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COMMISSIONER OF INTERNAL REVENUE vs.

MAGSAYSAY LINES

FACTS: Pursuant to a government program of privatization, The NDC decided to sell in one lot its NMC shares and five (5)
of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels.1 The vessels were constructed for the NDC
between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary.
Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC. 2 The NMC shares and the vessels
were offered for public bidding. Among the stipulated terms and conditions for the public auction was that the winning
bidder was to pay "a value added tax of 10% on the value of the vessels."3 On 3 June 1988, private respondent Magsaysay
Lines, Inc. (Magsaysay Lines) offered to buy the shares and the vessels for P168,000,000.00. The bid was made by
Magsaysay Lines, purportedly for a new company still to be formed composed of itself and was approved by the
Committee on Privatization, and a Notice of Award dated 1 July 1988 was issued to Magsaysay Lines who in turn was
assessed of VAT through VAT Ruling No. 568-88 dated 14 December 1988 from the BIR, holding that 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].

CTA ruled that


the sale of a vessel was an "isolated transaction," not done in the ordinary course of NDCs 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.
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.
Finally, the CTA ruled that any case of doubt should be resolved in favor of private respondents
since Section 99 of the Tax Code which implemented VAT is not an exemption provision,
but a classification provision which warranted the resolution of doubts in favor of the taxpayer.
Hence CIR appealed the CTA Decision.

ISSUE:

Whether the sale by the National Development Company (NDC) of five (5) of its vessels to the private respondents
is subject to value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax Code)
then prevailing at the time of the sale. The facts are culled primarily from the ruling of the CTA.

HELD: NOT SUBJECT TO VAT.

VAT is ultimately a tax on consumption,


even though it is assessed on many levels of transactions on the basis of a fixed percentage.15
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 16
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).17
The final purchase by the end consumer represents the final link in a production chain
that itself involves several transactions and several acts of consumption.
The VAT system assures fiscal adequacy through the collection of taxes on every level of consumption, 18
yet assuages the manufacturers or providers of goods and services by enabling them
to pass on their respective VAT liabilities to the next link of the chain
until finally the end consumer shoulders the entire tax liability.

Yet VAT is not a singular-minded tax on every transactional level.


Its assessment bears direct relevance to the taxpayers role or link in the production chain.
Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations, 19
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.

That the sale of the vessels was not in the ordinary course of trade or business of NDC
was appreciated by both the CTA and the Court of Appeals, the latter doing so
even in its first decision which it eventually reconsidered.20

We cite with approval the CTAs explanation on this point:


In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992),
the term "carrying on business" does not mean the performance of a single disconnected act,
but means conducting, prosecuting and continuing business
by performing progressively all the acts normally incident thereof;
while "doing business" conveys the idea of business being done,
not from time to time, but all the time.
"Course of business" is what is usually done in the management of trade or business

Court explained that


"course of business" or "doing business" connotes regularity of activity.
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.21

This finding is confirmed by the Revised Charter22 of the NDC


which bears no indication that the NDC was created for the primary purpose of selling real property.
The conclusion that - the sale was not in the course of trade or business,
which the CIR does not dispute before this Court, should have definitively settled the matter.

Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT.
Accordingly, the Court rules that - given the undisputed finding that
the transaction in question was not made in the course of trade or business of the seller, NDC that is,
the sale is not subject to VAT pursuant to Section 99 of the Tax Code,
no matter how the said sale may hew to those transactions deemed sale
as defined under Section 100. Petition Denied.

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners, vs.


THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents.
[G.R. No. 193007 July 19, 2011]

FACTS:

Renato V. Diaz and Aurora Ma. F. Timbol filed this petition for declaratory relief
assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR)
on the collections of tollway operators.

Petitioners claim that, since the VAT would result in increased toll fees,
they have an interest as regular users of tollways in stopping the BIR action.
They hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees
within the meaning of "sale of services" that are subject to VAT; that a toll fee is a "users tax," not a sale of services;
that to impose VAT on toll fees would amount to a tax on public service;
and that, since VAT was never factored into the formula for computing toll fees,
its imposition would violate the non-impairment clause of the constitution.

The Office of the Solicitor General filed the governments comment. The government avers that the NIRC imposes VAT on all
kinds of services of franchise grantees, including tollway operations, except where the law provides otherwise;
that the Court should seek the meaning and intent of the law from the words used in the statute;
and that the imposition of VAT on tollway operations has been the subject
as early as 2003 of several BIR rulings and circulars.

The government also argues that petitioners have no right to invoke the non-impairment of contracts clause since they clearly
have no personal interest in existing toll operating agreements (TOAs) between the government and tollway operators. At
any rate, the non-impairment clause cannot limit the States sovereign taxing power which is generally read into contracts.

Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing toll rates
cannot exempt tollway operators from VAT. In any event, it cannot be claimed that
the rights of tollway operators to a reasonable rate of return will be impaired by the VAT
since this is imposed on top of the toll rate.
Further, the imposition of VAT on toll fees would have very minimal effect on motorists using the tollways.

In their reply to the governments comment, petitioners point out that tollway operators cannot be regarded as franchise
grantees under the NIRC since they do not hold legislative franchises.

ISSUES:

1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators and tollway operations
in the terms "franchise grantees" and "sale of services" under Section 108 of the Code

2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax on services; b) will impair
the tollway operators right to a reasonable return of investment under their TOAs; and c) is not administratively feasible
and cannot be implemented.

SC RULING:

I
VAT is levied, assessed, and collected, according to Section 108, on the gross receipts
derived from the sale or exchange of services as well as from the use or lease of properties.
The third paragraph of Section 108 defines "sale or exchange of services" as follows:

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, resthouses, 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.

It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the Philippines for a fee, including
those specified in the list. The enumeration of affected services is not exclusive.
By qualifying "services" with the words "all kinds," Congress has given the term "services" an all-encompassing meaning.

The listing of specific services are intended to illustrate how pervasive and broad is the VATs reach
rather than establish concrete limits to its application. Thus, every activity that can be imagined as
a form of "service" rendered for a fee should be deemed included unless some provision of law especially excludes it.

Now, do tollway operators render services for a fee?


Presidential Decree (P.D.) 1112 or the Toll Operation Decree establishes the legal basis
for the services that tollway operators render.
Essentially, tollway operators construct, maintain, and operate exprlessways, also called tollways,
at the operators expense. Tollways serve as alternatives to regular public highways
that meander through populated areas and branch out to local roads.
Traffic in the regular public highways is for this reason slow-moving.
In consideration for constructing tollways at their expense,
the operators are allowed to collect government-approved fees from motorists using the tollways
until such operators could fully recover their expenses and earn reasonable returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of the tollway facilities over
which the operator enjoys private proprietary rights that its contract and the law recognize.
In this sense, the tollway operator is no different from the following service providers under Section 108
who allow others to use their properties or facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;

5. Lending investors (for use of money);

6. Transportation contractors on their transport of 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; and

7. 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.

It does not help petitioners cause that


Section 108 subjects to VAT "all kinds of services" rendered for a fee
"regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties."
This means that "services" to be subject to VAT
need not fall under the traditional concept of services,
the personal or professional kinds that require the use of human knowledge and skills.

And not only do tollway operators come under the broad term "all kinds of services,"
they also come under the specific class described in Section 108 as
"all other franchise grantees" who are subject to VAT,
"except those under Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions
(the low-income radio and/or television broadcasting companies with gross annual incomes of less than P10 million
and gas and water utilities) that Section 11913 spares from the payment of VAT.

The word "franchise" broadly covers government grants of a special right to do an act or series of acts of public concern.
It has been broadly construed as referring, not only to authorizations that Congress directly issues
in the form of a special law, but also to those granted by administrative agencies
to which the power to grant franchises has been delegated by Congress.

Thus, tollway operators are, owing to the nature and object of their business, "franchise grantees."

II

Petitioners argue that a toll fee is a "users tax" and to impose VAT on toll fees is tantamount to taxing a tax.21
Actually, petitioners base this argument on the following discussion in
Manila International Airport Authority (MIAA) v. Court of Appeals.
Petitioners assume that what the Court said above, equating terminal fees to a "users tax"
must also pertain to tollway fees.

Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR
and do not go to the general coffers of the government.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense.

A tax is imposed under the taxing power of the government principally


for the purpose of raising revenues to fund public expenditures.
Toll fees, on the other hand, are collected by private tollway operators
as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways,
as well as to assure them a reasonable margin of income.

Taxes may be imposed only by the government under its sovereign authority,
toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership.

VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax.
In indirect taxation, a distinction is made between the liability for the tax and burden of the tax.
The seller who is liable for the VAT may shift or pass on the amount of VAT
it paid on goods, properties or services to the buyer. In such a case,
what is transferred is not the sellers liability but merely the burden of the VAT.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway operator.
Under Section 105 of the Code,
VAT is imposed on any person who, in the course of trade or business, sells or renders services for a fee.
In other words, the seller of services, who in this case is the tollway operator, is the person liable for VAT.
The latter merely shifts the burden of VAT to the tollway user as part of the toll fees.

For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a "users tax." VAT is
assessed against the tollway operators gross receipts and not necessarily on the toll fees. Although the tollway operator
may shift the VAT burden to the tollway user, it will not make the latter directly liable for the VAT. The shifted VAT burden
simply becomes part of the toll fees that one has to pay in order to use the tollways.

Conclusion: No usurpation by CIR of legislative prerogative or expand the VAT laws coverage
when she sought to impose VAT on tollway operations. The petition is denied.

COMMISSIONER OF INTERNAL REVENUE (CIR), Petitioner, vs.


SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT CORPORATION, Respondents,
[GR No. 183505, February 26, 2010]
FACTS:

The Supreme Court (SC) made this preliminary statement:


When the intent of the law is not apparent as worded,
or when the application of the law would lead to absurdity or injustice,
legislative history is all important.
In such cases, courts may take judicial notice of the origin and history of the law,
the deliberations during the enactment, as well as prior laws on the same subject matter
to ascertain the true intent or spirit of the law.
Both SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development Corporation (First Asia),
respondents in this case, are domestic corporations duly organized and existing under the laws of the Philippines,
engaged in the business of operating cinema houses, among other undertakings.
The BIR seeks to collect VAT deficiency from the gross receipts derived from admission tickets
by cinema/theater operators or proprietors.

ISSUES:

Petitioner CIR alleges that the CTA En Banc seriously erred:

1. In not finding/holding that - the gross receipts received by operators/proprietors of cinema houses from admission tickets
are subject to the 10% VAT because
(a) the exhibition of movies by cinema operators/proprietors to the paying public is a sale of service;

(b) unless exempted by law,


all sales of services are expressly subject to VAT under section 108 of the NIRC of 1997;

(c) section 108 of the NIRC of 1997 is a clear provision of law


and the application of rules of statutory construction and extrinsic aids is unwarranted;

(d) granting without conceding that rules of construction are applicable herein,
still the Honorable Court erroneously applied the same and promulgated dangerous precedents;

(e) there is no valid, existing provision of law exempting respondents services


from the VAT imposed under Section 108 of the NIRC of 1997;

(f) questions on the wisdom of the law are not proper issues to be tried by the Honorable Court; and

(g) respondents were taxed based on the provision of Section 108 of the NIRC.

2. In ruling that the enumeration in Section 108 is exhaustive in coverage;

3. In misconstruing the NIRC of 1997 to conclude that the showing of motion pictures
is merely subject to the amusement tax imposed by the Local Government Code (LGC); and

4. In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.

In a nutshell, the 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 claims that the CTA erred in applying the rules on statutory construction and in using extrinsic aids in interpreting Section
108 because the provision is clear and unambiguous. Thus, he maintains that the exhibition of movies by cinema operators
or proprietors to the paying public, being a sale, is subject to
VAT.

Upon the other hand, respondents argue that a plain reading of Section 108 on the NIRC of 1997 shows that the gross receipts
of proprietors or operators of cinemas/theater derived from 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 the legislative intent. Respondents also highlight the fact that RMC No. 28-2001 on which the deficiency
assessments were based is an unpublished administrative ruling.

HELD:

The enumeration of services subject to VAT under Section 108 of the NIRC is not exhaustive
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
The SC denied the petition of CIR, ruling that:

Among those included in the enumeration is the lease of motion picture films, films, tapes and discs.
This, however, is not the same as the showing or exhibition of motion pictures or films.

A history of the precedents involving the present provisions of laws being considered led the Court to declare that
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 remain with the local government.

The Court likewise struck down RMC No. 28-2001 considering that there is no provision of law imposing VAT
on the gross receipts of cinema/theater operators or proprietors derived from admission tickets.
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.

CIR VS BURMEISTER & WAIN SCANDINAVIAN CONTRACTOR MINDANAO


By: Yin Oliveros

FACTS:
Burmeister is a domestic corporation.
A foreign consortium was formed between BWSC-Denmark, Mitsui Engineering and Shipbuilding,
and Mitsui and Co. It entered into a contract with NAPOCOR
for the operation & maintenance of two power barges.

BWSC-Denmark established Burmeister which subcontracted the actual operation and maintenance
of NAPOCORs two power barges as well as the performance of other duties and acts
which necessarily have to be done in the Philippines

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and Peso).
The freely convertible non-Peso component is deposited directly to the Consortiums bank accounts
in Denmark and Japan, while the Peso-denominated component is deposited
in a separate and special designated bank account in the Philippines.
On the other hand, the Consortium pays Burmeister in foreign currency
inwardly remitted to the Philippines through the banking system.
In order to ascertain the tax implications of the above transactions, Burmeister sought a ruling from the BIR.
It declared that - if Burmeister chooses to register as a VAT person
and the consideration for its services is paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas,
the aforesaid services shall be subject to VAT at zero-rate. Burmeister then chose to register as a VAT Tax payer.

For the year 1996, Burmeister seasonably filed its quarterly Value-Added Tax Returns reflecting, among others,
a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14.

In 1997 Burmeister availed of the Voluntary Assessment Program (VAP) of the BIR.
It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case.

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to
read as follows:
Section 4.102-2(b)(2) "Services other than processing, manufacturing or repacking for other
persons doing business outside the Philippines for goods which are subsequently exported, as
well as services by a resident to a non-resident foreign client such as project studies,
information services, engineering and architectural designs and other similar services, the
consideration for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP."

In conformity with the aforecited Revenue Regulations,


Burmeister subjected its sale of services to the Consortium to the 10% VAT in the total amount of P103,558,338.11
representing April to December 1996 sales
since said Revenue Regulations No. 5-96 became effective only on April 1996.
The sum of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate.

In 1999, Burmeister secured a ruling form the VAT committee saying that the services of Burmeister is really VAT-Free.
In short, it affirmed the ruling of BIR.
Burmeister now filed a claim for the issuance of a tax credit certificate with BIR.
Burmeister believed that it erroneously paid the output VAT for 1996
due to its availment of the Voluntary Assessment Program (VAP) of the BIR.
(kanang ruling pag-1997 nga ni-ana ang BIR nga bayad sila VAT)

CTA and CA ruled in favor of Burmeister.

ISSUE:
Whether or not Burmeister is entitled to a tax credit?

RULING:
Section 102(b) of the Tax Code, the applicable provision in 1996
when respondent rendered the services and paid the VAT in question,
enumerates which services are zero-rated, thus:

(b) Transactions subject to zero-rate. The following services performed in the Philippines by VAT-registered persons
shall be subject to 0%:

(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);
(2) Services other than those mentioned in the preceding sub-paragraph, 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);
(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 rate;
(4) Services rendered to vessels engaged exclusively in international shipping; and
(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

Another essential condition for qualification to zero-rating under Section 102(b)(2) is that
the recipient of such services is doing business outside the Philippines.

While this requirement is not expressly stated in the second paragraph of Section 102(b),
this is clearly provided in the first paragraph of Section 102(b) where the listed services must be
"for other persons doing business outside the Philippines."

The phrase "for other persons doing business outside the Philippines" not only refers to
the services enumerated in the first paragraph of Section 102(b),
but also pertains to the general term "services" appearing in the second paragraph of Section 102(b).

In short, services other than processing, manufacturing, or repacking of goods


must likewise be performed for persons doing business outside the Philippines.

If the provider and recipient of the "other services" are both doing business in the Philippines,
the payment of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a)
can avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services.

In this case, the payer-recipient of respondents services is the Consortium


which is a joint-venture doing business in the Philippines.
While the Consortiums principal members are non-resident foreign corporations,
the Consortium itself is doing business in the Philippines.

Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power barges in the Philippines.
NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency outwardly remitted.

In turn, the Consortium pays respondent also in foreign currency inwardly remitted
and accounted for in accordance with BSP rules.
This payment scheme does not entitle respondent to 0% VAT.

PETITION DENIED. NOT BECAUSE - BURMEISTER IS SUBJECT TO 0% VAT


BUT BECAUSE on the non-retroactivity of the prejudicial revocation -
of BIR Ruling No. 023-9517 and VAT Ruling No. 003-99,18
which held that respondents services are subject to 0% VAT
and which respondent invoked in applying for refund of the output VAT.

CIR v. PROFESSIONAL SERVICES (to follow)


PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) VS. BIR
[G.R. No. 172087, March 15, 2011]

FACTS:

PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A[2] on January 1, 1977.
Simultaneous to its creation, P.D. No. 1067-B[3] (supplementing P.D. No. 1067-A) was issued
exempting PAGCOR from the payment of any type of tax,
except a franchise tax of five percent (5%) of the gross revenue.[4]
Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's exemption.

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 1869[6] was issued.

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931,
but it was later restored by Letter of Instruction No. 1430, which was issued in September 1984.

On January 1, 1998, R.A. No. 8424,[8] otherwise known as the National Internal Revenue Code of 1997, took effect.
Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations (GOCCs)
shall pay corporate income tax, except petitioner PAGCOR, the Government Service and Insurance Corporation,
the Social Security System, the Philippine Health Insurance Corporation, and the Philippine Charity Sweepstakes Office

With the enactment of R.A. No. 9337[10] on May 24, 2005, certain sections of the National Internal Revenue Code of 1997
were amended. The particular amendment that is at issue in this case is Section 1 of R.A. No. 9337, which amended
Section 27 (c) of the National Internal Revenue Code of 1997 by excluding PAGCOR from the enumeration of GOCCs that
are exempt from payment of corporate income tax

Subsequently, respondent BIR issued Revenue Regulations (RR) No. 16-2005,[13] specifically identifying PAGCOR as one of the
franchisees subject to 10% VAT imposed under Section 108 of the National Internal Revenue Code of 1997, as amended by
R.A. No. 9337. The said revenue regulation, in part, reads:
Sec. 4. 108-3. Definitions and Specific Rules on Selected Services.

xxxx

(h) x x x

Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless of how their
franchisees may have been granted, shall be subject to the 10% VAT imposed under Sec.108 of the Tax Code. This includes,
among others, the Philippine Amusement and Gaming Corporation (PAGCOR), and its licensees or franchisees.

Hence, the present petition for certiorari.

The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of Comment,[16] concurred with the arguments
of the petitioner. It added that although the State is free to select the subjects of taxation and that the inequity resulting
from singling out a particular class for taxation or exemption is not an infringement of the constitutional limitation, a tax
law must operate with the same force and effect to all persons, firms and corporations placed in a similar situation.
Furthermore, according to the OSG, public respondent BIR exceeded its statutory authority when it enacted RR No. 16-
2005, because the latter's provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.

ISSUE:

Whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment of R.A. No. 9337?

RULING:

After a careful study of the positions presented by the parties, the Court finds the petition partly meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1977,
petitioner is no longer exempt from corporate income tax as it has been effectively omitted from the list of GOCCs
that are exempt from it.

Petitioner argues that such omission is unconstitutional,


as it is violative of its right to equal protection of the laws under Section 1, Article III of the Constitution:

Legislative bodies are allowed to classify the subjects of legislation. If the classification is reasonable,
the law may operate only on some and not all of the people without violating the equal protection clause.
The classification must, as an indispensable requisite, not be arbitrary.

To be valid, it must conform to the following requirements:


1) It must be based on substantial distinctions.
2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class.

It is not contested that before the enactment of R.A. No. 9337,


petitioner was one of the five GOCCs exempted from payment of corporate income tax
as shown in R.A. No. 8424, Section 27 (c)

A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways on Means dated
October 27, 1997 would show that the exemption of PAGCOR from the payment of corporate income tax was due to the
acquiescence of the Committee on Ways on Means to the request of PAGCOR that it be exempt from such tax.

The discussion of the committee bears out that under R.A. No. 8424, the exemption of PAGCOR from paying corporate
income tax was not based on a classification showing substantial distinctions which make for real differences, but to
reiterate, the exemption was granted upon the request of PAGCOR that it be exempt from the payment of corporate
income tax.

With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424,
PAGCOR has been excluded from the enumeration of GOCCs that are exempt from paying corporate income tax.
The records of the Bicameral Conference Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of
Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR be subject to the payment
of corporate income tax,

Taxation is the rule and exemption is the exception.


The burden of proof rests upon the party claiming exemption to prove that it is, in fact, covered by the exemption so
claimed. As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist clearly
and categorically, and supported by clear legal provision.

In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income tax,
considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal Revenue Code of 1997
by omitting PAGCOR from the exemption. The legislative intent, as shown by the discussions in the Bicameral Conference
Meeting, is to require PAGCOR to pay corporate income tax; hence, the omission or removal of PAGCOR from exemption
from the payment of corporate income tax. It is a basic precept of statutory construction that the express mention of one
person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius. Thus, the express mention of the GOCCs exempted from payment of corporate income tax excludes all others.

Not being excepted, petitioner PAGCOR must be regarded as coming within the purview of the general rule that GOCCs shall
pay corporate income tax, expressed in the maxim: exceptio firmat regulam in casibus non exceptis.

PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the Bicameral
Conference Meeting dated October 27, 1997, of the Committee on Ways and Means, show that PAGCOR's exemption from
payment of corporate income tax, as provided in Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of
1997, was not made pursuant to a valid classification based on substantial distinctions and the other requirements of a
reasonable classification by legislative bodies, so that the law may operate only on some, and not all, without violating the
equal protection clause. The legislative records show that the basis of the grant of exemption to PAGCOR from corporate
income tax was PAGCOR's own request to be exempted.

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the non-impairment
clause of the Constitution. Petitioner avers that laws form part of, and is read into, the contract even without the parties
expressly saying so. Petitioner states that the private parties/investors transacting with it considered the tax exemptions,
which inure to their benefit, as the main consideration and inducement for their decision to transact/invest with it.
Petitioner argues that the withdrawal of its exemption from corporate income tax by R.A. No. 9337 has the effect of
changing the main consideration and inducement for the transactions of private parties with it; thus, the amendatory
provision is violative of the non-impairment clause of the Constitution.

Petitioner's contention lacks merit.

The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides that no law impairing the
obligation of contracts shall be passed. The non-impairment clause is limited in application to laws that derogate from
prior acts or contracts by enlarging, abridging or in any manner changing the intention of the parties. There is impairment
if a subsequent law changes the terms of a contract between the parties, imposes new conditions, dispenses with those
agreed upon or withdraws remedies for the enforcement of the rights of the parties.

As regards franchises, Section 11, Article XII of the Constitution provides that no franchise or right shall be granted except
under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good
so requires.

In Manila Electric Company v. Province of Laguna, the Court held that a franchise partakes the nature of a grant, which is
beyond the purview of the non-impairment clause of the Constitution.

In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and other recreation or
amusement places, sports, gaming pools, i.e., basketball, football, lotteries, etc., whether on land or sea, within the
territorial jurisdiction of the Republic of the Philippines. Under Section 11, Article XII of the Constitution, PAGCOR's
franchise is subject to amendment, alteration or repeal by Congress such as the amendment under Section 1 of R.A. No.
9377. Hence, the provision in Section 1 of R.A. No. 9337, amending Section 27 (c) of R.A. No. 8424 by withdrawing the
exemption of PAGCOR from corporate income tax, which may affect any benefits to PAGCOR's transactions with private
parties, is not violative of the non-impairment clause of the Constitution.

Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT is invalid for being
contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to VAT. R.A. No. 9337 is
clear only as to the removal of petitioner's exemption from the payment of corporate income tax, which was already
addressed above by this Court.

As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k) thereof, which
reads:

Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:

Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be
exempt from the value-added tax:

xxxx

(k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special
laws, except Presidential Decree No. 529. [37]

Petitioner is exempt from the payment of VAT, because PAGCOR's charter, P.D. No. 1869, is a special law that grants
petitioner exemption from taxes. Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No.
9337, which retained Section 108 (B) (3) of R.A. No. 8424, thus:

[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further amended to read as
follows:
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: x x x

xxxx

(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;

xxxx

(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;

xxxx

As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No. 8424 by imposing VAT
on other services not previously covered, it did not amend the portion of Section 108 (B) (3) that subjects to zero percent
rate services performed by VAT-registered persons 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 0% rate.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and extensively discussed
in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation.[39] Acesite was the owner and operator of
the Holiday Inn Manila Pavilion Hotel. It leased a portion of the hotel's premises to PAGCOR. It incurred VAT amounting to
P30,152,892.02 from its rental income and sale of food and beverages to PAGCOR from January 1996 to April 1997. Acesite
tried to shift the said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR. However, PAGCOR refused
to pay the taxes because of its tax-exempt status. PAGCOR paid only the amount due to Acesite minus VAT in the sum of
P30,152,892.02. Acesite paid VAT in the amount of P30,152,892.02 to the Commissioner of Internal Revenue, fearing the
legal consequences of its non-payment. In May 1998, Acesite sought the refund of the amount it paid as VAT on the
ground that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. The Court
ruled that PAGCOR and Acesite were both exempt from paying VAT, thus:

xxxx

Petitioner contends that the tax exemption refers only to PAGCOR's direct tax liability and not to indirect taxes, like the
VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether
the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as
follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to PAGCOR. Although the
law does not specifically mention PAGCOR's exemption from indirect taxes, PAGCOR is undoubtedly exempt from such
taxes because the law exempts from taxes persons or entities contracting with PAGCOR in casino operations. Although,
differently worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting
tax exempt status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is
not liable for the P30, 152,892.02 VAT and neither is Acesite as the latter is effectively subject to zero percent rate under
Sec. 108 B (3), R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted
exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be shifted or
passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by extending the tax
exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being liable to
indirect taxes.
It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the
basic law prevails, because the said rule or regulation cannot go beyond the terms and provisions of the basic law. RR No.
16-2005, therefore, cannot go beyond the provisions of R.A. No. 9337. Since PAGCOR is exempt from VAT under R.A. No.
9337, the BIR exceeded its authority in subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the said regulatory
provision is hereby nullified.

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27 (c) of the National
Internal Revenue Code of 1997, by excluding petitioner Philippine Amusement and Gaming Corporation from the
enumeration of government-owned and controlled corporations exempted from corporate income tax is valid and
constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for
being contrary to the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.

SO ORDERED.

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