DIAZ vs SECRETARY OF FINANCE (Domingo) e.
The manner of implementing VAT on toll fees is highly
July 19,2011 | Abad, J. | Attributes of a Sound Tax System
Petitioner: Renato Diaz and Aurora Timbol
Respondents: Secretary of Finance and Commissioner of Internal Revenue
SUMMARY: Diaz and Timbol assail the impending imposition of the VAT on toll
fees collected by tollway operators. They argue, among others, that the system of
implementing the collection of VAT is highly impractical. This is because,
according to the proposed system, the name, address and TIN of each tollway
user must be included in the VAT receipt and invoice. Furthermore, the BIR wants
to round off the tax rates and put the excess in an escrow funds, which petitioners
argue is illegal. And in any case, the alternative of providing exact change to the
thousands of motorists who use tollways is a logistical nightmare. The Supreme
Court ruled that such a contention is prematurely raised. It is true that
administrative feasibility is a canon of a sound tax system. This means that a tax
system must be capable of being effectively administered and enforced with the
least inconvenience to the taxpayer. However, petitioners based their contention
on a proposed scheme. It remains to be seen how the BIR will actually implement
the collection of VAT. The Court should therefore not pre-empt the BIR, the
agency tasked with the implementation of this tax system, by ruling that the
proposed scheme violates administrative feasibility.
DOCTRINE: Administrative feasibility is one of the canons of a sound tax system.
It simply means that the tax system should be capable of being effectively
administered and enforced with the least inconvenience to the taxpayer. However,
just because a tax system violates the canon of administrative feasibility, this does
not automatically mean that a tax system is invalid. To strike down a tax system as
invalid, there must be an impairment of a specific constitutional or statutory
limitation
FACTS:
1. Petitioners Diaz and Timbol assail the validity of the impending imposition of
value-added tax (VAT) on the collections of tollway operators.
2. Diaz and Timbol’s contentions:
a. Congress did not intend to include toll fees within the meaning of
“sale of services” subject to VAT when it enacted the NIRC
b. A toll fee is a user’s tax, and not a sale of services, and hence it
cannot be subject to VAT
c. Imposing VAT on toll fees would amount to a tax on public service.
d. The imposition of VAT was not factored into the computation of toll
fees, and hence would violate the non-impairment clause.
impractical and incapable of implementation (see next point).
3. Reasons for contention (d): Petitioners based their contention on the
PROPOSED mode of implementation:
a. In order to claim input VAT, the name, address, and tax
identification number of the tollway user must be indicated in the
VAT receipt and invoice. Given the number of tollway users, Diaz
and Timbol argue that such a method of implementation would be
highly impractical.
b. The BIR also intends to implement the VAT by rounding off the toll
rate and putting excess collection in an escrow account.
Petitioners argue that this mode of implementation is illegal.
c. Also, the alternative of giving change to thousands of motorists in
order to meet the exact toll rate would be “a logistical nightmare”.
4. Government comments:
a. The NIRC imposes VAT on all kinds of services of franchise
grantees, including tollway operators.
b. Diaz and Timbol had no right to invoke the non-impairment clause
since they do not have personal interest in existing toll operating
agreements, which exist between the government and the tollway
operators.
ISSUE/S:
1. [RELEVANT ISSUE] W/N the mode and manner of implementing VAT on
tollway systems is highly impractical, and thus violates the canon of
administrative feasibility? (Petitioner’s contention is PREMATURE)
2. W/N toll fees may be the subject of VAT? (YES)
RATIO:
On whether or not the proposed manner of implementing VAT on toll fees is
highly impractical
1. Administrative feasibility is one of the canons of a sound tax system. It
simply means that the tax system should be capable of being effectively
administered and enforced with the least inconvenience to the taxpayer
2. However, just because a tax system violates the canon of administrative
feasibility, this does not automatically mean that a tax system is invalid. To
strike down a tax system as invalid, there must be an impairment of a
specific constitutional or statutory limitation.
3. The petitioners based their contention on a proposed scheme of
implementation. It remains to be seen how the BIR will actually implement
the VAT in tollway operations.
4. Also, in any case, concerns about the implementations of a tax system must
first be raised before the BIR. The Court cannot simply pre-empt the BIR’s
discretion on the matter, absent any clear violation of the law or the
Constitution.
 5. All things considered, this contention raised by petitioners is PREMATURE.

On whether or not toll fees may be the subject of VAT

1. The governing law here is Sec. 108 of the NIRC, as amended. Under this
section, VAT is levied on the gross receipts derived from the sale or
exchange of services as well as from the use or lease of properties.
2. Under the same section, “the phrase sale or exchange of services means
the performance of all kinds of services in the Philippines for others for a
fee, remuneration or consideration…including franchise grantees”.
3. Toll operators are, due to the nature of their business, franchise grantees.
This is because the act of constructing and operating toll facilities on public
improvements are activities of public consequence, and thus needs a
special grant of authority from the State (aka a franchise).
4. It does not matter if the toll operators do not hold a legislative franchise. The
law does not require a legislative franchise for the profits of such franchise
grantees to be subject to VAT. It is sufficient that the operators have a
franchise from a government authority, the Toll Regulatory Board.

DISPOSITION:
Dismissed for lack of merit