ZAPANTA VS. POSADAS G.R. NOS.

L-29204-09 29 DECEMBER 1928

(DONATION INTER VIVOS VS. DONATION MORTIS CAUSA)

FACTS:

Father Braulio Pineda died in January 1925 without any ascendants or descendants
leaving a will in which he instituted his sister Irene Pineda as his sole heiress. During his
lifetime Father Braulio donated some of his property by the instruments to the six
plaintifffs, severally, with the condition that some of them would pay him a certain
amount of rice, and others of money every year, and with the express provision that
failure to fulfill this condition would revoke the donations ipso facto. These six plaintiff-
donees are relatives, and some of them brothers of Father Braulio Pineda. The
donations contained another clause that they would take effect upon acceptance. They
were accepted during Father Braulio's lifetime by every one of the donees.

The trial court in deciding these six cases, held that the donations to the six plaintiffs
made by the deceased Father Braulio Pineda are donations inter vivos, and therefore,
not subject to the inheritance tax, and ordered the defendants to return to each of the
plaintiffs the sums paid by the latter.

ISSUE:

Whether or not the donations made by Father Braulio Pineda to each of the plaintiffs are
donations inter vivos, or mortis causa, for it is the latter upon which the Administrative
Code imposes inheritance tax.

HELD:

Said donations are inter vivos. It is so expressly stated in the instruments in which they
appear. They were made in consideration of the donor's affection for the donees, and of
the services they had rendered him, but he has charged them with the obligation to pay
him a certain amount of rice and money, respectively, each year during his lifetime, the
donations to become effective upon acceptance. They are therefore not in the nature of
donations mortis causa but inter vivos.

The principal characteristics of a donation mortis causa, which distinguish it essentially

from a donation inter vivos, are that in the former it is the donor's death that determines
the acquisition of, or the right to, the property, and that it is revocable at the will of the
donor. In the donations in question, their effect, that is, the acquisition of, or the right to,
the property, was produced while the donor was still alive, for according to their
expressed terms they were to have this effect upon acceptance, and this took place
during the donor's lifetime. The nature of these donations is not affected by the fact that
they were subject to a condition, since it was imposed as a resolutory condition, and in
this sense, it is necessarily implies that the right came into existence first as well as its
effect, because otherwise there would be nothing to resolve upon the nonfulfillment of
the condition imposed. Neither does the fact that these donations are revocable, give
them the character of donations mortis causa, inasmuch as the revocation is not the
failure to fulfill the condition imposed. In relation to the donor's will alone, these
donations are irrevocable. On the other hand, this condition, in so far as it renders the
donation onerous, takes it further away from the disposition mortis causa and brings it
nearer to contract. In this sense, by virtue of this condition imposed, they are not
donations throughout their full extent, but only so far as they exceed the incumbrance
imposed, for so far as concerns the portion equivalent to or less than said incumbrance,
it has the nature of a real contract and is governed by the rule on contracts (art. 622 of
the Civil Code). And in the part in which it is strictly a donation, it is a donation inter
vivos, because its effect was produced by the donees' acceptance during the donor's
lifetime and was not determined by the donor's death. Upon being accepted they had
full effect. If the donor's life is mentioned in connection with this condition, it is only fix
the donor's death as the end of the term within which the condition must be fulfilled, and
not because such death of the donor is the cause which determines the birth of the right
to the donation. The property donated passed to the ownership of the donees from the
acceptance of the donations, and these could not be revoked except upon the
nonfulfillment of the condition imposed, or for other causes prescribed by the law, but
not by mere will of the donor.

It can’t also be considered as advance of on inheritance or legacy, because they are

neither inheritance nor a legacy. And it cannot be said that the plaintiffs received such
advance on inheritance or legacy, since they were not heirs or legatees of their
predessor in interest upon his death. Neither can it be said that they obtained this
inheritance or legacy by virtue of a document which does not contain the requisites of a
will. Then the defendants are not justified in collecting from the donees the inheritance
tax, on property which has not been legally transferred to them, and in which they
acquired no right.
PUIG VS. PENAFLORIDA G.R. NO. L-15939, 31 JANUARY 1966

(DONATION INTER VIVOS VS. DONATION MORTIS CAUSA)

FACTS:

Defendants-appellants Estela Magbanua Peñaflorida, et al., insist that the reservation

by the donor of the right to dispose of the property during her lifetime in the deed of
December 28, 1949 indicates that title had passed to the donee in her lifetime,
otherwise, it is argued, the reservation would be superfluous.

This thesis would be plausible if the reservation of the power to dispose were the only
indication to be considered in deciding whether the donation of December 28, 1949
was mortis causa or inter vivos. But such is not the case. the deceased expressly and
consistently declared her conveyance to be one of donation mortis causa, and further
forbade the registration of the deed until after her death. All these features concordantly
indicated that the conveyance was not intended to produce any definitive effects, nor to
finally pass any interest to the grantee, except from and after the death of the grantor.

We see nothing in the deed itself to indicate that any right, title or interest in the
properties described was meant to be transferred to Doña Estela Magbanua prior to the
death of the grantor, Carmen Ubalde Vda. de Parcon. according to section 50 of the
Land Registration Act, that the deed in question should not take effect as a
conveyance nor bind the land until after the death of the "donor".

In view of the express condition that (paragraph 3) if at the date of her death the donor
had not transferred, sold, or conveyed one-half of lot 58 of the Pototan Cadastre to
other persons or entities, the donee would be bound to pay to Caridad Ubalde, married
to Tomas Pedrola, the amount of P600.00, and such payment was to be made on the
date the donee took possession of Lot No. 58. As the obligation to pay the legacy to
Caridad Ubalde would not definitely arise until after the death of the donor, because
only by then would it become certain that the "donor" could not transfer the property to
someone else, and such payment must precede the taking possession of the property
"donated", it necessarily follows that the "donee's" taking of possession could not occur
before the death of the donor.

ISSUE:

Whether or not the donation granted to Magbanua is a donation inter vivos or mortis
causa.

RULING:
It being thus clear that the disposition contained in the deed is one that produces no
effect until the death of the grantor, we are clearly faced by an act mortis causa of the
Roman and Spanish law. We thus see no need of resorting to American authorities as
to the import of the reservation of the donor's right to dispose of the donated property.

The presence of an acceptance is but a consequence of the erroneous concept of the

true nature of the juridical act, and does not indicate that in the same is a true
donation inter vivos.

In the Uy Tieng Piao case the contract could only be cancelled after six months, so that
there could be no doubt that it was in force at least for that long, and the optional
cancellation can be viewed as a resolutory condition (or more properly, a non-
retroactive revocatory one); but no such restriction limited the power of the donor, Doña
Carmen Ubalde, to set at naught the alleged conveyance in favor of Doña Estela
Magbanua by conveying the property to other parties at any time, even at the very next
instant after executing the donation, if she so chose. It requires no argument to
demonstrate that the power, as reserved in the deed, was a power to destroy the
donation at any time, and that it meant that the transfer is not binding on the grantor
until her death made it impossible to channel the property elsewhere. Which, in the last
analysis, as held in our main decision, signifies that the liberality is testamentary in
nature, and must appear with the solemnities required of last wills and testaments in
order to be legally valid.
DEL ROSARIO VS. FERRER G.R. NO. 187056, 20 SEPTEMBER 2010

(DONATION INTER VIVOS VS. DONATION MORTIS CAUSA)

FACTS:

spouses Leopoldo and Guadalupe Gonzales executed a document entitled

"Donation Mortis Causa"1 in favor of their two children, Asuncion and Emiliano, and their
granddaughter, Jarabini (daughter of their predeceased son, Zoilo) covering the
spouses’ 126-square meter lot and the house on it in Pandacan, Manila2 in equal
shares.

The deed of donation specifies that the donation shall be irrevocable and shall be
respected by the surviving donor spouse. The deed had no attestation clause and was
witnessed by only 2 persons. The donees also signified acceptance on the document.

A few months after the death of Guadalupe, Leopoldo assigned his rights and interest in
the subject property to Asuncion.

In 1998, Jarabini filed a petition for probate of the August 27, 1968 deed of donation
mortis causa before the RTC of Manila. Asuncion opposed the petition, contending that
Leopoldo has assigned his rights and interests in the property to her.

RTC held that the donation was in fact one made inter vivos due to the fact that the
donors intend to transfer title over the property to the donees during the donors’ lifetime,
given its irrevocability. The RTC further held that Leopoldo’s subsequent assignment
was void for he had nothing to assign.

CA reversed the RTC’s decision. It held that Jarabini cannot, through petition for
probate of the deed of donation mortis causa, collaterally attack Leopoldo’s deed of
assignment.

ISSUE:

Whether the donation executed by spouses Gonzales in favor of Asuncion, Emiliano,

and Jarabini was a donation inter vivios or donation mortis causa.

RULING:

It was a donation inter vivos. The document in question in this case was captioned
"Donation Mortis Causa" is not controlling. This Court has held that, if a donation by its
terms is inter vivos, this character is not altered by the fact that the donor styles it mortis
causa. Thus, the caption on the document is not controlling.
The court further ruled In Austria-Magat v. Court of Appeals,11 the Court held that
"irrevocability" is a quality absolutely incompatible with the idea of conveyances mortis
causa, where "revocability" is precisely the essence of the act. A donation mortis causa
has the following characteristics:

1. It conveys no title or ownership to the transferee before the death of the

transferor; or, what amounts to the same thing, that the transferor should retain
the ownership (full or naked) and control of the property while alive;

2. That before his death, the transfer should be revocable by the transferor at

will, ad nutum; but revocability may be provided for indirectly by means of a
reserved power in the donor to dispose of the properties conveyed; and

3. That the transfer should be void if the transferor should survive the
transferee.12 (Underscoring supplied)

Otherwise stated, express irrevocability of the donation is the distinctive standard

that identifies the document as a donation inter vivos. The intent to make the
donation irrevocable is evident in the proviso indicating that surviving donor shall
respect the irrevocability of the donation.

The donors in this case of course reserved the "right, ownership, possession,
and administration of the property" and made the donation operative upon their
death. But this Court has consistently held that such reservation (reddendum) in
the context of an irrevocable donation simply means that the donors parted with
their naked title, maintaining only beneficial ownership of the donated property
while they lived.

Notably, the three donees signed their acceptance of the donation, which acceptance
the deed required.14 This Court has held that an acceptance clause indicates that the
donation is inter vivos, since acceptance is a requirement only for such kind of
donations.1awphi1 Donations mortis causa, being in the form of a will, need not be
accepted by the donee during the donor’s lifetime.15

Since the donation in this case was one made inter vivos, it was immediately operative
and final. The reason is that such kind of donation is deemed perfected from the
moment the donor learned of the donee’s acceptance of the donation. The acceptance
makes the donee the absolute owner of the property donated.17

Given that the donation in this case was irrevocable or one given inter vivos,
Leopoldo’s subsequent assignment of his rights and interests in the property to
Asuncion should be regarded as void for, by then, he had no more rights to
assign. He could not give what he no longer had. Nemo dat quod non habet
ABELLO VS. CIR G. R. NO. 120721 23 FEBRUARY 2005

(DEFINITION OF GIFT/DONATION)

FACTS:

During the 1987 national elections, petitioners, who are partners in the Angara, Abello,
Concepcion, Regala and Cruz (ACCRA) law firm, contributed P882,661.31 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 P263,032.66 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. The CTA ruled in favor of the petitioners,
but such ruling was overturned by the CA, thus this petition for review.

ISSUE:

Whether or not electoral contributions are subject to donor’s tax.

RULING:

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: (a) the reduction of the patrimony of the donor; (b)
the increase in the patrimony of the donee; and, (c) 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. Abello8, Jose C. Concepcion, Teodoro D. Regala and Avelino V. Cruz, each
gave P882,661.31 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 P882,661.31 each. Senator Edgardo Angara's
patrimony correspondingly increased by P3,530,645.249 . 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.

Finally, this Court takes note of the fact that subsequent to the donations involved in this
case, Congress approved Republic Act No. 7166 on November 25, 1991, providing in
Section 13 thereof that political/electoral contributions, duly reported to the Commission
on Elections, are not subject to the payment of any gift tax. This all the more shows that
the political contributions herein made are subject to the payment of gift taxes, since the
same were made prior to the exempting legislation, and Republic Act No. 7166 provides
no retroactive effect on this point.
LLADOC VS. CIR 1965

G.R. No. L-19201             June 16, 1965

(DONOR’S TAX NOT A PROPERTY TAX)

FACTS:

Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash
to Rev. Fr. Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and
predecessor of herein petitioner, for the construction of a new Catholic Church in the
locality. The total amount was actually spent for the purpose intended.

The donor M.B. Estate, Inc., filed the donor's gift tax return. Under date of April 29,
1960, the respondent Commissioner of Internal Revenue issued an assessment for
donee's gift tax against the Catholic Parish of Victorias, Negros Occidental, of which
petitioner was the priest. The tax amounted to P1,370.00 including surcharges, interests
of 1% monthly from May 15, 1958 to June 15, 1960, and the compromise for the late
filing of the return.

Lladoc protested and moved to consider but was denied. He then appealed to the CTA,
in his petition for review, he claimed that at the time of the donation, he was not the
parish yet, thus, he is not liable. Moreover, he asserted that the assessment of the gift
tax, even against the Roman Catholic Church, would be a clear violation of the
constitution. The CTA ruled in favor of the CIR, hence this petition.

ISSUE:

Whether or not the donee should pay for the donor’s gift tax on the 10,000 pesos
donated for the construction of the Victoria’s Parish Church.

RULING:

Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation
cemeteries, churches and parsonages or convents, appurtenant thereto, and
all lands, buildings, and improvements used exclusively for religious purposes. The
exemption is only from the payment of taxes assessed on such properties enumerated,
as property taxes, as contra distinguished from excise taxes. In the present case, what
the Collector assessed was a donee's gift tax; the assessment was not on the
properties themselves. It did not rest upon general ownership; it was an excise upon the
use made of the properties, upon the exercise of the privilege of receiving the properties
(Phipps vs. Com. of Int. Rec. 91 F 2d 627). Manifestly, gift tax is not within the
exempting provisions of the section just mentioned. A gift tax is not a property tax, but
an excise tax imposed on the transfer of property by way of gift inter vivos, the
imposition of which on property used exclusively for religious purposes, does not
constitute an impairment of the Constitution. As well observed by the learned
respondent Court, the phrase "exempt from taxation," as employed in the Constitution
(supra) should not be interpreted to mean exemption from all kinds of taxes. And there
being no clear, positive or express grant of such privilege by law, in favor of petitioner,
the exemption herein must be denied.

The petitioner, however should not be made to pay the donor’s gift tax because at the
time of the donation he was not the priest of Victorias. The petitioner herein is not
personally liable for the said gift tax, and that the Head of the Diocese, herein substitute
petitioner, should pay, as he is presently ordered to pay, the said gift tax, without
special, pronouncement as to costs.
LORENZO VS. POSADAS G.R NO. 43082 18 JUNE 1937

(ACCRUAL OF ESTATE TAX)

FACTS:

Thomas Hanley dies in Zamboanga, leaving a will and considerable amount of real and
personal properties. Hanley’s will provides the following: his money will be given to his
nephew, Matthew Hanley, as well as real estate owned by him. The CFI for the best
interests of the estate appointed a trustee to administer the real properties which, under
the will, were to pass to nephew Matthew 10 years after the two executors named in the
will was appointed as trustee. Moore acted as trusted until he resigned and the plaintiff
Lorenzo herein was appointed in his stead.

Juan Posadas, collector of Internal Revenue, assessed inheritance tax against the
estate amounting to 2,057.74 which includes penalty and surcharge. He filed a motion
in the testamentary proceedings that Lorenzo will be ordered to pay the amount due.
Lorenzo paid the amount in protest after CFI granted Posada’s motion. He claimed that
the inheritance tax should have been assessed after 10 years. Lorenzo asked for a
refund but Posadas declined.

ISSUE:

When should the tax be assessed?

RULING:

The Supreme Court ruled that transmission by inheritance is taxable at the time of the
predecessor’s death, notwithstanding the postponement of the actual possession or
enjoyment of the estate by the beneficiary, and the tax measured by the value of the
property transmitted at that time regardless of its appreciation or depreciation.

The accrual of the inheritance tax is distinct from the obligation to pay the same. Section
1536 as amended, of the Administrative Code, imposes the tax upon "every
transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in
anticipation of inheritance, devise, or bequest." The tax therefore is upon transmission
or the transfer or devolution of property of a decedent, made effective by his death.

The delinquency in payment occurred on March 10, 1924, the date when Moore
became trustee. The interest due should be computed from that date and it is error on
the part of the defendant to compute it one month later. The provision of law requiring
the payment of interest in appropriate cases is mandatory and neither the Collector of
Internal Revenue nor this court may remit or decrease such interest, no matter how
heavily it may burden the taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and
demand thereof by the Collector of Internal Revenue, a surcharge of twenty-five per
centum should be added (sec. 1544, subsec. (b), par. 2 Revised Administrative Code).
Demand was made by the Deputy Collector of Internal Revenue upon Moore in a
communication dated October 16, 1931 (Exhibit 29). The date fixed for the payment of
the tax and interest was November 30, 1931. November 30 being an official holiday, the
tenth day fell on December 1, 1931. As the tax and interest due were not paid on that
date, the estate became liable for the payment of the surcharge.
MARCOS II VS. CA G.R. NO. 120880 05 JUNE 1997

(ACCRUAL OF ESTATE TAX)

FACTS:

Ferdinand Marcos sought for the reversal of the ruling of the CA to grant CIR’s petition
to levy the properties of the late Pres. Ferdinand Marcos to cover the payment of his tax
delinquencies during the period of his exile in the US. The Marcos family was assessed
by the BIR after it failed to file the estate tax returns.

However, the assessment were not protested administratively by Mrs. Marcos and his
counsel and the heirs of the late president, so they became final and unappealable after
the period for filing of opposition has prescribed. Marcos contends that the properties
could not be levied to cover tax dues because they are still pending probate with the
court, and settlement of tax deficiencies could not be had, unless there is an order by
the probate court or until the probate proceedings are terminated.

Petitioner also pointed out that applying Memorandum Circular No. 38-68, the BIR’s
Notices of Levy on the Marcos properties were issued beyond the allowed period, and
are therefore null and void.

Petitioner argues that all the questioned Notices of Levy, however, must be nullified for
having been issued without validly serving copies thereof to the petitioner. As a
mandatory heir of the decedent, petitioner avers that he has an interest in the subject
estate, and notices of levy upon its properties should have been served upon him.

ISSUE: Are the contentions of Marcos II correct?

RULING:

No. His Contentions are incorrect. From the foregoing, it is discernible that the
approval of the court, sitting in probate, or as a settlement tribunal over the
deceased is not a mandatory requirement in the collection of estate taxes. It
cannot therefore be argued that the Tax Bureau erred in proceeding with the
levying and sale of the properties allegedly owned by the late President, on the
ground that it was required to seek first the probate court's sanction. There is
nothing in the Tax Code, and in the pertinent remedial laws that implies the
necessity of the probate or estate settlement court's approval of the state's claim
for estate taxes, before the same can be enforced and collected.

Apart from failing to file the required estate tax return within the time required for the
filing of the same, petitioner, and the other heirs never questioned the assessments
served upon them, allowing the same to lapse into finality, and prompting the BIR to
collect the said taxes by levying upon the properties left by President Marcos.
The deficiency income tax assessments and estate tax assessment are already final
and unappealable and the subsequent levy of real properties is a tax remedy resorted to
by the government, sanction by Section 213 and 218 of the NIRC. This summary tax
remedy is distinct and separate from the other tax remedies (such as Judicial Civil
actions and Criminal Actions), and is not affected or precluded by the pendency of any
other tax remedies instituted by the government.

The omission to file an estate tax return, and the subsequent failure to contest or
appeal the assessment made by the BIR is fatal to the petitioner's cause, as under
the above-cited provision, in case of failure to file a return, the tax may be assessed at
any time within ten years after the omission, and any tax so assessed may be collected
by levy upon real property within three years following the assessment of the tax. Since
the estate tax assessment had become final and unappealable by the petitioner's
default as regards protesting the validity of the said assessment, there is now no reason
why the BIR cannot continue with the collection of the said tax. Any objection against
the assessment should have been pursued following the avenue paved in Section 229
of the NIRC on protests on assessments of internal revenue taxes.

There being sufficient service of Notices to herein petitioner (and his mother) and
it appearing that petitioner continuously ignored said Notices despite several
opportunities given him to file a protest and to thereafter appeal to the Court of
Tax Appeals, — the tax assessments subject of this case, upon which the levy
and sale of properties were based, could no longer be contested (directly or
indirectly) via this instant petition for certiorari. 20

Petitioner’s contention that he should be given notices of levy as a mandatory heir of the
decedent and consider the levy null and void is without merit. In the case of notices of
levy issued to satisfy the delinquent estate tax, the delinquent taxpayer is the Estate of
the decedent, and not necessarily, and exclusively, the petitioner as heir of the
deceased. In the same vein, in the matter of income tax delinquency of the late
president and his spouse, petitioner is not the taxpayer liable. Thus, it follows that
service of notices of levy in satisfaction of these tax delinquencies upon the petitioner is
not required by law, as under Section 213 of the NIRC, which pertinently states:

. . . Levy shall be effected by writing upon said certificate a description of the property
upon which levy is made. At the same time, written notice of the levy shall be mailed to
or served upon the Register of Deeds of the province or city where the property is
located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his
agent or the manager of the business in respect to which the liability arose, or if there
be none, to the occupant of the property in question.
VIDAL DE ROCES VS. POSADAS G.R. NO. L-34937 13 MARCH 1933

(DONATIONS IN CONTEMPLATION OF DEATH)

FACTS:

Esperanza Tuazon, by means of public documents, donated certain parcels of land

situated in Manila to the plaintiffs herein, who, with their respective husbands, accepted
them in the same public documents, which were duly recorded in the registry of deeds.
By virtue of said donations, the plaintiffs took possession of the said lands, received the
fruits thereof and obtained the corresponding transfer certificates of title.

The donor died in the City of Manila without leaving any forced heir and her will which
was admitted to probate, she bequeathed to each of the donees the sum of P5,000.
After the estate had been distributed among the instituted legatees and before delivery
of their respective shares, the appellee herein, as Collector of Internal Revenue, ruled
that the appellants, as donees and legatees, should pay as inheritance tax. The donees
paid under protest.

The appellee filed a demurrer to the complaint on the ground that the facts alleged
therein were not sufficient to constitute a cause of action. After the legal questions
raised therein had been discussed, the court sustained the demurrer and ordered the
amendment of the complaint which the appellants failed to do, whereupon the trial court
dismissed the action on the ground that the afore- mentioned appellants did not really
have a right of action.

Appellants contend that the imposition of the inheritance tax on donation inter vivos is a
clear violation of the rule of uniformity of taxation.

ISSUE:

Whether or not the imposition of inheritance tax to the donees that were later on
instituted as legatees of the deceased is considered as an advance of their inheritance
and is constitutional and considered as donation in contemplation of death.

RULING:

Yes. The tax collected by the appellee on the properties donated in 1925 really
constitutes an inheritance tax imposed on the transmission of said properties in
contemplation or in consideration of the donor's death and under the
circumstance that the donees were later instituted as the former's legatees. For
this reason, the law considers such transmissions in the form of gifts inter vivos,
as advances on inheritance and nothing therein violates any constitutional
provision, inasmuch as said legislation is within the power of the Legislature.
Property Subject to Inheritance Tax. — The inheritance tax ordinarily applies to all
property within the power of the state to reach passing by will or the laws regulating
intestate succession or by gift inter vivos in the manner designated by statute, whether
such property be real or personal, tangible or intangible, corporeal or incorporeal.

In the case of Tuason and Tuason vs. Posadas, supra, it was also held that section
1540 of the Administrative Code did not violate the constitutional provision regarding
uniformity of taxation. It cannot be null and void on this ground because it equally
subjects to the same tax all of those donees who later become heirs, legatees or
donees mortis causa by the will of the donor. There would be a repugnant and arbitrary
exception if the provisions of the law were not applicable to all donees of the same kind.
In the case cited above, it was said: "At any rate the argument adduced against its
constitutionality, which is the lack of Uniformity, does not seem to be well founded. It
was said that under such an interpretation, while a donee inter vivos who, after the
predecessor's death proved to be an heir, a legatee, or a donee mortis causa, would
have to pay the tax, another donee inter vivos who did not prove to be an heir, a
legatee, or a donee mortis causa of the predecessor, would be exempt from such a tax.
But as these are two different cases, the principle of uniformity is inapplicable to them."

Wherefore, the demurrer interposed by the appellee was well-founded because it

appears that the complaint did not allege fact sufficient to constitute a cause of action.
When the appellants refused to amend the same, spite of the court's order to that effect,
they voluntarily waived the opportunity offered them and they are not now entitled to
have the case remanded for further proceedings, which would serve no purpose
altogether in view of the insufficiency of the complaint.
TOLENTINO VS. SEC. OF FINANCE G.R. NO. 115455 26 AUGUST 1994

(NATURE OF VAT, CONSTITUTIONALITY OF VAT)

FACTS:

FACTS:
Petitioners (Tolentino, Kilosbayan, Inc., Philippine Airlines, Roco, and Chamber of Real
Estate and Builders Association) seek reconsideration of the Court’s previous ruling
dismissing the petitions filed for the declaration of unconstitutionality of R.A. No. 7716,
the Expanded Value-Added Tax Law. Petitioners contend that the R.A. did not “originate
exclusively” in the HoR as required by Article 6, Section 24 of the Constitution. The
Senate allegedly did not pass it on second and third readings, instead passing its own
version. Petitioners contend that it should have amended the House bill by striking out
the text of the bill and substituting it with the text of its own bill, so as to conform with the
Constitution.

ISSUE:
W/N the R.A. is unconstitutional for having “originated” from the Senate, and not the
HoR.

HELD:
Petition is unmeritorious. The enactment of the Senate bill has not been the first
instance where the Senate, in the exercise of its power to propose amendments to bills
(required to originate in the House), passed its own version. An amendment by
substitution (striking out the text and substituting it), as urged by petitioners, concerns a
mere matter of form, and considering the petitioner has not shown what substantial
difference it would make if Senate applied such substitution in the case, it cannot be
applied to the case at bar. While the aforementioned Constitutional provision states that
bills must “originate exclusively in the HoR,” it also adds, “but the Senate may propose
or concur with amendments.” The Senate may then propose an entirely new bill as a
substitute measure. Petitioners erred in assuming the Senate version to be an
independent and distinct bill. Without the House bill, Senate could not have enacted the
Senate bill, as the latter was a mere amendment of the former. As such, it did not have
to pass the Senate on second and third readings.
Petitioners question the signing of the president on both bills, to support their contention
that such are separate and distinct. The President certified the bills separately only
because the certification had to be made of the version of the same revenue bill which
at the moment was being considered.
Petitioners question the power of the conference Committee to insert new provisions.
The jurisdiction of the conference committee is not limited to resolving differences
between the senate and the House. It may propose an entirely new provision, given that
such are germane to the subject of the conference, and that the respective houses of
Congress subsequently approve its report.

Petitioner PAL contends that the amendment of its franchise by the withdrawal of its
exemption from VAT is not expressed in the title of the law, thereby violating the
constitution. The court believes that the title of the RA satisfies the Constitutional
Requirement.

Petitioners claim that the RA violates their press freedom and religious liberty, having
removed them from the exemption to pay VAT. Suffice it to say that since the law
granted the press a privilege, the law could take back the privilege anytime without
offense to the constitution. By granting exemptions, the state does not forever waive the
exercise off its sovereign prerogative.

Lastly, petitioners content that RA violates due process, equal protection and contract
clauses and the rule on taxation. Petitioners fail to take into consideration the fact that
the VAT was already provided for in E.O. No. 273 long before the RA was enacted. The
latter merely expands the base of the tax. Equality and uniformity in taxation means that
all taxable articles or kinds of property of the same class be taxed at the same rate, the
taxing power having authority to make reasonable and natural classifications for
purposes of taxation. It is enough that the statute applies equally to all persons, forms
and corporations placed in similar situations.
ABAKADA GURO PARTYLIST VS. ERMITA G.R.NO. 168056 1 SEPTEMBER 2005
(CONTITUTIONALITY OF VAT, CONCEPT OF VAT)

ABAKADA Guro Party List vs Executive Secretary

Bills Must Originate EXCLUSIVELY from the House of Representatives; Undue

Delegation of Legislative Power; Equal Protection Clause

 ABAKADA GURO PARTY LIST VS EXECUTIVE SECRETARY

G.R. No. 168056     September 1, 2005

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S.

ALCANTARA and ED VINCENT S. ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE
SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and
HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO,
JR., Respondent.

Facts:

Petitioners ABAKADA GURO Party List challenged the constitutionality of R.A. No.
9337 particularly Sections 4, 5 and 6, amending Sections 106, 107 and 108,
respectively, of the National Internal Revenue Code (NIRC). These questioned
provisions contain a uniform proviso authorizing the President, upon recommendation of
the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after
any of the following conditions have been satisfied, to wit:

. . . That the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%),
after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds
one and one-half percent (1 ½%).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by

Congress of its exclusive authority to fix the rate of taxes under Article VI, Section 28(2)
of the 1987 Philippine Constitution. They further argue that VAT is a tax levied on the
sale or exchange of goods and services and cannot be included within the purview of
tariffs under the exemption delegation since this refers to customs duties, tolls or tribute
payable upon merchandise to the government and usually imposed on
imported/exported goods. They also said that the President has powers to cause,
influence or create the conditions provided by law to bring about the conditions
precedent. Moreover, they allege that no guiding standards are made by law as to how
the Secretary of Finance will make the recommendation. They claim, nonetheless, that
any recommendation of the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter, such that, ultimately, it is the
President who decides whether to impose the increased tax rate or not.

Issues:

1. Whether or not R.A. No. 9337 has violated the provisions in Article VI, Section
24, and Article VI, Section 26 (2) of the Constitution.
2. Whether or not there was an undue delegation of legislative power in violation of
Article VI Sec 28 Par 1 and 2 of the Constitution.
3. Whether or not there was a violation of the due process and equal protection
under Article III Sec. 1 of the Constitution.
 

Discussions:

1. Basing from the ruling of Tolentino case, it is not the law, but the revenue bill
which is required by the Constitution to “originate exclusively” in the House of
Representatives, but Senate has the power not only to propose amendments, but
also to propose its own version even with respect to bills which are required by
the Constitution to originate in the House. the Constitution simply means is that
the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the
public debt, private bills and bills of local application must come from the House
of Representatives on the theory that, elected as they are from the districts, the
members of the House can be expected to be more sensitive to the local needs
and problems. On the other hand, the senators, who are elected at large, are
expected to approach the same problems from the national perspective. Both
views are thereby made to bear on the enactment of such laws.
2. In testing whether a statute constitutes an undue delegation of legislative power
or not, it is usual to inquire whether the statute was complete in all its terms and
provisions when it left the hands of the legislature so that nothing was left to the
judgment of any other appointee or delegate of the legislature.
 3. The equal protection clause under the Constitution means that “no person or
class of persons shall be deprived of the same protection of laws which is
enjoyed by other persons or other classes in the same place and in like
circumstances.”
 Rulings:

1. R.A. No. 9337 has not violated the provisions. The revenue bill exclusively
originated in the House of Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included
provisions in Senate Bill No. 1950 amending corporate income taxes,
percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the
Constitution does not contain any prohibition or limitation on the extent of the
amendments that may be introduced by the Senate to the House revenue bill.
2. There is no undue delegation of legislative power but only of the discretion as to
the execution of a law. This is constitutionally permissible. Congress does not
abdicate its functions or unduly delegate power when it describes what job must
be done, who must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative process can go
forward.
3. Supreme Court held no decision on this matter. The power of the State to make
reasonable and natural classifications for the purposes of taxation has long been
established. Whether it relates to the subject of taxation, the kind of property, the
rates to be levied, or the amounts to be raised, the methods of assessment,
valuation and collection, the State’s power is entitled to presumption of validity.
As a rule, the judiciary will not interfere with such power absent a clear showing
of unreasonableness, discrimination, or arbitrariness.
CIR VS. MAGSAYSAY LINES, INC. G.R. NO. 146984 28 JUNE 2006

(NATURE OF VAT, “IN THE COURSE OF TRADE/BUSINESS”)

FACTS:

NDC decided to sell to private enterprise all of its shares in its wholly-owned subsidiary
the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC
shares and five (5) of its ships. The NMC shares and the vessels were offered for public
bidding. Among the stipulated terms and conditions for the public auction was that the
winning bidder was to pay "a value added tax of 10% on the value of the vessels.
private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares
and the vessels. The bid was made by Magsaysay Lines, Baliwag Navigation, Inc., and
FIM Limited of the Marden Group based in Hongkong. the implementing Contract of
Sale was executed between NDC, on one hand, and Magsaysay Lines, Baliwag
Navigation, and FIM Limited, on the other. Paragraph 11.02 of the contract stipulated
that "[v]alue-added tax, if any, shall be for the account of the PURCHASER.

Private respondents received VAT Ruling No. 568-88 from the BIR, holding that
the sale of the vessels was subject to the 10% VAT. The ruling cited the fact that
NDC was a VAT-registered enterprise, and thus its "transactions incident to its
normal VAT registered activity of leasing out personal property including sale of
its own assets that are movable, tangible objects which are appropriable or
transferable are subject to the 10% [VAT].

Private respondents filed an appeal and Petition for Refund with the CTA. The
CTA rejected the CIRs arguments and granted the petition.

ISSUE:

Whether the sale by the NDC of five of its vessels to the respondent is subject to
VAT

RULING:

NO. VAT is not a singular-minded tax on every transactional level. Its assessment bears
direct relevance to the taxpayer's role or link in the production chain. Hence, as affirmed
by Section 99 of the Tax Code and its subsequent incarnations, the tax is levied only on
the sale, barter or exchange of goods or services by persons who engage in such
activities, in the course of trade or business. These transactions outside the course
of trade or business may invariably contribute to the production chain, but they do so
only as a matter of accident or incident. As the sales of goods or services do not occur
within the course of trade or business, the providers of such goods or services would
hardly, if at all, have the opportunity to appropriately credit any VAT liability as against
their own accumulated VAT collections since the accumulation of output VAT arises in
the first place only through the ordinary course of trade or business.
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955
(97 Phil. 992), the term "carrying on business" does not mean the performance of a
single disconnected act, but means conducting, prosecuting and continuing business by
performing progressively all the acts normally incident thereof; while "doing business"
conveys the idea of business being done, not from time to time, but all the time.

What is clear therefore, based on the aforecited jurisprudence, is that "course of

business" or "doing business" connotes regularity of activity. In the instant case,
the sale was an isolated transaction. The sale which was involuntary and made
pursuant to the declared policy of Government for privatization could no longer
be repeated or carried on with regularity. It should be emphasized that the normal
VAT-registered activity of NDC is leasing personal property.

The conclusion that the sale was not in the course of trade or business, which the CIR
does not dispute before this Court, should have definitively settled the matter. Any sale,
barter or exchange of goods or services not in the course of trade or business is not
subject to VAT.

What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the
meaning of "in the course of trade or business," but instead the identification of
the transactions which may be deemed as sale. It would become necessary to
ascertain whether under those two provisions the transaction may be deemed a
sale, only if it is settled that the transaction occurred in the course of trade or
business in the first place. If the transaction transpired outside the course of
trade or business, it would be irrelevant for the purpose of determining VAT
liability whether the transaction may be deemed sale, since it anyway is not
subject to VAT.

Accordingly, the Court rules that given the undisputed finding that the transaction in
question was not made in the course of trade or business of the seller, NDC that is, the
sale is not subject to VAT pursuant to Section 99 of the Tax Code, no matter how the
said sale may hew to those transactions deemed sale as defined under Section 100.
CIR VS. PLDT G.R.NO. 140230 15 DECEMBER 2005

(DIRECT TAXES VS. INDIRECT TAXES. “IN LIEU OF ALL TAXES” CLAUSE)

FACTS:

PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate
and maintain a telecommunications system throughout the Philippines.

For equipment, machineries and spare parts it imported for its business' on different
dates from October 1, 1992 to May 31, 1994. PLDT paid the BIR the amount
of P164,510,953.00, broken down as follows: (a) compensating tax of P126,713,037.00;
advance sales tax of P12,460,219.00 and other internal revenue taxes
of P25,337,697.00. For similar importations made between March 1994 to May 31,
1994, PLDT paid P116,041,333.00 value-added tax (VAT).

PLDT addressed a letter to the BIR seeking a confirmatory ruling on its tax exemption
privilege under Section 12 of R.A. 7082. Sec. 12*** and the said percentage shall be
in lieu of all taxes on this franchise or earnings thereof. Then the BIR issued on
April 19, 1994 Ruling No. UN-140-94, [3] pertinently reading, as follows:

PLDT shall be subject only to the following taxes, to wit:

7. The 3% franchise tax on gross receipts which shall be in lieu of all taxes on its
franchise or earnings thereof.

The 'in lieu of all taxes' provision under Section 12 of RA 7082 clearly exempts PLDT
from all taxes including the 10% value-added tax (VAT) prescribed by Section 101 (a) of
the same Code on its importations of equipment, machineries and spare parts
necessary in the conduct of its business covered by the franchise, except the
aforementioned enumerated taxes for which PLDT is expressly made liable.

PLDT filed on December 2, 1994 a claim [4] for tax credit/refund of the VAT,

compensating taxes, advance sales taxes and other taxes it had been paying 'in
connection with its importation of various equipment, machineries and spare parts
needed for its operations' . With its claim not having been acted upon by the BIR, and
obviously to forestall the running of the prescriptive period therefor, PLDT filed with the
CTA a petition for review, [5] therein seeking a refund of, or the issuance of a tax credit
certificate. CTA rendered its decision in favor of PLDT. BIR moved for a reconsideration
however denied. BIR Commissioner elevated the matter to the Court of Appeals, but to
no avail.
The BIR Commissioner submits that the exempting 'in lieu of all taxes' clause covers
direct taxes only, adding that for indirect taxes to be included in the exemption, the
intention to include must be specific and unmistakable. He thus faults the Court of
Appeals for erroneously declaring PLDT exempt from payment of VAT and other
indirect taxes on its importations. To the Commissioner, PLDT's claimed entitlement to
tax refund/credit is without basis inasmuch as the 3% franchise tax being imposed on
PLDT is not a substitute for or in lieu of indirect taxes.

ISSUE: whether or not PLDT, given the tax component of its franchise, is exempt from
paying (Indirect taxes) VAT, compensating taxes, advance sales taxes and internal
revenue taxes on its importations.

RULING:

Time and again, the Court has stated that taxation is the rule, exemption is the
exception. Accordingly, statutes granting tax exemptions must be construed in
strictissimi juris against the taxpayer and liberally in favor of the taxing authority.  To
him, therefore, who claims a refund or exemption from tax payments rests the burden of
justifying the exemption by words too plain to be mistaken and too categorical to be
misinterpreted.

As may be noted, the clause 'in lieu of all taxes' in Section 12 of RA 7082 is
immediately followed by the limiting or qualifying clause 'on this franchise or earnings
thereof, suggesting that the exemption is limited to taxes imposed directly on PLDT
since taxes' pertaining to PLDT's franchise or earnings are its direct liability.
Accordingly, indirect taxes, not being taxes on PLDT's franchise or earnings, are outside
the purview of the 'in lieu provision.

It cannot be over-emphasized that tax exemption represents a loss of revenue to the

government and must, therefore, not rest on vague inference. When claimed, it must be
strictly construed against the taxpayer who must prove that he falls under the exception.
And, if an exemption is found to exist, it must not be enlarged by construction, since the
reasonable presumption is that the state has granted in express terms all it intended to
grant at all, and that, unless the privilege is limited to the very terms of the statute the
favor would be extended beyond dispute in ordinary cases.

All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT blanket
exemption from payment of indirect taxes, which, in the ultimate analysis, are not taxes
on its franchise or earnings. 'PLDT has not shown its eligibility for the desired
exemption. None should be granted.
'As a final consideration, the Court takes particular stock, PLDT's allegation that the
Bureau of Customs assessed the company for advance sales tax and compensating tax
for importations entered between October 1, 1992 and May 31, 1994 when the value-
added tax system already replaced, if not totally eliminated, advance sales and
compensating taxes. [40] Indeed, pursuant to Executive Order No. 273 [41] which took
effect on January 1, 1988, a multi-stage value-added tax was put into place to replace
the tax on original and subsequent sales tax. [42] It stands to reason then, as urged by
PLDT, that compensating tax and advance sales tax were no longer collectible internal
revenue taxes under the NILRC when the Bureau of Customs made the assessments in
question and collected the corresponding tax. Stated a bit differently, PLDT was no
longer under legal obligation to pay compensating tax and advance sales tax on its
importation from 1992 to 1994.

Given the above perspective, the amount PLDT paid in the concept of advance sales
tax and compensating tax on the 1992 to 1994 importations were, in context, erroneous
tax payments and would theoretically be refundable. It should be emphasized, however,
that, such importations were, when made, already subject to VAT. The BIR to grant a
refund of the advance sales tax and compensating tax in the total amount
of P94,673,422.00, subject to the condition that PLDT present proof of payment of the
corresponding VAT on said transactions.

The petition is partially GRANTED. The Decision of the Court of Appeals is MODIFIED.

The Commissioner of Internal Revenue is ORDERED to issue a Tax Credit Certificate
or to refund to PLDT only the of P94,673,422.00 advance sales tax and compensating
tax erroneously collected by the Bureau of Customs from October 1, 1992 to May 31,
1994, less the VAT which may have been due on the importations in question, but have
otherwise remained uncollected.
CIR VS. SEAGATE TECH.

G.R. NO. 153866 11 FEBRUARY 2005

(NATURE OF VAT, TAX REFUND OF UNUTILIZED INPUT TAX, PEZA-REGISTERED

ENTITIES, EXEMPT TRANSACTIONS VS. EXEMPT ENTITIES)

FACTS:

Seagate is a resident foreign corporation duly registered with the SEC to do business in
the Philippines engage in the manufacture of recording components primarily used in
computers for export located at the new Cebu Township One, Special Economic Zone,
Barangay Cantao-an, Naga, Cebu. VAT registered entity, filed VAT returns for the
period April 1 1998 to June 30, 1999. Seagate filed an administrative claim for refund of
VAT input taxes in the amount of P28,369,226.38 with supporting documents (inclusive
of the P12,267,981.04 VAT input taxes subject of this Petition for Review). No action
received from the BIR. This prompted SEAGATE to elevate the case to CTA by way of
Petition for Review in order to toll the running of the 2-year prescriptive period.

CIR raised the following special and affirmative defenses:

1. Seagate’s alleged claim for refund/credit is subject to administrative routinary

investigation/examination by the Bureau, Since ‘taxes are presumed to have
been collected in accordance with laws and regulations;
2. SEAGATE has the burden of proof that the taxes sought to be refunded were
erroneously or illegally collected;
3. Claims for tax refund/tax credit are construed in ‘strictissimi juris’ against the
taxpayer. This is due to the fact that claims for refund/credit [partake of] the
nature of an exemption from tax;
4. Granting, without admitting, that [respondent] is a Philippine Economic Zone
Authority (PEZA) registered Ecozone Enterprise, then its business is not subject
to VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in relation to
Section 103 of the Tax Code, as amended. As [respondent’s] business is not
subject to VAT, the capital goods and services it alleged to have purchased are
considered not used in VAT taxable business. As such, [respondent] is not
entitled to refund of input taxes on such capital goods pursuant to Section
4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services
pursuant to Section 4.103 of said regulations.
5. SEAGATE must show compliance with the provisions of Section 204 (C) and 229
of the 1997 Tax Code on filing of a written claim for refund within two (2) years
from the date of payment of tax.
The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a
tax credit certificate (TCC) in favor of respondent in the reduced amount
of P12,122,922.66. Hence this petition.

ISSUE:

Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate
in the amount of P12,122,922.66 representing alleged unutilized input VAT paid on
capital goods purchased for the period April 1, 1998 to June 30, 1999

RULING:

YES. 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. Business companies registered in and operating from
the Special Economic Zone in Naga, Cebu -- like herein respondent --
are entities exempt from all internal revenue taxes and the implementing rules relevant
thereto, including the value-added taxes or VAT. Although export sales are not deemed
exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the
distinction between exempt entities and exempt transactions has little significance,
because the net result is that the taxpayer is not liable for the VAT.

Nature of the VAT and the Tax Credit Method

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 business29 as they pass along the
production and distribution chain, the tax being limited only to the value added30 to such
goods, properties or services by the seller, transferor or lessor. 31 It is an indirect tax that
may be shifted or passed on to the buyer, transferee or lessee of the goods, properties
or services.32 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.

Zero-Rated and Effectively Zero-Rated Transactions

Zero-rated transactions generally refer to the export sale of goods and supply of
services.47 The tax rate is set at zero.48 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,49 but can claim a refund of or a tax credit certificate
for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of
services51 to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such transactions
to a zero rate.52 Again, as applied to the tax base, such rate does not yield any tax
chargeable against the purchaser. The seller who charges zero output tax on such
transactions can also claim a refund of or a tax credit certificate for the VAT previously
charged by suppliers.

Zero Rating and Exemption

In terms of the VAT computation, zero rating and exemption are the same, but
the extent of relief that results from either one of them is not.

Applying the destination principle53 to the exportation of goods, automatic zero rating54 is

primarily intended to be enjoyed by the seller who is directly and legally liable for the
VAT, making such seller internationally competitive by allowing the refund or credit of
input taxes that are attributable to export sales.55 Effective zero rating, on the contrary, is
intended to benefit the purchaser who, not being directly and legally liable for the
payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers.

In both instances of zero rating, there is total relief for the purchaser from the burden of
the tax.56 But in an exemption there is only partial relief,57 because the purchaser is not
allowed any tax refund of or credit for input taxes paid.58

Exempt Transaction >and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the
parties to the transaction.59

An exempt transaction, on the one hand, involves goods or services which, by their
nature, are specifically listed in and expressly exempted from the VAT under the Tax
Code, without regard to the tax status -- VAT-exempt or not -- of the party to
the transaction.60 Indeed, such transaction is not subject to the VAT, but the seller is not
allowed any tax refund of or credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption under
the Tax Code, a special law or an international agreement to which the Philippines is a
signatory, and by virtue of which its taxable transactions become exempt from the
VAT.61 Such party is also not subject to the VAT, but may be allowed a tax refund of or
credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer.

Since the purchases of respondent are not exempt from the VAT, the rate to be applied
is zero. Its exemption under both PD 66 and RA 7916 effectively subjects such
transactions to a zero rate,68 because the ecozone within which it is registered is
managed and operated by the PEZA as a separate customs territory.69 This means that
in such zone is created the legal fiction of foreign territory. 70 Under the cross-border
principle71 of the VAT system being enforced by the Bureau of Internal Revenue
(BIR),72 no VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority. If exports of goods
and services from the Philippines to a foreign country are free of the VAT,73 then the
same rule holds for such exports from the national territory -- except specifically
declared areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-registered

entity are considered exports to a foreign country; conversely, sales by a PEZA-
registered entity to a VAT-registered person in the customs territory are deemed imports
from a foreign country.74 An ecozone -- indubitably a geographical territory of the
Philippines -- is, however, regarded in law as foreign soil.75 This legal fiction is
necessary to give meaningful effect to the policies of the special law creating the
zone.76 If respondent is located in an export processing zone77 within that ecozone, sales
to the export processing zone, even without being actually exported, shall in fact be
viewed as constructively exported under EO 226.78 Considered as export sales,79 such
purchase transactions by respondent would indeed be subject to a zero rate.

Tax Exemptions Broad and Express

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.

RA 7916 states that "no taxes, local and national, shall be imposed on business
establishments operating within the ecozone."81 Since this law does not exclude the VAT
from the prohibition, it is deemed included

Tax Refund as Tax Exemption

Respondent, which as an entity is exempt, is different from its transactions which are
not exempt. The end result, however, is that it is not subject to the VAT. The non-
taxability of transactions that are otherwise taxable is merely a necessary incident to the
tax exemption conferred by law upon it as an entity, not upon the transactions
themselves.108 Nonetheless, its exemption as an entity and the non-exemption of its
transactions lead to the same result for the following considerations:

VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT
Refund

The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting
from internal revenue laws and regulations the equipment -- including capital goods --
that registered enterprises will use, directly or indirectly, in manufacturing.132 EO 226
even reiterates this privilege among the incentives it gives to such
enterprises.133 Petitioner merely asserts that by virtue of the PEZA registration alone of
respondent, the latter is not subject to the VAT. Consequently, the capital goods and
services respondent has purchased are not considered used in the VAT business, and
no VAT refund or credit is due.134 This is a non sequitur. By the VAT’s very nature as a
tax on consumption, the capital goods and services respondent has purchased are
subject to the VAT, although at zero rate. Registration does not determine taxability
under the VAT law.

Tax Refund or Credit in Order

Having determined that respondent’s purchase transactions are subject to a zero VAT
rate, the tax refund or credit is in order.

Therefore, respondent can be considered exempt, not from the VAT, but only from the
payment of income tax for a certain number of years, depending on its registration as a
pioneer or a non-pioneer enterprise. Besides, the remittance of the aforesaid 5 percent
of gross income earned in lieu of local and national taxes imposable upon business
establishments within the ecozone cannot outrightly determine a VAT exemption. Being
subject to VAT, payments erroneously collected thereon may then be refunded or
credited.

Compliance with All Requisites for VAT Refund or Credit

SEAGATE is a VAT-registered entity. This Court held that the petitioner therein was
registered as a non-VAT taxpayer.151 Hence, for being merely VAT-exempt, the
petitioner in that case cannot claim any VAT refund or credit.

Input taxes paid on the capital goods of respondent are duly supported by VAT invoices
and have not been offset against any output taxes.

There was a very clear intent on the part of our legislators, not only to exempt investors
in ecozones from national and local taxes, but also to grant them tax credits.

To summarize, special laws expressly grant preferential tax treatment to business

establishments registered and operating within an ecozone, which by law is considered
as a separate customs territory. As such, respondent is exempt from all internal revenue
taxes, including the VAT, and regulations pertaining thereto. It has opted for the income
tax holiday regime, instead of the 5 percent preferential tax regime. As a matter of law
and procedure, its registration status entitling it to such tax holiday can no longer be
questioned. Its sales transactions intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior application for the effective zero
rating of its transactions is necessary. Being VAT-registered and having satisfactorily
complied with all the requisites for claiming a tax refund of or credit for the input VAT
paid on capital goods purchased, respondent is entitled to such VAT refund or credit.

CIR VS. SEKISUI PHILS. INC. G.R.NO. 149671 21 JULY 2006

(PEZA-REGISTERED ENTITIES)

FACTS:

SEKISUI Phils. Inc. is a domestic corporation duly organized and existing under and by
virtue of the laws of the Philippines with principal office located at Laguna. It is
principally engaged in the business of manufacturing, importing, exporting, buying,
selling, or otherwise dealing in, at wholesale such goods as strapping bands and other
packaging materials and goods of similar nature, and any and all equipment, materials,
supplies used or employed in or related to the manufacture of such finished products.

Registered as VAT Taxpayer, respondent filed its quarterly returns with the BIR, for the
period January 1 to June 30, 1997, reflecting therein input taxes in the amount
of P4,631,132.70 paid by it in connection with its domestic purchase of capital goods
and services. Said input taxes remained unutilized since respondent has not engaged in
any business activity or transaction for which it may be liable for output tax and for
which said input taxes may be credited.

Respondent filed with the One-Stop-Shop Inter-Agency Tax Credit and Duty Drawback
Center of the Department of Finance (CENTER-DOF) two (2) separate applications for
tax credit/refund of VAT input taxes paid for the period January 1 to June 30, 1997. No
action on its application. Respondent then filed within the two (2)-year prescriptive
period under Section 229 of said Code, a Petition for Review with the Court of Tax
Appeals.

BIR said that: 1. ) said claim for tax credit/refund is subject to administrative routinary
investigation by the BIR; (2) respondent miserably failed to show that the amount
claimed as VAT input taxes were erroneously collected or that the same were properly
documented; (3) taxes due and collected are presumed to have been made in
accordance with law, hence, not refundable; (4) the burden of proof is on the taxpayer
to establish his right to a refund in an action for tax refund. Failure to discharge such
duty is fatal to his action; (5) respondent should show that it complied with the
provisions of Section 204 in relation to Section 229 of the 1997 Tax Code; and (6)
claims for refund are strictly construed against the taxpayer as it partakes of the nature
of a tax exemption.

CTA ruled that the respondent was entitled to the refund. CA upheld the decision of
CTA. Hence, this petition.

ISSUE:

Whether or not respondent is entitled to the refund or issuance of tax credit certificate in
the amount of P4,377,102.26 as alleged unutilized input taxes paid on domestic
purchase of capital goods and services for the period covering January 1 to June 30,
1997.
RULING:

YES. An entity registered with the PEZA as an ecozone may be covered by the VAT
system. Section 23 of Republic Act 7916, as amended, gives a PEZA-registered
enterprise the option to choose between two fiscal incentives: a) a five percent
preferential tax rate on its gross income under the said law; or b) an income tax holiday
provided under Executive Order No. 226 or the Omnibus Investment Code of 1987, as
amended. If the entity avails itself of the five percent preferential tax rate under the first
scheme, it is exempt from all taxes, including the VAT; under the second, it is exempt
from income taxes for a number of years, but not from other national internal revenue
taxes like the VAT.

Respondent had availed itself of the fiscal incentive of an income tax holiday under
Executive Order No. 226. By availing itself of the income tax holiday, respondent
became subject to the VAT. It correctly registered as a VAT taxpayer, because its
transactions were not VAT-exempt.

ecozone is geographically within the Philippines, it is deemed a separate customs

territory and is regarded in law as foreign soil. Sales by suppliers from outside the
borders of the ecozone to this separate customs territory are deemed as exports and
treated as export sales.These sales are zero-rated or subject to a tax rate of zero
percent.

Respondent was able to prove that it had paid input taxes in the amount
of P4,377,102.26. Petitioner has not challenged the computation. since 100 percent of
the products of respondent are exported, all its transactions are deemed export sales
and are thus VAT zero-rated. It has been shown that respondent has no output tax with
which it could offset its paid input tax.Since the subject input tax it paid for its domestic
purchases of capital goods and services remained unutilized, it can claim a refund for
the input VAT previously charged by its suppliers.The amount of P4,377,102.26 is
excess input taxes that justify a refund.

CIR VS. AMERICAN EXPRESS INTERNATIONAL INC. G.R. NO. 152609 29 JUNE
2005
 (ZERO-RATED SERVICES, CONCEPT OF INPUT TAX CREDIT, TAX REFUND OF
UNUTIZED INPUT TAX)

FACTS:

"[Respondent] is a Philippine branch of American Express International, Inc., a

corporation duly organized and existing under and by virtue of the laws of the State of
Delaware, U.S.A., with office in the Philippines at Makati City. It is a servicing unit of
American Express International, Inc. - Hongkong Branch (Amex-HK) and is engaged
primarily to facilitate the collections of Amex-HK receivables from card members
situated in the Philippines and payment to service establishments in the Philippines.

Amex Philippines registered itself with the BIR as a VAT Taxpayer. [respondent] filed
with the BIR a letter-request for the refund of its 1997 excess input taxes in the amount
of P3,751,067.04, which amount was arrived at after deducting from its total input VAT
paid of P3,763,060.43 its applied output VAT liabilities only for the third and fourth
quarters of 1997 amounting to P5,193.66 and P6,799.43, respectively. [Respondent]
cites as basis therefor, Section 110 (B) of the 1997 Tax Code.

Section 110. Tax Credits '(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. Any input tax attributable to the purchase of
capital goods or 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.

No action by the BIR. Respondent filed a petition for review at CTA and ruled in favor of
the respondent and CA affirmed CTA’s decision.

ISSUE: Whether or not Respondent is entitled to the refund of the amount

of P3,352,406.59 allegedly representing excess input VAT for the year 1997

RULING:

Yes. Services performed by VAT-registered persons in the Philippines (other than

processing, manufacturing or repacking of goods of persons doing business outside the
Philippines), when paid in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP, are zero-rated. Respondent is a VAT-
registered person that facilitates the collection and payment of receivables belonging to
its non-resident foreign client, for which it gets paid in acceptable foreign currency
inwardly remitted and accounted for in conformity with BSP rules and regulations.
Certainly, the services it renders in the Philippines is not in the same category as
“processing, manufacturing or repacking of goods” and should, therefore, be zero-rated.
In reply to a query of respondent, the BIR opined in VAT Ruling No. 080-89 that the
income respondent earned from its parent company’s regional operating centers was
automatically zero- rated effectively January 1, 1998. Service has been defined as “the
art of doing something useful for a person or company for a fee” or “useful labor or work
rendered or to be rendered by one person to another.” For facilitating in the Philippines
the collection and payment of receivables belonging to its hongkong based foreign
client, and getting paid for it in duly accounted acceptable foreign currency , respondent
renders service falling under the category of zero-rating. Pursuant to tax code, a VAT of
zero percent should, therefore, be levied upon the supply of service. the law clearly
provides for an exception to the destination principle; that is, for a zero percent VAT rate
for services that are performed in the Philippines, "paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the
[BSP]."57 Thus, for the supply of service to be zero-rated as an exception, the law
merely requires that first, the service be performed in the Philippines; second, the
service fall under any of the categories in Section 102(b) of the Tax Code; and, third, it
be paid in acceptable foreign currency accounted for in accordance with BSP rules and
regulations.

Indeed, these three requirements for exemption from the destination principle are met
by respondent. Its facilitation service is performed in the Philippines. It falls under the
second category found in Section 102(b) of the Tax Code, because it is a service other
than "processing, manufacturing or repacking of goods" as mentioned in the provision.
Undisputed is the fact that such service meets the statutory condition that it be paid in
acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it
should be zero-rated.

SILKAIR PTE. LTD. VS. CIR G.R. NO. 173594 6 FEBRUARY 2008
(NATURE OF INDIRECT TAXES)

FACTS:

(Silkair), a corporation organized under the laws of Singapore which has a Philippine
representative office, is an online international air carrier operating the Singapore-Cebu-
Davao-Singapore, Singapore-Davao-Cebu-Singapore, and Singapore-Cebu-Singapore
routes.

Silkair filed with the BIR a refund of P4,567,450.79 excise taxes it claimed to have paid
on its purchases of jet fuel from Petron Corporation from January to June 2000. BIR not
acted, hence, petitioner filed with the CTA a petition for review. CIR alleged in his
answers that Petitioner failed to prove that the sale of the petroleum products was
directly made from a domestic oil company to the international carrier. The excise tax on
petroleum products is the direct liability of the manufacturer/producer, and when added
to the cost of the goods sold to the buyer, it is no longer a tax but part of the
price which the buyer has to pay to obtain the article. CTA denied silkair’s petition on
the ground that the case of excise tax imposed on petroleum products, the seller thereof
may shift the tax burden to the buyer, the latter is the proper party to claim for the refund
in the case of exemption from excise tax. Since the excise tax was imposed upon
Petron Corporation as the manufacturer of petroleum products, pursuant to
Section 130(A)(2), and that the corresponding excise taxes were indeed, paid by
it, . . . any claim for refund of the subject excise taxes should be filed by Petron
Corporation as the taxpayer contemplated under the law. Petitioner cannot be
considered as the taxpayer because it merely shouldered the burden of the excise tax
and not the excise tax itself.

Therefore, the right to claim for the refund of excise taxes paid on petroleum products
lies with Petron Corporation who paid and remitted the excise tax to the BIR.
Respondent, on the other hand, may only claim from Petron Corporation the
reimbursement of the tax burden shifted to the former by the latter. The excise tax
partaking the nature of an indirect tax, is clearly the liability of the manufacturer or seller
who has the option whether or not to shift the burden of the tax to the purchaser. Where
the burden of the tax is shifted to the [purchaser], the amount passed on to it is
no longer a tax but becomes an added cost on the goods purchased  which
constitutes a part of the purchase price. The incidence of taxation or the person
statutorily liable to pay the tax falls on Petron Corporation though the impact of taxation
or the burden of taxation falls on another person, which in this case is petitioner Silkair

ISSUE:

WHETHER OR NOT SILKAIR IS THE PROPER PARTY TO CLAIM FOR REFUND OR

TAX CREDIT

RULING:
NO. The proper party to question, or seek a refund of, an indirect tax is the statutory
taxpayer, the person on whom the tax is imposed by law and who paid the same even if
he shifts the burden thereof to another. Section 130 (A) (2) of the NIRC provides that
"[u]nless otherwise specifically allowed, the return shall be filed and the excise tax paid
by the manufacturer or producer before removal of domestic products from place of
production." Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is
entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of
the Air Transport Agreement between RP and Singapore.

The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of
the Air Transport Agreement between RP and Singapore cannot, without a clear
showing of legislative intent, be construed as including indirect taxes. Statutes granting
tax exemptions must be construed in strictissimi juris against the taxpayer and liberally
in favor of the taxing authority, and if an exemption is found to exist, it must not be
enlarged by construction

SAN ROQUE POWER CORP. VS. CIR G.R. NO.180345 25 NOVEMBER 2009
(TAX REFUND OF UNUTIZED INPUT TAX)

FACTS:

petitioner is a domestic corporation, incorporated for the sole purpose of building and
operating the San Roque Multipurpose Project in San Manuel, Pangasinan, which is an
indivisible project consisting of the power station, the dam, spillway, and other related
facilities. It is registered with the Board of Investments (BOI) on a preferred pioneer
status to engage in the design, construction, erection, assembly, as well as own,
commission, and operate electric power-generating plants and related activities.
registered with the BIR as a VAT taxpayer.

Petitioner entered into a Power Purchase Agreement (PPA) with the National Power
Corporation (NPC) to develop the hydro potential of the Lower Agno River, and to be
able to generate additional power and energy for the Luzon Power Grid, by developing
and operating the San Roque Multipurpose Project. The PPA provides that petitioner
shall be responsible for the design, construction, installation, completion and testing and
commissioning of the Power Station and it shall operate and maintain the same, subject
to the instructions of the NPC. During the cooperation period of 25 years commencing
from the completion date of the Power Station, the NPC shall purchase all the electricity
generated by the Power Plant.

Petitioner applied for and was granted five Certificates of Zero Rate by the BIR.
Petitioner filed with the respondent its Monthly VAT Declarations and Quarterly VAT
Returns. Its Quarterly VAT Returns showed excess input VAT payments on account of
its importation and domestic purchases of goods and services.

Petitioner filed two letters with the BIR to amend its claims for tax refund or credit for the
first and fourth quarter of 2002, respectively. Petitioner sought to recover a total amount
of P249,397,620.18 representing its unutilized excess VAT on its importation and
domestic purchases of goods and services for the year 2002. CTA denied petitioners
claim.

Issue:

Whether or not petitioner may claim a tax refund or credit in the amount
of P249,397,620.18 for creditable input tax attributable to zero-rated or effectively zero-
rated sales pursuant to Section 112(A) of the NIRC or for input taxes paid on capital
goods as provided under Section 112(B) of the NIRC.

RULING:

Yes. petitioner complied with the requirements necessary for a claim for refund or credit
under Section 112(A) of the NIRC.

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 or 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.

1. Petitioner had adequately proved that it is a VAT registered taxpayer.

2. petitioner is engaged in providing electricity for NPC, an activity which is subject

to zero rate, under Section 108(B)(3) of the NIRC

3. petitioner offered as evidence suppliers' VAT invoices or official receipts, as well

as Import Entries and Internal Revenue Declarations which were examined in the
audit by the court-commissioned CPA and noted some errors and based on his
findings, the remaining input VAT of P246,131,610.40 was properly documented
and recorded in the books.

4. the input taxes claimed, which consisted of local purchases and importations
made in 2002, are not transitional input taxes, which Section 111 of the NIRC
defines as input taxes allowed on the beginning inventory of goods, materials
and supplies.

5. the audit report of Aguilar affirms that the input VAT being claimed for tax refund
or credit is net of the input VAT that was already offset against output VAT
amounting to P26,247.27 for the first quarter of 2002 and P34,996.36 for the
fourth quarter of 2002, as reflected in the Quarterly VAT Returns.

6. Court finds it an equitable construction of the law that when the term "sale" is
made to include certain transactions for the purpose of imposing a tax, these
same transactions should be included in the term "sale" when considering the
availability of an exemption or tax benefit from the same revenue measures. It is
undisputed that during the fourth quarter of 2002, petitioner transferred to NPC
all the electricity that was produced during the trial period. The fact that it was not
transferred through a commercial sale or in the normal course of business does
not deflect from the fact that such transaction is deemed as a sale under the law

7. requirement regarding foreign currency exchange proceeds is inapplicable where

petitioner's zero-rated sale of electricity to NPC did not involve foreign exchange
 and consisted only of a single transaction wherein NPC paid
petitioner P42,500,000.00 in exchange for the electricity transferred to it by
petitioner

8. eighth requirement is inapplicable to this case, where the only sale transaction
consisted of an effectively zero-rated sale and there are no exempt or taxable
sales that transpired, which will require the proportionate allocation of the
creditable input tax paid.

9. petitioners seasonably filed its requests for refund and tax credit. However, for
the period April 2002 to May 2002, the claim was filed prematurely on 25 October
2002, before the last quarter had closed on 31 December 2002. The fact that it
had filed its claim for refund or credit during the quarter when the transfer of
electricity had taken place, instead of at the close of the said quarter does not
make petitioner any less entitled to its claim.

Substantial justice, equity and fair play are on the side of the petitioner. Technicalities
and legalisms, however, exalted, should not be misused by the government to keep
money not belonging to it, thereby enriching itself at the expense of its law abiding
citizens.

petitioner is entitled to claim refund or tax credit under Section 112(A) of the NIRC or on
the basis of effectively zero-rated sales in the amount of P246,131,610.40, there is no
more need to establish its right to make the same claim under Section 112(B) of the
NIRC or on the basis of purchase of capital goods.
CIR VS. TOSHIBA INFORMATION EQUIPMENT G.R NO. 150154 9 AUGUST 2005

(TAX REFUND OF UNUTILIZED INPUT TAX, PEZA-REGISTERED ENTITIES,

EXEMPT TRANSACTIONS VS. EXEMPT ENTITIES)\

FACTS:

CIR vs. TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC.

G.R. No. 150154. August 9, 2005 / 466 SCRA 211
Chico-Nazario, J.

FACTS: Toshiba registered with the PEZA as an ECOZONE Export Enterprise and it
registered with the BIR as a VAT taxpayer and a withholding agent.

Toshiba filed its VAT returns for the first and second quarters of taxable year 1996,
reporting input VAT in the amount of P13,118,542.00 and P5,128,761.94, respectively,
or a total of P18,247,303.94. It alleged that the said input VAT was from its purchases of
capital goods and services which remained unutilized since it had not yet engaged in
any business activity or transaction for which it may be liable for any output VAT.

Toshiba filed with DOF applications for tax credit/refund of its unutilized input VAT. To
toll the running of the two-year prescriptive period for judicially claiming a tax
credit/refund Toshiba, filed with the CTA a Petition for Review.

CTA ordered CIR to refund, or in the alternative, to issue a tax credit certificate to
Toshiba in the amount of P16,188,045.44. CA AFFIRMED.

ISSUE: WON Toshiba is entitled to the tax credit/refund of its input VAT on its
purchases of capital goods and services.

HELD: YES. An ECOZONE enterprise is a VAT-exempt entity. Sales of goods,

properties, and services by persons from the Customs Territory to ECOZONE
enterprises shall be subject to VAT at zero percent (0%).

It would seem that CIR failed to differentiate between VAT-exempt transactions from
VAT-exempt entities.

An exempt transaction, on the one hand, involves goods or services which, by their
nature, are specifically listed in and expressly exempted from the VAT under the Tax
Code, without regard to the tax status – VAT-exempt or not – of the party to the
transaction…

An exempt party, on the other hand, is a person or entity granted VAT exemption
under the Tax Code, a special law or an international agreement to which the
Philippines is a signatory, and by virtue of which its taxable transactions become
exempt from VAT…

CIR, bases its argument on VAT-exempt transactions. Since such transactions are not
subject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods,
properties, or services, and they may not claim tax credit/refund of the input VAT they
had paid thereon.

This cannot apply to transactions of Toshiba because although the transactions covered
by special laws may be exempt from VAT, those falling under Presidential Decree No.
66 (EPZA) are not.

This Court agrees, however, that PEZA-registered enterprises, which would necessarily
be located within ECOZONES, are VAT-exempt entities because ECOZONES are
foreign territory. As a result, sales made by a supplier in the Customs Territory to a
purchaser in the ECOZONE shall be treated as an exportation from the Customs
Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in
the Customs Territory shall be considered as an importation into the Customs Territory.

The Philippine VAT system adheres to the Cross Border Doctrine, according to which,
no VAT shall be imposed to form part of the cost of goods destined for consumption
outside of the territorial border of the taxing authority. Hence, actual export of goods and
services from the Philippines to a foreign country must be free of VAT; while, those
destined for use or consumption within the Philippines shall be imposed with ten percent
(10%) VAT.

No output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt

entity. The VAT treatment of sales to it, however, varies depending on whether the
supplier from the Customs Territory is VAT-registered or not.

Sales of goods, properties and services by a VAT-registered supplier from the Customs
Territory to an ECOZONE enterprise shall be treated as export sales. If such sales are
made by a VAT-registered supplier, they shall be subject to VAT at zero percent (0%).
In zero-rated transactions, the VAT-registered supplier shall not pass on any output
VAT to the ECOZONE enterprise, and at the same time, shall be entitled to claim tax
credit/refund of its input VAT attributable to such sales. Zero-rating of export sales
primarily intends to benefit the exporter (i.e., the supplier from the Customs Territory),
who is directly and legally liable for the VAT, making it internationally competitive by
allowing it to credit/refund the input VAT attributable to its export sales.
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered
supplier would only be exempt from VAT and the supplier shall not be able to claim
credit/refund of its input VAT.

Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is

a VAT-exempt entity that could not have engaged in a VAT-taxable business, this Court
still believes, given the particular circumstances of the present case, that it is entitled to
a credit/refund of its input VAT.

The sale of capital goods by suppliers from the Customs Territory to Toshiba took place
way before the issuance of RMC No. 74-99, and when the old rule was accepted and
implemented by no less than the BIR itself. Since Toshiba opted to avail itself of the
income tax holiday under Exec. Order No. 226, as amended, then it was deemed
subject to the ten percent (10%) VAT. It was very likely therefore that suppliers from the
Customs Territory had passed on output VAT to Toshiba, and the latter, thus, incurred
input VAT. Accordingly, this Court gives due respect to and adopts herein the CTA’s
findings that the suppliers of capital goods from the Customs Territory did pass on
output VAT to Toshiba and the amount of input VAT which Toshiba could claim as
credit/refund.

WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court
of Appeals in CA-G.R. SP. No. 59106, and the order of the CTA in CTA Case No. 5593,
ordering said petitioner CIR to refund or, in the alternative, to issue a tax credit
certificate to respondent Toshiba, in the amount of P16,188,045.44, representing
unutilized input VAT for the first and second quarters of 1996.
CORAL BAY NICKEL CORP. VS. CIR G.R.NO. 190506 13 JUNE 2016

(TAX REFUND OF UNUTILIZED INPUT TAX, PEZA-REGISTERED ENTITIES)

FACTS:

Petitioner, a domestic corporation engaged in the manufacture of nickel and/or cobalt

mixed sulphide, is a VAT registered entity. also registered with the Philippine Economic
Zone Authority (PEZA) as an Ecozone Export Enterprise at the Rio Tuba Export
Processing Zone under PEZA.

petitioner filed its Amended VAT Return declaring unutilized input tax from its domestic
purchases of capital goods, other than capital goods and services, for its third and
fourth quarters of 2002 totalling P50,124,086.75. On June 14, 2004,3 it filed with
Revenue District in Palawan its Application for Tax Credits/Refund. Due to inaction of
the respondent, the petitioner elevated its claim to the CTA, however, the latter denied
petitioner’s petition for refund on the ground that the petitioner was not entitled to the
refund of alleged unutilized input VAT 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. CTA en
banc also denied petitioner's Motion for Reconsideration.

ISSUE:

Whether or not petitioner is entitled to the refund of its unutilized input taxes incurred
before it became a PEZA registered entity?

Ruling:

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%).
Based on this old rule, Toshiba allowed the claim for refund or credit on the part
of Toshiba Information Equipment (Phils) Inc.
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. Thus, Toshiba opined: The rule that any sale by a VAT-registered
supplier from the Customs Territory to a PEZA-registered enterprise shall be considered
an export sale and subject to zero percent (0%) VAT was clearly established only on 15
October 1999, upon the issuance of RMC No. 74-99. Prior to the said date, however,
whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of
fiscal incentives availed of by the said enterprise. This old rule on VAT-exemption or
liability of PEZA-registered enterprises, followed by the BIR, also recognized and
affirmed by the CTA, the Court of Appeals, and even this Court, cannot be lightly
disregarded considering the great number of PEZA-registered enterprises which did rely
on it to determine its tax liabilities, as well as, its privileges.

It is important to note herein that respondent Toshiba is located within an

ECOZONE.

The petitioner's principal office was located in Barangay Rio Tuba, Bataraza,
Palawan.21 Its plant site was specifically located inside the Rio Tuba Export Processing
Zone — a special economic zone (ECOZONE) created by Proclamation No. 304, Series
of 2002, in relation to Republic Act No. 7916. 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 following RMC No. 42-03,22 which provides: In case the supplier alleges that
it reported such sale as a taxable sale, the substantiation of remittance of the output
taxes of the seller (input taxes of the exporter-buyer) can only be established upon the
thorough audit of the suppliers' VAT returns and corresponding books and records. It is,
therefore, imperative that the processing office recommends to the concerned BIR
Office the audit of the records of the seller.

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 buyejr.23 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. This Court has repeatedly poirited out that a claim for tax refund
or credit is similar to a tax exemption and should be strictly construed against the
taxpayer. The burden of proof to show that he is ultimately entitled to the grant of such
tax refund or credit rests on the taxpayer.24 Sadly, the petitioner has not discharged its
burden.

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORP. VS. CIR G.R NOS.
141104 & 148763 8 JUNE 2007

(TAX REFUND OF UNUTILIZED INPUT TAX, PEZA-REGISTERED ENTITIES)

FACTS:

FACTS: Petitioner corporation is engaged in the business of mining, production, and

sale of various mineral products, such as gold, pyrite, and copper concentrates. It is a
VAT-registered taxpayer.

Petitioner corporation filed with the BIR the application for the refund/credit of its
input VAT on its purchases of capital goods and on its zero-rated sales. When its
application for refund/credit remained unresolved by the BIR, petitioner filed a Petition
for Review with the CTA. The CTA 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 Export Processing Zone Authority
(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. 

ISSUES:

1. Whether or not the claims were filed within the 2-year prescriptive period
2. Whether or not the claims for refund/credit of input VAT of petitioner corporation
have sufficient legal bases
3. Whether or not petitioner sufficiently established the factual bases for its applications
for refund/credit of input VAT
HELD:
1. YES. The filing of a quarterly income tax returns required in Section 85 (now Section
68) and implemented per BIR Form 1702-Q and payment of quarterly income tax should
only be considered mere installments of the annual tax due. These quarterly tax
payments which are computed based on the cumulative figures of gross receipts and
deductions in order to arrive at a net taxable income, should be treated as advances or
portions of the annual income tax due, to be adjusted at the end of the calendar or fiscal
year. This is reinforced by Section 87 (now Section 69) which provides for the filing of
adjustment returns and final payment of income tax. Consequently, the two-year
prescriptive period provided in Section 292 (now Section 230) of the Tax Code should
be computed from the time of filing the Adjustment Return or Annual Income Tax Return
and final payment of income tax.

2. YES. Section 106(b)(2), in relation to Section 100(a)(2) of the Tax Code of 1977, as
amended, allowed the refund/credit of input VAT on export sales to enterprises
operating within export processing zones and registered with the EPZA, since such
export sales were deemed to be effectively zero-rated sales.

Tax treatment of goods brought into the export processing zones is only
consistent with the Destination Principle and Cross Border Doctrine to which the
Philippine VAT system adheres. According to the Destination Principle, goods and
services are taxed only in the country where these are consumed. In connection
with the said principle, the Cross Border Doctrine mandates that no VAT shall be
imposed to form part of the cost of the goods destined for consumption outside
the territorial border of the taxing authority. Hence, actual export of goods and
services from the Philippines to a foreign country must be free of VAT, while
those destined for use or consumption within the Philippines shall be imposed
with 10% VAT. 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. For this reason, sales by persons from the
Philippine customs territory to those inside the export processing zones are already
taxed as exports.

3. NO. For a judicial claim for refund to prosper, however, respondent must not only
prove that it is a VAT registered entity and that it filed its claims within the prescriptive
period. It must substantiate the input VAT paid by purchase invoices or official receipts.
This respondent failed to do. Petitioner corporation failed to present together with its
application the required supporting documents, whether before the BIR or the CTA.
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 VS MANILA MINING CORP. G.R.NO. 153204 31 AUGUST 2005

(CLAIM FOR REFUND, SUBSTANTIATION)

FACTS:

Respondent is a mining corporation duly organized and existing under Philippines laws,
is registered with the Bureau of Internal Revenue (BIR) as a VAT-registered enterprise.
In 1991, respondent's sales of gold to the Central Bank amounted to P200,832,364.70.
Respondent filed its VAT Returns for the 1st, 2nd, 3rd and 4th quarters of 1991 with the
BIR of Makati. CIR failed to act upon respondent's application within sixty (60) days
from the dates of filing. Hence, a petition for review with the CTA was filed. To the
petition in CTA, the CIR filed its Answer admitting that respondent filed its VAT returns
for the 1st and 2nd quarters of 1991 and an application for credit/refund of input VAT
payment. It, however, specifically denied the veracity of the amounts stated in
respondent's VAT returns and application for credit/refund as the same continued to be
under investigation.

Original copies of the official receipts and sales invoices, were submitted to BIR-VAT,
as required, for domestic purchases of goods and services (1st semester, 1991) for a
total net claimable of P5,268,401.90; while its VAT input tax paid for importation
was P679,853.00. CTA CTA denied respondent's claim for refund of input VAT for
failure to prove that it paid the amounts claimed as such for the year 1991, no sales
invoices, receipts or other documents as required under Section 2(c)(1) of Revenue
Regulations No. 3-88 having been presented.

In granting the refund, the appellate court held that there was no need for respondent to
present the photocopies of the purchase invoices or receipts evidencing the VAT paid in
view of Rule 26, Section 2 of the Revised Rules of Court and the Resolutions of the
CTA holding that the matters requested in respondent's Request for Admissions in CTA
No. 4968 were deemed admitted by the CIR in light of its failure to file a verified reply
thereto. Hence, the present petition for review.

ISSUE:

whether respondent adduced sufficient evidence to prove its claim for refund of its
input VAT for taxable year 1991 in the amounts of P5,683,035.04 and P8,173,789.60.
RULING:

NO. In Commissioner of Internal Revenue v. Benguet Corporation, this Court had the

occasion to note that as early as 1988, the BIR issued several VAT rulings to the effect
that sales of gold to the Central Bank by a VAT-registered person or entity are
considered export sales.

In January of 1988, respondent applied for and was granted by the BIR zero-rated
status on its sale of gold to the Central Bank. On 28 August 1988, Deputy
Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No. 3788-88,
which declared that "[t]he sale of gold to Central Bank is considered as export sale
subject to zero-rate pursuant to Section 100 of the Tax Code, as amended by Executive
Order No. 273." The BIR came out with at least six (6) other issuances, reiterating the
zero-rating of sale of gold to the Central Bank, the latest of which is VAT Ruling No.
036-90 dated 14 February 1990

As export sales, the sale of gold to the Central Bank is zero-rated, hence, no tax is
chargeable to it as purchaser. Zero rating is primarily intended to be enjoyed by the
seller - respondent herein, which charges no output VAT but can claim a refund of or a
tax credit certificate for the input VAT previously charged to it by suppliers.

For a judicial claim for refund to prosper, however, respondent must not only prove that
it is a VAT registered entity and that it filed its claims within the prescriptive period. It
must substantiate the input VAT paid by purchase invoices or official receipts. Mere
listing of VAT invoices and receipts, even if certified to have been previously examined
by an independent certified public accountant, would not suffice to establish the
truthfulness and accuracy of the contents thereof unless offered and actually verified by
this Court. CTA Circular No. 1-95, as amended by CTA Circular No. 10-97, requires that
the photocopies of invoices, receipts and other documents covering said accounts or
payments must be pre-marked by the party and submitted to this Court.

For failure of respondent then not only to strictly comply with the rules of procedure but
also to establish the factual basis of its claim for refund, this Court has to deny its claim.
A claim for refund is in the nature of a claim for exemption and should be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.
SITEL PHILS. CORP., ETC. VS. CIR G.R. NO. 201326 8 FEBRUARY 2017

(ZERO-RATED SERVICES)

FACTS:

Sitel, a domestic corporation engaged in the business of providing call center services
from the Philippines to domestic and offshore businesses. It is registered with the BIR
as a VAT taxpayer, as well as with the Board of Investments on pioneer status as a new
information technology service firm in the field of call center. For the period from
January 1, 2004 to December 31, 2004, Sitel filed with the BIR its Quarterly VAT
Returns. On March 28, 2006, Sitel filed separate formal claims for refund or issuance of
tax credit with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center
of the Department of Finance for its unutilized input VAT arising from domestic
purchases of goods and services attributed to zero-rated transactions and
purchases/importations of capital goods for the 1st, 2nd, 3rd and 4th quarters of 2004 in the
aggregate amount of P23,093,899.59. Sitel filed a judicial claim for refund or tax credit
via a petition for review before the CTA. CTA partially granted Sitel's claim for VAT
refund or tax credit.

ISSUE: WHETHER OR NOT PETITIONER IS ENTITLED TO A REFUND OR TAX

CREDIT OF ITS UNUTILIZED INPUT VAT ARISING FROM PURCHASES OF GOODS
AND SERVICES ATTRIBUTABLE TO ZERO-RATED SALES AND
ST ND RD
PURCHASES/IMPORTATIONS OF CAPITAL GOODS FOR THE 1 , 2 , 3 , [AND]
4TH QUARTERS OF TAXABLE YEAR 2004 IN THE AGGREGATE AMOUNT OF
P20,994,405.16.

RULING:

The Court finds the petition partly meritorious.

Site/'s Judicial Claim for VAT Refund was deemed timely filed pursuant to the
Court's pronouncement in San Roque.

(C) Period within which Refund or Tax Credit of Input Taxes shall be Made . - In proper
cases, 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 in support of the application filed in
accordance with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on
the part of the Commissioner to act on the application within the period prescribed
above, the taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred twenty day-period, appeal
the decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied)

Based on the plain language of the foregoing provision, the CIR is given 120 days within
which to grant or deny a claim for refund. Upon receipt of CIR's decision or ruling
denying the said claim, or upon the expiration of the 120-day period without action from
the CIR, the taxpayer has thirty (30) days within which to file a petition for review with
the CTA. In Aichi, the Court ruled that the 120-day period granted to the CIR was
mandatory and jurisdictional, the non-observance of which was fatal to the filing of a
judicial claim with the CTA. The Court further explained that the two (2)-year
prescriptive period under Section 112(A) of the NIRC pertained only to the filing of the
administrative claim with the BIR; while the judicial claim may be filed with the CTA
within thirty (30) days from the receipt of the decision of the CIR or the expiration of the
120-day period of the CIR to act on the claim.

Section 112 (D) of the NIRC clearly provides that the CIR has "120 days, from the date
of the submission of the complete documents in support of the application [for tax
refund/credit]," within which to grant or deny the claim. In case of full or partial denial by
the CIR, the taxpayer's recourse is to file an appeal before the CTA within 30 days from
receipt of the decision of the CIR. However, if after the 120-day period the CIR fails to
act on the application for tax refund/credit, the remedy of the taxpayer is to appeal the
inaction of the CIR to CTA within 30 days.

In this case, the administrative and the judicial claims were simultaneously filed on
September 30, 2004. Obviously, respondent did not wait for the decision of the CIR or
the lapse of the 120-day period. For this reason, we find the filing of the judicial claim
with the CTA premature.

Respondent's assertion that the non-observance of the 120-day period is not fatal to the
filing of a judicial claim as long as both the administrative and the judicial claims are
filed within the two-year prescriptive period has no legal basis.

Now, Sitel claims that testimonial and documentary evidence sufficiently established
that its clients were non-resident foreign corporations not doing business in Philippines.
It also asserts that the input VAT on its purchases of capital goods were duly
substantiated because the supporting official receipts substantially complied with the
invoicing requirements provided by the rules.
Sitel failed to strictly comply with invoicing requirements for VAT refund. The CTA
Division also did not err when it denied the amount of P2,668,852.55, allegedly
representing input taxes claimed on Sitel's domestic purchases of goods and services
which are supported by invoices/receipts with pre-printed TIN-V. In Western Mindanao
Power Corp. v. Commissioner of Internal Revenue,44 the Court ruled that in a claim for
tax refund or tax credit, the applicant must prove not only entitlement to the grant of the
claim under substantive law, he must also show satisfaction of all the documentary and
evidentiary requirements for an administrative claim for a refund or tax credit and
compliance with the invoicing and accounting requirements mandated by the NIRC, as
well as by revenue regulations implementing them. The NIRC requires that the
creditable input VAT should be evidenced by a VAT invoice or official receipt, 45 which
may only be considered as such when the TIN-VAT is printed thereon

In the same vein, Sitel fell short of proving that the recipients of its call services were
foreign corporations doing business outside the Philippines. As correctly pointed out by
the CTA Division, while Sitel's documentary evidence, which includes Certifications
issued by the Securities and Exchange Commission and Agreements between Sitel and
its foreign clients, may have established that Sitel rendered services to foreign
corporations in 2004 and received payments therefor through inward remittances, said
documents failed to specifically prove that such foreign clients were doing business
outside the Philippines or have a continuity of commercial dealings outside the
Philippines.

Thus, the Court finds no reason to reverse the ruling of the CTA Division denying the
refund of P7,170,276.02, allegedly representing Sitel's input VAT attributable to zero-
rated sales.
WHEREFORE, premises considered, the instant petition for review is GRANTED IN
PART. The Decision dated November 11, 2011 and Resolution dated March 28, 2012
of the CTA En Banc in CTA EB No. 644 are hereby REVERSED and SET ASIDE.
Accordingly, the October 21, 2009 Decision of the CTA First Division in CTA Case No.
7423 is hereby REINSTATED.

Respondent is hereby ORDERED TO REFUND or, in the alternative, TO ISSUE A TAX

CREDIT CERTIFICATE, in favor of the petitioner in the amount of P11,155,276.59,
representing unutilized input VAT arising from purchases/importations of capital goods
for taxable year 2004.
CIR VS. EASTERN TELECOM. PHILS. INC. G.R. NO. 163835 7 JULY 2010

(REFUND OF INPUT TAXES ON CAPITAL GOODS)

FACTS:

Eastern is a domestic corporation granted by Congress with a telecommunications

franchise under Republic Act (RA) No. 7617. Under its franchise, Eastern is allowed to
install, operate, and maintain telecommunications system throughout the Philippines.

From July 1, 1995 to December 31, 1996, Eastern purchased various imported
equipment, machineries, and spare parts necessary in carrying out its business
activities. The importations were subjected to a 10% value-added tax (VAT) by the
Bureau of Customs, which was duly paid by Eastern.

Eastern filed with the CIR a written application for refund or credit of unapplied input
taxes it paid on the imported equipment during the taxable years 1995 and 1996
amounting to ₱22,013,134.00. In claiming for the tax refund, Eastern principally relied
on Sec. 10 of RA No. 7617, which allows Eastern to pay 3% of its gross receipts in lieu
of all taxes on this franchise or earnings thereof.5 In the alternative, Eastern cited
Section 106(B) of the National Internal Revenue Code of 19776 (Tax Code) which
authorizes a VAT-registered taxpayer to claim for the issuance of a tax credit certificate
or a tax refund of input taxes paid on capital goods imported or purchased locally to the
extent that such input taxes7 have not been applied against its output taxes.

To toll the running of the two-year prescriptive period under the same provision, Eastern
filed an appeal with the CTA without waiting for the CIR’s decision on its application for
refund. the CTA found that Eastern. CA also affirmed CTA’s ruling.Hence, the present
petition.

THE PETITIONER’S ARGUMENTS

The CIR takes exception to the CA’s ruling that Eastern is entitled to the full amount of
unapplied input taxes paid for its purchase of imported capital goods that were
substantiated by the corresponding receipts and invoices. The CIR posits that, applying
Section 104(A) of the Tax Code on apportionment of tax credits, Eastern is entitled to a
tax refund of only ₱8,814,790.15, instead of the ₱16,229,100.00 adjudged by the CTA
and the CA. Section 104(A) of the Tax Code
To be entitled to a tax refund of the full amount of ₱16,229,100.00, the CIR asserts that
Eastern must prove that (a) it was engaged in purely VAT taxable transactions and (b)
the unapplied input taxes it claims as refund were directly attributable to transactions
subject to VAT. The VAT returns of Eastern for the 1st, 2nd, 3rd, and 4th quarters of
1996, however, showed that it earned income from both transactions subject to VAT
and transactions exempt from VAT;19 the returns reported income earned from taxable
sales, zero-rated sales, and exempt sales Since the VAT returns clearly reflected
income from exempt sales, the CIR asserts that this constitutes as an admission on
Eastern’s part that it engaged in transactions not subject to VAT. Hence, the
proportionate allocation of the tax credit to VAT and non-VAT transactions provided in
Section 104(A) of the Tax Code should apply. Eastern is then entitled to only
₱8,814,790.15 as the ratable portion of the tax credit

ISSUE:

whether the rule in Section 104(A) of the Tax Code on the apportionment of tax credits
can be applied in appreciating Eastern’s claim for tax refund, considering that the matter
was raised by the CIR only when he sought reconsideration of the CTA ruling?

Ruling:

We find the CIR’s petition meritorious.

[W]e maintain that [Eastern’s] claims are not creditable input taxes under [Section
104(A) of the Tax Code]. What the law contemplates as creditable input taxes are only
those paid on purchases of goods and services specifically enumerated under [Section
104 (A)] and that such input tax must have been paid by a VAT[-]registered
person/entity in the course of trade or business. It must be noted that [Eastern] failed to
prove that such purchases were used in their VAT[-]taxable business. [Eastern’s pieces
of] evidence are not purchases of capital goods and do not fall under the enumeration x
x x.

It is significant to point out here that refund of input taxes on capital goods shall be
allowed only to the extent that such capital goods are used in VAT[-]taxable business. x
x x a perusal of the evidence submitted before [the CTA] does not show that the alleged
capital goods were used in VAT[-]taxable business of [Eastern]

As applied in the present case, even without the CIR raising the applicability of Section
104(A), the CTA should have considered it since all four of Eastern’s VAT returns
corresponding to each taxable quarter of 1996 clearly stated that it earned income from
exempt sales, i.e., non-VAT taxable sales. Eastern’s quarterly VAT returns are matters
of record. In fact, Eastern included them in its formal offer of evidence before the CTA
"to prove that [it is] engaged in VAT taxable, VAT exempt, and VAT zero-rated sales."
By declaring income from exempt sales, Eastern effectively admitted that it engaged in
transactions not subject to VAT. In VAT-exempt sales, the taxpayer/seller shall not bill
any output tax on his sales to his customers and, corollarily, is not allowed any credit or
refund of the input taxes he paid on his purchases.This non-crediting of input taxes in
exempt transactions is the underlying reason why the Tax Code adopted the rule on
apportionment of tax credits under Section 104(A) whenever a VAT-registered taxpayer
engages in both VAT taxable and non-VAT taxable sales. In the face of these
disclosures by Eastern, we thus find the CA’s the conclusion that "there is no evidence
on record that would evidently show that [Eastern] is also engaged in other transactions
that are not subject to VAT" to be questionable

The mere declaration of exempt sales in the VAT returns, whether based on Section
103 of the Tax Code or some other special law, should have prompted the CA to apply
Section 104(A) of the Tax Code to Eastern’s claim. It was thus erroneous for the
appellate court to rule that the declaration of exempt sales in Eastern’s VAT return,
which may correspond to exempt transactions under Section 103, does not indicate that
Eastern was also involved in non-VAT transactions.

Eastern cannot validly claim to have been taken by surprise by the CIR’s arguments on
the relevance of Section 104(A) of the Tax Code, considering that the arguments were
based on the reported exempt sales in the VAT returns that Eastern itself prepared and
formally offered as evidence. Even if we were to consider the CIR’s act as a lapse in the
observance of procedural rules, such lapse does not work to entitle Eastern to a tax
refund when the established and uncontested facts have shown otherwise. Lapses in
the literal observance of a rule of procedure may be overlooked when they have not
prejudiced the adverse party and especially when they are more consistent with
upholding settled principles in taxation.

WHEREFORE, we GRANT the petitioner’s petition for review on certiorari, and

REVERSE the decision of the Court of Appeals in CA G.R. SP No. 61157, promulgated
on October 1, 2003, as well as its resolution of May 26, 2004. We order the REMAND of
the case to the Court of Tax Appeals to determine the proportionate amount of tax credit
that respondent is entitled to, consistent with our ruling above. Costs against the
respondent.
PHILIPPINE HEALTH CARE PROVIDERS INC VS CIR G.R. NO. 167330 18
SEPTEMBER 2009 (VATABILITY OF HMOs, HMO VS. INSURANCE COMPANIES)

FACTS:

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain,

conduct and operate a prepaid group practice health care delivery system or a health
maintenance organization to take care of the sick and disabled persons enrolled in the
health care plan and to provide for the administrative, legal, and financial responsibilities
of the organization." 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 its 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.

CIR sent petitioner a formal demand letter and the corresponding assessment notices
demanding the payment of deficiency taxes, including surcharges and interest, for the
taxable years 1996 and 1997 in the total amount of ₱224,702,641.18. The deficiency
[documentary stamp tax (DST)] assessment was imposed. Petitioner protested the
assessment. As respondent did not act on the protest, petitioner filed a petition for
review seeking the cancellation of the deficiency VAT and DST assessments. CTA
ordered to pay the deficiency VAT amounting to ₱22,054,831.75 inclusive of 25%
surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT
deficiency and ₱31,094,163.87 inclusive of 25% surcharge plus 20% interest from
January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling
No. [231]-88 is declared void and without force and effect. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED AND SET
ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency
tax.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it
cancelled the DST assessment. He claimed that petitioner’s health care agreement was
a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.

CA rendered that petitioner’s health care agreement was in the nature of a non-life
insurance contract subject to DST.
ISSUE: whether or not Petitioner considered as MHO is considered engaged in doing
business and is liable for DST

Ruling:

xxx Although Group Health’s activities may be considered in one aspect as creating
security against loss from illness or accident more truly they constitute the quantity
purchase of well-rounded, continuous medical service by its members. xxx The
functions of such an organization are not identical with those of insurance or
indemnity companies. The latter are concerned primarily, if not exclusively, with risk
and the consequences of its descent, not with service, or its extension in kind, quantity
or distribution; with the unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned principally with
getting service rendered to its members and doing so at lower prices made
possible by quantity purchasing and economies in operation. Its primary purpose
is to reduce the cost rather than the risk of medical care; to broaden the service
to the individual in kind and quantity; to enlarge the number receiving it; to
regularize it as an everyday incident of living, like purchasing food and clothing
or oil and gas, rather than merely protecting against the financial loss caused by
extraordinary and unusual occurrences, such as death, disaster at sea, fire and
tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills
and all the temporary bodily discomforts as well as the more serious and unusual
illness. 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.

There is another and more compelling reason for holding that the service is not
engaged in the insurance business. Absence or presence of assumption of risk or
peril is not the sole test to be applied in determining its status. The question,
more broadly, is whether, looking at the plan of operation as a whole, ‘service’
rather than ‘indemnity’ is its principal object and purpose. Certainly the objects and
purposes of the corporation organized and maintained by the California physicians have
a wide scope in the field of social service. Probably there is no more impelling need
than that of adequate medical care on a voluntary, low-cost basis for persons of
small income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is ‘service’ of a high order and not ‘indemnity.’
American courts have pointed out that the main difference between an HMO and an
insurance company is that HMOs undertake to provide or arrange for the provision of
medical services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-agreed
limit. 

The basic distinction between medical service corporations and ordinary health and
accident insurers is that the former undertake to provide prepaid medical
services through participating physicians, thus relieving subscribers of any further
financial burden, while the latter only undertake to indemnify an insured for medical
expenses up to, but not beyond, the schedule of rates contained in the policy.

Consequently, the mere presence of risk would be insufficient to override the primary
purpose of the business to provide medical services as needed, with payment made
directly to the provider of these services.In short, even if petitioner assumes the risk of
paying the cost of these services even if significantly more than what the member has
prepaid, it nevertheless cannot be considered as being engaged in the insurance
business.

As an HMO, it is its obligation to maintain the good health of its members. Accordingly,

its health care programs are designed to prevent or to minimize the possibility of
any assumption of risk on its part. Thus, its undertaking under its agreements is not
to indemnify its members against any loss or damage arising from a medical condition
but, on the contrary, to provide the health and medical services needed to prevent such
loss or damage.

Overall, petitioner appears to provide insurance-type benefits to its members (with

respect to its curative medical services), but these are incidental to the principal activity
of providing them medical care. The "insurance-like" aspect of petitioner’s business is
miniscule compared to its noninsurance activities. Therefore, since it substantially
provides health care services rather than insurance services, it cannot be considered as
being in the insurance business.

A Health Care Agreement Is Not An Insurance Contract Contemplated Under

Section 185 Of The NIRC of 1997

We reconsider. We shall quote once again the pertinent portion of Section 185:

Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies
of insurance or bonds or obligations of the nature of indemnity for loss, damage,
or liability made or renewed by any person, association or company or corporation
transacting the business of accident, fidelity, employer’s liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life,
marine, inland, and fire insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are
strictly construed against the taxing authority. This is because taxation is a destructive
power which interferes with the personal and property rights of the people and takes
from them a portion of their property for the support of the government. Hence, tax laws
may not be extended by implication beyond the clear import of their language, nor their
operation enlarged so as to embrace matters not specifically provided.

There Was No Legislative Intent To Impose DST On Health Care Agreements Of

HMOs

Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable
years 1996 and 1997 became moot and academic when it availed of the tax amnesty
under RA 9480 on December 10, 2007. It paid ₱5,127,149.08 representing 5% of its net
worth as of the year ended December 31, 2005 and complied with all requirements of
the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from payment
of taxes as well as additions thereto, and the appurtenant civil, criminal or administrative
penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all
internal revenue taxes for taxable year 2005 and prior years.

Taking into account that health care agreements are clearly not within the ambit of
Section 185 of the NIRC and there was never any legislative intent to impose the same
on HMOs like petitioner, the same should not be arbitrarily and unjustly included in its
coverage.

medical services at a cost which the average wage earner can afford. HMOs arrange,
organize and manage health care treatment in the furtherance of the goal of providing a
more efficient and inexpensive health care system made possible by quantity
purchasing of services and economies of scale. They offer advantages over the pay-for-
service system (wherein individuals are charged a fee each time they receive medical
services), including the ability to control costs. They protect their members from
exposure to the high cost of hospitalization and other medical expenses brought about
by a fluctuating economy. Accordingly, they play an important role in society as partners
of the State in achieving its constitutional mandate of providing its citizens with
affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged. Its
imposition will elevate the cost of health care services. This will in turn necessitate an
increase in the membership fees, resulting in either placing health services beyond the
reach of the ordinary wage earner or driving the industry to the ground. At the end of the
day, neither side wins, considering the indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004

decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET
ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting
the said tax.

CIR VS. ACESITE HOTEL CORP. G.R. NO. 147295 16 FEBRUARY 2007

(TAX REFUND PAID BY MISTAKE)

FACTS:

Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along United
Nations Avenue in Manila. It leases 6,768.53 square meters of the hotel’s premises to
PAGCOR for casino operations. It also caters food and beverages to PAGCOR’s casino
patrons through the hotel’s restaurant outlets. For the period January (sic) 96 to April
1997, Acesite incurred VAT amounting to P30,152,892.02 from its rental income and
sale of food and beverages to PAGCOR during said period. Acesite tried to shift the
said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR but the
latter refused to pay the taxes on account of its tax exempt status.

Thus, PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT while
the latter paid the VAT to the CIR as it feared the legal consequences of non-payment
of the tax. However, Acesite belatedly arrived at the conclusion that its transaction with
PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. On 21 May
1998, Acesite filed an administrative claim for refund with the CIR but the latter failed to
resolve the same.

ISSUE:

(1) whether PAGCOR’s tax exemption privilege includes the indirect tax of VAT to
entitle Acesite to zero percent (0%) VAT rate; and (2) whether the zero percent (0%)
VAT rate under then Section 102 (b)(3) of the Tax Code (now Section 108 (B)(3) of the
Tax Code of 1997) legally applies to Acesite.

RULING:

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to
taxes with no distinction on whether the taxes are direct or indirect. We are one with the
CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or
operator refers to PAGCOR. Although the law does not specifically mention PAGCOR’s
exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes
because the law exempts from taxes persons or entities contracting with
PAGCOR in casino operations. Although, differently worded, the provision clearly
exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting
tax exempt status to persons dealing with PAGCOR in casino operations. The
unmistakable conclusion is that PAGCOR is not liable for the P30,152,892.02 VAT and
neither is Acesite as the latter is effectively subject to zero percent rate under Sec. 108
B (3). R.A. 8424.

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the
latter is not liable for the payment of it as it is exempt in this particular transaction by
operation of law to pay the indirect tax. Such exemption falls within the former Section
102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424),
which provides:

Section 102. Value-added tax on sale of services – (a) Rate and base of tax – There
shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross
receipts derived by any person engaged in the sale of services x x x; Provided, that the
following services performed in the Philippines by VAT-registered persons shall be
subject to 0%.

Acesite paid VAT by mistake

Considering the foregoing discussion, there are undoubtedly erroneous payments of the
VAT pertaining to the effectively zero-rate transactions between Acesite and PAGCOR.
Verily, Acesite has clearly shown that it paid the subject taxes under a mistake of fact,
that is, when it was not aware that the transactions it had with PAGCOR were zero-
rated at the time it made the payments.

Solutio indebiti applies to the Government

Tax refunds are based on the principle of quasi-contract or solutio indebiti and the
pertinent laws governing this principle are found in Arts. 2142 and 2154 of the Civil
Code.

The BIR must release the refund to respondent without any unreasonable delay.
Indeed, fair dealing is expected by our taxpayers from the BIR and this duty demands
that the BIR should refund without any unreasonable delay what it has erroneously
collected.
PAGCOR VS. BIR G.R. NO. 172087 15 MARCH 2011

(PAGCOR’S EXEMPTION FROM VAT)

FACTS:

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

On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal Revenue

Code of 1997, took effect. Section 27 (c) of R.A. No. 8424 provides that government-
owned and controlled corporations (GOCCs) shall pay corporate income tax, except
petitioner PAGCOR, the Government Service and Insurance Corporation, the Social
Security System, the Philippine Health Insurance Corporation, and the Philippine
Charity Sweepstakes Office. However, With the enactment of R.A. No. 933710 on May
24, 2005, certain sections of the National Internal Revenue Code of 1997 were
amended. The particular amendment that is at issue in this case is Section 1 of R.A. No.
9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by
excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of
corporate income tax.

Respondent BIR issued (RR) No. 16-2005 specifically identifying PAGCOR as one of
the franchisees subject to 10% VAT imposed under Section 108 of the NIRC as
amended by R.A. No. 9337.

ISSUE:

whether or not PAGCOR is still exempt from

1. corporate income tax and

 2. VAT with the enactment of R.A. No. 9337.

RULING.:

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

In this case, PAGCOR failed to prove that it is still exempt from the payment of
corporate income tax, considering that Section 1 of R.A. No. 9337 amended Section 27
(c) of the National Internal Revenue Code of 1997 by omitting PAGCOR from the
exemption. The legislative intent, as shown by the discussions in the Bicameral
Conference Meeting, is to require PAGCOR to pay corporate income tax; hence, the
omission or removal of PAGCOR from exemption from the payment of corporate
income tax. Thus, the express mention of the GOCCs exempted from payment of
corporate income tax excludes all others. Not being excepted, petitioner PAGCOR must
be regarded as coming within the purview of the general rule that GOCCs shall pay
corporate income tax, expressed in the maxim: exceptio firmat regulam in casibus non
exceptis.

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

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

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337,

amending Section 27 (c) of the National Internal Revenue Code of 1997, by excluding
petitioner Philippine Amusement and Gaming Corporation from the enumeration of
government-owned and controlled corporations exempted from corporate income tax is
valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it
subjects PAGCOR to 10% VAT is null and void for being contrary to the National
Internal Revenue Code of 1997, as amended by Republic Act No. 9337.
FORT BONIFACIO DEVELOPMENT CORPORATION G.R. NOS. 158885 & 170680 2
APRIL 2009 (TRANSITIONAL INPUT VAT)

FACTS:

(FBDC) is engaged in the development and sale of real property. On 8 February 1995,
FBDC acquired by way of sale from the national government, a vast tract of land that
formerly formed part of the Fort Bonifacio military reservation, located in what is now the
Fort Bonifacio Global City (Global City) in Taguig City.9 Since the sale was
consummated prior to the enactment of Rep. Act No. 7716, no VAT was paid thereon.
FBDC then proceeded to develop the tract of land, and from October, 1966 onwards it
has been selling lots located in the Global City to interested buyers.

Following the effectivity of Rep. Act No. 7716, real estate transactions such as those
regularly engaged in by FBDC have since been made subject to VAT. As the vendor,
FBDC from thereon has become obliged to remit to the Bureau of Internal Revenue
(BIR) output VAT payments it received from the sale of its properties to the Bureau of
Internal Revenue (BIR). FBDC likewise invoked its right to avail of the transitional input
tax credit and accordingly submitted an inventory list of real properties it owned, with a
total book value of ₱71,227,503,200.00.

 FBDC sent two (2) letters to the BIR requesting appropriate action on whether its use of
its presumptive input VAT on its land inventory, to the extent of ₱28,413,783.00 in
partial payment of its output VAT for the fourth quarter of 1996, was in order. After
investigating the matter, the BIR recommended that the claimed presumptive input tax
credit be disallowed.14 Consequently, the BIR issued to FBDC a Pre-Assessment Notice
(PAN) for deficiency VAT for the 4th quarter of 1996.  This was followed by a letter of
respondent Commissioner of Internal Revenue (CIR),15 addressed to and received by
FBDC on 5 March 1998, disallowing the presumptive input tax credit arising from the
land inventory on the basis of Revenue Regulation 7-95 (RR 7-95) and Revenue
Memorandum Circular 3-96 (RMC 3-96). Section 4.105-1 of RR 7-95 provided the basis
in main for the CIR’s opinion.
Consequently, FBDC received an Assessment Notice in the amount of ₱45,188,708.08,
representing deficiency VAT for the 4th quarter of 1996, including surcharge, interest
and penalty. After respondent Regional Director denied FBDC’s motion for
reconsideration/protest, FBDC filed a petition for review with the Court of Tax Appeals.
the CTA rendered a decision affirming the assessment made by the
respondents.17 FBDC assailed the CTA decision through a petition for review filed with
the Court of Appeals to which the latter affirmed the decision of the CTA but removing
the surcharge, interests and penalties, thus reducing the amount due to
₱28,413,783.00.

ISSUE: Whether or not petitioner should be refunded with the transitional input tax paid
to the respondent.

RULING:

Yes. Rep. Act No. 7716 clarifies that it is the real properties "held primarily for sale to
customers or held for lease in the ordinary course of trade or business" that are subject
to the VAT, and not when the real estate transactions are engaged in by persons who
do not sell or lease properties in the ordinary course of trade or business. It is clear that
those regularly engaged in the real estate business are accorded the same treatment as
the merchants of other goods or properties available in the market. In the same way that
a milliner considers hats as his goods and a rancher considers cattle as his goods, a
real estate dealer holds real property, whether or not it contains improvements, as his
goods

Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as the
basis for the introduction of transitional input tax credit in 1987. If the core purpose of
the tax credit is only, as hinted by the CTA, to allow for some mode of accreditation of
previously-paid sales taxes, then Section 25 alone would have sufficed. Yet E.O. No.
273 amended the Old NIRC itself by providing for the transitional input tax credit under
Section 105, thereby assuring that the tax credit would endure long after the last goods
made subject to sales tax have been consumed.

Under Section 105 of the Old NIRC, the rate of the transitional input tax credit is "8% of
the value of such inventory or the actual value-added tax paid on such goods, materials
and supplies, whichever is higher."38 If indeed the transitional input tax credit is
premised on the previous payment of VAT, then it does not make sense to afford the
taxpayer the benefit of such credit based on "8% of the value of such inventory" should
the same prove higher than the actual VAT paid. This intent that the CTA alluded to
could have been implemented with ease had the legislature shared such intent by
providing the actual VAT paid as the sole basis for the rate of the transitional input tax
credit.
Under Section 105, the beginning inventory of "goods" forms part of the valuation of the
transitional input tax credit. Goods, as commonly understood in the business sense,
refers to the product which the VAT-registered person offers for sale to the public. With
respect to real estate dealers, it is the real properties themselves which constitute their
"goods." Such real properties are the operating assets of the real estate dealer.

Let us clarify the distinction between the presumptive input tax credit and the transitional
input tax credit. As with the transitional input tax credit, the presumptive input tax credit
is creditable against the output VAT. It necessarily has come into existence in our tax
structure only after the introduction of the VAT. As quoted earlier,41 E.O. No. 273
provided for a "presumptive input tax credit" as one of the transitory measures in the
shift from sales taxes to VAT, but such presumptive input tax credit was never
integrated in the NIRC itself. It was only in 1997, or eleven years after the VAT was first
introduced, that the presumptive input tax credit was first incorporated in the NIRC,
more particularly in Section 111(B) of the New NIRC. As borne out by the text of the
provision,42 it is plain that the presumptive input tax credit is highly limited in application
as it may be claimed only by "persons or firms engaged in the processing of sardines,
mackerel and milk, and in manufacturing refined sugar and cooking oil;" 43 and "public
works contractors.

A final observation. Section 4.105.1 of RR No. 7-95, insofar as it disallows real estate
dealers from including the value of their real properties in the beginning inventory of
goods, materials and supplies, has in fact already been repealed. The offending
provisions were deleted with the enactment of Revenue Regulation No. 6-97 (RR 6-97)
dated 2 January 1997, which amended RR 7-95.45 The repeal of the basis for the
present assessments by RR 6-97 only highlights the continuing absurdity of the position
of the BIR towards FBDC.

FBDC points out that while the transactions involved in G.R. No. 158885 took place
during the effectivity of RR 7-95, the transactions involved in G.R. No. 170680 in fact
took place after RR No. 6-97 had taken effect. Indeed, the assessments subject of G.R.
No. 170680 were for the third quarter of 1997, or several months after the effectivity of
RR 6-97. That fact provides additional reason to sustain FBDC’s claim for refund of its
1997 Third Quarter VAT payments. Nevertheless, since the assailed restrictions
implemented by RR 7-95 were not sanctioned by law in the first place there is no longer
need to dwell on such fact.

WHEREFORE, the petitions are GRANTED. The assailed decisions of the Court of Tax
Appeals and the Court of Appeals are REVERSED and SET ASIDE. Respondents are
hereby (1) restrained from collecting from petitioner the amount of ₱28,413,783.00
representing the transitional input tax credit due it for the fourth quarter of 1996; and (2)
directed to refund to petitioner the amount of ₱347,741,695.74 paid as output VAT for
the third quarter of 1997 in light of the persisting transitional input tax credit available to
petitioner for the said quarter, or to issue a tax credit corresponding to such amount. No
pronouncement as to costs.