TAXATION LAW REVIEW

I. TRANSFER TAXES

A. ESTATE TAX

COLLECTOR OF INTERNAL REVENUE V. FISHER

GR. No. L-11622, January 28, 1961

DOCTRINE: Reciprocity must be total. If any of the two states collects or imposes or does not
exempt any transfer, death, legacy or succession tax of any character, the reciprocity does not
work.

FACTS:
• Walter G. Stevenson was born in the Philippines of British parents, married in Manila to
another Britsh subject, Beatrice. He died in 1951 in California where he and his wife moved
to. In his will, he instituted Beatrice as his sole heiress to certain real and personal
properties, among which are 210,000 shares of stocks in Mindanao Mother Lode Mines
(Mines).
• Ian Murray Statt (Statt), the appointed ancillary administrator of his estate filed an estate
and inheritance tax return.
• He made a preliminary return to secure the waiver of the CIR on the inheritance of the
Mines shares of stock.
• In 1952, Beatrice assigned all her rights and interests in the estate to the spouses Fisher.
Statt, filed an amended estate and inheritance tax return claiming additional exceptions,
one of which is the estate and inheritance tax on the Mines‘ shares of stock pursuant to a
reciprocity proviso in the NIRC, hence, warranting a refund from what he initially paid. The
collector denied the claim. He then filed in the CFI of Manila for the said amount.
• CFI ruled that:
• a) The 1/2 share of Beatrice should be deducted from the net estate of Walter;
• b) The intangible personal property belonging to the estate of Walter is exempt from
inheritance tax pursuant to the reciprocity proviso in NIRC.

ISSUE: Whether or not the estate can avail itself of the reciprocity proviso in the NIRC granting
exception from the payment of taxes for the Mines shares of stock.

HELD:
• NO. Reciprocity must be total. If any of the two states collects or imposes or does not
exempt any transfer, death, legacy or succession tax of any character, the reciprocity does
not work.
• In the Philippines, upon the death of any citizen or resident, or non-resident with
properties, they are imposed upon his estate, both an estate and an inheritance tax.
• But, under the laws of California, only inheritance tax is imposed. Also, although the
Federal Internal Revenue Code imposes an estate tax, it does not grant exemption based
on reciprocity. Thus, a Filipino Citizen shall always be at a disadvantage. This is not what
the legislators intended. Specifically, Section 122 of the NIRC provides that ―No tax shall
be collected under this title in respect of intangible personal property:
• a) if the decedent at the time of his death was a resident of a foreign country which at the
same of his death did not impose a transfer of tax or death tax of any character in respect
of intangible personal property of citizens of the Philippines not residing in that foreign
country, or
• b) if the laws of the foreign country of which the decedent was a resident at the time of his
death allow a similar exemption from transfer taxes or death taxes of every character in
 respect of intangible personal property owned by citizens of the Philippines not residing in
that foreign country, or
• On the other hand, Section 13851 of the California Inheritance Tax Law provides that
intangible personal property is exempt from tax if the decedent at the time of his death
was: a resident of a territory of another State of the United States; or of a foreign state or
country which then imposed a legacy, succession, or death tax in respect to intangible
personal property of its own residents, but either:
• 1) did not impose a legacy, succession, or death tax of any character in respect to
intangible personal property of residents of this State; or
• 2) had in its laws a reciprocal provision under which intangible personal property of a
nonresident was exempt from legacy, succession, or death taxes of every character if the
territory; or other State of the United States; or foreign state or country in which the
nonresident resided allowed a similar exemption in respect to intangible personal property
of residents of the territory or State of the United States or foreign state or country of
residence of the decedent.

DIZON v CTA
G.R. No. 140944 April 30, 2008

FACTS:
• On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate
of his will was filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate
court). The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon
(Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and
Assistant Special Administrator, respectively, of the Estate of Jose (Estate).
• Petitioner alleged that several requests for extension of the period to file the required
estate tax return were granted by the BIR since the assets of the estate, as well as the
claims against it, had yet to be collated, determined and identified.

ISSUES:
1. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of
evidence which were not formally offered by the BIR; and
2. Whether the actual claims of the aforementioned creditors may be fully allowed as
deductions from the gross estate of Jose despite the fact that the said claims were reduced
or condoned through compromise agreements entered into by the Estate with its creditors
Or Whether or not the CA erred in affirming the CTA in the latter's determination of the
deficiency estate tax imposed against the Estate.

HELD:
1. Yes. While the CTA is not governed strictly by technical rules of evidence, as rules of
procedure are not ends in themselves and are primarily intended as tools in the
administration of justice, the presentation of the BIR's evidence is not a mere procedural
technicality which may be disregarded considering that it is the only means by which the
CTA may ascertain and verify the truth of BIR's claims against the Estate. The BIR's failure
to formally offer these pieces of evidence, despite CTA's directives, is fatal to its cause.

2. Yes. The claims existing at the time of death are significant to, and should be made the
basis of, the determination of allowable deductions. Also, as held in Propstra v. U.S., where
a lien claimed against the estate was certain and enforceable on the date of the decedent's
death, the fact that the claimant subsequently settled for lesser amount did not preclude
the estate from deducting the entire amount of the claim for estate tax purposes. This is
called the date-of-death valuation rule.
B. DONOR'S TAX

Abella v. CIR
G.R. No. 120721, February 23, 2005, Azcuna, J.:

FACTS:
• During the 1987 national elections, petitioners, who are partners in the Angara, Abello,
Concepcion, Regala and Cruz (ACCRA) law firm, contributed ₱882,661.31 each to the
campaign funds of Senator Edgardo Angara, then running for the Senate.
• In letters dated April 21, 1988, the Bureau of Internal Revenue (BIR) assessed each of the
petitioners ₱263,032.66 for their contributions. On August 2, 1988, petitioners questioned
the assessment through a letter to the BIR. They claimed that political or electoral
contributions are not considered gifts under the National Internal Revenue Code (NIRC),
and that, therefore, they are not liable for donor‘s tax. The claim for exemption was denied
by the Commissioner.
• As per Solicitor General, the fact that the contributions were given to be used as campaign
funds of Sen. Angara does not affect the character of the fund transfers as donation or gift.
There was thereby no retention of control over the disposition of the contributions. There
was simply an indication of the purpose for which they were to be used. For as long as the
contributions were used for the purpose for which they were intended, Sen. Angara had
complete and absolute power to dispose of the contributions.
• He was fully entitled to the economic benefits of the contributions.

ISSUES:
1. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER IN ITS
DECISION THE PURPOSE BEHIND THE ENACTMENT OF OUR GIFT TAX LAW?
2. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE INTENTION OF
THE GIVERS IN DETERMINING WHETHER OR NOT THE PETITIONERS‘ POLITICAL
CONTRIBUTIONS WERE GIFTS SUBJECT TO DONORS TAX?
3. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE AMERICAN
JURISPRUDENCE RELIED UPON BY THE COURT OF TAX APPEALS AND BY THE PETITIONERS
TO THE EFFECT THAT POLITICAL CONTRIBUTIONS ARE NOT TAXABLE GIFTS?
4. DID THE HONORABLE COURT OF APPEALS ERR IN NOT APPLYING AMERICAN
JURISPRUDENCE ON THE GROUND THAT THIS WAS NOT KNOWN AT THE TIME THE
PHILIPPINES GIFT TAX LAW WAS ADOPTED IN 1939?
HELD:

1. For ISSUES 1, 3 & 4. NO.

• Section 91 of the National Internal Revenue Code (NIRC) reads:
• a. There shall be levied, assessed, collected and paid upon the transfer by any person,
resident or nonresident, of the property by gift, a tax, computed as provided in Section 92
• b. The tax shall apply whether the transfer is in trust or otherwise, whether the gift is
direct or indirect, and whether the property is real or personal, tangible or intangible. The
NIRC does not define transfer of property by gift.
• However, Article 18 of the Civil Code, states: In matters which are governed by the Code of
Commerce and special laws, their deficiency shall be supplied by the provisions of this
Code. Thus, reference may be made to the definition of a donation in the Civil Code. Article
725 of said Code defines donation as: . . . an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another, who accepts it. Donation has the
following elements:
i. the reduction of the patrimony of the donor;
ii. the increase in the patrimony of the donee; and
iii. the intent to do an act of liberality or animus donandi.
 • The present case falls squarely within the definition of a donation. Petitioners, the late
Manuel G. Abello , Jose C. Concepcion, Teodoro D. Regala and Avelino V. Cruz, each gave
₱882,661.31 to the campaign funds of Senator Edgardo Angara, without any material
consideration. All three elements of a donation are present. The patrimony of the four
petitioners were reduced by ₱882,661.31 each. Senator Edgardo Angara‘s patrimony
correspondingly increased by ₱3,530,645.249 . There was intent to do an act of liberality
or animus donandi was present since each of the petitioners gave their contributions
without any consideration.
• Taken together with the Civil Code definition of donation, Section 91 of the NIRC is clear
and unambiguous, thereby leaving no room for construction.

2. NO.
• Since animus donandi or the intention to do an act of liberality is an essential element of a
donation, petitioners argue that it is important to look into the intention of the giver to
determine if a political contribution is a gift. Petitioners‘ argument is not tenable. First of
all, donative intent is a creature of the mind.
• It cannot be perceived except by the material and tangible acts which manifest its
presence.
• This being the case, donative intent is presumed present when one gives a part of ones
patrimony to another without consideration. Second, donative intent is not negated when
the person donating has other intentions, motives or purposes which do not contradict
donative intent. This Court is not convinced that since the purpose of the contribution was
to help elect a candidate, there was no donative intent.
• Petitioners‘ contribution of money without any material consideration evinces animus
donandi. The fact that their purpose for donating was to aid in the election of the donee
does not negate the presence of donative intent.

EVONO v. DOF, CIR

CTA EB NO. 705, JUNE 4, 2012

DOCTRINE: To determine whether or not there is a donation, the true intention of the parties
must be ascertained. Records show that petitioners presented various contracts to prove that their
children were also buyers in the sale of the subject properties. However, in order to determine the
tax liability for any transaction, not only the legal documents will be considered, but also some
other external factors surrounding the transaction, such as the capacity of the buyer in cases of
transfer of properties. This is a preventive measure imposed to prevent avoidance of the legal tax
due.

FACTS:
• Maribel Evono purchased parcels of land from Sps. Credo and Sps. Diores in two separate
transactions, by way of absolute deeds of sale. For each separate transaction, the Sps.
Credo and Diores acknowledge having received form Evono the amounts of P1,356,000,
and P4,117,500, respectively. For each transaction, BIR RDO-80 issued a Certificate
Authorizing registration (CAR).
• Maribel Evono then wrote a letter to the Devenue District Officer requesting the latter to
include the name of her children in the CAR so that their names would also be affixed in
the titles of the properties. For this, Evono received a computation for Donor‘s tax which
she eventually paid under protest. She then wrote a letter to the CIR requesting for the
cancellation of the computation for the Donor‘s tax. This letter was not acted upon by the
CIR, hence Evono filed a petiton for review with the CTA.
• The petition was dismissed by the first division because of prescription. Hence, Evono filed
 a petiton for review with the CTA EnBanc.
• In their petition for review, Evono alleged that the frst division erred in assuming that
Evono transferred to properties to the minor children when in fact the deeds of absoulute
sale says that the transfer was from the original owners and unto Evono and her minor
children.

ISSUE: Whether the inclusion on the names of the minor children in the CAR and transfer
certificate of titles may be deemed as donation from their parents.

HELD:
• Yes, as aptly ruled by the Special First Division there is clearly an animus donandi on the
part of petitioners.
• Donation (donatio) is defined as "a gift; a transfer of the title to property to one who
receives it without paying for it; the act by which the owner of a thing voluntarily transfers
the title and possession of the same from himself to another person, without any
consideration.
• Section 98 of the NIRC of 1997, as amended, provides:
• SEC. 98. Imposition of Tax.-
• A. There shall be levied, assessed, collected and paid upon the transfer by any person,
resident or non- resident, of the property by gift, a tax, computed as provided in Section
99.
• B. The tax shall apply whether the transfer is in trust or otherwise, whether the gift is
direct or indirect, and
• C. whether the property 1s real or personal, tangible or intangible.
• Pursuant to the above provision, the transfer of property by gift is taxable, whether the
same is direct or indirect, real or personal, tangible or intangible.
• To determine whether or not there is a donation, the true intention of the parties must be
ascertained. Records show that petitioners presented various contracts to prove that their
children were also buyers in the sale of the subject properties. However, in order to
determine the tax liability for any transaction, not only the legal documents will be
considered, but also some other external factors surrounding the transaction, such as the
capacity of the buyer in cases of transfer of properties. This is a preventive measure
imposed to prevent avoidance of the legal tax due.
• In this case, petitioners admitted that their children are not earning income, but are
financially capable to purchase the subject properties from their own savings from
allowances given by their parents. Logically, at such young ages, the three minor children
would not be able to save such substantial amount, even if they were receiving enormous
allowances from their parents.
• To own a real property at an early age without a source of income, said property is deemed
to be a donation, within the meaning of the law. There is a clear animus donandi, as
evidenced by petitioners' request to include the names of their minor children in the CARs
and certificates of title of the properties.

PHILAM LIFE v. SECRETARY OF FINANCE

G.R. No. 210987, Case Digest

FACTS:
• Philam Life sold its shares in Philam Care Health Systems to STI Investments Inc., the
highest bidder. After the sale was completed, Philam life applied for a tax clearance and
was informed by BIR that there is a need to secure a BIR Ruling due to a potential donor‘s
tax liability on the sold shares.
ISSUE on DONOR’S TAX: W/N the sales of shares sold for less than an adequate consideration
be subject to donor‘s tax?

PETITIONER’S CONTENTION:
• The transaction cannot attract donor‘s tax liability since there was no donative intent and,
ergo, no taxable donation, citing BIR Ruling [DA-(DT-065) 715-09] dated November 27,
2009; that the shares were sold at their actual fair market value and at arm‘s length; that
as long as the transaction conducted is at arm‘s length––such that a bonafide business
arrangement of the dealings is done in the ordinary course of business––a sale for less
than an adequate consideration is not subject to donor‘s tax; and that donor‘s tax does not
apply to sale of shares sold in an open bidding process.

CIR DENYING THE REQUEST:

• Through BIR Ruling No. 015-12. As determined by the Commissioner, the selling price of
the shares thus sold was lower than their book value based on the financial statements of
Philam Care as of the end of 2008.
• The Commissioner held donor‘s tax became imposable on the price difference pursuant to
Sec. 100 of the National Internal Revenue Code (NIRC):
• SEC. 100. Transfer for Less Than Adequate and full Consideration. - Where property, other
than real property referred to in Section 24(D), is transferred for less than an adequate
and full consideration in money or money‘s worth, then the amount by which the fair
market value of the property exceeded the value of the consideration shall, for the purpose
of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing
the amount of gifts made during the calendar year.

HELD:
• The price difference is subject to donor’s tax.
• Petitioner‘s substantive arguments are unavailing. The absence of donative intent, if that
be the case, does not exempt the sales of stock transaction from donor‘s tax since Sec.
100 of the NIRC categorically states that the amount by which the fair market value of the
property exceeded the value of the consideration shall be deemed a gift. Thus, even if
there is no actual donation, the difference in price is considered a donation by fiction of
law.
• Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets
the parameters for determining the ―fair market value‖ of a sale of stocks. Such issuance
was made pursuant to the Commissioner‘s power to interpret tax laws and to promulgate
rules and regulations for their implementation.
• Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale,
was being applied retroactively in contravention to Sec. 246 of the NIRC.26 Instead, it
merely called for the strict application of Sec. 100, which was already in force the moment
the NIRC was enacted.

ISSUE on TAX REMEDIES:

• The issue that now arises is this––where does one seek immediate recourse from the
adverse ruling of the Secretary of Finance in its exercise of its power of review under Sec.
4?
• Petitioner essentially questions the CIR‘s ruling that Petitioner‘s sale of shares is a taxable
donation under Sec. 100 of the NIRC. The validity of Sec. 100 of the NIRC, Sec. 7 (C.2.2)
and RMC 25-11 is merely questioned incidentally since it was used by the CIR as bases for
its unfavourable opinion.
• Clearly, the Petition involves an issue on the taxability of the transaction rather than a
direct attack on the constitutionality of Sec. 100, Sec.7 (c.2.2.) of RR 06-08 and RMC 25-
11. Thus, the instant Petition properly pertains to the CTA under Sec. 7 of RA 9282.
 • As a result of the seemingly conflicting pronouncements, petitioner submits that taxpayers
are now at a quandary on what mode of appeal should be taken, to which court or agency
it should be filed, and which case law should be followed.
• Petitioner‘s above submission is specious (erroneous). CTA, through its power of certiorari,
to rule on the validity of a particular administrative rule or regulation so long as it is within
its appellate jurisdiction.
• Hence, it can now rule not only on the propriety of an assessment or tax treatment of a
certain transaction, but also on the validity of the revenue regulation or revenue
memorandum circular on which the said assessment is based.
• Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA petition
not only contested the applicability of Sec. 100 of the NIRC over the sales transaction but
likewise questioned the validity of Sec. 7(c.2.2) of RR 06-08 and RMC 25-11 does not
divest the CTA of its jurisdiction over the controversy, contrary to petitioner‘s arguments.

II. VALUE-ADDED TAX

A. VATABLE TRANSACTIONS

Value-Added Tax Description

• Value-Added Tax (VAT) is a form of sales tax. It is a tax on consumption levied on the sale,
barter, exchange or lease of goods or properties and services in the Philippines and on
importation of goods into the Philippines. It is an indirect tax, which may be shifted or
passed on to the buyer, transferee or lessee of goods, properties or services.

Who are Required to File VAT Returns?

• Any person or entity who, in the course of his trade or business, sells, barters, exchanges,
leases goods or properties and renders services subject to VAT, if the aggregate amount of
actual gross sales or receipts exceed Three Million Pesos (Php3,000,000.00)
• A person required to register as VAT taxpayer but failed to register
• Any person, whether or not made in the course of his trade or business, who imports
goods

Value-Added Tax Rates

• On sale of goods and properties - twelve percent (12%) of the gross selling price or gross
value in money of the goods or properties sold, bartered or exchanged
• On sale of services and use or lease of properties - twelve percent (12%) of gross receipts
derived from the sale or exchange of services, including the use or lease of properties
• On importation of goods - twelve percent (12%) 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 as 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 quantity or volume of the goods, the VAT shall be based on the
landed cost plus excise taxes, if any.
• On export sales and other zero-rated sales – 0%

REVENUE REGULATIONS NO. 15-2018 issued on April 5, 2018 amends Revenue Regulations
(RR) No. 8-2018 on the updating of registration of taxpayers from Value-Added Tax (VAT) to non-
VAT which was due last March 31, 2018.

Section 13 of RR No. 8-2018 is amended by extending the deadline of registration updates to

read as follows:

SECTION 13. TRANSITORY PROVISIONS. – In connection with the provision of Section 24 (A)
(2)(b) and Section 2(A)(2)(c) of the Tax Code, as amended, all existing VAT registered taxpayers
whose gross sales/receipts and other non-operating income in the preceding year did not exceed
the VAT threshold of P3,000,000.00 shall have the option to update their registration to non-VAT
until April 30, 2018, following the existing procedures on registration updates, and the inventory
and surrender/cancellation of unused VAT invoices/receipt. After the above-mentioned date,
existing VAT-registered taxpayers who have note exceeded the threshold for the immediately
preceding three years, may opt to update their registration to non-VAT following rules and
regulations on registration updates, verification, and the inventory and cancellation of VAT
invoices/receipts.

CONTEX CORPORATION V. COMMISSIONER OF INTERNAL REVENUE

G.R. No. 151135, July 2, 2004, Quisumbing, J.

DOCTRINE 1: VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or
services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or
lessor to the buyer, transferee or lessee. Unlike a direct tax, such as the income tax, which
primarily taxes an individual‘s ability to pay based on his income or net wealth, an indirect tax,
such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the
same. The VAT, thus, forms a substantial portion of consumer expenditures.

DOCTRINE 2: Only VAT-Registered entities can claim Input VAT Credit/Refund. An exempt VAT
taxpayer, is not allowed any tax credit on VAT (input tax) previously paid.

FACTS:
• Petitioner Contex Corporation is a domestic corporation engaged in the business of
manufacturing hospital textiles and garments and other hospital supplies for export.
Petitioner‘s place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered
with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise,
pursuant to the provisions of RA No. 7227 (Bases Conversion and Development Act). As an
SBMA-registered firm, petitioner is exempt from all local and national internal revenue
taxes except for the preferential tax provided for in Section 12 (c) of RA No. 7227.
Petitioner also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer.
• From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and
materials necessary in the conduct of its manufacturing business. The suppliers of these
goods shifted unto petitioner the 10% VAT on the purchased items, which led the petitioner
to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997 and 1998,
respectively.
• On the belief that it was exempt from all national and local taxes, including VAT, pursuant
to RA No. 7227, petitioner filed 2 applications for tax refund or tax credit of the VAT it paid.
The revenue district officer of BIR RDO No. 19, denied the first application letter in 1998.
• In 1999, petitioner filed another application for tax refund/credit directly with the regional
director of BIR Revenue Region No. 4. The letter sought a refund or issuance of a tax credit
certificate in the amount of P1,108,307.72, representing erroneously paid input VAT for the
period January 1, 1997 to November 30, 1998.
• When the BIR Regional Director did not respond, petitioner elevated the matter to the
Court of Tax Appeals (CTA), in a petition for review. Petitioner stressed that under the
National Internal Revenue Code (NIRC), and RA No. 7227 would show that it was not liable
in any way for any value-added tax.
• In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule
 that claims for refund are strictly construed against the taxpayer. Since petitioner failed to
establish both its right to a tax refund or tax credit and its compliance with the rules on tax
refund as provided for in the NIRC, its claim should be denied.
• The CTA, in its Decision, partially granted the petition and ordered the BIR to Refund or in
the alternative to issue a tax credit certificate in favor of Petitioner the sum of
P683,061.90, representing erroneously paid input VAT.
• In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a)
and 112(A) of the Tax Code. The tax court stressed that the provisions apply only to
entities registered as VAT taxpayers whose sales are zero-rated. Petitioner does not fall
under this category, since it is a non-VAT taxpayer thus it is exempt from VAT, pursuant to
RA No. 7227.
• Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT
on its purchases of supplies and materials. It pointed out that under Section 12(c) of RA
No. 7227 and the Implementing Rules and Regulations of the Bases Conversion and
Development Act of 1992, all that petitioner is required to pay as a SBFZ-registered
enterprise is a 5% preferential tax.
• The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29,
1997 for being barred by the twoyear prescriptive period under the Tax Code. The CTA
limited the refund only to the input VAT paid by the petitioner on the supplies and
materials directly used by the petitioner in the manufacture of its goods. It struck down all
claims for input VAT paid on maintenance, office supplies, freight charges, and all materials
and supplies shipped or deli vered to the petitioner‘s offices.
• Respondent CIR then filed a petition for review of the CTA decision by the Court of Appeals
(CA). Respondent maintained that the exemption of Contex Corp. under RA No. 7227 was
limited only to direct taxes and not to indirect taxes such as the input component of the
VAT. The Commissioner pointed out that from its very nature, the value-added tax is a
burden passed on by a VAT registered person to the end users; hence, the direct liability
for the tax lies with the suppliers and not Contex.
• The CA reversed the CTA Decision holding that the exemption from duties and taxes on the
importation of raw materials, capital, and equipment of SBFZ-registered enterprises under
RA No. 7227 and its implementing rules covers only "the VAT imposable under Section 107
of the NIRC, which is a direct liability of the importer, and in no way includes the value-
added tax of the seller-exporter the burden of which was passed on to the importer as an
additional costs of the goods." This was because the exemption granted by RA No. 7227
relates to the act of importation and the NIRC specifically imposes the VAT on
importations. The CA applied the principle that tax exemptions are strictly construed
against the taxpayer. The CA pointed out that under the implementing rules of RA No.
7227, the exemption of SBFZ-registered enterprises from internal revenue taxes is
qualified as pertaining only to those for which they may be directly liable. It then stated
that apparently, the legislative intent behind RA No. 7227 was to grant exemptions only to
direct taxes, which SBFZ-registered enterprise may be liable for and only in connection
with their importation of raw materials, capital, and equipment as well as the sale of their
goods and services.

ISSUES:
1. Whether VAT is a direct tax.
2. Whether Petitioner is exempt from payment of VAT on its purchases of supplies and
materials.
3. Whether Petitioner may claim for a tax refund.

HELD:
1. No. VAT is an indirect tax.
• As such, the amount of tax paid on the goods, properties or services bought, transferred,
or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer,
 transferee or lessee.
• Unlike a direct tax, such as the income tax, which primarily taxes an individual‘s ability to
pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on
consumption of goods, services, or certain transactions involving the same. The VAT, thus,
forms a substantial portion of consumer expenditures.
• Further, in indirect taxation, there is a need to distinguish between the liability for the tax
and the burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or
passed on by the seller to the buyer. What is transferred in such instances is not the
liability for the tax, but the tax burden.
• In adding or including the VAT due to the selling price, the seller remains the person
primarily and legally liable for the payment of the tax. What is shifted only to the
intermediate buyer and ultimately to the final purchaser is the burden of the tax. Stated
differently, a seller who is directly and legally liable for payment of an indirect tax, such as
the VAT on goods or services is not necessarily the person who ultimately bears the burden
of the same tax. It is the final purchaser or consumer of such goods or services who,
although not directly and legally liable for the payment thereof, ultimately bears the
burden of the tax.

2. Yes. Exemptions from VAT are granted by express provision of the Tax Code or special
laws.
• Under VAT, the transaction can have preferential treatment in the following ways:
• (a) VAT Exemption. An exemption means that the sale of goods or properties and/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. This is a case wherein the
VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of
the goods or properties). 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. On the other hand, a VAT-registered purchaser of VAT-exempt
goods/properties or services which are exempt from VAT is not entitled to any input tax on
such purchase despite the issuance of a VAT invoice or receipt.
• (b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0%
rate, meaning the tax burden is not passed on to the purchaser. 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 purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund in accordance with
these regulations.
• Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In
contrast, exemption only removes the VAT at the exempt stage, and it will actually
increase, rather than reduce the total taxes paid by the exempt firm‘s business or non-
retail customers. It is for this reason that a sharp distinction must be made between zero-
rating and exemption in designating a value-added tax.
• Apropos, the petitioner‘s claim to VAT exemption in the instant case for its purchases of
supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No.
7227, which basically exempts them from all national and local internal revenue taxes,
including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.
• Petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by
the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of
Registration issued by the BIR. As such, it is exempt from VAT on all its sales and
importations of goods and services.

3. No. Petitioner‘s claim for exemption from VAT for its purchases of supplies and raw
materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered
 entities can claim Input VAT Credit/Refund.
• While it is true that the petitioner should not have been liable for the VAT inadvertently
passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the
petitioner is not the proper party to claim such VAT refund.
• Petitioner is registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an
exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. In
fine, even if we are to assume that exemption from the burden of VAT on petitioner‘s
purchases did exist, petitioner is still not entitled to any tax credit or refund on the input
tax previously paid as petitioner is an exempt VAT taxpayer.
• Rather, it is the petitioner‘s suppliers who are the proper parties to claim the tax credit and
accordingly refund the petitioner of the VAT erroneously passed on to the latter.
• The CA did not commit any reversible error of law in holding that petitioner‘s VAT
exemption under RA No. 7227 is limited to the VAT on which it is directly liable as a seller
and hence, it cannot claim any refund or exemption for any input VAT it paid, if any, on its
purchases of raw materials and supplies.

Meaning of the phrase ―”in the ordinary course of trade or busines”

COMMISSIONER OF INTERNAL REVENUE V. COURT OF APPEALS

329 SCRA 237, G.R. No. 125355 March 30, 2000

DOCTRINE: The above provision clarifies that even a non-stock, nonprofit, 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.

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 latter to perform
collection, consultative and other technical services, including functioning as an internal
auditor, of Philamlife and its other affiliates.
• Petitioner, Commissioner of the Bureau of Internal Revenue (BIR) issued an assessment to
private respondent COMASERCO for deficiency value-added tax (VAT) amounting to
P351,851.01, for taxable year 1988.
• With this, COMASERCO filed with the BIR, a letter-protest objecting to the latter‘s finding
of deficiency VAT. In lieu however, the Commissioner of Internal Revenue sent a collection
letter to COMASERCO demanding payment of the deficiency VAT.
• As a result, COMASERCO filed with the Court of Tax Appeals a petition for review
contesting the Commissioner‘s assessment asserting 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 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, hence not liable to pay VAT.
• The Court of Tax Appeals rendered decision in favor of the Commissioner of Internal
Revenue.
• On its appeal with the Court of Appeals, the appellate court rendered decision reversing
that of the Court of Tax Appeals.
• The former anchored its decision on the ratiocination in another tax case involving the
same parties, where it was held that COMASERCO was not liable to pay fixed and
contractor‘s tax for services rendered to Philamlife and its affiliates. The Court of Appeals,
in that case, reasoned that COMASERCO was not engaged in business of providing services
to Philamlife and its affiliates. In the same manner, the Court of Appeals held that
COMASERCO was not liable to pay VAT for it was not engaged in the business of selling
services.

ISSUE: Whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT
thereon

HELD:
• YES. The Court agreed with the Petitioner 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.
• Pursuant to Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other
sections, Section 99 of the Tax Code, it is provided that:
• 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‖ 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.
• Sec. 108 of the National Internal Revenue Code 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 Commissioner of Internal Revenue 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
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.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

SONY PHILIPPINES, INC., respondent.
G.R. No. 178697. November 17, 2010

DOCTRINE(1): It is evident under Section 110 of the 1997 Tax Code that an advertising expense
duly covered by a Value Added Tax (VAT) invoice is a legitimate business expense.—

The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the
CTA-EB, Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT
credits that should have been realized from the advertising expense of the latter. It is evident
under Section 110 of the 1997 Tax Code that an advertising expense duly covered by a VAT
invoice is a legitimate business expense. This is confirmed by no less than CIR’s own witness,
Revenue Officer Antonio Aluquin. There is also no denying that Sony incurred advertising expense.
Aluquin testified that advertising companies issued invoices in the name of Sony and the latter
paid for the same. Indubitably, Sony incurred and paid for advertising expense/ services. Where
the money came from is another matter all t ogether but will definitely not change said fact.

DOCTRINE (2): Value Added Tax (VAT); Services rendered for a fee even on reimbursement-on-
cost basis only and without realizing profit are also subject to Value Added Tax (VAT).—

In the case of CIR v. Court of Appeals (CA), 329 SCRA 237 (2000), the Court had the occasion to
rule that services rendered for a fee even on reimbursement-on-cost basis only and without
realizing profit are also subject to VAT. The case, however, is not applicable to the present case. In
that case, COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was paid the cost or expense that it incurred although
without profit. This is not true in the present case. Sony did not render any service to SIS at all.
The services rendered by the advertising companies, paid for by Sony using SIS dole-out, were for
Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent to the latter’s
advertising expense but never received any goods, properties or service from Sony.
FACTS:
• On November 24, 1998, the CIR issued Letter of Authority (LOA) authorizing certain
revenue officers to examine Sony’s books of accounts and other accounting records
regarding revenue taxes for “the period 1997 and unverified prior years.”
• On December 6, 1999, a preliminary assessment for 1997 deficiency taxes and penalties
was issued by the CIR which Sony protested.
• Thereafter, acting on the protest, the CIR issued final assessment notices, the formal letter
of demand and the details of discrepancies.
• Sony sought re-evaluation of the aforementioned assessment by filing a protest on
February 2, 2000. Sony submitted relevant documents in support of its protest on the 16th
of that same month.
• On October 24, 2000, within 30 days after the lapse of 180 days from submission of the
said supporting documents to the CIR, Sony filed a petition for review before the CTA.
• After trial, the CTA-First Division disallowed the deficiency VAT assessment because the
subsidized advertising expense paid by Sony which was duly covered by a VAT invoice
resulted in an input VAT credit. As regards the EWT, the CTA-First Division maintained the
deficiency EWT assessment on Sony’s motor vehicles and on professional fees paid to
general professional partnerships. It also assessed the amounts paid to sales agents as
commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations
No. 6-85. The CTA-First Division, however, disallowed the EWT assessment on rental
expense since it found that the total rental deposit of P10,523,821.99 was incurred from
January to March 1998 which was again beyond the coverage of LOA 19734. Except for the
compromise penalties, the CTA-First Division also upheld the penalties for the late payment
of VAT on royalties, for late remittance of final withholding tax on royalty as of December
1997 and for the late remittance of EWT by some of Sony’s branches. In sum, the CTA-First
Division partly granted Sony’s petition by cancelling the deficiency VAT assessment but
upheld a modified deficiency EWT assessment as well as the penalties.
• DISPOSITIVE PORTION:

“WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is

ORDERED to CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for
lack of merit. However, the deficiency assessments for expanded withholding tax and penalties for
late remittance of internal revenue taxes are UPHELD.

Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding
tax in the amount of P1,035,879.70 and the following penalties for late remittance of internal
revenue taxes in the sum of P1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty P 831,428.20
3. EWT of Petitioner’s Branches P 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)
(3) of the 1997 Tax Code. SO ORDERED.”

• The CIR sought a reconsideration of the above decision but the CTA-First Division denied
the motion for reconsideration. The CIR filed a petition for review with the CTA-EB.
• The CTA-EB dismissed CIR’s petition on May 17, 2007. CIR’s motion for reconsideration was
denied by the CTA-EB on July 5, 2007. Hence, this petition.

ISSUES:
1. W/N Sony is liable for deficiency VAT.
2. W/N the CTA En Banc erred in ruling that the commision expense should be subjected to a
withholding tax of 5% instead of 10% tax rate.
 3. W/N the CTA En Banc erred in ruling that the assessment with respect to the 5%
withholding tax on rental deposit is not proper.

HELD:
1. NO.
• As aptly found by the CTA-First Division and later affirmed by the CTA-EB, Sony’s
deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT credits
that should have been realized from the advertising expense of the latter. It is evident
under Section 110 of the 1997 Tax Code that an advertising expense duly covered by a VAT
invoice is a legitimate business expense. This is confirmed by no less than CIR’s own
witness, Revenue Officer Antonio Aluquin.
• There is also no denying that Sony incurred advertising expense. Aluquin testified that
advertising companies issued invoices in the name of Sony and the latter paid for the
same. Indubitably, Sony incurred and paid for advertising expense/services. Where the
money came from is another matter all together but will definitely not change said fact.
• Insofar as the above-mentioned subsidy may be considered as income and, therefore,
subject to income tax, the Court agrees. However, the Court does not agree that the same
subsidy should b subject to the 10% VAT. To begin with, the said subsidy termed by the
CIR as reimbursement was not even exclusively earmarked for Sony’s advertising expense
for it was but an assistance or aid in view of Sony’s dire or adverse economic conditions,
and was only “equivalent to the latter’s (Sony’s) advertising expenses.”
• Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:

“SEC. 106. Value-added Tax on Sale of Goods or Properties.—

(A) Rate and Base of Tax.—There shall be levied, assessed and collected on every sale,
barter or exchange of goods or properties, valueadded tax equivalent to ten percent (10%)
of the gross selling price or gross value in money of the goods or properties sold, bartered
or exchanged, such tax to be paid by the seller or transferor.”

• Thus, there must be a sale, barter or exchange of goods or properties before any VAT may
be levied. Certainly, there was no such sale, barter or exchange in the subsidy given by
SIS to Sony. It was but a dole out by SIS and not in payment for goods or propertie sold,
bartered or exchanged by Sony.
• In the case of CIR v. Court of Appeals (CA), the Court had the occasion to rule that
services rendered for a fee even on reimbursement-on-cost basis only and without
realizing profit are also subject to VAT. The case, however, is not applicable to the present
case. In that case, COMASERCO rendered service to its affiliates and, in turn, the affiliates
paid the former reimbursement-on-cost which means that it was paid the cost or expense
that it incurred although without profit. This is not true in the present case.
• Sony did not render any service to SIS at all. The services rendered by the advertising
companies, paid for by Sony using SIS dole-out, were for Sony and not SIS. SIS just gave
assistance to Sony in the amount equivalent to the latter’s advertising expense but never
received any goods, properties or service from Sony.

2. YES, it should be subjected to 5% tax rate.

• Regarding the deficiency EWT assessment, more particularly Sony’s commission expense,
the CIR insists that said deficiency EWT assessment is subject to the ten percent (10%)
rate instead of the five percent (5%) citing Revenue Regulation No. 2-98 dated April 17,
1998.
• On the other hand, the application of the five percent (5%) rate by the CTA-First Division is
based on Section 1(g) of Revenue Regulations No. 6-85.
 • The Court agrees with the CTA-EB when it affirmed the CTAFirst Division decision. Indeed,
the applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations
No. 12- 94, which was the applicable rule during the subject period of examination and
assessment as specified in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was
only adopted in April 1998 and, therefore, cannot be applied in the present case. Besides,
the withholding tax on brokers and agents was only increased to 10% much later or by the
end of July 2001 under Revenue Regulations No. 6-2001. Until then, the rate was only 5%.

3. NO.
• The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the
deficiency EWT assessment on the rental deposit. According to their findings, Sony
incurred the subject rental deposit in the amount of P10,523,821.99 only from January to
March 1998. As stated earlier, in the absence of the appropriate LOA specifying the
coverage, the CIR’s deficiency EWT assessment from January to March 1998, is not valid
and must be disallowed.

MINDANAO II GEOTHERMAL PARTNERSHIP v. COMM’R OF INTERNAL REVENUE

MINDANAO I GEOTHERMAL PARTNERSHIP v. COMM’R OF INTERNAL REVENUE
G.R. Nos. 193301, 194637, March 11, 2013

DOCTRINE(s): SUMMARY OF RULES ON PRESCRIPTIVE PERIODS INVOLVING VAT

1) An administrative claim must be filed with the CIR within two years after the close of the
taxable quarter when the zerorated or effectively zero-rated sales were made.
2) The CIR has 120 days from the date of submission of complete documents in support of
the administrative claim within which to decide whether to grant a refund or issue a tax
credit certificate. The 120-day period may extend beyond the twoyear period from the
filing of the administrative claim if the claim is filed in the later part of the two-year period.
If the 120-day period expires without any decision from the CIR, then the administrative
claim may be considered denied by inaction
3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR‘s
decision denying the administrative claim, or from the expiration of the 120-day period
without any action from the CIR.
4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance
on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, as an
exception to the mandatory and jurisdictional 120+30 day periods.

FACTS:
• Mindanao I and II (Mindanao) are value-added taxpayers, and Block Power Production
Facilities accredited by the Department of Energy. They had a Build-Operate-Transfer
contract with the Philippine National Oil Corporation–Energy Development Company
(PNOC-EDC), whereby Mindanao converts steam supplied to it by PNOC-EDC into
electricity, and then delivers the electricity to the National Power Corporation (NPC) in
behalf of PNOC-EDC.
• The Electric Power Industry Reform Act of 2000 (EPIRA, RA 9136), amended the Tax
Reform Act of 1997 (RA 8424), when it decreed that sales of power by generation
companies shall be subjected to a zero rate of VAT. Pursuant to EPIRA, Mindanao I and II
filed their claims for the issuance of tax credit certificates on unutilized or excess input
taxes from their sales of generated power and delivery of electric capacity and energy to
NPC.
• The CTA En Banc denied Mindanao II‘s claims for refund tax credit for the first and second
quarters of 2003, and Mindanao I‘s claims for refund/tax credit for the first, second, third,
 and fourth quarters of 2003, for being filed out of time.
• The following are relevant dates:
xxx
• CTA (En Banc): Mindanao II‘s judicial claims were filed beyond the period allowed in Sec.
112(A), by which the reckoning of the two-year prescriptive period for filing the application
for refund or credit of input VAT attributable to zero-rated sales or effectively zero-rated
sales shall be counted from the close of the taxable quarter when the sales were made
(regardless of whether the tax was actually paid), according to CIR v. Mirant Pagbilao
Corporation (Mirant). Also, the sale of the fully-depreciated Nissan Patrol is incidental to
Mindanao II‘s VAT zero-rated transactions and is VATable pursuant to Sec. 105.
• Mindanao I‘s claims for the first, second, third and fourth quarters of 2003 were filed out of
time. Section 229 is inapplicable in light of Mirant. Moreover, the procedure prescribed
under Section 112(C) should be followed first before the CTA En Banc can act on Mindanao
I‘s claim.
• Mindanao I and II went up to the Supreme Court arguing that their claims were timely filed
pursuant to the case of Atlas, which was then the controlling ruling at the time of the filing.
The Mirant case, which uses the close of the taxable quarter when the sales were made as
the reckoning date in counting the two-year prescriptive period, cannot be applied
retroactively to their prejudice.

ISSUES:
1. Whether the reckoning date for counting the two-year prescriptive period in Section 112
should be counted from the end of the taxable quarter when the sales were made (Mirant)
or the date of filing the return (Atlas)?
2. Whether the sale of the fully-depreciated Nissan Patrol is a one-time transaction not
incidental to the VAT zero-rated operation of Mindanao II, thus not VATable?

HELD:
1. Neither Atlas nor Mirant applies, because when Mindanao II and Mindanao I filed
their respective administrative and judicial claims in 2005, neither case had been
promulgated. Atlas was promulgated on 8 June 2007, Mirant on 12 September 2008.
• Besides, Atlas merely stated that the two-year prescriptive period should be counted from
the date of payment of the output VAT, not from the close of the taxable quarter when the
sales involving the input VAT were made. The Atlas doctrine did not interpret, expressly or
impliedly, the 120+30 day periods.
• Prescriptive Period for the Filing of Administrative Claims Section 112(A) of the 1997 Tax
Code was the applicable law at the time of filing of the claims in issue, therefore the claims
needed to have been filed within two (2) years after the close of the taxable quarter when
the sales were made. Mindanao I and II‘s administrative claims for the first quarter of 2003
had prescribed, but their claims for the second, third and fourth quarters of 2003 were
filed on time.
• Prescriptive Period for the Filing of Judicial Claims.
• In determining whether the claims for the second, third and fourth quarters of 2003 had
been properly appealed, there is still see no need to refer to either Atlas or Mirant, or even
to Sec. 229. The second paragraph of Sect. 112(C) is clear that the taxpayer can appeal to
the CTA “ within thirty (30) days from the receipt of the decision denying the claim or after
the expiration of the one hundred twenty day-period.”
• The 120+30 day periods are mandatory and jurisdictional. The taxpayer cannot simply file
a petition with the CTA without waiting for the Commissioner‘s decision within the 120-day
period, because otherwise there would be “no decision” or “deemed a denial” decision for
the CTA to review.
• Moreover, Sec. 112(C) expressly grants a 30-day period to appeal to the CTA, and this
period need not necessarily fall within the two-year prescriptive period, as long as the
 administrative claim is filed within such time.
• The said prescriptive period does not refer to the filing of the judicial claim with the CTA,
but to the administrative claim with the Commissioner.

San Roque: Recognition of BIR Ruling No. DA-489-03

• BIR Ruling No. DA-489-03 provided that the “taxpayer-claimant need not wait for the
lapse of the 120-day period before it could seek judicial relief with the CTA.” In the
consolidated cases of CIR v. San Roque, however, the Supreme Court En Banc held that the
taxpayer cannot simply file a petition with the CTA without waiting for the Commissioner‘s
decision within the 120-day jurisdictional period. Notwithstanding, the Court also held in
San Roque that BIR Ruling No. DA 489-03 constitutes equitable estoppel in favor of
taxpayers. Being a general interpretative rule, it can be relied on by all taxpayers from the
time of its issuance on 10 December 2003 up to its reversal by the Court in Commissioner
of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi) on 6 October 2010,
where this Court held that the 120+30 day periods are mandatory and jurisdictional.
• Mindanao II filed its administrative claims for the second, third, and fourth quarters of
2003 on 13 April 2005. Counting 120 days after filing of the administrative claim (11
August 2005) and 30 days after the CIR‘s denial by inaction, the last day for filing a judicial
claim with the CTA for the second, third, and fourth quarters of 2003 was on 12 September
2005. However, the judicial claim could not be filed earlier than 11 August 2005, which was
the expiration of the 120-day period for the Commissioner to act. Mindanao II filed its
judicial claim for the second quarter before the expiration of the 120-day period; it was
thus prematurely filed. However, pursuant to San Roque, the claim qualifies under the
exception to the strict application of the 120+30 day periods. Its judicial claims for the
third quarter and fourth quarter of 2003 were filed on time.
• Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003
on 4 April 2005. Counting 120 days after filing of the administrative claim with the CIR (2
August 2005) and 30 days after the CIR‘s denial by inaction, the last day for filing a judicial
claim was on 1 September 2005. However, the judicial claim cannot be filed earlier than 2
August 2005, which is the expiration of the 120-day period for the Commissioner to act on
the claim. Mindanao I prematurely filed its judicial claim for the second quarter of 2003 but
claim qualifies under the exception in San Roque. Its judicial claims for the third and fourth
quarters of 2003, however, were filed after the prescriptive period.

2. NO.
• Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental
transaction in the course of its business but an isolated transaction that should not have
been subject to 10% VAT. It does not follow that an isolated transaction cannot be an
incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 would
show that a transaction “in the course of trade or business” includes “transactions
incidental thereto.”
• In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol. Prior
to the sale, the Nissan Patrol was part of Mindanao II‘s property, plant, and equipment.
• Therefore, the sale of the Nissan Patrol is an incidental transaction made in the
course of Mindanao II‘s business which should be liable for VAT.

DISPOSITION: Petitions partially granted. The claim of Mindanao II for the first quarter of 2003
is DENIED, while its claims for the second, third, and fourth quarters of 2003 are GRANTED. The
claims of Mindanao I for the first, third, and fourth quarters of 2003 are DENIED while its claim for
the second quarter of 2003 is GRANTED.
POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION v. COMM’R
OF INTERNAL REVENUE
 G.R. No. 198146 August 8, 2017

DOCTRINE:
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.

FACTS:
• Power Sector Assets and Liabilities Management Corporation (PSALM) is a government-
owned and controlled corporation created under Republic Act No. 9136 (RA 9136), also
known as the Electric Power Industry Reform Act of 2001 (EPIRA). Section 50 of RA 9136
states that the principal purpose of PSALM is to manage the orderly sale, disposition, and
privatization of the National Power Corporation (NPC) generation assets, real estate and
other disposable assets, and Independent Power Producer (IPP) contracts with the
objective of liquidating all NPC financial obligations and stranded contract costs in an
optimal manner.
• PSALM conducted public biddings for the privatization of the Pantabangan-Masiway
Hydroelectric Power Plant (Pantabangan-Masiway Plant) and Magat Hydroelectric Power
Plant (Magat Plant) on 8 September 2006 and 14 December 2006, respectively. First Gen
Hydropower Corporation with its $129 Million bid and SN Aboitiz Power Corporation with its
$530 Million bid were the winning bidders for the PantabanganMasiway Plant and Magat
Plant, respectively.
• On 28 August 2007, the NPC received a letter dated 14 August 2007 from the Bureau of
Internal Revenue (BIR) demanding immediate payment of ₱3,813,080,472 deficiency
value-added tax (VAT) for the sale of the Pantabangan-Masiway Plant and Magat Plant. The
NPC indorsed BIR's demand letter to PSALM. On 30 August 2007, the BIR, NPC, and PSALM
executed a Memorandum of Agreement (MOA), wherein in compliance with the MOA,
PSALM remitted under protest to the BIR the amount of ₱3, 813, 080, 472, representing
the total basic VAT due.
• On 21 September 2007, PSALM filed with the Department of Justice (DOJ) a petition for
the adjudication of the dispute with the BIR to resolve the issue of whether the sale of the
power plants should be subject to VAT. DOJ ruled in favor of PSALM.
• The BIR moved for reconsideration the BIR stated that the sale of the subject power plants
by PSALM to private entities is in the course of trade or business, as contemplated under
Section 105 of the National Internal Revenue Code (NIRC) of 1997, which covers incidental
transactions. Thus, the sale is subject to VAT. On 14 January 2009, the DOJ denied BIR's
Motion for Reconsideration.
• On 7 April 2009, the BIR Commissioner filed with the Court of Appeals a petition for
certiorari, seeking to set aside the DOJ's decision for lack of jurisdiction and was dismissed.
The Court of Appeals held that the petition filed by PSALM with the DOJ was really a
protest against the assessment of deficiency VAT, which under Section 204 of the NIRC of
1997 is within the authority of the Commissioner of Internal Revenue (CIR) to resolve. In
fact, PSALM's objective in filing the petition was to recover the ₱3,813,080,472 VAT which
was allegedly assessed erroneously and which PSALM paid under protest to the BIR. PSALM
moved for reconsideration, which the Court of Appeals denied in its 3 August 2011
Resolution. Hence, this petition.

ISSUE: Whether or not the sale of the Pantabangan-Masiway and Magat Power Plants to private
entities under the mandate of the EPIRA is subject to VAT

HELD:
• NO. The Court must determine whether the sale is "in the course of trade or business" as
 contemplated under Section 105 of the NIRC, which reads:
• 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, propert ies or services at the
time of the effectivity of Republic Act 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
rendered in the course of trade or business. (Emphasis supplied).
• Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage the orderly
sale, disposition, and privatization of the NPC generation assets, real estate and other
disposable assets, and IPP contracts with the objective of liquidating all NPC financial
obligations and stranded contract costs in an optimal manner.
• PSALM asserts that the privatization of NPC assets, such as the sale of the Pantabangan-
Masiway and Magat Power Plants, is pursuant to PSALM's mandate under the EPIRA law
and is not conducted in the course of trade or business. PSALM cited the BIR Ruling No.
020- 02, that PSALM' s sale of assets is not conducted in pursuit of any commercial or
profitable activity as to fall within the ambit of a VAT-able transaction under Sections 105
and 106 of the NIRC. The pertinent portion of the ruling adverted to states:
• 2. Privatization of assets by PSALM is not subject to VAT Pursuant to Section 105 in
relation to Section 106, both of the Tax Code of 1997, a value-added tax equivalent to ten
percent (10%) of the gross selling price or gross value in money of the goods, is collected
from any person, who, in the course of trade or business, sells, barters, exchanges, leases
goods or properties, which tax shall be paid by the seller or transferor.
• The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial activity, including transactions incidental thereto.
• Since the disposition or sale of the assets is a consequence of PSALM's mandate to ensure
the orderly sale or disposition of' the property and thereafter to liquidate the outstanding
loans and obligations of NPC, utilizing the proceeds from sales and other property
contributed to it, including the proceeds from the Universal Charge, and not conducted in
pursuit of any commercial or profitable activity, including transactions incidental thereto,
the same will be considered an isolated,transaction, which will therefore not be subject to
VAT. (BIR Ruling No. 113-98 dated July 23, 1998) (Emphasis supplied)
• CIR posits that the VAT exemption accorded to PSALM under BIR Ruling No. 020-02 is also
deemed revoked since PSALM is a successor-in-interest of NPC. Furthermore, the CIR avers
that prior to the sale, NPC still owned the power plants and not PSALM, which is just
considered as the trustee of the NPC properties. Thus, the sale made by NPC or its
successors-ininterest of its power plants should be subject to the 10% VAT beginning 1
November 2005 and 12% VAT beginning 1 February 2007.
• We do not agree with the CIR's position. The power plants are already owned by PSALM,
not NPC. Under the EPIRA law, the ownership of these power plants was transferred to
PSALM for sale, disposition, and privatization in order to liquidate all NPC financial
obligations. Unlike the Mindanao II case, the power plants in this case were not previously
used in PSALM's business. The power plants, which were previously owned by NPC were
transferred to PSALM for the specific purpose of privatizing such assets. The sale of the
 power plants cannot be considered as an incidental transaction made in the course of NPC's
or PSALM's business. Therefore, the sale of the power plants should not be subject to VAT.
Since PSALM is not a successor-in-interest of NPC, the repeal by RA 9337 of NPC's VAT
exemption does not affect PSALM.
• In any event, even if PSALM is deemed a successor-in-interest of NPC, still the sale of the
power plants is not "in the course of trade or business" as contemplated under Section 105
of the NIRC, and thus, not subject to VAT. The sale of the power plants is not in pursuit of a
commercial or economic activity but a governmental function mandated by law to privatize
NPC generation assets. PSALM was created primarily to liquidate all NPC financial
obligations and stranded contract costs in an optimal manner.

B. VAT ON GOODS
1. Sec. 106 of the NIRC.

SEC. 106. Value-Added Tax on Sale of Goods or Properties. -

(A) Rate and Base of Tax. - There shall be levied, assessed and collected on every sale, barter or exchange of goods or
properties, value-added tax equivalent to twelve percent (12%) of the gross selling price or gross value in money of the
goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.

(1) “Goods or Properties.” 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.

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.

(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 and delivery of goods to:
(i) Registered enterprises within a separate customs territory as provided under special laws; and
(ii) Registered enterprises within tourism enterprise zones as declared by the Tourism Infrastructure and
Enterprise Zone Authority(TIEZA) subject to the provisions under Republic Act No. 9593 or The Tourism Act of
2009.

*** NOTE: The amendment introduced by the TRAIN Law on Section 106(A)(2)(9)(2) was vetoed by the President. The
veto message reads:

I am constrained to veto the provisions under Section 31 of the enrolled bill, to wit: Section 31:

(2) Sale and Delivery of Goods to:

(i) Registered Enterprises Within a Separate Customs Territory As Provided Under Special Laws; and
(ii) Registered Enterprises Within Tourism Enterprise Zones As Declared By The Tourism Infrastructure And
Enterprise Zone Authority(TIEZA) Subject To The Provisions Under Republic Act No. 9593 Or The Tourism Act of
2009.

(3) 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);
(4) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy
percent (70%) of total annual production;
(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
transport operations: Provided, That the goods, supplies, equipment and fuel shall be used for international
shipping or air transport operations.

• Provided, That subparagraphs (3), (4), and (5) hereof shall be subject to the twelve percent (12%) value-added
tax and no longer be considered export sales subject to zero percent (0%) VAT rate upon satisfaction of the
following conditions:

(1) The successful establishment and implementation of an enhanced VAT refund system that grants refunds of
creditable input tax within ninety (90) days from the filing of the VAT refund application with the Bureau:
Provided, That, to determine the effectivity of item no. 1, all applications filed from January 1, 2018 shall be
processed and must be decided within ninety (90) days from the filing of the VAT refund application; and
(2) All pending VAT refund claims as of December 21, 2017 shall be fully paid in cash by December 31, 2019.

• Provided, That the Department of Finance shall establish a VAT refund center in the Bureau of Internal Revenue
(BIR) and in the Bureau of Customs (BOC) that will handle the processing and granting of cash refunds of
creditable input tax.
• An amount equivalent to five percent (5%) of the total VAT collection of the BIR and the BOC from the
immediately preceding year shall be automatically appropriated annually and shall be treated as a special account
in the General Fund or as trust receipts for the purpose of funding claims for VAT refund: Provided, That any
unused fund, at the end of the year shall revert to the General Fund.
• Provided, further, That the BIR and the BOC shall be required to submit to the Congressional Oversight
Committee on the Comprehensive Tax Reform Program (COCCTRP) a quarterly report of all pending claims for
refund and any unused fund.

(b) 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.

(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.

(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.

(D) 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.

(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.
 2. Sale of Real Property
– Tax base for goods vs. Tax base for real property.
– Sec. 4.106-4 of RR No. 16-2005.

SEC. 4.106-4. Meaning of the Term “Gross Selling Price”.

– 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 VAT. The excise tax, if any, on such goods or properties shall form part of the gross selling price.

In the case of sale, barter or exchange of real property subject to VAT, gross selling price shall mean the consideration
stated in the sales document or the fair market value whichever is higher. The term ―fair market value‖ shall mean
whichever is the higher of:

1) the fair market value as determined by the Commissioner (zonal value), or

2) the fair market value as shown in schedule of values of the Provincial and City Assessors (real property tax declaration).

However, in the absence of zonal value, gross selling price refers to the market value shown in the latest real property tax
declaration or the consideration, whichever is higher. If the gross selling price is based on the zonal value or market value
of the property, the zonal or market value shall be deemed inclusive of VAT. If the VAT is not billed separately, the selling
price stated in the sales document shall be deemed to be inclusive of VAT.

a. Exempt Real Property – Sec. 109(p) of the NIRC. (as amended by RA 10963)
i. Clarification of VAT exempt thresholds – Sec. 4.109-1 p of RR No. 13-2018.

SEC. 109. Exempt Transactions. –

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

(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 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 beginning January 1, 2021, the VAT exemption shall only apply to sale of real
properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, sale of real
property utilized for socialized housing as defined by Republic Act No. 7279, sale of house and lot, and other residential
dwellings with the selling price of not more than Two million pesos (P2,000,000): Provided, further, That 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 Philippine Statistics Authority(PSA);

SEC. 4.109-1. VAT-Exempt Transactions. – xxx xxx xxx

(B) Exempt transactions. –

(1) Subject to the provisions of Section 4.109.2 hereof, the following transactions shall be exempt from VAT:

(p) The following sales of real properties are exempt from VAT, namely:

(1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course
of trade or business.

However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of
trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being
a transaction incidental to the taxpayer‘s main business.

(2) Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise known as
the "Urban Development and Housing Act of 1992" and other related laws.

"Low-cost housing" refers to housing projects intended for homeless low-income family beneficiaries, undertaken by the
Government or private developers, which may either be a subdivision or a condominium registered and licensed by the
Housing and Land Use Regulatory Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or any other similar law, wherein
the unit selling price is within the selling price per unit as set by the Housing and Urban Development Coordinating Council
(HUDCC) pursuant to RA No. 7279 otherwise known as the ―Urban Development and Housing Act of 1992‖ and other
laws.
 (3) Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related
laws, such as RA No. 7835 and RA No. 8763, wherein the price ceiling per unit is P450,000.00 or as may
from time to time be determined by the HUDCC and the NEDA and other related laws.

"Socialized housing" refers to housing programs and projects covering houses and lots or home lots only undertaken by
the Government or the private sector for the underprivileged and homeless citizens which shall include sites and services
development, long-term financing, liberated terms on interest payments, and such other benefits in accordance with the
provisions of RA No. 7279, otherwise known as the "Urban Development and Housing Act of 1992" and RA No. 7835 and
RA No. 8763. "Socialized housing" shall also refer to projects intended for the underprivileged and homeless wherein the
housing package selling price is within the lowest interest rates under the Unified Home Lending Program (UHLP) or any
equivalent housing program of the Government, the private sector or nongovernment organizations.

(4) Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below,
or house & lot and other residential dwellings valued at Two Million Five Hundred Thousand Pesos
(P2,500,000.00) and below, as adjusted in 2011 using the 2010 Consumer Price Index values.

If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as
one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1,500,000.00.
Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed to
one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale of one
residential lot.

Provided, That beginning January 1, 2021, the VAT exemption shall only apply to sale of real properties not
primarily held for sale to customers or held for lease in the ordinary course of trade or business, sale of real
property utilized for socialized housing as defined by Republic Act No. 7279, sale of house and lot, and other
residential dwellings with selling price of not more than Two Million Pesos (P2,000,000.00): Provided, further,
That every three (3) years thereafter, the amounts stated herein shall be adjusted to its present value using the Consumer
Price Index, as published by the Philippine Statistics Authority (PSA).

3. Transactions deemed sale

– Sec. 106(B) of the NIRC
- Sec. 4.106-7 of RR No. 16-2005 as amended by RR No. 4-2007.

SEC. 4.106-7. Transactions Deemed Sale. –

(a) The following transactions shall be “deemed sale” pursuant to Sec. 106 (B) of the Tax Code:
(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. Transfer of goods or properties not in the course of business can take place when
VAT-registered person withdraws goods from his business for his personal use;
(2) Distribution or transfer to:
i. Shareholders or investors share in the profits of VAT-registered person;

• Property dividends which constitute stocks in trade or properties primarily held for sale or lease declared out of
retained earnings on or after January 1, 1996 and distributed by the company to its shareholders shall be subject
to VAT based on the zonal value or fair market value at the time of distribution, whichever is applicable.

ii. Creditors in payment of debt or obligation.

(3) Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned.
Consigned goods returned by the consignee within the 60-day period are not deemed sold;

(4) Retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-in
trade, supplies or materials as of the date of such retirement or cessation, whether or not the business is
continued by the new owner or successor.

The following circumstances shall, among others, give rise to transactions “deemed sale” for purposes of this
Section;
i. Change of ownership of the business. There is a change in the ownership of the business when a single
proprietorship incorporates; or the proprietor of a single proprietorship sells his entire business.
ii. Dissolution of a partnership and creation of a new partnership which takes over the business.

(b) The Commissioner of Internal Revenue shall determine the appropriate tax base in cases where a transaction
is deemed a sale, barter or exchange of goods or properties under Sec. 4.106-7 paragraph (a) hereof, or where the gross
selling price is unreasonably lower than the actual market value. The gross selling price is unreasonably lower than the
actual market value if it is lower by more than 30% of the actual market value of the same goods of the same quantity
and quality sold in the immediate locality on or nearest the date of sale.

For transactions deemed sale, the output tax shall be based on the market value of the goods deemed sold as of the time
of the occurrence of the transactions enumerated in Sec. 4.106-7(a)(1),(2), and (3) of these Regulations. However, in the
case of retirement or cessation of business, the tax base shall be the acquisition cost or the current market price of the
goods or properties, whichever is lower.

In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual market
value shall be the tax base.

C. VAT on Services
1. Sec. 108 of the NIRC.

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 twelve
percent (12%) 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 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 by any entity, and distribution companies, including electric cooperatives, 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 of 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 technical 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.

(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);
(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);
(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;
(4) Services rendered to persons engaged in international shipping or international air transport operations, including
leases of property for use thereof: Provided, That these services shall be exclusively for international shipping or
air transport operations;
(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;
(6) Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country; and
(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.
(8) Services rendered to:
(i) Registered enterprises within a separate customs territory as provided under special law; and
(ii) Registered enterprises within tourism enterprise zones as declared by TIEZA subject to the provisions under
Republic Act No. 9593 or the Tourism Act of 2009.

NOTE: The amendment introduced by the TRAIN Law was vetoed by the President. The veto message reads:

I am constrained to veto the provisions under Section 33 of the enrolled bill, to wit:

Section 33:
(8) Services Rendered To:
I. Registered Enterprises Within A Separate Customs Territory As Provided Under Special Laws; and
II. Registered Enterprises Within Tourism Enterprise Zones As Declared By the TIEZA Subject To the Provisions Under
Republic Act No. 9593 Or The Tourism Act of 2009.

The above provisions go against the principle of limiting the VAT zero-rating to direct exporters. The proliferation of
separate customs territories, which include buildings, creates significant leakages in our tax system. This makes the tax
system highly inequitable and significantly reduces the revenues that could be better used for the poor. As to tourism
enterprises, the current law only allows for duty and tax free importation of capital equipment, transportation equipment
and other goods. The TIEZA Law explicitly allows only duty and tax free importation of capital equipment, transportation
equipment and other goods (in certain cases and always subject to rules provided by the DOF). Thus, this provision
actually grants a new incentive to suppliers of registered tourism enterprises. At any rate, TIEZA law, which is still in effect
for two more years, can be used to avail of the above-mentioned incentives.

Provided, That subparagraphs (B)(1) and (B)(5) hereof shall be subject to the twelve percent (12%) value-added tax and
no longer subject to zero percent (0%) VAT rate upon satisfaction of the following conditions:

(1) The successful establishment and implementation of an enhanced VAT refund system that grants refund of
creditable input tax within ninety (90) days from the filing of the VAT refund application with the Bureau;
Provided, That, to determine the effectivity of item no. 1, all applications filed from January 1, 2018 shall be
processed and must be decided within ninety (90) days from the filing of the VAT refund application; and
(2) All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019.
Provided, That the Department of Finance shall establish a VAT refund center in the Bureau of Internal
Revenue(BIR) and in the Bureau of Customs(BOC) that will handle the processing and granting of cash refunds of
creditable input tax.

An amount equivalent to five percent (5%) of the total value-added tax collection of the BIR and the BOC from the
immediately preceding year shall be automatically appropriated annually and shall be treated as a special account in the
General Fund or as trust receipts for the purpose of funding claims for VAT Refund: Provided, That any unused fund, at the
end of the year shall revert to the General Fund.

Provided, further, That the BIR and the BOC shall be required to submit to the COCCTRP a quarterly report of all pending
claims for refund and any unused fund.
C. VAT ON SERVICES

MEDICARD PHILIPPINES, INC. v. COMMISSIONER OF INTERNAL REVENUE

G.R. No. 222743. April 5, 2017

DOCTRINE: HMO's gross receipts shall be the total amount of money or its equivalent
representing the service fee actually or constructively received during the taxable period for the
services performed or to be performed for another person, excluding the value-added tax. The
compensation for their services representing their service fee, is presumed to be the total amount
received as enrollment fee from their members plus other charges received.

Section 4. 108-4. x x x. "Gross receipts" refers to 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 applied as payments for services
rendered, and advance payments actually or constructively received during the taxable period for
the services performed or to be performed for another person, excluding the VAT.

The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax
unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear
and express words for that purpose. Accordingly, the general rule of requiring adherence to the
letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a
taxing act are not to be extended by implication. In answering the question of who is subject to
tax statutes, it is basic that in case of doubt, such statutes are to be construed most strongly
against the government and in favor of the subjects or citizens because burdens are not to be
imposed nor presumed to be imposed beyond what statutes expressly and clearly import. As
burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax
laws.

FACTS:
• MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and
medical insurance coverage to its clients. Individuals enrolled in its health care programs
pay an annual membership fee and are entitled to various preventive, diagnostic and
curative medical services provided by duly licensed physicians, specialists and other
professional technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.
• MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing
and Payment System (EFPS), and its Fourth Quarterly VAT Return. Upon finding some
discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT Returns, the CIR
informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated
September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment Notice
(PAN) against MEDICARD for deficiency VAT. A Memorandum dated December 10, 2007
was likewise issued recommending the issuance of a Formal Assessment Notice (FAN)
against MEDICARD. On. January 4, 2008, MEDICARD received CIR's FAN dated December'
10, 2007 for alleged deficiency VAT for taxable year 2006 in the total amount of P
196,614,476.69,10 inclusive of penalties.
• According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts
without any deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005.
Citing Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc., the CIR
argued that since MEDICARD does not actually provide medical and/or hospital services,
but merely arranges for the same, its services are not VAT exempt.
• MEDICARD argued that:
• 1) the services it renders is not limited merely to arranging for the provision of medical
and/or hospital services by hospitals and/or clinics but include actual and direct rendition of
medical and laboratory services; in fact, its 2006 audited balance sheet shows that it owns
 x-ray and laboratory facilities which it used in providing medical and laboratory services to
its members;
• 2) the professional fees in the amount of Pl 1 Million should also be excluded because it
represents the amount of medical services actually and directly rendered by MEDICARD
and/or its subsidiary company; and
• 3) even if it is liable to pay for the VAT, the 12% VAT rate should not be applied on the
entire amount but only for the period when the 12% VAT rate was already in effect, i.e., on
February 1, 2006. It should not also be held liable for surcharge and deficiency interest
because it did not pass on the VAT to its members.
• On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer
Romualdo Plocios to verify the supporting documents of MEDICARD's Protest. MEDICARD
also submitted additional supporting documentary evidence in aid of its Protest thru a
letter dated March 18, 2008.
• On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated
May 15, 2009, denying MEDICARD's protest. On July 20, 2009, MEDICARD proceeded to
file a petition for review before the CTA, reiterating its position before the tax authorities.
On June 5, 2014, the CTA Division rendered a Decision affirming with modifications the
CIR's deficiency VAT assessment covering taxable year 2006.
• MEDICARD is ordered to pay CIR the amount of P223,173,208.35, inclusive of the 25%
surcharge imposed under -Section 248(A)(3) of the NIRC of 1997.
• The CTA Division held that:
• 1) the amounts that MEDICARD earmarked, and eventually paid to doctors, hospitals and
clinics cannot be excluded from the computation of its gross receipts under the provisions
of RR No. 4-2007 because the act of earmarking or allocation is by itself an act of
ownership and management over the funds by MEDICARD which is beyond the
contemplation of RR No. 4-2007;
• 2) MEDICARD's earnings from its clinics and laboratory facilities cannot be excluded from
its gross receipts because the operation of these clinics and laboratory is merely an
incident to MEDICARD's main line of business as HMO and there is no evidence that
MEDICARD segregated the amounts pertaining to this at the time it received the premium
from its members; and
• 3) MEDICARD was not able to substantiate the amount pertaining to its January 2006
income and therefore has no basis to impose a 10% VAT rate.
• MEDICARD filed a Motion for Reconsideration but it was denied. Hence, MEDICARD
elevated the matter to the CTA en banc.
• In a Decision dated September 2, 2015, the CTA en banc partially granted the petition only
insofar as the 10% VAT rate for January 2006 is concerned but sustained the findings of
the CTA Division in all other matters.
• MEDICARD filed a motion for reconsideration but it was denied by the CTA. Hence,
MEDICARD now seeks recourse to this Court via a petition for review on certiorari.

ISSUE: Whether or Not the amounts that MEDICARD earmarked and eventually paid to the
medical service providers should still form part of its gross receipts for vat purposes?

HELD:
• NO.
• The amounts earmarked and actually spent for medical utilization of its members should
not be included in the computation of its gross receipts.
• MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CT A
Division that the gross receipts of an HMO for VAT purposes shall be the total amount of
money or its equivalent actually received from members undiminished by any amount paid
or payable to the owners/operators of hospitals, clinics and medical and dental
 practitioners.
• MEDICARD explains that its business as an HMO involves two different although
interrelated contracts. One is between a corporate client and MEDICARD, with the
corporate client's employees being considered as MEDICARD members; and the other is
between the health care institutions/healthcare professionals and MEDICARD.
• Under the first, MEDICARD undertakes to make arrangements with healthcare
institutions/healthcare professionals for the coverage of MEDICARD members under
specific health related services for a specified period of time in exchange for payment of a
more or less fixed membership fee. Under its contract with its corporate clients, MEDICARD
expressly provides that 20% of the membership fees per individual, regardless of the
amount involved, already includes the VAT of 10%/20% excluding the remaining 80%
because MEDICARD would earmark this latter portion for medical utilization of its
members. Lastly, MEDICARD also assails CIR's inclusion in its gross receipts of its earnings
from medical services which it actually and directly rendered to its members.
• Since an HMO like MEDICARD is primarily engaged in arranging for coverage or designated
managed care services that are needed by plan holders/members for fixed prepaid
membership fees and for a specified period, then MEDICARD is principally engaged in the
sale of services. Its VAT base and corresponding liability is, thus, determined under Section
108(A)32 of the Tax Code, as amended by Republic Act No. 9337.
• Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as
a dealer in securities whose gross receipts is the amount actually received as contract price
without allowing any deduction from the gross receipts. This restrictive tenor changed
under RR No. 16-2005. Under this RR, an HMO's gross receipts and gross receipts in
general were defined.
• HMO's gross receipts shall be the total amount of money or its equivalent representing the
service fee actually or constructively received during the taxable period for the services
performed or to be performed for another person, excluding the value-added tax. The
compensation for their services representing their service fee, is presumed to be the total
amount received as enrollment fee from their members plus other charges received.
• Section 4. 108-4. x x x. "Gross receipts" refers to 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 applied
as payments for services rendered, and advance payments actually or constructively
received during the taxable period for the services performed or to be performed for
another person, excluding the VAT.
• The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005
merely presumed that the amount received by an HMO as membership fee is the HMO's
compensation for their services. As a mere presumption, an HMO is, thus, allowed to
establish that a portion of the amount it received as membership fee does NOT actually
compensate it but some other person, which in this case are the medical service providers
themselves. It is a well-settled principle of legal hermeneutics that words of a statute will
be interpreted in their natural, plain and ordinary acceptation and signification, unless it is
evident that the legislature intended a technical or special legal meaning to those words.
The Court cannot read the word "presumed" in any other way.
• To summarize, the distinctive features of the cooperative are the rendering of service, its
extension, the bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid for; not, except incidentally to
these features, the indemnification for cost after .the services is rendered. Except the last,
these are not distinctive or generally characteristic of the insurance arrangement. There is,
therefore, a substantial difference between contracting in this way for the rendering of
service, even on the contingency that it be needed, and contracting merely to stand its
cost when or after it is rendered. (Emphasis ours).
 • The rule in the interpretation of tax laws is that a statute will not be construed as imposing
a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed
without clear and express words for that purpose. Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar strictness to tax laws
and the provisions of a taxing act are not to be extended by implication. In answering the
question of who is subject to tax statutes, it is basic that in case of doubt, such statutes
are to be construed most strongly against the government and in favor of the subjects or
citizens because burdens are not to be imposed nor presumed to be imposed beyond what
statutes expressly and clearly import. As burdens, taxes should not be unduly exacted nor
assumed beyond the plain meaning of the tax laws.
• The Court rules that for purposes of determining the VAT liability of an HMO, the
amounts earmarked and actually spent for medical utilization of its members
should not be included in the computation of its gross receipts.

COMMISSIONER OF INTERNAL REVENUE v.

SM PRIME HOLDINGS, INC. and FIRST ASIA REALTY DEVELOPMENT CORPORATION
G.R. No. 183505, February 26, 2010

FACTS :
• CTA Case No. 7079 - On September 26, 2003, the BIR sent SM Prime a Preliminary
Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema ticket sales in the
amount of ₱119,276,047.40 for taxable year 2000.
• In response, SM Prime filed a letter-protest dated December 15, 2003.
• On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged
VAT deficiency, which the latter protested in a letter dated January 14, 2004.
• On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay
the VAT deficiency for taxable year 2000 in the amount of ₱124,035,874.12.
• On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA
Case No. 7079.
• CTA Case No. 7085 - On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount of ₱35,823,680.93. First Asia
protested the PAN in a letter dated July 9, 2002.
• Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency
which was protested by First Asia in a letter dated December 12, 2002.
• On September 6, 2004, the BIR rendered a Decision denying the protest and ordering First
Asia to pay the amount of ₱35,823,680.93 for VAT deficiency for taxable year 1999.
• Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA,
docketed as CTA Case No. 7085.
• CTA Case No. 7111 - On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency
on cinema ticket sales for taxable year 2000 in the amount of ₱35,840,895.78. First Asia
protested the PAN through a letter dated April 22, 2004.
• Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency. First Asia
protested the same in a letter dated July 9, 2004.
• On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT
deficiency in the amount of ₱35,840,895.78 for taxable year 2000.
• This prompted First Asia to file a Petition for Review before the CTA on December 16, 2004.
The case was docketed as CTA Case No. 7111.
• CTA Case No. 7272
• Re: Assessment Notice No. 008-02
• A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total
 amount of ₱32,802,912.21 was issued against First Asia by the BIR. In response, First Asia
filed a protest-letter dated November 11, 2004. The BIR then sent a Formal Letter of
Demand, which was protested by First Asia on December 14, 2004.
• Re: Assessment Notice No. 003-03
• A PAN for VAT deficiency on cinema ticket sales in the total amount of ₱28,196,376.46 for
the taxable year 2003 was issued by the BIR against First Asia. In a letter dated
September 23, 2004, First Asia protested the PAN. A Formal Letter of Demand was
thereafter issued by the BIR to First Asia, which the latter protested through a letter dated
November 11, 2004.
• On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia
to pay the amounts of ₱33,610,202.91 and ₱28,590,826.50 for VAT deficiency for taxable
years 2002 and 2003, respectively.
• Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as
CTA Case No. 7272.
• Consolidated Petitions - The Commissioner of Internal Revenue (CIR) filed his Answers
to the Petitions filed by SM Prime and First Asia . SM Prime Motion to Consolidate CTA Case
Nos. 7085, 7111 and 7272 with CTA Case No. 7079 on the grounds that the issues raised
therein are identical and that SM Prime is a majority shareholder of First Asia was granted.
• CTA DIVISION RULINGS:
• CTA rendered a Decision granting the Petition for Review. Resorting to the language used
and the legislative history of the law, it ruled that the activity of showing cinematographic
films is not a service covered by VAT under the National Internal Revenue Code (NIRC) of
1997, as amended, but an activity subject to amusement tax under RA 7160, otherwise
known as the Local Government Code (LGC) of 1991. CTA 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 State‘s 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 unit. The CTA First Division likewise found that
(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. Assessment Notices Nos. VT-00-
000098, VT-99-000057, VT-00-000122, 003- 03 and 008-02 are ORDERED cancelled and
set aside.
• CTA ENBANC RULINGS:
• 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. 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.

ISSUE: Whether gross receipts derived from admission tickets by cinema/theater operators or
proprietors are subject to VAT.

HELD:
• 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, 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.
• Petition DENIED. The Decision of the CTA En Banc holding that gross receipts derived by
respondents from admission tickets in showing motion pictures, films or movies are not
subject to value-added tax under Section 108 of the National Internal Revenue Code of
1997 AFFIRMED.

DIAZ V. THE SECRETARY OF FINANCE AND CIR

GR No. 193007. July 19, 2011

DOCTRINE:
• 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."
• Fees paid by the public to tollway operators for use of the tollways, are not taxes in any
sense.
• VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an
indirect tax.
FACTS:
• Petitioners assails the validity of the impending imposition of VAT on the collections of
tollway operators. They 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.
• Petitioners 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 "user‘s 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.

ISSUE: W/N toll fees collected by tollway operators can be subjected to VAT.
HELD:
• Yes.
• Sec. 108 of NIRC 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 VAT‘s 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.
• PD 1112 or the Toll Operation Decree establishes the legal basis for the services that
tollway operators render.
• Essentially, tollway operators construct, maintain, and operate expressways, 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 latter‘s 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.
• 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 ₱10 million and gas and water utilities) that Section 119 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.
• Tollway operators are, owing to the nature and object of their business, "franchise
grantees." The construction, operation, and maintenance of toll facilities on public
improvements are activities of public consequence that necessarily require a special grant
of authority from the state. Indeed, Congress granted special franchise for the operation of
tollways to the Philippine National Construction Company, the former tollway
concessionaire for the North and South Luzon Expressways. Apart from Congress, tollway
franchises may also be granted by the TRB, pursuant to the exercise of its delegated
powers under PD 1112. The franchise in this case is evidenced by a "Toll Operation
Certificate.”
• 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. Although toll fees are charged for the use of
public facilities, therefore, they are not government exactions that can be properly treated
as a tax. 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.
• Parenthetically, 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 seller‘s liability but merely the burden of the VAT.
• Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer
bears its burden since the amount of VAT paid by the former is added to the selling price.
Once shifted, the VAT ceases to be a tax and simply becomes part of the cost that the
buyer must pay in order to purchase the good, property or service.
• 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 "user‘s tax." VAT is assessed against the tollway operator‘s 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.

D. Zero-rated Sales and Exempt Sales

CIR v. UNITED CADIZ

G.R. No. 209776, December 07, 2016, J. Brion

FACTS:
• The respondent United Cadiz Sugar Farmers Association Multi-purpose Cooperative
(UCSFA-MPC) is a multi-purpose cooperative. Tax exemtion was granted in favor of UCSFA-
MPC. In November 2007, BIR Regional Director Rodita B. Galanto of BIR Region 12 -
Bacolod City required UCSFA-MPC to pay in advance the value-added tax (VAT) before her
office could issue the Authorization Allowing Release of Refined Sugar (AARRS) from the
sugar refinery/mill.
• Coop made query. the CIR ruled that the cooperative "is considered as the actual producer
of the members' sugarcane production, because it primarily provided the various inputs
(fertilizers), capital, technology transfer, and farm management."
• Regional Director Galanto, again demanded the payment of advance VAT from UCSFA-MPC.
Forced to pay. On November 11, 2009, UCSFA-MPC filed an administrative claim for refund
with the BIR under the Cooperative Code.
• The CTA division ruled in UCSFA-MPC's favor. the division held that the amount of
P3,469,734.00 representing advance VAT on 34,017 LKG bags of refined sugar withdrawn
from the refinery, was illegally or erroneously collected by the BIR. MR denied. the CTA en
banc affirmed the CTA division's ruling

ISSUE: W/N the granted exemption also covers the payment of advance VAT upon withdrawal of
refined sugar from the refinery or mill.

HELD:
• As we discussed above, the sale of refined sugar by an agricultural cooperative is exempt
from VAT. To fully understand the difference between VAT on the sale of refined sugar and
the advance VAT upon withdrawal of refined sugar, we distinguish between the tax liability
that arises from the imposition of VAT and the obligation of the taxpayer to pay the same.
• Persons liable for VAT on the sale of goods shall pay the VAT due, in general, on a monthly
basis. VAT accruing from the sale of goods in the current month shall be payable the
following month.
• However, there are instances where VAT is required to be paid in advance, such as in the
sale of refined sugar.
• To specifically address the policies and procedures governing the advance payment of VAT
on the sale of refined sugar, RR Nos. 6-2007 and 13-2008 were issued.
• Under these regulations, VAT on the sale of refined sugar that, under regular
circumstances, is payable within the month following the actual sale of refined sugar, shall
nonetheless be paid in advance before the refined sugar can even be withdrawn from the
sugar refinery/mill by the sugar owner. Any advance VAT paid by sellers of refined sugar
shall be allowed as credit against their output tax on the actual gross selling price of
refined sugar.
• Recall in this regard that VAT is a transaction tax imposed at every stage of the distribution
process: on the sale, barter, exchange, or lease of goods or services.60 Simply stated, VAT
generally arises because an actual sale, barter, or exchange has been consummated.
• In the sugar industry, raw sugar is processed in a refinery/mill which thereafter transforms
the raw sugar into refined sugar. The refined sugar is then withdrawn or taken out of the
refinery/mill and sold to customers. Under this flow, the withdrawal of refined sugar
evidently takes place prior to its sale.
• The VAT implications of the withdrawal of refined sugar from the sugar refinery/mill and
the actual sale of refined sugar are different.
• While the sale is the actual transaction upon which VAT is imposed, the withdrawal gives
rise to the obligation to pay the VAT due, albeit in advance. Therefore, the requirement for
the advance payment of VAT for refined sugar creates a special situation: While the
transaction giving rise to the imposition of VAT — the actual sale of refined sugar — has
not yet taken place, the VAT that would be due from the subsequent sale is, nonetheless,
already required to be paid earlier, which is before the withdrawal of the goods from the
sugar refinery/mill.
• To be clear, the transaction subject to VAT is still the sale of refined sugar. The withdrawal
of sugar is not a separate transaction subject to VAT. It is only the payment thereof that is
required to be made in advance. While the payment of advance VAT on the sale of refined
sugar is, in general, required before these goods may be withdrawn from the refinery/mill,
cooperatives are exempt from this requirement because they are cooperatives.
• Revenue regulations specifically provide that such withdrawal shall not be subject to the
payment of advance VAT if the following requisites are present, viz:
• First, the withdrawal is made by a duly accredited and registered agricultural cooperative
in good standing.6It was later clarified that a cooperative is in good standing if it is a
holder of a certificate of good standing issued by the CDA.
• Second, the cooperative should also the producer of the sugar being withdrawn.
• Third, the cooperative withdrawing the refined sugar should subsequently sell the same to
either its members or another agricultural cooperative.
• In sum, the sale of refined sugar by an agricultural cooperative duly registered
with the CDA is exempt from VAT. A qualified cooperative also enjoys exemption
from the requirement of advance payment of VAT upon withdrawal from the
refinery/mill. The agricultural cooperative's exemption from the requirement of
advance payment is a logical consequence of the exemption from VAT of its sales
of refined sugar.
• We elaborate on this point as follows:
• First, the VAT required to be paid in advance (upon withdrawal) is the same VAT to be
imposed on the subsequent sale of refined sugar. If the very transaction (sale of refined
sugar) is VAT-exempt, there is no VAT to be paid in advance because, simply, there is no
 transaction upon which VAT is to be imposed.
• Second, any advance VAT paid upon withdrawal shall be allowed as credit against its
output tax arising from its sales of refined sugar. If all sales by a cooperative are VAT-
exempt, no output tax shall materialize. It is simply absurd to require a cooperative to
make advance VAT payments if it will not have any output tax against which it can
use/credit its advance payments.

CORAL BAY NICKEL CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

G.R. No. 190506, June 13, 2016, BERSAMIN, J.:

FACTS:
• Coral Bay Nickel Corporation, the petitioner is a VAT registered entity. It is also registered
with Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise. The
appeal to the Supreme Court was brought by the petitioner, when its claim for refund or
credit to its alleged input tax for the third and fourth quarters of the year 2002 was denied
by CTA Division, and which decision was subsequently upheld by CTA En Banc.
• CTA Division denied petitioner's claim for refund, following Section 106(A)(2)(a)(5) of the
National Internal Revenue Code (NIRC) of 1997, as amended, in relation to Article 77(2) of
the Omnibus Investment Code and conformably with the Cross Border Doctrine. In support
of its ruling, the CTA in Division cited Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils) Inc. (Toshiba).
• Petitioner contends that Toshiba is not applicable inasmuch as the unutilized input VAT
subject of its claim was incurred from May 1, 2002 to December 31, 2002 as a VAT-
registered taxpayer, not as a PEZA-registered enterprise; that during the period subject of
its claim, it was not yet registered with PEZA because it was only on December 27, 2002
that its Certificate of Registration was issued; that until then, it could not have refused the
payment of VAT on its purchases because it could not present any valid proof of zero-rating
to its VAT-registered suppliers; and that it complied with all the procedural and substantive
requirements under the law and regulations for its entitlement to the refund.

ISSUE: Whether or not, petitioner, an entity located within an ECOZONE, is entitled to the refund
of its unutilized input taxes incurred before it became a PEZA-registered entity.

HELD:
• NO.
• Prior to the effectivity of RMC 74-99, the old VAT rule for PEZA-registered enterprises was
based on their choice of fiscal incentives, namely:
• (1) if the PEZA-registered enterprise chose the 5% preferential tax on its gross income in
lieu of all taxes, as provided by Republic Act No. 7916, as amended, then it was VAT-
exempt; and
• (2) if the PEZA-registered enterprise availed itself of the income tax holiday under
Executive Order No. 226, as amended, it was subject to VAT at 10%17 (now, 12%).
• This is not true with the petitioner. With the issuance of RMC 74-99, the distinction under
the old rule was disregarded and the new circular took into consideration the two important
principles of the Philippine VAT system: the Cross Border Doctrine and the Destination
Principle.
• The petitioner's principal office was located in Barangay Rio Tuba, Bataraza, Palawan. Its
plant site was specifically located inside the Rio Tuba Export Processing Zone - a special
economic zone (ECOZONE). As such, the purchases of goods and services by the petitioner
that were destined for consumption within the ECOZONE should be free of VAT; hence, no
input VAT should then be paid on such purchases, rendering the petitioner not entitled to
 claim a tax refund or credit.
• Verily, if the petitioner had paid the input VAT, the CTA was correct in holding that the
petitioner's proper recourse was not against the Government but against the seller who
had shifted to it the output VAT.
• In the meantime, the claim for input tax credit by the exporter-buyer should be denied
without prejudice to the claimant's right to seek reimbursement of the VAT paid, if any,
from its supplier. We should also take into consideration the nature of VAT as an indirect
tax. Although the seller is statutorily liable for the payment of VAT, the amount of the tax is
allowed to be shifted or passed on to the buyer. However, reporting and remittance of the
VAT paid to the BIR remained to be the seller/supplier's obligation. Hence, the proper party
to seek the tax refund or credit should be the suppliers, not the petitioner.
• In view of the foregoing considerations, the Court must uphold the rejection of the appeal
of the petitioner.

COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES)

451 SCRA 132, February 11, 2005

DOCTRINES:
1. The VAT on capital goods is an internal revenue tax from which petitioner as an entity is
exempt. Although the transactions involving such tax are not exempt, petitioner as a VAT-
registered person, however, is entitled to their credits.
2. The VAT is an indirect tax that may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services.
3. Zero-rated transactions generally refer to the export sale of goods and supply of services.
The tax rate is set at zero. When applied to the tax base, such rate obviously results in no
tax chargeable against the purchaser. The seller of such transactions charges no output
tax, but can claim a refund of or a tax credit certificate for the VAT previously charged by
suppliers.
4. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales
nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its
purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not
distinguish, we ought not to distinguish.
5. Tax refunds are in the nature of such exemptions. Accordingly, the claimants of those
refunds bear the burden of proving the factual basis of their claims; and of showing, by
words too plain to be mistaken, that the legislature intended to exempt them.

FACTS:
• Seagate is a resident foreign corporation duly registered with the SEC to do business in the
Philippines, with principal office at the new Cebu Township One, Special Economic Zone,
Barangay Cantao-an, Naga, Cebu. Seagate is registered with the Philippine Export Zone
Authority (PEZA) and has been issued PEZA Certificate No. 97-044 pursuant to Presidential
Decree No. 66, as amended, to engage in the manufacture of recording components
primarily used in computers for export. Such registration was made on 6 June 1997.
Seagate is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration
Certification No. 97- 083-000600-V issued on 2 April 1997. VAT returns for the period 1
April 1998 to 30 June 1999 have been filed by Seagate.
• A 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 with Revenue District Office No. 83,
Talisay Cebu. No final action has been received by Seagate from CIR on Seagate claim for
VAT refund.
ISSUE: W/N respondent is entitled to the refund or issuance of Tax Credit Certificate representing
alleged unutilized input VAT paid on capital goods purchased.

HELD:
• 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 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.
• Preferential Tax Treatment Under Special Laws
• Respondent enjoys preferential tax treatment. It is not subject to internal revenue laws
and regulations and is even entitled to tax credits. The VAT on capital goods is an internal
revenue tax from which respondent as an entity is exempt. Although the transactions
involving such tax are not exempt, petitioner as a VAT-registered person, however, is
entitled to their credits.
• Nature of the VAT and the Tax Credit Method
• Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent
levied on every importation of goods, whether or not in the course of trade or business, or
imposed on each sale, barter, exchange or lease of goods or properties or on each
rendition of services in the course of trade or business as they pass along the production
and distribution chain, the tax being limited only to the value added to such goods,
properties or services by the seller, transferor or lessor. It is an indirect tax that may be
shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.
As such, it should be understood not in the context of the person or entity that is primarily,
directly and legally liable for its payment, but in terms of its nature as a tax on
consumption. In either case, though, the same conclusion is arrived at.
• The law that originally imposed the VAT in the country, as well as the subsequent
amendments of that law, has been drawn from the tax credit method. Such method
adopted the mechanics and self-enforcement features of the VAT as first implemented and
practiced in Europe and subsequently adopted in New Zealand and Canada. Under the
present method that relies on invoices, an entity can credit against or subtract from the
VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.
• If at the end of a taxable quarter the output taxes charged by a seller are equal to the
input taxes passed on by the suppliers, no payment is required. It is when the output taxes
exceed the input taxes that the excess has to be paid. If, however, the input taxes exceed
the output taxes, the excess shall be carried over to the succeeding quarter or quarters.
Should the input taxes result from zero-rated or effectively zero-rated transactions or from
the acquisition of capital goods, any excess over the output taxes shall instead be refunded
to the taxpayer or credited against other internal revenue taxes.
E. Input Tax

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
SONY PHILIPPINES, INC., respondent.
G.R. No. 178697. November 17, 2010

DOCTRINE(1): It is evident under Section 110 of the 1997 Tax Code that an advertising expense
duly covered by a Value Added Tax (VAT) invoice is a legitimate business expense.—

The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the
CTA-EB, Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT
credits that should have been realized from the advertising expense of the latter. It is evident
under Section 110 of the 1997 Tax Code that an advertising expense duly covered by a VAT
invoice is a legitimate business expense. This is confirmed by no less than CIR’s own witness,
Revenue Officer Antonio Aluquin. There is also no denying that Sony incurred advertising expense.
Aluquin testified that advertising companies issued invoices in the name of Sony and the latter
paid for the same. Indubitably, Sony incurred and paid for advertising expense/ services. Where
the money came from is another matter all t ogether but will definitely not change said fact.

DOCTRINE (2): Value Added Tax (VAT); Services rendered for a fee even on reimbursement-on-
cost basis only and without realizing profit are also subject to Value Added Tax (VAT).—

In the case of CIR v. Court of Appeals (CA), 329 SCRA 237 (2000), the Court had the occasion to
rule that services rendered for a fee even on reimbursement-on-cost basis only and without
realizing profit are also subject to VAT. The case, however, is not applicable to the present case. In
that case, COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was paid the cost or expense that it incurred although
without profit. This is not true in the present case. Sony did not render any service to SIS at all.
The services rendered by the advertising companies, paid for by Sony using SIS dole-out, were for
Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent to the latter’s
advertising expense but never received any goods, properties or service from Sony.

FACTS:
• On November 24, 1998, the CIR issued Letter of Authority (LOA) authorizing certain
revenue officers to examine Sony’s books of accounts and other accounting records
regarding revenue taxes for “the period 1997 and unverified prior years.”
• On December 6, 1999, a preliminary assessment for 1997 deficiency taxes and penalties
was issued by the CIR which Sony protested.
• Thereafter, acting on the protest, the CIR issued final assessment notices, the formal letter
of demand and the details of discrepancies.
• Sony sought re-evaluation of the aforementioned assessment by filing a protest on
February 2, 2000. Sony submitted relevant documents in support of its protest on the 16th
of that same month.
• On October 24, 2000, within 30 days after the lapse of 180 days from submission of the
said supporting documents to the CIR, Sony filed a petition for review before the CTA.
• After trial, the CTA-First Division disallowed the deficiency VAT assessment because the
subsidized advertising expense paid by Sony which was duly covered by a VAT invoice
resulted in an input VAT credit. As regards the EWT, the CTA-First Division maintained the
deficiency EWT assessment on Sony’s motor vehicles and on professional fees paid to
general professional partnerships. It also assessed the amounts paid to sales agents as
commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations
No. 6-85. The CTA-First Division, however, disallowed the EWT assessment on rental
expense since it found that the total rental deposit of P10,523,821.99 was incurred from
 January to March 1998 which was again beyond the coverage of LOA 19734. Except for the
compromise penalties, the CTA-First Division also upheld the penalties for the late payment
of VAT on royalties, for late remittance of final withholding tax on royalty as of December
1997 and for the late remittance of EWT by some of Sony’s branches. In sum, the CTA-First
Division partly granted Sony’s petition by cancelling the deficiency VAT assessment but
upheld a modified deficiency EWT assessment as well as the penalties.
• DISPOSITIVE PORTION:

“WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is

ORDERED to CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for
lack of merit. However, the deficiency assessments for expanded withholding tax and penalties for
late remittance of internal revenue taxes are UPHELD.

Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding
tax in the amount of P1,035,879.70 and the following penalties for late remittance of internal
revenue taxes in the sum of P1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty P 831,428.20
3. EWT of Petitioner’s Branches P 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)
(3) of the 1997 Tax Code. SO ORDERED.”

• The CIR sought a reconsideration of the above decision but the CTA-First Division denied
the motion for reconsideration. The CIR filed a petition for review with the CTA-EB.
• The CTA-EB dismissed CIR’s petition on May 17, 2007. CIR’s motion for reconsideration was
denied by the CTA-EB on July 5, 2007. Hence, this petition.

ISSUES:
1. W/N Sony is liable for deficiency VAT.
2. W/N the CTA En Banc erred in ruling that the commision expense should be subjected to a
withholding tax of 5% instead of 10% tax rate.
3. W/N the CTA En Banc erred in ruling that the assessment with respect to the 5%
withholding tax on rental deposit is not proper.

HELD:
1. NO.
As aptly found by the CTA-First Division and later affirmed by the CTA-EB, Sony’s deficiency VAT
assessment stemmed from the CIR’s disallowance of the input VAT credits that should have been
realized from the advertising expense of the latter. It is evident under Section 110 of the 1997 Tax
Code that an advertising expense duly covered by a VAT invoice is a legitimate business expense.
This is confirmed by no less than CIR’s own witness, Revenue Officer Antonio Aluquin.

There is also no denying that Sony incurred advertising expense. Aluquin testified that advertising
companies issued invoices in the name of Sony and the latter paid for the same. Indubitably, Sony
incurred and paid for advertising expense/services. Where the money came from is another
matter all together but will definitely not change said fact.

Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to
income tax, the Court agrees. However, the Court does not agree that the same subsidy should b
subject to the 10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was
not even exclusively earmarked for Sony’s advertising expense for it was but an assistance or aid
in view of Sony’s dire or adverse economic conditions, and was only “equivalent to the latter’s
(Sony’s) advertising expenses.”

Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:

“SEC. 106. Value-added Tax on Sale of Goods or Pro perties.—

(A) Rate and Base of Tax.—There shall be levied, assessed and collected on every sale,
barter or exchange of goods or properties, valueadded tax equivalent to ten percent (10%)
of the gross selling price or gross value in money of the goods or properties sold, bartered
or exchanged, such tax to be paid by the seller or transferor.”

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be
levied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony.
It was but a dole out by SIS and not in payment for goods or propertie sold, bartered or
exchanged by Sony.

In the case of CIR v. Court of Appeals (CA), the Court had the occasion to rule that services
rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also
subject to VAT. The case, however, is not applicable to the present case. In that case,
COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was paid the cost or expense that it incurred although
without profit. This is not true in the present case.

Sony did not render any service to SIS at all. The services rendered by the advertising companies,
paid for by Sony using SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony
in the amount equivalent to the latter’s advertising expense but never received any goods,
properties or service from Sony.

2. YES, it should be subjected to 5% tax rate.

Regarding the deficiency EWT assessment, more particularly Sony’s commission expense, the CIR
insists that said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the
five percent (5%) citing Revenue Regulation No. 2-98 dated April 17, 1998.

On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based
on Section 1(g) of Revenue Regulations No. 6-85.

The Court agrees with the CTA-EB when it affirmed the CTAFirst Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12- 94,
which was the applicable rule during the subject period of examination and assessment as
specified in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April
1998 and, therefore, cannot be applied in the present case. Besides, the withholding tax on
brokers and agents was only increased to 10% much later or by the end of July 2001 under
Revenue Regulations No. 6-2001. Until then, the rate was only 5%.

3. NO.
The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency
EWT assessment on the rental deposit. According to their findings, Sony incurred the subject
rental deposit in the amount of P10,523,821.99 only from January to March 1998. As stated
earlier, in the absence of the appropriate LOA specifying the coverage, the CIR’s deficiency EWT
assessment from January to March 1998, is not valid and must be disallowed.
 FORT BONIFACIO DEVELOPMENT CORP v. COMMISSIONER OF INTERNAL REVENUE
G.R. No. 173425, September 4, 2012

DOCTRINE: It is argued that prior payment of taxes is a prerequisite before a taxpayer could
avail of the transitional input tax credit. This argument has long been settled. To reiterate, prior
payment of taxes is not necessary before a taxpayer could avail of the 8% transitional input tax
credit. This position is solidly supported by law and jurisprudence.

FACTS:
• By virtue of RA 7227, creating the Bases Conversion Development Authority, and EO No.
40, petitioner FBDC purchased from the national government a portion of the Fort
Bonifacio reservation, now known as the Fort Bonifacio Global City (Global City).
• After the restructuring of the VAT systems, through RA 7716, by extending its coverage to
real properties held primarily for sale to customers or held for lease in the ordinary course
of trade or business, petitioner FBDC submitted to the Bureau of Internal Revenue (BIR) an
inventory of all its real properties.
• Petitioner FBDC started selling Global City lots to interested buyers and paid the output
VAT by making cash payments to the BIR. Realizing that its transitional input tax credit
was not applied in computing its output VAT for the first quarter of 1997, petitioner FBDC
filed with the BIR a claim for refund of the amount of ₱359,652,009.47 erroneously paid as
output VAT for the said period. Due to the inaction of the respondent CIR, petitioner FBDC
elevated the matter to the CTA.
• The CTA denied petitioner FBDC‘s claim for refund on the ground that the benefit of
transitional input tax credit comes with the condition that business taxes should have been
paid first. In this case, since petitioner FBDC acquired the Global City property under a
VAT-free sale transaction, it cannot avail of the transitional input tax credit. It likewise
pointed out that under RR 7- 95, implementing Section 105 of the old NIRC, the 8%
transitional input tax credit should be based on the value of the improvements on land
such as buildings, roads, drainage system and other similar structures, constructed on or
after January 1, 1998, and not on the book value of the real property. On appeal, the Court
of Appeals (CA) affirmed the decision of the CTA.

ISSUES: Whether or not petitioner FBDC is entitled to 8% transitional input tax credit provided in
Section 105 of the old NIRC?

HELD:
• YES.
• The Court held that petitioner FBDC is entitled to the 8% transitional input tax credit
provided in Section 105 of the old NIRC. The fact that it acquired the Global City property
under a tax-free transaction makes no difference as prior payment of taxes is not a pre-
requisite.
• Section 105 of the old NIRC reads:
• 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.
• Contrary to the view of the CTA and the CA, there is nothing in the above-quoted provision
to indicate that prior payment of taxes is necessary for the availment of the 8% transitional
input tax credit. Obviously, all that is required is for the taxpayer to file a beginning
inventory with the BIR.
• To require prior payment of taxes, as proposed in the Dissent is not only tantamount to
 judicial legislation but would also render nugatory the provision in Section 105 of the old
NIRC that the transitional input tax credit shall be ―8% of the value of [the beginning]
inventory or the actual [VAT] paid on such goods, materials and supplies, whichever is
higher‖ because the actual VAT (now 12%) paid on the goods, materials, and supplies
would always be higher than the 8% (now 2%) of the beginning inventory which, following
the view of Justice Carpio, would have to exclude all goods, materials, and supplies where
no taxes were paid.
• Clearly, limiting the value of the beginning inventory only to goods, materials, and
supplies, where prior taxes were paid, was not the intention of the law. Otherwise, it would
have specifically stated that the beginning inventory excludes goods, materials, and
supplies where no taxes were paid.
• Moreover, prior payment of taxes is not required to avail of the transitional input tax credit
because it is not a tax refund per se but a tax credit. Tax credit is not synonymous to tax
refund. Tax refund is defined as the money that a taxpayer overpaid and is thus returned
by the taxing authority. Tax credit, on the other hand, is an amount subtracted directly
from one‘s total tax liability. It is any amount given to a taxpayer as a subsidy, a refund, or
an incentive to encourage investment. Thus, unlike a tax refund, prior payment of taxes is
not a prerequisite to avail of a tax credit.
• However, the Court did not agree with its finding that the carry-over of tax credits under
the said special law to succeeding taxable periods, and even their application against
internal revenue taxes, did not necessitate the existence of a tax liability.
• In this case, when petitioner FBDC realized that its transitional input tax credit was not
applied in computing its output VAT for the 1st quarter of 1997, it filed a claim for refund
to recover the output VAT it erroneously or excessively paid for the 1st quarter of 1997. In
filing a claim for tax refund, petitioner is simply applying its transitional input tax credit
against the output VAT it has paid. Hence, it is merely availing of the tax credit incentive
given by law to first time VAT taxpayers.
• Obviously then, the purpose behind the transitional input tax credit is not confined to the
transition from sales tax to VAT.
• There is hardly any constricted definition of "transitional" that will limit its possible
meaning to the shift from the sales tax regime to the VAT regime. Indeed, it could also
allude to the transition one undergoes from not being a VAT-registered person to becoming
a VAT-registered person. Such transition does not take place merely by operation of law,
EO No. 273 or RA No. 7716, in particular. It could also occur when one decides to start a
business. Section 105 states that the transitional input tax credits become available either
to (1) a person who becomes liable to VAT; or (2) any person who elects to be VAT-
registered. The clear language of the law entitles new trades or businesses to avail of the
tax credit once they become VAT-registered. The transitional input tax credit, whether
under the Old NIRC or the New NIRC, may be claimed by a newly-VAT registered person
such as when a business as it commences operations. If we view the matter from the
perspective of a starting entrepreneur, greater clarity emerges on the continued utility of
the transitional input tax credit.
• 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 regards
Section 4.105-1 of RR 7-95 which limited the 8% transitional input tax credit to the value
of the improvements on the land, the same contravenes the provision of Section 105 of the
old NIRC, in relation to Section 100 of the same Code, as amended by RA 7716, which
 defines "goods or properties," as tangible and intangible objects which are capable of
pecuniary estimation and shall include real properties held primarily for sale to customers
or held for lease in the ordinary course of trade or business.
• To be valid, an administrative rule or regulation must conform, not contradict, the
provisions of the enabling law. An implementing rule or regulation cannot modify, expand,
or subtract from the law it is intended to implement. Any rule that is not consistent with
the statute itself is null and void.

F. VAT Refund

ATLAS CONSOLIDATED MINING DEVT CORP v. CIR

524 SCRA 73, 103 GR Nos. 141104 & 148763, June 8, 2007

DOCTRINE/S:
1. "The taxpayer must justify his claim for tax exemption or refund by the clearest grant of
organic or statute law and should not be permitted to stand on vague implications."
2. "Export processing zones (EPZA) are effectively considered as foreign territory for tax
purposes."

FACTS:
• Petitioner corporation, a VAT-registered taxpayer engaged in mining, production, and sale
of various mineral products, filed claims with the BIR for refund/credit of input VAT on its
purchases of capital goods and on its zero-rated sales in the taxable quarters of the years
1990 and 1992. BIR did not immediately act on the matter prompting the petitioner to file
a petition for review before the CTA.
• The latter denied the claims on the grounds that for zero-rating to apply, 70% of the
company's sales must consists of exports, that the same were not filed within the 2-year
prescriptive period (the claim for 1992 quarterly returns were judicially filed only on April
20, 1994), and that petitioner failed to submit substantial evidence to support its claim for
refund/credit.
• The petitioner, on the other hand, contends that CTA failed to consider the following: sales
to PASAR and PHILPOS within the EPZA as zero-rated export sales; the 2-year prescriptive
period should be counted from the date of filing of the last adjustment return which was
April 15, 1993, and not on every end of the applicable quarters; and that the certification
of the independent CPA attesting to the correctness of the contents of the summary of
suppliers‘ invoices or receipts examined, evaluated and audited by said CPA should
substantiate its claims.

ISSUE: Did the petitioner corporation sufficiently establish the factual bases for its applications
for refund/credit of input VAT?

HELD:
• NO.
• Although the Court agreed with the petitioner corporation that the two-year prescriptive
period for the filing of claims for refund/credit of input VAT must be counted from the date
of filing of the quarterly VAT return, and that sales to PASAR and PHILPOS inside the EPZA
are taxed as exports because these export processing zones are to be managed as a
separate customs territory from the rest of the Philippines, and thus, for tax purposes, are
effectively considered as foreign territory, it still denies the claims of petitioner corporation
for refund of its input VAT on its purchases of capital goods and effectively zero-rated sales
during the period claimed for not being established and substantiated by appropriate and
 sufficient evidence.
• Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the
sovereign authority, and should be construed in strictissimi juris against the person or
entity claiming the exemption. The taxpayer who claims for exemption must justify his
claim by the clearest grant of organic or statute law and should not be permitted to stand
on vague implications.

CIR v. SAN ROQUE POWER CORPORATION

G.R. No. 187485, February 12, 2013

FACTS:
• On October 11, 1997, [San Roque] entered into a Power Purchase Agreement ("PPA") with
the National Power Corporation ("NPC") to develop hydro-potential of the Lower Agno River
and generate additional power and energy for the Luzon Power Grid, by building the San
Roque Multi-Purpose Project located in San Manuel, Pangasinan. The PPA provides, among
others, that [San Roque] shall be responsible for the design, construction, installation,
completion, testing and commissioning of the Power Station and shall operate and maintain
the same, subject to NPC instructions.
• On the construction and development of the San Roque Multi- Purpose Project which
comprises of the dam, spillway and power plant, [San Roque] allegedly incurred, excess
input VAT in the amount of ₱559,709,337.54 for taxable year 2001 which it declared in its
Quarterly VAT Returns filed for the same year. [San Roque] duly filed with the BIR separate
claims for refund, in the total amount of ₱559,709,337.54.
• However, on March 28, 2003, [San Roque] filed amended Quarterly VAT Returns for the
year 2001 since it increased its unutilized input VAT to the amount of ₱560,200,283.14.
Consequently, [San Roque] filed with the BIR on even date, separate amended claims for
refund in the aggregate amount of ₱560,200,283.14. [CIR‘s] inaction on the subject claims
led to the filing by [San Roque] of the Petition for Review with the Court [of Tax Appeals] in
Division on April 10, 2003.
• The CTA Second Division initially denied San Roque‘s claim. In its Decision dated 8
March 2006, it cited the following as bases for the denial of San Roque‘s claim: lack of
recorded zero-rated or effectively zero-rated sales; failure to submit documents specifically
identifying the purchased goods/services related to the claimed input VAT which were
included in its Property, Plant and Equipment account; and failure to prove that the related
construction costs were capitalized in its books of account and subjected to depreciation.
• The CTA Second Division required San Roque to show that it complied with the following
requirements of Section 112(B) of (RA 8424) to be entitled to a tax refund or credit of
input VAT attributable to capital goods imported or locally purchased: (1) it is a VAT-
registered entity; (2) its input taxes claimed were paid on capital goods duly supported by
VAT invoices and/or official receipts; (3) it did not offset or apply the claimed input VAT
payments on capital goods against any output VAT liability; and (4) its claim for refund was
filed within the twoyear prescriptive period both in the administrative and judicial levels.
• San Roque filed a Motion for New Trial and/or Reconsideration on 7 April 2006. In its
November 2007 Amended Decision, the CTA Second Division found legal basis to partially
grant San Roque‘s claim. The CTA Second Division ordered the Commissioner to refund or
issue a tax credit in favor of San Roque in the amount of ₱483,797,599.65, which
represents San Roque‘s unutilized input VAT on its purchases of capital goods and services
for the taxable year 2001. The CTA based the adjustment in the amount on the findings of
the independent certified public accountant. The following reasons were cited for the
disallowed claims: erroneous computation; failure to ascertain whether the related
purchases are in the nature of capital goods; and the purchases pertain to capital goods.
Moreover, the reduction of claims was based on the following: the difference between San
 Roque‘s claim and that appearing on its books; the official receipts covering the claimed
input VAT on purchases of local services are not within the period of the claim; and the
amount of VAT cannot be determined from the submitted official receipts and invoices.
• The CTA Second Division denied San Roque‘s claim for refund or tax credit of its
unutilized input VAT attributable to its zero-rated or effectively zero-rated sales because
San Roque had no record of such sales for the four quarters of 2001.
• The Commissioner filed a Petition for Review before the CTA EB praying for the denial of
San Roque‘s claim for refund or tax credit in its entirety as well as for the setting aside of
the 29 November 2007 Amended Decision and the 11 July 2008 Resolution in CTA Case No.
6647.
• The CTA EB dismissed the CIR‘s petition for review and affirmed the challenged
decision and resolution. The CTA EB cited Commissioner of Internal Revenue v. Toledo
Power, Inc. and RMC No. 49-03,22 as its bases for ruling that San Roque‘s judicial claim
was not prematurely filed.
• Lastly, it is apparent from the following provisions of RMC No. 49-03 dated August 18,
2003, that [the CIR] knows that claims for VAT refund or tax credit filed with the Court [of
Tax Appeals] can proceed simultaneously with the ones filed with the BIR and that
taxpayers need not wait for the lapse of the subject 120-day period.

ISSUE: Did the CTA En Banc erred in holding that [San Roque‘s] claim for refund was not
prematurely filed.

HELD:
• YES.
• On 10 April 2003, a mere 13 days after it filed its amended administrative claim with the
Commissioner on 28 March 2003, San Roque filed a Petition for Review with the CTA
docketed as CTA Case No. 6647. From this we gather two crucial facts: first, San Roque
did not wait for the 120-day period to lapse before filing its judicial claim; second, San
Roque filed its judicial claim more than four (4) years before the Atlas45 doctrine, which
was promulgated by the Court on 8 June 2007.
• Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly
given by law to the Commissioner to decide whether to grant or deny San Roque‘s
application for tax refund or credit. It is indisputable that compliance with the 120- day
waiting period is mandatory and jurisdictional. The waiting period, originally fixed at 60
days only, was part of the provisions of the first VAT law, Executive Order No. 273, which
took effect on 1 January 1988. The waiting period was extended to 120 days effective 1
January 1998 under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has
been in our statute books for more than fifteen (15) years before San Roque filed its
judicial claim.
• Failure to comply with the 120-day waiting period violates a mandatory provision of law. It
violates the doctrine of exhaustion of administrative remedies and renders the petition
premature and thus without a cause of action, with the effect that the CTA does not
acquire jurisdiction over the taxpayer‘s petition. Philippine jurisprudence is replete with
cases upholding and reiterating these doctrinal principles.
• The charter of the CTA expressly provides that its jurisdiction is to review on appeal
"decisions of the Commissioner of Internal Revenue in cases involving x x x refunds of
internal revenue taxes." When a taxpayer prematurely files a judicial claim for tax refund
or credit with the CTA without waiting for the decision of the Commissioner, there is no
"decision" of the Commissioner to review and thus the CTA as a court of special jurisdiction
has no jurisdiction over the appeal. The charter of the CTA also expressly provides that if
the Commissioner fails to decide within "a specific period" required by law, such "inaction
shall be deemed a denial" of the application for tax refund or credit. It is the
Commissioner‘s decision, or inaction "deemed a denial," that the taxpayer can take to the
 CTA for review. Without a decision or an "inaction x x x deemed a denial" of the
Commissioner, the CTA has no jurisdiction over a petition for review.
• San Roque‘s failure to comply with the 120-day mandatory period renders its petition for
review with the CTA void. Article 5 of the Civil Code provides, "Acts executed against
provisions of mandatory or prohibitory laws shall be void, except when the law itself
authorizes their validity." San Roque‘s void petition for review cannot be legitimized by the
CTA or this Court because Article 5 of the Civil Code states that such void petition cannot
be legitimized "except when the law itself authorizes [its] validity." There is no law
authorizing the petition‘s validity.
• It is hornbook doctrine that a person committing a void act contrary to a mandatory
provision of law cannot claim or acquire any right from his void act. A right cannot spring in
favor of a person from his own void or illegal act. This doctrine is repeated in Article 2254
of the Civil Code, which states, "No vested or acquired right can arise from acts or
omissions which are against the law or which infringe upon the rights of others."50 For
violating a mandatory provision of law in filing its petition with the CTA, San Roque cannot
claim any right arising from such void petition. Thus, San Roque‘s petition with the CTA is a
mere scrap of paper.
• This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of
the 120-day period just because the Commissioner merely asserts that the case was
prematurely filed with the CTA and does not question the entitlement of San Roque to the
refund. The mere fact that a taxpayer has undisputed excess input VAT, or that the tax was
admittedly illegally, erroneously or excessively collected from him, does not entitle him as
a matter of right to a tax refund or credit. Strict compliance with the mandatory and
jurisdictional conditions prescribed by law to claim such tax refund or credit is essential
and necessary for such claim to prosper. Well-settled is the rule that tax refunds or credits,
just like tax exemptions, are strictly construed against the taxpayer. The burden is on the
taxpayer to show that he has strictly complied with the conditions for the grant of the tax
refund or credit.
• This Court cannot disregard mandatory and jurisdictional conditions mandated by law
simply because the Commissioner chose not to contest the numerical correctness of the
claim for tax refund or credit of the taxpayer. Non-compliance with mandatory periods,
non-observance of prescriptive periods, and non-adherence to exhaustion of administrative
remedies bar a taxpayer‘s claim for tax refund or credit, whether or not the Commissioner
questions the numerical correctness of the claim of the taxpayer. This Court should not
establish the precedent that non-compliance with mandatory and jurisdictional conditions
can be excused if the claim is otherwise meritorious, particularly in claims for tax refunds
or credit. Such precedent will render meaningless compliance with mandatory and
jurisdictional requirements, for then every tax refund case will have to be decided on the
numerical correctness of the amounts claimed, regardless of non-compliance with
mandatory and jurisdictional conditions.
• San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine
because San Roque filed its petition for review with the CTA more than four years before
Atlas was promulgated. The Atlas doctrine did not exist at the time San Roque failed to
comply with the 120- day period. Thus, San Roque cannot invoke the Atlas doctrine as an
excuse for its failure t wait for the 120-day period to lapse. In any event, the Atlas doctrine
merely stated that the two-year prescriptive period should be counted from the date of
payment of the output VAT, not from the close of the taxable quarter when the sales
involving the input VAT were made. The Atlas doctrine does not interpret, expressly or
impliedly, the 120+3052 day periods.
• In fact, Section 106(b) and (e) of the Tax Code of 1977 as amended, which was the law
cited by the Court in Atlas as the applicable provision of the law did not yet provide for the
30-day period for the taxpayer to appeal to the CTA from the decision or inaction of the
Commissioner. Thus, the Atlas doctrine cannot be invoked by anyone to disregard
compliance with the 30-day mandatory and jurisdictional period. Also, the difference
 between the Atlas doctrine on one hand, and the Mirant doctrine on the other hand, is a
mere 20 days. The Atlas doctrine counts the two-year prescriptive period from the date of
payment of the output VAT, which means within 20 days after the close of the taxable
quarter. The output VAT at that time must be paid at the time of filing of the quarterly tax
returns, which were to be filed "within 20 days following the end of each quarter."
• At the time San Roque filed its petition for review with the CTA, the 120+30 day
mandatory periods were already in the law. Section 112(C) expressly grants the
Commissioner 120 days within which to decide the taxpayer‘s claim. The law is clear, plain,
and unequivocal: "x x x the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days from the date of
submission of complete documents." Following the verba legis doctrine, this law must be
applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot
simply file a petition with the CTA without waiting for the Commissioner‘s decision within
the 120-day mandatory and jurisdictional period. The CTA will have no jurisdiction because
there will be no "decision" or "deemed a denial" decision of the Commissioner for the CTA
to review. In San Roque‘s case, it filed its petition with the CTA a mere 13 days after it filed
its administrative claim with the Commissioner
• Indisputably, San Roque knowingly violated the mandatory 120-day period, and it cannot
blame anyone but itself. This law is clear, plain, and unequivocal. Following the well-settled
verba legis doctrine, this law should be applied exactly as worded since it is clear, plain,
and unequivocal. As this law states, the taxpayer may, if he wishes, appeal the decision of
the Commissioner to the CTA within 30 days from receipt of the Commissioner‘s decision,
or if the Commissioner does not act on the taxpayer‘s claim within the 120-day period, the
taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day period.

MICROSOFT PHILIPPINES VS. COMMISSIONER OF INTERNAL REVENUE

GR No. 180173, APRIL 6, 2011, CARPIO. J:

DOCTRINES:
1. Only VAT-registered persons are required to print their TIN followed by the word "VAT" in
their invoices or receipts and this shall be considered as a "VAT invoice." All purchases
covered by invoices other than a "VAT invoice" shall not give rise to any input tax.
2. A VAT-registered taxpayer is required to comply with all the VAT invoicing requirements to
be able to file a claim for input taxes on domestic purchases for goods or services
attributable to zero-rated sales.

FACTS:
• Microsoft Philippines, Inc. (Microsoft) is a value-added tax (VAT) taxpayer duly registered
with the Bureau of Internal Revenue (BIR). Microsoft renders marketing services to
Microsoft Operations Pte Ltd. (MOP) and Microsoft Licensing, Inc. (MLI), both affiliated non-
resident foreign corporations. The services are paid for in acceptable foreign currency and
qualify as zero-rated sales for VAT purposes under Section 108(B)(2) of the National
Internal Revenue Code (NIRC.
• Microsoft filed for a tax credit in the amount of P11, 449, 814.99, representing input taxes
in paid in 2001 on its domestic pucrases of taxable goods and services. Due to the inaction
of the BIR, Microsoft filed a petition for review with the CTA, alleging that is its entitled to
refund of unutilized input Vat attributable to its zero-rated sales. The CTA denied the
petition on the ground that Microsoft failed to comply with the invoicing requirements
under Sections 113 and 117 of the NIRC, as well as Section 4.108-1 of RR 7-95. According
to the CTA, the official receipts of Microsoft does not bear the imprinted words ‗zero-rated‘
on its face, hence it cannot be considered as a valid evidence to prove zero-rated sales for
vat purposes. Microsoft field for a petition for review with the CTA En Banc but the same
 was denied on the ground that no new matters were alleged in the petition. Hence,
Microsoft filed a petition for review on certiorari with the SC. Microsoft insist that Section
113 and 237 of the NIRC and Section 4.108-1 of RR 7-95 does not provide that failure to
indicate the word ‗zero-rated‘ in the receipts would invalidate these receipts for input tax
purposes.

ISSUE: Whether Microsoft is entitled to claim of tax credit or refund on input taxes for domestic
purchases of goods and services, even if its receipts do not bear the words ‗zero-rated‘.

HELD:
• Microsoft is not entitled to a tax credit or to a tax refund for failure to comply with the
invoicing requirements under Section 113 and 237 of the NIRC and Section 4.108-1 of RR
7-95.

Sections 113(A) and 237 of the NIRC which provide for the invoicing requirements for VAT
registered persons state:

SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. -

(A) Invoicing Requirements. - A VAT-registered person shall, for every sale, issue an invoice or
receipt. In addition to the information required under Section 237, the following information shall
be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification
number (TIN); and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the
indication that such amount includes the value-added tax. x x x

SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. - All persons subject to an
internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued
at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial
invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and
description of merchandise or nature of service: Provided, however, That in the case of sales,
receipts or transfers in the amount of

One hundred pesos (P100.00) or more, or regardless of the amount, where the sale or transfer is
made by a person liable to valueadded tax to another person also liable to value-added tax; or
where the receipt is issued to cover payment made as rentals, commissions, compensations or
fees, receipts or invoices shall be issued which shall show the name, business style, if any, and
address of the purchaser, customer or client: Provided, further, That where the purchaser is a VAT
registered person, in addition to the information herein required, the invoice or receipt shall
further show the Taxpayer Identification Number (TIN) of the purchaser.

The original of each receipt or invoice shall be issued to the purchaser, customer or client at the
time the transaction is effected, who, if engaged in business or in the exercise of profession, shall
keep and preserve the same in his place of business for a period of three (3) years from the close
of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept
and preserved by the issuer, also in his place of business, for a like period.

The Commissioner may, in meritorious cases, exempt any person subject to internal revenue tax
from compliance with the provisions of this Section.

• Related to these provisions, Section 4.108-1 of RR 7-95 enumerates the information which
must appear on the face of the official receipts or invoices for every sale of goods by VAT-
registered persons. At the time Microsoft filed its claim for credit of VAT input tax, RR 7-95
 was already in effect. The provision states:

Sec. 4.108-1. Invoicing Requirements. - All VAT-registered persons shall, for every sale or
lease of goods or properties or services, issue duly registered receipts or sales or commercial
invoices which must show:

1. the name, TIN and address of seller;

2. date of transaction;
3. quantity, unit cost and description of merchandise or nature of service;
4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or
client;
5. the word "zero-rated" imprinted on the invoice covering zero-rated sales; and
6. the invoice value or consideration.

• Only VAT-registered persons are required to print their TIN followed by the word "VAT" in
their invoices or receipts and this shall be considered as a "VAT invoice." All purchases
covered by invoices other than a "VAT invoice" shall not give rise to any input tax.
• The invoicing requirements for a VAT-registered taxpayer as provided in the NIRC and
revenue regulations are clear. A VAT-registered taxpayer is required to comply with all the
VAT invoicing requirements to be able to file a claim for input taxes on domestic purchases
for goods or services attributable to zero-rated sales. A "VAT invoice" is an invoice that
meets the requirements of Section 4.108-1 of RR 7-95. Contrary to Microsoft's claim, RR 7-
95 expressly states that "[A]ll purchases covered by invoices other than a VAT invoice shall
not give rise to any input tax." Microsoft's invoice, lacking the word "zero-rated," is not a
"VAT invoice," and thus cannot give rise to any input tax.

-0-0-0-0-0-0-0-0-0-0-0-0-

SEC. 112. Refunds or Tax Credits of Input Tax. -

(A) Zero-rated or Effectively Zero-rated Sales.

- Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two
(2) years after the close of the taxable quarter when the sales were made, apply for the issuance
of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales,
except transitional input tax, to the extent that such input tax has not been applied against output
tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2)
and (b) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds
thereof had been duly accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services,
and the amount of creditable input tax due or paid cannot be directly and entirely attributed to
any one of the transactions, it shall be allocated proportionately on the basis of the volume of
sales. Provided, finally, That for a person making sales that are zero-rated under Section 108(B)
(6), the input taxes shall be allocated ratably between his zero-rated and non-zerorated sales.

(B) Cancellation of VAT Registration. - A person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under
Section 106(C) of this Code may, within two (2) years from the date of cancellation, apply for the
issuance of a tax credit certificate for any unused input tax which may be used in payment of his
other internal revenue taxes.

(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper
cases, the Commissioner shall grant a refund for creditable input taxes within ninety (90) days
from the date of submission of the official receipts or invoices and other documents in support of
the application filed in accordance with Subsections (A) and (B) hereof: Provided, That should the
Commissioner find that the grant of refund is not proper, the Commissioner must state in writing
the legal and factual basis for the denial.

In case of full or partial denial of the claim for tax refund, the taxpayer affected may, within thirty
(30) days from the receipt of the decision denying the claim, appeal the decision with the Court of
Tax Appeals: Provided, however, That failure on the part of any official, agent, or employee of the
BIR to act on the application within ninety (90) days period shall be punishable under Section 269
of this Code.

(D) Manner of Giving Refund. - Refunds shall be made upon warrants drawn by the
Commissioner or by his duly authorized representative without the necessity of being
countersigned by the Chairman, Commission on audit, the provisions of the Administrative Code
of 1987 to the contrary notwithstanding: Provided, That refunds under this paragraph shall be
subject to post audit by the Commission on Audit.

SEC. 4.112-1. Claims for Refund/Credit of Input Tax. –

(a) Zero-rated and Effectively Zero-rated Sales of Goods, Properties or Services A VAT-registered
person whose sales of goods, properties or services are zero-rated or effectively zero-rated may
apply for the issuance of a tax refund of input tax attributable to such sales. The input tax that
may be subject of the claim shall exclude the portion of input tax that has been applied against
the output tax. The application should be filed within two (2) years after the close of the taxable
quarter when such sales were made.

In case of zero-rated sales under Secs. 106(A)(2)(a)(1) and (3), Secs. 108(B)(1) and (2) of the
Tax Code, the payments for the sales must have been made in acceptable foreign currency duly
accounted for in accordance with the BSP rules and regulations.

Where the taxpayer is engaged in both zero-rated or effectively zerorated sales and in taxable
(including sales subject to final withholding VAT) or exempt sales of goods, properties or services,
and the amount of creditable input tax due or paid cannot be directly and entirely attributed to
any one of the transactions, only the proportionate share of input taxes allocated to zero-rated or
effectively zero-rated sales can be claimed for refund or issuance of a tax credit certificate.

COCA-COLA BOTTLERS PHILIPPINES, INC., petitioner, vs.

COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. 222428. February 19, 2018.

FACTS:
• On April 24, 2008, petitioner Coca-Cola Bottlers Philippines, Inc., a Value-Added Tax (VAT)-
registered, domestic corporation engaged in the business of manufacturing and selling
beverages, filed its Quarterly VAT Return for the period of January 1, 2008 to March 31,
2008 and amended the same a few times thereafter.
• On May 27, 2009, the Bureau of Internal Revenue (BIR) issued a Letter of Authority to
examine petitioner's books of accounts for all internal revenue taxes for the period January
1, 2008 to December 31, 2008. Subsequently, on April 20, 2010, petitioner filed with the
BIR's Large Taxpayers Service an administrative claim for refund or tax credit of its alleged
over/erroneous payment of VAT for the quarter ended March 31, 2008 in the total amount
of P123,459,647.70.
• Three (3) days thereafter, or on April 23, 2010, petitioner filed with the CTA a judicial claim
for refund or issuance of tax credit certificate presenting its financial employees as
 witnesses in support of its case. According to the witnesses, all of petitioner's records and
documents, including invoices and official receipts for the period January 1 to March 31,
2008 subject of the instant claim were completely destroyed. They were, however, able to
determine petitioner's input and output VAT through its computerized accounting system.
• In a Decision dated September 16, 2013 and Resolution dated December 4, 2013, the CTA
Division denied petitioner's claim for lack of merit.
• Subsequently, the CTA En Banc affirmed the ruling of the CTA Division in its Decision
dated August 12, 2015. According to the CTA En Banc, Section 110 (B) of the 1997
National Internal Revenue Code (NIRC), as amended, is clear that when input tax exceeds
the output tax, the excess shall be carried over to the succeeding quarters. But when input
tax, attributable to zero-rated sales, exceeds the output tax, it may be refunded or
credited.
• Section 112 is also categorical that there are only two (2) instances when excess input
taxes may be claimed for refund and/or issuance of tax credit certificate: (1) when the
claimant is a VAT-registered person, whose sales are zero-rated or effectively zero-rated
under Section 112 (A); and (2) when the VAT registration of the claimant has been
cancelled due to retirement from or cessation of business, or due to changes in or
cessation of status under Section 112 (B).
• But since the amount sought to be credited or refunded in the instant case essentially
represents undeclared input taxes for the first quarter of 2008, and not erroneously paid
VAT or understatement of VAT overpayment, then it does not fall under the instances
enumerated in Section 112 which pertain to excess taxes only.
• In addition, the CTA En Banc also cited jurisprudence which provide that Sections 204(C)
and 229 of the NIRC similarly apply only to instances of erroneous payment or illegal
collection of internal revenue taxes. In claims for refund or credit of excess input VAT
under Sections 110 (B) and 112 (A), the input VAT is not "excessively" collected as
understood under Section 229. The term "excess" input VAT simply means that the input
VAT available as credit exceeds the output VAT, not that the input VAT is excessively
collected because it is more than what is legally due. Section 229, therefore, is inapplicable
to the instant claim for refund or credit.
• The CTA En Banc further held that for input taxes to be available as tax credits, they must
be substantiated and reported in the VAT Return of the taxpayer. Petitioner, being well-
aware of the law allowing the amendment of a VAT Return within three (3) years from its
filing provided that an LOA has not yet been served on the taxpayer, was not prompt
enough to include the alleged omitted input VAT in this case. Moreover, even if the
substantiated input taxes were declared in the VAT Return for the first (1st) quarter of
2008, the same would still be not enough to offset petitioner's output tax liabilities for the
same period leaving no balance that may be refunded.
• CTA En Banc denied its Motion for Reconsideration.

ISSUE: W/N THE CTA EN BANC GRAVELY ERRED IN RULING THAT THE UNDECLARED INPUT VAT
IN THE AMOUNT OF P123,459,674.70 FOR THE QUARTER ENDED MARCH 31, 2008 IS REQUIRED
TO BE REPORTED IN THE QUARTERLY VAT RETURN AS A REQUISITE FOR PETITIONER'S CLAIM
FOR REFUND OF TAX UNDER SECTION 229
OF THE NIRC OF 1997, AS AMENDED, IN RELATION TO SECTION 204(C) OF THE SAME CODE.

HELD:
• NO.
• The CTA En Banc and CTA Division are correct in holding that, based on the San Roque
doctrine above, Section 229 of the 1997 NIRC is inapplicable to the instant claim for refund
or issuance of tax credit.
• In addition, neither can petitioner advance its claim for refund or tax credit under Sections
110 (B) and 112 (A) of the 1997 NIRC. For clarity and reference, said Sections are
 reproduced below:
• SEC. 110. Tax Credits. — xxx xxx xxx
• (B) Excess Output or Input Tax. — If at the end of any taxable quarter the output tax
exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input
tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or
quarters. Provided, however, That any input tax attributable to zero-rated sales by a VAT-
registered person may at his option be refunded or credited against other internal revenue
taxes, subject to the provisions of Section 112.
• xxx xxx xxx
• SEC. 112. Refunds or Tax Credits of Input Tax. —
• (A) Zero-rated or Effectively Zero-rated Sales.
— Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may,
within two (2) years after the close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund of creditable input tax due or
paid attributable to such sales, except transitional input tax, to the extent that such input
tax has not been applied against output tax: Provided, however, That in the case of zero-
rated sales under Section 106(A)(2)(a)(1), (2) and (b) and Section 108 (B)(1) and (2), the
acceptable foreign currency exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP):
Provided, further, That where the taxpayer is engaged in zero-rated or effectively zerorated
sale and also in taxable or exempt sale of goods of properties or services, and the amount
of creditable input tax due or paid cannot be directly and entirely attributed to any one of
the transactions, it shall be allocated proportionately on the basis of the volume of sales.
Provided, finally, That for a person making sales that are zero-rated under Section 108(B)
(6), the input taxes shall be allocated rateably between his zero-rated and nonzero- rated
sales.
• A plain and simple reading of the aforequoted provisions reveals that if and when the input
tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or
quarters. It is only when the sales of a VAT-registered person are zero-rated or effectively
zero-rated that he may have the option of applying for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales. Such is
the clear import of the Court's ruling in San Roque, to wit:
• Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT.
The only exception is when the taxpayer is expressly "zero-rated or effectively zero-rated"
under the law, like companies generating power through renewable sources of energy.
Thus, a non zero-rated VAT-registered taxpayer who has no output VAT because he has no
sales cannot claim a tax refund or credit of his unused input VAT under the VAT System.
Even if the taxpayer has sales but his input VAT exceeds his output VAT, he cannot seek a
tax refund or credit of his "excess" input VAT under the VAT System. He can only carry-
over and apply his "excess" input VAT against his future output VAT. If such "excess" input
VAT is an "excessively" collected tax, the taxpayer should be able to seek a refund or credit
for such "excess" input VAT whether or not he has output VAT.
• The VAT System does not allow such refund or credit. Such "excess" input VAT is not an
"excessively" collected tax under Section 229. The "excess" input VAT is a correctly and
properly collected tax. However, such "excess" input VAT can be applied against the output
VAT because the VAT is a tax imposed only on the value added by the taxpayer. If the input
VAT is in fact "excessively" collected under Section 229, then it is the person legally liable
to pay the input VAT, not the person to whom the tax was passed on as part of the
purchase price and claiming credit for the input VAT under the VAT System, who can file
the judicial claim under Section 229.
• It is clear, based on the foregoing, that neither the law nor jurisprudence authorize
petitioner's claim for refund or issuance of tax credit. In asserting its alleged right to said
claim, petitioner unfortunately failed to convince the Court that it is entitled to the refund
or credit of input VAT in the amount of P123,459,647.70 it inadvertently failed to include in
its VAT Return. This is because as shown above, petitioner's claim is not governed by
Section 229 as an ordinary refund or credit outside of the VAT System as the same does
not involve a tax that is "erroneously, illegally, excessively, or in any manner wrongfully
collected." Neither is said claim authorized under Sections 110 (B) and 112 (A) as the
same does not seek to refund or credit input tax due or paid attributable to zero-rated or
effectively zero-rated sales.