CIR vs. Magsaysay Lines GR No.

146984 dated July 28, 2006

Facts:

Because of a government program of privatization, National Development Company(NDC) decided to sell

its National Marine Corporation(NMC) shares and five of its ships. In a VAT Ruling, it was held that the
sale was subject to VAT since NDC was a VAT-registered enterprise and the transaction is incident to its
normal VAT-registered activity of leasing out personal property.

Issue:

Whether or not the sale by NDC whose VAT-registered activity is leasing out personal property is subject
to VAT considering that such sale was made pursuant to a government program of privatization.

Ruling:

No, the sale of the vessels is not subject to VAT since it was not in the ordinary course of trade or
business of NDC. “Course of business” is what is usually done in the management of trade or business. It
connotes regularity. In the case at bar, the sale was an isolated transaction. The sale which was
involuntary and made pursuant to the declared policy of government for privatization could no longer be
repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of
NDC is leasing personal property. Any sale, barter, or exchange of goods or services not in the course of
trade or business is not subject to tax.
 CIR vs. Seagate Technology (Phils) GR No. 153866 February 11, 2005

Facts:

Seagate Technology was claiming a refund for the input tax it paid on the unutilized capital goods purcha
sed. It asserted that it is exempt from all internal revenue taxes including VAT since it is registered in and
operating from the Special Economic Zone in Naga, Cebu.

Issue:

Whether or not an entity registered and operating within an ecozone is exempt from all revenue taxes incl
uding VAT.

Ruling:

Yes. Ecozone is considered by law as a separate customs authority. It means that in such zone is created
the legal fiction of foreign authority although it is a geographical territory of the Philippines.

Under the cross-

border principle of the VAT system, no VAT shall be imposed to form part of the cost of the goods destine
d for consumption outside of the territorial border of the taxing authority. If exports of goods and services f
rom the Philippines to a foreign authority are free of VAT, then the same rule holds for such exports from t
he national territory to an ecozone.

This is to encourage foreign investments in order to win international markets and to promote sustainable
economic growth.
 Concurring Opinion of Justice Abad –
Fort Bonifacio Development Corp. vs. CIR,
GR No. 173425 dated September 4, 2012.

FACTS:

Petitioner was a real estate developer that bought from the national government a parcel of land that
used to be the Fort Bonifacio military reservation. At the time of the said sale there was as yet no VAT
imposed so Petitioner did not pay any VAT on its purchase. Subsequently, Petitioner sold two parcels of
land to Metro Pacific Corp. In reporting the said sale for VAT purposes (because the VAT had already
been imposed in the interim), Petitioner claimed transitional input VAT corresponding to its inventory of
land. The BIR disallowed the claim of presumptive input VAT and thereby assessed Petitioner for
deficiency VAT.

ISSUE:

Is Petitioner entitled to claim the transitional input VAT on its sale of real properties given its nature as a
real estate dealer and if so (i) is the transitional input VAT applied only to the improvements on the real
property or is it applied on the value of the entire real property and (ii) should there have been a previous
tax payment for the transitional input VAT to be creditable?

HELD:

YES. Petitioner is entitled to claim transitional input VAT based on the value of not only the improvements
but on the value of the entire real property and regardless of whether there was in fact actual payment on
the purchase of the real property or not.

The amendments to the VAT law do not show any intention to make those in the real estate business
subject to a different treatment from those engaged in the sale of other goods or properties or in any other
commercial trade or business. On the scope of the basis for determining the available transitional input
VAT, the CIR has no power to limit the meaning and coverage of the term "goods" in Section 105 of the
Tax Code without statutory authority or basis. 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.

Concurring Opinion of Justice Abad

The Court was correct in allowing FBDC the right to be refunded the VAT that it already paid, applying
instead to the VAT tax due on its sales the transitional input VAT that Section 105 provides.

Justice Carpio also argues that ifFBDC will be given a tax refund, it would be sourced from public funds,
which violates Section 4(2) of the Govenm1ent Auditing Code that govemment funds or property cannot
be used in order to benefit private individuals or entities. They shall only be spent or used solely for public
purposes.

But the records show that FBDC actually paid to the BIR the amounts for which it seeks a BIR tax refund.
The CIR does not deny this fact. FBDC was forced to pay cash on the VAT due on its sales because the
BIR refused to apply the 8% transitional input VAT tax credits that the law allowed it. Since such tax
credits were sufficient to cover the VAT due, FBDC is entitled to a refund of the VAT it already paid. And,
contrary to the dissenting opinion, if FBDC will be given a tax refund, it would be sourced, not from public
funds, but from the VAT payments which FBDC itself paid to the BIR.
Like the previous cases before the Court, the BIR has the option to refund what FBDC paid it with
equivalent tax credits. Such tax credits have never been regarded as needing appropriation out of
government funds. Indeed, FBDC concedes in its prayers that it may get its refund in the form of a Tax
Credit Certificate.

For the above reasons, I concur with Justice Del Castillo's ponencia.
 Contex vs. CIR GR No. 151135 dated July 2, 2004

FACTS:

Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles

and garments and other hospital supplies for export. Petitioners 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 Republic Act No. 7227.[4] 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)[5] of Rep. Act No. 7227. Petitioner also registered with the Bureau of
Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180-
000133

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.[6]

Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant
to Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr.
Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application letter, dated
December 29, 1998.

Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit,
this time directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The
second 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.

ISSUE:

WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE
TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY
PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND
MATERIALS.

RULING:

The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax
exemptions, such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-
registered business may be directly liable. Hence, SBFZ locators are not relieved from the indirect taxes
that may be shifted to them by a VAT-registered seller.

At this juncture, it must be stressed that the 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.[17] Unlike a direct tax, such as the income tax,
which primarily taxes an individuals 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.[18] 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.[19]

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.[20] 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.[21]

(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.[22]

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 firms 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.[23]

Apropos, the petitioners 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.[24]

On this point, 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[25]
issued by the BIR. As such, it is exempt from VAT on all its sales and importations of goods and services.