The following shall be exempt from the value-added tax: (a) Sale of nonfood agricultural, marine and forest products in their original state by the primary producer or the owner of the land where the same are produced; (b) Sale or importation in their original state of agricultural and marine food products, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption, and breeding stock and genetic material therefor;

x Under 103(a), as above quoted, the sale of agricultural non-food products in their original state is exempt from VAT only if the sale is made by the primary producer or owner of the land from which the same are produced. The sale made by any other person or entity, like a trader or dealer, is not exempt from the tax. x On the other hand, under 103(b) the sale of agricultural food products in their original state is exempt from VAT at all stages of production or distribution regardless of who the seller is.

ISSUE: Whether the Commissioner erred in not considering copra as an "agricultural food product" within the meaning of 103(b) of the NIRC? RULING: NO. COMMISSIONER DID NOT ERRED. In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering copra as an "agricultural food product" within the meaning of 103(b) of the NIRC. As the Solicitor General contends, "copra per se is not food, that is, it is not intended for human consumption. Simply stated, nobody eats copra for food." That previous Commissioners considered it so, is not reason for holding that the present interpretation is wrong. The Commissioner of Internal Revenue is not bound by the ruling of his predecessors. To the contrary, the overruling of decisions is inherent in the interpretation of laws.


PETITIONERS CONTENTIONS: 1. Based from opinion of Dr. Quintin Kintanar of the Bureau of Food and Drug to the effect that copra should be considered "food" because it is produced from coconut which is food and 80% of coconut products are edible. 2. RMC No. 47-91 is discriminatory and violative of the equal protection clause of the Constitution because while coconut farmers and copra producers are exempt, traders and dealers are not, although both sell copra in its original state 3. RMC No. 47-91 is counterproductive because traders and dealers would be forced to buy copra from coconut farmers who are exempt from the VAT and that to the extent that prices are reduced the government would lose revenues as the 10% tax base is correspondingly diminished. HELD:

1. In interpreting 103(a) and (b) of the NIRC, the CIR gave it a strict construction consistent with the rule that tax exemptions must be strictly construed against the taxpayer and liberally in favor of the state. Indeed, even Dr. Kintanar said that his classification of copra as food was based on "the

Date post:	15-Sep-2015
Category:	Documents
Upload:	samjuan1234
View:	224 times
Download:	1 times

Part 2. Vat - Zarate

Documents