CIR vs. American Express GR No.
152609 dated June 29, 2005 (Supra) As a general rule, the VAT system uses the destination principle as a basis for
Topic:
VAT > Zero-rated Sales & VAT-exempt Transactions > Destination principle
and cross border doctrine
Doctrine:
As a general rule, the value-added tax (VAT) system uses the destination
principle. However, our VAT law itself provides for a clear exception, under
which the supply of service shall be zero-rated when the following
requirements are met: (1) the service is performed in the Philippines; (2) the
service falls under any of the categories provided in Section 102(b) of the Tax
Code; and (3) it is paid for in acceptable foreign currency that is accounted
for in accordance with the regulations of the Bangko Sentral ng Pilipinas.
Since respondent’s services meet these requirements, they are zero-rated.
Petitioner’s Revenue Regulations that alter or revoke the above
requirements are ultra vires and invalid.
Facts:
American Express international is a foreign corporation operating in the
Philippines, it is a registered taxpayer. On April 13, 1999, [respondent] filed
with the BIR a letter-request for the refund of its 1997 excess input taxes in
the amount of P3,751,067.04, which amount was arrived at after deducting
from its total input VAT paid of P3,763,060.43 its applied output VAT
liabilities only for the third and fourth quarters of 1997 amounting to
P5,193.66 and P6,799.43, respectively. The CTA ruled in favor of the herein
respondent holding that its services are subject to zero-rate pursuant to
Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of
Revenue Regulations 5-96. The CA affirmed the decision of the CTA.
Issue:
Whether the services of American Express are exempt from the Destination
Principle
Held: Yes.
the jurisdictional reach of the tax.51 Goods and services are taxed only in the
country where they are consumed. Thus, exports are zero-rated, while
imports are taxed.
The law clearly provides for an exception to the destination principle; that is,
for a zero percent VAT rate for services that are performed in the Philippines,
"paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the [BSP].Thus, for the supply of service to
be zero-rated as an exception, the law merely requires that first, the service
be performed in the Philippines; second, the service fall under any of the
categories in Section 102(b) of the Tax Code; and, third, it be paid in
acceptable foreign currency accounted for in accordance with BSP rules and
regulations.
Indeed, these three requirements for exemption from the destination
principle are met by respondent. Its facilitation service is performed in the
Philippines. It falls under the second category found in Section 102(b) of the
Tax Code, because it is a service other than "processing, manufacturing or
repacking of goods" as mentioned in the provision. Undisputed is the fact
that such service meets the statutory condition that it be paid in acceptable
foreign currency duly accounted for in accordance with BSP rules. Thus, it
should be zero-rated.
For facilitating in the Philippines the collection and payment of receivables
belonging to its Hong Kong-based foreign client, and getting paid for it in duly
accounted acceptable foreign currency, respondent renders service falling
under the category of zero rating. Pursuant to the Tax Code, a VAT of zero
percent should, therefore, be levied upon the supply of that service
CIR vs. Toshiba Information Equipment GR No. 150154 dated August 9, 2005
(Supra)
Topic: VAT > Zero-rated Sales & VAT-exempt Transactions > Destination
principle and cross border doctrine
Doctrine: Rationale for zero-rating of exports. 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.
Facts:
Respondent Toshiba was organized and established as a domestic
corporation, duly-registered with the Securities and Exchange Commission
on 07 July 1995, with the primary purpose of engaging in the business of
manufacturing and exporting of electrical and mechanical machinery,
equipment, systems, accessories, parts, components, materials and goods of
all kinds, including, without limitation, to those relating to office automation
and information technology, and all types of computer hardware and
software, such as HDD, CD-ROM and personal computer printed circuit
boards.
On 27 September 1995, respondent Toshiba also registered with the
Philippine Economic Zone Authority (PEZA) as an ECOZONE Export Enterprise,
with principal office in Laguna Technopark, Biñan, Laguna. Finally, on 29
December 1995, it registered with the Bureau of Internal Revenue (BIR) as a
VAT taxpayer and a withholding agent.
Respondent Toshiba filed its VAT returns for the first and second quarters of
taxable year 1996, reporting input VAT in the amount of ₱13,118,542.00 and
₱5,128,761.94, respectively, or a total of ₱18,247,303.94. It alleged that the
said input VAT was from its purchases of capital goods and services which
remained unutilized since it had not yet engaged in any business activity or
transaction for which it may be liable for any output VAT. Consequently, on
27 March 1998, respondent Toshiba filed with the One-Stop Shop Inter-
Agency Tax Credit and Duty Drawback Center of the Department of Finance
(DOF) applications for tax credit/refund of its unutilized input VAT for 01
January to 31 March 1996 in the amount of ₱14,176,601.28, and for 01 April
to 30 June 1996 in the amount of ₱5,161,820.79, for a total of
₱19,338,422.07. To toll the running of the two-year prescriptive period for
judicially claiming a tax credit/refund, respondent Toshiba, on 31 March
1998, filed with the CTA a Petition for Review.
CTA, in its Decision dated 10 March 2000, ordered petitioner CIR to refund,
or in the alternative, to issue a tax credit certificate to respondent Toshiba in
the amount of ₱16,188,045.44. The Court of Appeals, in its Decision dated
27 September 2001, dismissed petitioner CIR’s Petition for Review and
affirmed the CTA Decision dated 10 March 2000.
Issue:
Whether respondent Toshiba, as a PEZA-registered enterprise, is entitled
credit/refund of its input VAT?
Held: Yes.
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.
Sales of goods, properties and services by a VAT-registered supplier from the
Customs Territory to an ECOZONE enterprise shall be treated as export sales.
If such sales are made by a VAT-registered supplier, they shall be subject to
VAT at zero percent (0%). In zero-rated transactions, the VATregistered
supplier shall not pass on any output VAT to the ECOZONE enterprise, and at
the same time, shall be entitled to claim tax credit/refund of its input VAT
attributable to such sales. Zero-rating of export sales primarily intends to
benefit the exporter (i.e., the supplier from the Customs Territory), who is
directly and legally liable for the VAT, making it internationally competitive
by allowing it to credit/refund the input VAT attributable to its export sales.
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or
unregistered supplier would only be exempt from VAT and the supplier shall
not be able to claim credit/refund of its input VAT. Even conceding, however,
that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-exempt
entity that could not have engaged in a VATtaxable business, this Court still
believes, given the particular circumstances of the present case, that it is
entitled to a credit/refund of its input VAT.

The sale of capital goods by suppliers from the Customs Territory to

respondent Toshiba in the present Petition took place during the first and
second quarters of 1996, way before the issuance of RMC No. 74-99, and
when the old rule was accepted and implemented by no less than the BIR
itself. Since respondent Toshiba opted to avail itself of the income tax holiday
under Exec. Order No. 226, as amended, then it was deemed subject to the
ten percent (10%) VAT. It was very likely therefore that suppliers from the
Customs Territory had passed on output VAT to respondent Toshiba, and the
latter, thus, incurred input VAT. It bears emphasis that the CTA, with the help
of SGV & Co., the independent accountant it commissioned to make a report,
already thoroughly reviewed the evidence submitted by respondent Toshiba
consisting of receipts, invoices, and vouchers, from its suppliers from the
Customs Territory. Accordingly, this Court gives due respect to and adopts
herein the CTA’s findings that the suppliers of capital goods from the
Customs Territory did pass on output VAT to respondent Toshiba and the
amount of input VAT which respondent Toshiba could claim as credit/refund.
CIR vs. Cebu Toyo Corp. GR No. 149073 dated February 16, 2005
Topic: VAT > Zero-rated Sales & VAT-exempt Transactions > Zero Rated Sales
vs. Exempt Sales
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. Its principal office is
located at the Mactan Export Processing Zone (MEPZ) in Lapu-Lapu City,
Cebu. 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.5
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 ₱4,462,412.63.
On March 30, 1998, respondent filed with the Tax and Revenue Group of the
One-Stop Inter-Agency Tax Credit and Duty Drawback Center of the
Department of Finance, an application for tax credit/refund of VAT paid for
the period April 1, 1996 to December 31, 1997 amounting to ₱4,439,827.21
representing excess VAT input payments.
Issue:
Whether Cebu Toyo Corp is engaged in taxable transactions subject to VAT
at the rate of 0% having been VAT and PEZA registered and thus, entitled to
refund or credit of its unutilized input VAT related to its zero rated sales?
Held: Yes.
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. The person
making the exempt sale of goods, properties or services shall not bill any
output tax to his customers because the said transaction is not subject to
VAT. Thus, a VAT-registered purchaser of goods, properties or services that
are VAT-exempt, is not entitled to any input tax on such purchases despite
the issuance of a VAT invoice or receipt. Now, having determined that
respondent is engaged in taxable transactions subject to VAT, let us then
proceed to determine whether it is subject to 10% or zero (0%) rate of VAT.
To begin with, it must be recalled that 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. 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. In
principle, the purpose of applying a zero percent (0%) rate on a taxable
transaction is to exempt the transaction completely from VAT previously
collected on inputs. It is thus the only true way to ensure that goods are
provided free of VAT. While the zero rating and the exemption are
computationally the same, they actually differ in several aspects, to wit:
(a) A zero-rated sale is a taxable transaction but does not result in an output
tax while an exempted transaction is not subject to the output tax;
(b) The input VAT on the purchases of a VAT-registered person with zerorated
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. In this case, it is undisputed that respondent is engaged in the
export business and is registered as a VAT taxpayer per Certificate of
Registration of the BIR.[27] Further, the records show that the respondent is
subject to VAT as it availed of the income tax holiday under E.O. No. 226.
Perforce, respondent is subject to VAT at 0% rate and is entitled to a refund
or credit of the unutilized input taxes, which the Court of Tax Appeals
computed at P2,158,714.46, but which we find—after recomputation—
should be P2,158,714.52.
CIR vs. Seagate Technology (Phils) GR No. 153866 February 11, 2005
Topic: VAT > Zero-rated Sales & VAT-exempt Transactions > Exempt Persons
vs. Exempt Transactions
Doctrine:
Business companies registered in and operating from the Special Economic
Zone in Naga, Cebu -- like herein respondent -- are entities exempt from all
internal revenue taxes and the implementing rules relevant thereto,
including the value-added taxes or VAT. Although export sales are not
deemed exempt transactions, they are nonetheless zero-rated. Hence, in the
present case, the distinction between exempt entities and exempt
transactions has little significance, because the net result is that the taxpayer
is not liable for the VAT. Respondent, a VAT-registered enterprise, has
complied with all requisites for claiming a tax refund of or credit for the input
VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and
the Court of Appeals did not err in ruling that it is entitled to such refund or
credit.
Facts:
Respondent is a resident foreign corporation duly registered with the
Securities and Exchange Commission to do business in the Philippines and is
registered with the Philippine Export Zone Authority (PEZA). The respondent
is Value Added Tax-registered entity and filed for the VAT returns. An
administrative claim for refund of VAT input taxes in the amount of
P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04
VAT input taxes subject of this Petition for Review), was filed on 4 October
1999, but no final action has been received by the respondent from the
petitioner on the claim for VAT refund. CIR asserts that by virtue of the PEZA
registration alone of respondent, the latter is not subject to the VAT.
Consequently, the capital goods and services respondent has purchased are
not considered used in the VAT business, and no VAT refund or credit is due.
RULING OF THE CA:
The CA affirmed the Decision of the CTA granting the claim for refund or
issuance of a tax credit certificate (TCC) in favor of respondent in the reduced
amount of P12,122,922.66. This sum represented the unutilized but
substantiated input VAT paid on capital goods purchased for the period
covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the
fiscal incentives under Executive Order No. (EO) 226 (otherwise known as the
Omnibus Investment Code of 1987), not of those under both Presidential
Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent
was, therefore, considered exempt only from the payment of income tax
when it opted for the income tax holiday in lieu of the 5 percent preferential
tax on gross income earned. As a VAT-registered entity, though, it was still
subject to the payment of other national internal revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections
4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the input VAT
on the capital goods it purchased, respondent correctly filed the
administrative and judicial claims for its refund within the two-year
prescriptive period. Such payments were -- to the extent of the refundable
value -- duly supported by VAT invoices or official receipts, and were not yet
offset against any output VAT liability.
Issue:
Whether the purchase transactions entered into by Seagate are VAT exempt
because it is a VAT exempt entity pursuant PD 66 and RA 7916?
Held: No. Not VAT exempt.
Exempt Transaction >and Exempt Party
The object of exemption from the VAT may either be the transaction itself or
any of the parties to the transaction.
An exempt transaction, on the one hand, involves goods or services which,
by their nature, are specifically listed in and expressly exempted from the VAT
under the Tax Code, without regard to the tax status -- VAT-exempt or not --
of the party to the transaction.60 Indeed, such transaction is not subject to Since the purchases of respondent are not exempt from the VAT, the rate to
the VAT, but the seller is not allowed any tax refund of or credit for any input be applied is zero. Its exemption under both PD 66 and RA 7916 effectively
taxes paid. subjects such transactions to a zero rate, because the ecozone within which
it is registered is managed and operated by the PEZA as a separate customs
An exempt party, on the other hand, is a person or entity granted VAT
territory. This means that in such zone is created the legal fiction of foreign
exemption under the Tax Code, a special law or an international agreement
territory. Under the cross-border principle of the VAT system being enforced
to which the Philippines is a signatory, and by virtue of which its taxable
by the Bureau of Internal Revenue (BIR), no VAT shall be imposed to form
transactions become exempt from the VAT.61 Such party is also not subject
part of the cost of goods destined for consumption outside of the territorial
to the VAT, but may be allowed a tax refund of or credit for input taxes paid,
border of the taxing authority. If exports of goods and services from the
depending on its registration as a VAT or non-VAT taxpayer.
Philippines to a foreign country are free of the VAT, then the same rule holds
As mentioned earlier, the VAT is a tax on consumption, the amount of which for such exports from the national territory -- except specifically declared
may be shifted or passed on by the seller to the purchaser of the goods, areas -- to an ecozone.
properties or services. While the liability is imposed on one person, the
To summarize, special laws expressly grant preferential tax treatment to
burden may be passed on to another. Therefore, if a special law merely
business establishments registered and operating within an ecozone, which
exempts a party as a seller from its direct liability for payment of the VAT, but
by law is considered as a separate customs territory. As such, respondent is
does not relieve the same party as a purchaser from its indirect burden of
exempt from all internal revenue taxes, including the VAT, and regulations
the VAT shifted to it by its VAT-registered suppliers, the purchase transaction
pertaining thereto. It has opted for the income tax holiday regime, instead of
is not exempt. Applying this principle to the case at bar, the purchase
the 5 percent preferential tax regime. As a matter of law and procedure, its
transactions entered into by respondent are not VAT-exempt.
registration status entitling it to such tax holiday can no longer be
Special laws may certainly exempt transactions from the VAT. However, the questioned. Its sales transactions intended for export may not be exempt,
Tax Code provides that those falling under PD 66 are not. PD 66 is the but like its purchase transactions, they are zero-rated. No prior application
precursor of RA 7916 -- the special law under which respondent was for the effective zero rating of its transactions is necessary. Being VAT-
registered. The purchase transactions it entered into are, therefore, not VAT- registered and having satisfactorily complied with all the requisites for
exempt. These are subject to the VAT; respondent is required to register. claiming a tax refund of or credit for the input VAT paid on capital goods
purchased, respondent is entitled to such VAT refund or credit.
If respondent enters into such sales transactions with a purchaser -- usually
in a foreign country -- for use or consumption outside the Philippines, these
shall be subject to 0 percent. If entered into with a purchaser for use or
consumption in the Philippines, then these shall be subject to 10 percent,
unless the purchaser is exempt from the indirect burden of the VAT, in which
case it shall also be zero-rated.
Fort Bonifacio Development vs. CIR GR No. 158885 dated April 2, 2009
Topic: VAT > Zero-rated Sales & VAT-exempt Transactions > Transitional &
Presumptive Input Taxes
Facts:
At the outset, FBDC sought the refund of the total amount of
₱347,741,695.74 which it had itself paid in cash to the BIR.
This is a a Motion for Reconsideration on the Supreme Court Decision dated
April 2, 2009 which granted the consolidated petitions of petitioner Fort
Bonifacio Development Corporation, the dispositive portion of which reads:
WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court
of Tax Appeals and the Court of Appeals are REVERSED and SET ASIDE.
Respondents are hereby (1) restrained from collecting from petitioner the
amount of ₱28,413,783.00 representing the transitional input tax credit due
it for the fourth quarter of 1996; and (2) directed to refund to petitioner the
amount of ₱347,741,695.74 paid as output VAT for the third quarter of 1997
in light of the persisting transitional input tax credit available to petitioner for
the said quarter, or to issue a tax credit corresponding to such amount. No
pronouncement as to costs.
Issue:
Whether in the case of real estate dealers, the basis of the presumptive input
tax shall only be the improvements made?
Held: No.
The Supreme Court invalidated a provision of Revenue Regulations (RR) No.
07-95, which limits the application of the 8-percent transitional-input tax to
inventory consisting of improvements only, and not to the total value of lot
inventory, in the case of real-estate dealers. The court emphasized that the
law which RR 07-95 seeks to implement did not make any differentiation
between the treatment of a real-estate dealer from those engaged in other
transactions such as, for example, sellers of commercial goods. Thus, there is
no basis for the BIR to make that differentiation for real-estate dealers in the
implementing regulation. The Court noted that the common standard for the
application of the transitional input tax credit, as enacted by EO 273 and all
subsequent tax laws which reinforced or reintegrated the tax credit, is simply
that the taxpayer in question has become liable to VAT or has elected to be
a VAT registered person.
It is apparent that the transitional input tax credit operates to benefit newly
VAT-registered persons, whether or not they previously paid taxes in the
acquisition of their beginning inventory of goods, materials and supplies.
During that period of transition from non-VAT to VAT status, the transitional
input tax credit serves to alleviate the impact of the VAT on the taxpayer. At
the very beginning, the VAT-registered taxpayer is obliged to remit a
significant portion of the income it derived from its sales as output VAT. The
transitional input tax credit mitigates this initial diminution of the taxpayer’s
income by affording the opportunity to offset the losses incurred through the
remittance of the output VAT at a stage when the person is yet unable to
credit input VAT payments.
As pointed out in Our Decision of April 2, 2009, to give Section 105 a
restrictive construction that transitional input tax credit applies only when
taxes were previously paid on the properties in the beginning inventory and
there is a law imposing the tax which is presumed to have been paid, is to
impose conditions or requisites to the application of the transitional tax input
credit which are not found in the law. The courts must not read into the law
what is not there. To do so will violate the principle of separation of powers
which prohibits this Court from engaging in judicial legislation.
The amendatory provision of Section 105 of the NIRC, as introduced by RA
7716, states:
Sec. 105. Transitional Input tax Credits. – A person who becomes liable to
value-added tax or any person who elects to be a VAT-registered person shall,
subject to the filing of an inventory as prescribed by regulations, be allowed
input tax on his beginning inventory of goods, materials and supplies
equivalent to 8% of the value of such inventory or the actual value-added tax
paid on such goods, materials and supplies, whichever is higher, which shall
be creditable against the output tax.
The term "goods or properties" by the unambiguous terms of Section 100
includes "real properties held primarily for sale to costumers or held for lease
in the ordinary course of business." Having been defined in Section 100 of
the NIRC, the term "goods" as used in Section 105 of the same code could
not have a different meaning. This has been explained in the Decision dated
April 2, 2009, thus:

Under Section 105, the beginning inventory of "goods" forms part of the
valuation of the transitional input tax credit. Goods, as commonly
understood in the business sense, refers to the product which the VAT-
registered person offers for sale to the public. With respect to real estate
dealers, it is the real properties themselves which constitute their "goods."
Such real properties are the operating assets of the real estate dealer.