VALUE ADDED TAX

a. Nature and characteristic of VAT in general

ACES Phil Cellular vs CIR - G.R. No. 226680. August 30, 2022

Doctrine:
The case reiterates the principle of sourcing income based on the location where the
income-generating activities occur. It underscores that foreign entities engaging in
transactions that utilize facilities located within the Philippines to generate income are
subject to Philippine income tax on such income.

FACTS:

Aces Philippines Cellular Satellite Corporation (petitioner) engages in a legal battle against
the Commissioner of Internal Revenue (respondent) over deficiency final withholding tax
(FWT) for the taxable year 2006. The Philippine Long Distance Telephone Company (PLDT)
originally entered into a Gateway Agreement with Aces Indonesia in 1995, which was
followed by an Air Time Purchase Agreement in 1997. These agreements essentially
permitted Aces Indonesia to provide PLDT with the equipment necessary to operate a
gateway in the Philippines and to sell satellite airtime to PLDT. Subsequently, Aces Indonesia
transferred its rights under the Air Time Purchase Agreement to Aces International Limited
(Aces Bermuda), and PLDT transferred its rights to its subsidiary, the petitioner.
In 2007, the BIR audited the petitioner’s books and assessed a deficiency FWT for payments
made to Aces Bermuda, arguing these were income paid to a non-resident foreign
corporation from sources within the Philippines. The petitioner protested administratively
but was unsuccessful, leading to a judicial protest before the CTA. The CTA Division and the
CTA En Banc upheld the assessment, prompting the petitioner to file a Petition for Review
on Certiorari before the Supreme Court.

ISSUE:

Whether or not the satellite airtime fee payments to Aces Bermuda, a non-resident foreign
corporation, constituted income from sources within the Philippines, thereby subjecting it to
Philippine income tax and consequently to final withholding tax obligations on the part of
the petitioner.

RULING:

The Supreme Court dismissed the petition, affirming the CTA En Banc’s decision with
modifications concerning the computation of interests. It held that the satellite airtime fee
payments to Aces Bermuda were indeed income from sources within the Philippines. It
elucidated that income was sourced within the Philippines because the activity generating
the income, i.e., the receipt and utilization of satellite airtime facilitated by a gateway
located in the Philippines, took place in the country. Consequently, Aces Bermuda, through
 its business operations facilitated by the petitioner, derived income from within the
Philippines, thus necessitating the imposition of tax.

b. VAT as an indirect tax

Contex vs. CIR GR No. 151135 dated July 2, 2004

DOCTRINE:

This decision reiterates the principle that VAT exemptions under special laws like RA 7227 are
strictly construed and only pertain to taxes for which a taxpayer is directly liable. It distinguishes
between the liability for VAT and the burden of VAT, indicating that only VAT registered entities
are eligible for input VAT credit/refund.

FACTS:

Contex Corporation, a domestic entity manufacturing hospital textiles for export and operating
within the Subic Bay Freeport Zone (SBFZ), availed itself of tax exemptions under Republic Act
No. 7227. It registered with the BIR as a non-VAT entity, believing it was exempt from all
national and local taxes, including VAT. From 1997 to 1998, Contex paid VAT on its purchases,
believing these were erroneously charged. After its initial tax refund request was denied by the
BIR, Contex filed a second request, which also went unaddressed, prompting it to seek recourse
with the Court of Tax Appeals (CTA).

The CTA granted a partial refund, accepting Contex’s claim for exemption from input VAT but
limited the refund to VAT paid on materials used directly in manufacturing and disallowed
claims for VAT paid before June 29, 1997, due to the prescriptive period. The Commissioner of
Internal Revenue (CIR) appealed to the Court of Appeals (CA), which reversed the CTA’s
decision, arguing that Contex’s VAT exemption under RA 7227 did not extend to input VAT. The
CA held that such exemptions are strictly construed and only pertain to direct taxes. Contex’s
motion for reconsideration was denied, leading to the petition before the Supreme Court.

ISSUE:

1. Whether RA 7227’s exemption from “all local and national internal revenue taxes” includes
VAT on purchases made by Contex Corporation.

1. Whether Contex Corporation is entitled to a tax refund or credit for the VAT paid on its
purchases of supplies and materials for the years 1997 and 1998.

RULING:

The Supreme Court denied the petition, affirming the CA’s decision. The Court held that while
Contex is VAT-exempt as a purchaser, its exemption does not extend to input VAT on its
purchases since this would essentially grant Contex a benefit intended for VAT registered
entities, namely, input VAT credit/refund. The Court clarified that VAT is an indirect tax where
the liability for the tax differs from the burden of the tax, which can be passed to the buyer. The
Court emphasized that tax exemptions are granted expressly by law and are strictly construed.
Since Contex is registered as a non-VAT taxpayer, it cannot claim a refund or credit for input VAT
paid as it is exempt from VAT on all its sales and importations.

This decision reiterates the principle that VAT exemptions under special laws like RA 7227 are
strictly construed and only pertain to taxes for which a taxpayer is directly liable. It distinguishes
between the liability for VAT and the burden of VAT, indicating that only VAT registered entities
are eligible for input VAT credit/refund.

c. Persons Liable (Sec. 105)

(1) Persons liable in general

CIR vs. CA & CoMaSerco GR No. 125355, March 30, 2000

Doctrine:

The Supreme Court reinforced the doctrine that VAT is imposed on any provision of services for
a fee, remuneration, or consideration, irrespective of the entity’s profit motive or organizational
structure. It stressed that exemptions to tax laws are construed strictly against the grantee and
in favor of the government, emphasizing that any transaction not expressly exempt from VAT
under the law is subject to VAT.

Facts:

Commonwealth Management and Services Corporation (COMASERCO), an affiliate of the

Philippine American Life Insurance Co. (Philamlife), was organized to perform services such as
collection, consultative, and other technical services, including functioning as an internal auditor
for Philamlife and its affiliates. The Bureau of Internal Revenue (BIR) issued an assessment for
deficiency value-added tax (VAT) against COMASERCO amounting to P351,851.01 for the taxable
year 1988. COMASERCO contested this, asserting that it operated on a “no-profit,
reimbursement-of-cost-only” basis, not engaged in the business of providing services, and
therefore was not liable for VAT. This led to a series of legal contests: COMASERCO protested
the BIR’s finding, leading to a petition for review filed with the Court of Tax Appeals (CTA) which
decided in favor of the BIR; this decision was then taken to the Court of Appeals, which reversed
the CTA’s decision. The BIR then appealed to the Supreme Court.

Issues:

1. Whether COMASERCO was engaged in the sale of services, rendering it liable for VAT.

2. The interpretation of the term “in the course of trade or business” in relation to VAT liability.

3. Whether an entity’s motive for profit impacts its VAT liability on services rendered.
 RULING:

The Supreme Court reversed the decision of the Court of Appeals, reinstating the CTA decision in
favor of the BIR. The Court clarified that VAT is a tax on transactions rather than profit, and
anyone who provides services for a fee, remuneration, or consideration is subject to VAT,
regardless of the profit motive or the tax-exempt status of an organization. The Court further
elucidated that “in the course of trade or business” covers regular conduct or pursuit of a
commercial or economic activity, including non-stock, nonprofit organizations, hence making
COMASERCO liable for VAT on its services rendered to Philamlife and its affiliates.

VAT liability applies to transactions of goods or services in the course of trade or business. – “In
the course of trade or business” includes activity by any person or entity, irrespective of profit
motive.

– VAT is an indirect tax, which can be passed on to the buyer or client.

– Tax exemption claims must be clearly stipulated in the law and are construed strictly against
the grantee. – The opinion of the Commissioner of Internal Revenue, unless evidently incorrect,
holds substantial weight in tax matters.

c. Meaning of the phrase “in the course of trade of business” (Sec. 105)
Sec. 4.105-3 of RR No. 16-05

CIR vs. Magsaysay Lines GR No. 146984 dated July 28, 2006

Doctrine:
The main doctrine established is that sales, barters, or exchanges of goods or services not made
in the ordinary and regular course of trade or business are beyond the purview of VAT. A
transaction’s incidental contribution to the production chain does not necessarily imply VAT
liability if it is not a regular business activity.

FACTS:

In an effort to privatize, the National Development Company (NDC) decided to sell its shares and
five vessels owned through its subsidiary, National Marine Corporation (NMC). These vessels
were sold in one package during a public bidding where Magsaysay Lines, Inc., along with
Baliwag Navigation, Inc., and FIM Limited, emerged as the winning bidders. The sale included a
stipulation that the buyers would shoulder any value-added tax (VAT) if applicable.
Subsequently, both parties sought clarification from the Bureau of Internal Revenue (BIR)
regarding the VAT liability. The BIR issued rulings indicating that the sale was subject to a 10%
VAT, identifying NDC as a VAT-registered entity. The private respondents contested these rulings
and, after NDC drew from a Letter of Credit to cover the VAT payment, formally requested a
refund from the Court of Tax Appeals (CTA), arguing that the sale was not made in the ordinary
course of NDC’s business and thus should not be VAT-liable. The CTA sided with the
respondents, a decision the Commissioner of Internal Revenue (CIR) appealed to the Court of
Appeals. The appellate court initially reversed the CTA’s decision but ultimately upheld it upon
 reconsideration, agreeing that the sale was not subject to VAT as it was not conducted in the
ordinary course of NDC’s business.

ISSUES:

1. Whether the sale of NDC’s vessels is subject to VAT under the National Internal Revenue Code
of 1986.
2. The applicability of VAT on transactions not made in the ordinary course of trade or business.

2. Interpretation of “deemed sale” provisions under VAT regulations.

RULING:

The Supreme Court affirmed the appellate court’s ruling that the sale was not subject to VAT. It
clarified that transactions not undertaken in the ordinary course of business do not attract VAT,
aligning with the purpose of VAT as a consumption tax ultimately borne by the end consumer. The
Court emphasized the transaction’s classification over its formality, underlining that the
government program of privatization was a singular event rather than a regular business activity
of NDC.

Vatable Transactions

1. Vatable Sale on Goods & Services

Meaning of gross selling price and gross receipts (Sec. 106 and Sec.108)

Medicard Philippines, Inc. vs. Commissioner of Internal Revenue

G.R. No. 222743
Doctrine:

This case reiterates the strict requirement for an LOA in conducting tax assessments,
underlining its critical role in ensuring due process. It also establishes the principle that
earmarked funds explicitly used for direct expenses related to the service provider’s primary
operation should not be included in the calculation of gross receipts for VAT purposes.

FACTS:

Medicard Philippines, Inc. (MEDICARD), a Health Maintenance Organization (HMO), provides

prepaid health and medical insurance coverage. The case stemmed from discrepancies found
between MEDICARD’s Income and Value-Added Tax (VAT) Returns for the taxable year 2006,
leading to a deficiency VAT assessment by the Commissioner of Internal Revenue (CIR).
MEDICARD argued that a significant portion of its revenues was derived from services outside
the VAT scope, including member fees from Philippine Export Zone Authority (PEZA) clients
and charges for medical services rendered directly or via owned facilities. MEDICARD
challenged the imposition of VAT on these amounts, the lack of a valid Letter of Authority
(LOA) for the assessment, and the inclusion of earmarked funds for healthcare provision
within its gross receipts subject to VAT.
After internal protests were denied, MEDICARD elevated its case to the Court of Tax Appeals
(CTA), which affirmed the CIR’s assessment with modifications. Both the CTA division and en
banc rulings maintained the deficiency assessment but adjusted the figures. Ultimately,
MEDICARD sought recourse from the Supreme Court.

ISSUES:

Whether amounts earmarked and eventually paid by MEDICARD to medical service providers
should form part of its gross receipts for VAT purposes.

RULING:
The Supreme Court granted MEDICARD’s petition, overturning the CTA en banc’s decision.
The Court ruled that amounts earmarked for medical services, corresponding to 80% of the
membership fees, must be excluded from gross receipts for VAT purposes. The decision
emphasized that these amounts, intended for direct medical expenses, do not represent
income to MEDICARD and thus should not be subjected to VAT.

For VAT purposes, gross receipts should only include amounts received as compensation for
services rendered or to be rendered, excluding funds used directly for operational costs not
constituting the taxpayers’ income.

f. Rules for Certain Services

Common Carriers Sec. 4.108-2 Nos. 11 and 12 of RR No. 16-05 Sec. 4.108-3 of RR No. 16-05
outbound vs inbound

Association of International Shipping Lines, Inc. v. Secretary of Finance and Commissioner of

Internal Revenue

DOCTRINE:

The doctrine established in this case reiterates that interpretative regulations issued by
administrative agencies, aimed at clarifying statutory provisions that the agencies are tasked
to enforce, do not require public hearing or filing with the University of the Philippines Law
Center for their effectivity.

Facts:

The case originates from the challenging of Revenue Memorandum Circular No. 31-2008
(RMC 31-2008) by the petitioners – Association of International Shipping Lines, Inc. (AISL), APL
Co. PTE LTD., and Maersk-Filipinas, Inc. – which was issued by the then Commissioner of
Internal Revenue Lilian Hefti following the amendments of Republic Act No. 9337 to the
National Internal Revenue Code (NIRC) of 1997. The petitioners argued against the imposition
of a 12% VAT on demurrage and detention fees collected by international shipping carriers,
deeming it contrary to the provisions of the NIRC. This led to a petition for declaratory relief
filed with the RTC-Branch 98, Quezon City, which ruled in favor of the petitioners by declaring
the portions of RMC 31-2008 invalid, as it imposed taxes not sanctioned by the NIRC. The
order became final and executory on June 16, 2012. Subsequently, Republic Act No. 10378
(RA 10378) was enacted, amending Section 28(A)(3)(a) of the NIRC, which led to the issuance
of Revenue Regulation No. 15-2013 (RR 15-2013) by the Secretary of Finance – now the focus
of the petitioners’ challenge. The petitioners argued that RR 15-2013 invalidly subjected
demurrage and detention fees to the regular corporate income tax rate, which had previously
been declared invalid in relation to RMC 31-2008.

Issues:

1. Whether res judicata applies in this case.

2. Whether a petition for declaratory relief is proper for invalidating RR No. 15-2013.
3. Whether RR 15-2013 is a valid revenue regulation.

RULING:

The Supreme Court denied the petition, holding that Res judicata does not apply since there is
no substantial identity of parties and subject matter between the previous case and the
present case. – Petition for declaratory relief is not the proper remedy for challenging RR 15-
2013, but the Court treated the case as one for prohibition, noting its significant implications.
– RR 15-2013 is a valid issuance as it was issued as an interpretative rule and in accordance
with the Secretary of Finance’s authority under the NIRC and RA 10378, clarifying the tax
implications on demurrage and detention fees, which do not form part of the Gross Philippine
Billings.

Professional Services – 8% on gross sales/receipts below 3M threshold, in lieu of VAT and

Percentage

IBP/College of Physicians, Phil Medical etc vs Hon Purisima, GR 211772/212178

FACTS

In March 2014, then Secretary of Finance (SOF), upon recommendation of then Commissioner
of Internal Revenue (CIR), issued Revenue Regulations No. (RR) 4-2014,1 requiring all self-
employed professionals to (1) submit to the Bureau of Internal Revenue (BIR) an affidavit of
rates, manner of billing, and the factors that they consider in determining service fees; (2)
register with the BIR their books of account and appointment books containing the names of
their clients, and their meeting date and time; and (3) issue a BIR registered receipt showing
the 100% discount if no professional fees are charged.
Consequently, petitioners filed the instant case seeking to declare said RR as unconstitutional.
The ponencia partly granted the petitions, declaring void certain portions of paragraphs 1 and
2 of Section 2 of RR 4-2014.2 The ponencia held that while requiring professionals to submit
affidavit of rates, manner of billing, and consideration regarding fees neither encroaches on
the Court's rule-making power nor violates ethical norms, Section 2(1) is unconstitutional for
going beyond the mandates of the National Internal Revenue Code (NIRC).3 As to Section 2(2),
the ponencia found that the mandatory registration of appointment books is an
unconstitutional intrusion into the fundamental rights of the professionals and their clients
and patients.4 It was ruled that the same violates privacy rights and ethical norms in
petitioners' respective professions.

ISSUE:

WON the revenue regulation is unconstitutional.

RULING:

As regards the requirement of submitting an affidavit indicating the rates, manner of billings,
and factors considered in determining service fees,15 there is merit in the contention of
petitioner IBP that there is no compelling necessity for the execution of the same.16 One
possible use of said affidavit is for the conduct of a reasonableness test. It is an audit tool
which provides an analysis of an account balance that involves developing an expectation
based on financial data, nonfinancial data, or both. For example, an expectation for hotel
revenues may be developed using the average occupancy rate, average room rate for all
rooms, or room rate by category or class of room.17 However, this procedure is inherently
imprecise, especially in cases where there are several variables that may affect the fees
charged and the rates are not fixed, such as in the profession of herein petitioners.
Particularly applying to lawyers, fees may in fact differ in every case. Notably, even the CPR
lists the different factors, i.e., novelty and difficulty of the questions involved, which may
affect a lawyer's manner of billing.18 Thus, it may be well to point out that the submission of
the affidavit may be an empty requirement, since the BIR officers cannot accurately rely on it
in the conduct of their audit.

The Court has consistently held that administrative issuances must not override, supplant, or
modify the law, they must remain consistent with the law intended to carry out.23 When the
application of an administrative issuance modifies existing laws or exceeds the intended
scope, the issuance becomes void, not only for being ultra vires, but also for being
unreasonable. Surely, courts will not countenance such administrative issuances that
override, instead of remaining consistent and in harmony with the law they seek to apply and
implement.
It must be underlined that the power of administrative officials to promulgate rules in the
implementation of a statute is necessarily limited to what is provided for in the legislative
enactment. The implementing rules and regulations of a law cannot extend the law or expand
its coverage, as the power to amend or repeal a statute is vested in the legislature. It bears
stressing, however, that administrative bodies are allowed under their power of subordinate
legislation to implement the broad policies laid down in a statute by "filling in" the details. All
that is required is that the regulation be germane to the objectives and purposes of the law;
that the regulation does not contradict but conforms with the standards prescribed by law.26
All this to say that the function of promulgating rules and regulations may be legitimately
exercised only for the purpose of carrying out the provisions of the law into effect. Hence,
administrative regulations cannot extend the law or amend a legislative enactment, for
settled is the rule that administrative regulations must be in harmony with the provisions of
the law.27
It is, thus, imperative that We determine the limits of the power of the CIR to obtain
information under Section 5 of the NIRC.

The power of CIR to obtain information under Section 5 of the NIRC flows from its power and
duty under Section 2 of said law, i.e., the assessment and collection of all national internal
revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines
connected therewith. Verily, Section 5 clearly states that the actions enumerated therein are
for the purpose of ascertaining the correctness of any return, making a return when none has
been made, determining the liability of any person for any internal revenue tax, or collecting
any such liability, or evaluating tax compliance.

While the powers of the CIR under Section 5 of the NIRC are arguably extensive, the law
provides limitations. By way of example, under Section 5(a), the examination of the books and
records are limited to the purposes enumerated in the opening paragraph of Section 5 and
only to books and records "which may be relevant or material to such inquiry." These
limitations are normally reflected in the Letter of Authority.28 Moreover, under Section 235
of the NIRC, such examination must generally be done only once in a taxable year and in the
taxpayer's office or place of business, or in the BIR's office.

Under Section 1 of the RR, it was stated that the regulations were issued for the purpose of
monitoring the fees charged by the professionals and aiding the BIR in its tax audit and
revenue collection. However, the Court cannot accept the avowed purpose of the regulations
as compliance with Section 5 when the requirement clearly does not support such objective.
The required affidavit by Section 2(1) of the RR does not affect the assessment and collection
functions of the BIR, and, as such, is beyond the delegated power of the BIR. As Justice Singh
eloquently explained, the affidavit, which is merely indicative of the value of the services
performed, is immaterial to the BIR's function. In so declaring, We are not questioning the
wisdom of the regulation. The Court is simply determining whether the BIR acted within the
power granted to it under Section 5.

Medical Services

Sec. 4.109-1 (B)(g) of RR No. 16-05

CIR vs Philippine Healthcare Providers GR No. 168129 April 24, 2007

DOCTRINE:

VAT on Services: Entities acting as intermediaries in providing services, even if health-related,

are subject to VAT unless expressly exempted.

Non-Retroactivity of Tax Rulings: Tax rulings or circulars should not have a retroactive effect
to the detriment of taxpayers, especially in the absence of bad faith or deliberate
misrepresentation by the taxpayer.

FACTS:

The case revolves around the dispute between the Commissioner of Internal Revenue (CIR)
and Philippine Health Care Providers, Inc. (PhilCare), regarding Value-Added Tax (VAT) and
documentary stamp taxes (DST) assessments for the taxable years 1996 and 1997. PhilCare, a
corporation offering prepaid health care services, sought clarifications from the CIR in
December 1987 on its VAT obligations under the newly instituted VAT system through
Executive Order (E.O.) No. 273. The CIR, through VAT Ruling No. 231-88, initially confirmed
PhilCare’s VAT-exemption status, which was further substantiated by Regional Director
Osmundo G. Umali in April 1994.

However, post the effectuation of the Expanded VAT Law (R.A. No. 7716) and the National
Internal Revenue Code of 1997 (R.A. No. 8424), the BIR issued a Preliminary Assessment
Notice to PhilCare in October 1999 for deficiency in VAT and DST payments for 1996 and
1997. PhilCare contested this through a protest with the BIR, eventually taking the matter to
the Court of Tax Appeals (CTA) in September 2000 due to BIR’s inaction on their protests. The
CTA initially ruled partially in favor of PhilCare but, upon motion for reconsideration, entirely
sided with them, deciding that the VAT assessment was wrongly issued based on the principle
of non-retroactivity of rulings. The CIR’s appeal to the Court of Appeals (CA) upheld the CTA’s
decision, leading to the current petition for review before the Supreme Court.

ISSUES:

1. Whether PhilCare’s services are subject to VAT.

2. Whether VAT Ruling No. 231-88, exempting PhilCare from VAT, should have retroactive
application.

RULING:

The Supreme Court upheld the CA’s decision, denying the petition. It addressed the issues as
follows:
 On VAT liability:

The court affirmed the findings of both the CTA and the CA that PhilCare is not directly
rendering medical services but rather acts as an intermediary, arranging such services for a
prepaid fee. Hence, its services are not VAT-exempt under Section 103 of the Tax Code.

On retroactivity of VAT

The Court found no indication of bad faith on PhilCare’s part when it relied on the VAT Ruling.
It ruled that applying the ruling retroactively would be prejudicial to PhilCare and against the
principles of equity, fair play, and non-retroactivity of tax rulings as provided under Section
246 of the National Internal Revenue Code of 1997.

III. Zero-rated Sales & VAT-exempt Transactions

Zero Rated Sale of Services (Sec. 108 B)

CIR vs. American Express GR No. 152609 dated June 29, 2005

Doctrine:

The Supreme Court reiterates the doctrine that services performed in the Philippines by VAT-
registered entities, paid for in acceptable foreign currency and accounted for in accordance
with BSP rules and regulations, qualify for zero-rated VAT under Section 102(b) of the Tax
Code.

Doctrine

The Supreme Court reinforced the doctrine that VAT is imposed on any provision of services for a fee,
remuneration, or consideration, irrespective of the entity’s profit motive or

Facts

American Express International, Inc. (Philippine Branch), herein referred to as American Express
Philippines or the respondent, is a branch of American Express International, Inc., a corporation
established under the laws of Delaware, USA. This branch is primarily engaged in facilitating collections
of receivables and payments to service establishments in the Philippines on behalf of the American
Express International, Inc. – Hong Kong Branch (Amex-HK).

For the year 1997, American Express Philippines filed its quarterly VAT returns and subsequently
amended these returns declaring significant zero-rated sales and domestic purchases. On April 13, 1999,
it submitted a request for a refund of its excess input VAT for 1997, amounting to P3,751,067.04, based
on Section 110(B) of the 1997 Tax Code. The Commissioner of Internal Revenue did not take immediate
action, prompting American Express Philippines to file a petition with the Court of Tax Appeals (CTA).
The CTA ruled in favor of American Express Philippines, affirming its entitlement to a refund. The
Commissioner of Internal Revenue appealed to the Court of Appeals (CA), which also upheld the CTA’s
decision. The case was then elevated to the Philippine Supreme Court on the grounds that the CA
committed a reversible error in its judgment.

Issues:

1. Whether American Express Philippines’ services, which were paid for in acceptable foreign currency
inwardly remitted and accounted for according to Bangko Sentral ng Pilipinas (BSP) regulations, should
be zero-rated under the VAT system.
2. Whether the Court of Appeals erred in upholding the decision granting a refund to American Express
Philippines for the excess input VAT paid for the year 1997.

RULING:

The Supreme Court denied the petition, affirming the decision of the CA. The Court ruled that American
Express Philippines’ services qualified for zero-rating under Section 102(b) of the Tax Code, as they were
performed in the Philippines, fell under the specified categories, and were paid for in acceptable foreign
currency duly accounted for according to BSP rules. Hence, American Express Philippines was entitled to
the VAT refund.

CIR vs. Burmeister and Wain GR No. 153205 dated January22, 2007

DOCTRINE:

The principle of “solutio indebiti” applies, requiring the return of payments made by mistake.
Additionally, the Court reiterated that any revocation of a BIR ruling should not have retroactive
application if it would be prejudicial to the taxpayer, following Section 246 of the Tax Code.

Facts:

Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (BWSCMI), a domestic corporation,
subcontracted the operation and maintenance of two power barges from a foreign consortium that had
a contract with the National Power Corporation (NAPOCOR). Transactions involved payments in a
mixture of foreign currencies and PHP, with the foreign currency component being directly deposited
abroad, and the PHP component in the Philippines. BWSCMI registered as a VAT taxpayer, and for the
year 1996, it filed its VAT returns indicating zero-rated sales and input taxes.

BWSCMI sought clarification from the BIR regarding the tax implications of its transactions, resulting in
BIR Ruling No. 023-95, which stated that its services could be VAT zero-rated. However, due to a
misinterpretation of Revenue Regulations No. 5-96, BWSCMI paid output VAT for 1996 under the belief
it was subject to 10% VAT for certain sales. BWSCMI later sought a reconfirmation of its VAT status,
resulting in VAT Ruling No. 003-99, which reconfirmed the zero-rating of its services. Believing it
erroneously paid the output VAT due to this mix-up, BWSCMI filed a claim for the issuance of a tax credit
certificate. When unresolved by the BIR, BWSCMI filed a petition with the Court of Tax Appeals (CTA),
which ruled in BWSCMI’s favor, a decision affirmed by the Court of Appeals.

Issues:

1. Whether BWSCMI’s services are rightfully subject to VAT at a zero-rate.

2. Whether BWSCMI is entitled to a refund of the output VAT it erroneously paid for the year 1996.

RULING:

The Supreme Court denied the petition, not on the grounds that BWSCMI’s services were subject to 0%
VAT but based on the non-retroactivity of the revocation of BIR Ruling Nos. 023-95 and VAT Ruling No.
003-99. The Court clarified that for services to qualify for zero-rating under Section 102(b)(2) of the Tax
Code, the recipient of the services must be doing business outside the Philippines, which was not the
case with the foreign consortium since it was engaged in a long-term contract with NAPOCOR and
thereby doing business within the Philippines. However, the Supreme Court upheld the CTA and Court of
Appeals’ decisions to grant BWSCMI a tax credit/refund due to the BIR’s prior confirmatory rulings,
applying the principle of non-retroactivity in favor of the taxpayer.

CIR vs. Acesite GR No. GR No. 147295 dated February 16, 2007 – PAGCOR

DOCTRINE:

The exemptions granted to a tax-exempt entity extend to entities in contractual relationships with it,
covering both direct and indirect taxes.

Facts:

Acesite (Philippines) Hotel Corporation (Acesite), which operates the Holiday Inn Manila Pavilion Hotel,
leased 6,768.53 square meters to the Philippine Amusement and Gaming Corporation (PAGCOR) and
provided food and beverages to PAGCOR’s casino patrons. Acesite incurred VAT amounting to PHP
30,152,892.02 from January 1996 to April 1997.

PAGCOR refused to pay the VAT stating its tax-exempt status. Hence, Acesite paid the VAT to the
Commissioner of Internal Revenue (CIR) fearing legal consequences.

Acesite filed an administrative claim for a VAT refund with the CIR, contending that transactions with
PAGCOR should be zero-rated.

The CIR failed to act on the claim, prompting Acesite to file a petition with the Court of Tax Appeals
(CTA) on 29 May 1998.

On 3 January 2000, the CTA ruled in favor of Acesite, recognizing its transactions with PAGCOR as zero-
rated and ordered the refund of PHP 30,054,148.64.
Issues

1. Whether PAGCOR’s tax exemption privilege includes indirect taxes like VAT, thus entitling Acesite to
zero percent VAT rate.
2. Whether the 0% VAT rate under Section 102(b)(3) of the Tax Code (now Section 108(B)(3) of the Tax
Code of 1997) applies to Acesite.

RULING:

The Supreme Court affirmed that PAGCOR’s exemption under P.D. 1869 extends to all forms of taxes,
both direct and indirect. This includes the VAT, which is typically an indirect tax.

The Court agreed with the CA that PAGCOR was exempt from indirect taxes and thus Acesite’s
transactions with PAGCOR were effectively zero-rated, as per Section 108(B)(3) of the Tax Code of 1997.

Services rendered to tax-exempt entities are zero-rated under Section 108(B)(3) of the Tax Code,
meaning no VAT should be charged.

Manila Pen vs CIR GR 229338 April 2024

in relation to RMC 46-2008 and RMC 31-2011

DOCTRINE:

The Supreme Court ruled that Manila Peninsula Hotel's services to Delta Air's pilots and crew during
layovers qualify for VAT zero-rating under Section 108(B)(4) of the NIRC, as the additional conditions
imposed by Revenue Memorandum Circulars were deemed invalid.

Facts:

The case involves Manila Peninsula Hotel, Inc. (petitioner) and the Commissioner of Internal Revenue
(CIR) (respondent).

Manila Peninsula provided hotel accommodations and food services to Delta Air Lines, Inc. (Delta Air),
which operates international flights.

Delta Air's pilots and cabin crew required scheduled rest periods upon landing in the Philippines.

Services were rendered under a Hotel Room Agreement executed on August 26, 2010, substantiated by
various documents, including billings and invoices.

Manila Peninsula, a VAT-registered entity, claimed that the services rendered to Delta Air's crew
members qualified for zero-rated VAT under Section 108(B)(4) of the National Internal Revenue Code
(NIRC), as amended.

The Bureau of Internal Revenue (BIR) assessed Manila Peninsula for VAT, arguing that not all services
provided were exclusively for international air transport operations.
The Court of Tax Appeals (CTA) initially ruled against Manila Peninsula, leading to the present appeal
before the Supreme Court.

The case raised questions about the applicability of VAT zero-rating for services rendered to
international air transport operators and the interpretation of the relevant provisions of the NIRC.

ISSUE:
Whether Revenue Memorandum Circular No. 46-2008 and Revenue Memorandum Circular No.
31-2011 are valid.

RULING:

The Petition is meritorious.

Manila Peninsula claims that Revenue Memorandum Circular No. 46-2008 and Revenue Memorandum
Circular No. 31-2011 are not controlling BIR issuances because they are contrary to Section 108(B)(4) of
the NIRC, as amended. The CIR, on the other hand, argues that Manila Peninsula's challenge against the
foregoing BIR issuances is a collateral attack on the duly issued administrative issuances which the law
frowns upon.[

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals. (Emphasis supplied)The CIR's exercise of its
power to interpret tax laws comes in the form of revenue issuances, which include Revenue
Memorandum Circulars defined as "issuances that publish pertinent and applicable portions, as well as
amplifications, of laws, rules, regulations and precedents issued by the BIR and other
agencies/offices."[53] These revenue issuances are subject to the review of the Secretary of Finance. In
relation thereto, Department of Finance Department Order No. 007-02 [54] issued by the Secretary of
Finance lays down the procedure and requirements for filing an appeal from the adverse ruling of the
CIR to the said office. A taxpayer is granted 30 days from receipt of the adverse ruling of the CIR to file
with the Office of the Secretary of Finance a request for review in writing and under oath. [55]

The Court agrees with the CTA EB. The validity of Revenue Memorandum Circular No. 46-2008 and
Revenue Memorandum Circular No. 31-2011 should have been first subjected to the review of the
Secretary of Finance before Manila Peninsula sought judicial recourse with the CTA as dictated by the
rule on exhaustion of administrative remedies.

Nevertheless, despite the failure of Manila Peninsula to file an appeal with the Secretary of Finance in
assailing the validity of Revenue Memorandum Circular No. 46-2008 and Revenue Memorandum
Circular No. 31-2011, the Court deems it prudent, if not crucial, to take cognizance of, and accordingly
act on, the Petition as they assail the validity of the actions of the CIR that affect the taxation of services
in the hotel industry and international airlines, as addressing it can have significant economic
implications. For this reason, the Court, following recent jurisprudence, avails itself of its judicial
prerogative in order not to delay the disposition of the case at hand and to promote the vital interest of
justice. Accordingly, Manila Peninsula's recourse to the CTA and now, before the Court, are permissible
and, hence, is not a ground to dismiss the case.

Automatic zero-rate vs. Effectively zero-rate

application for zero rating – RMC 24-2022; See RR 3-2023 and RMC 80-2023 Applications for zero-
rating of effectively zero rated sales with BIR – not required

CIR vs. Seagate Technology (Phils) GR No. 153866 February 15 11, 2005

DOCTRINE:

Entities operating within Special Economic Zones, such as those registered under PEZA, are exempt from
internal revenue taxes, including VAT. However, transactions by such entities can be zero-rated for VAT
purposes. The entitlement to a VAT refund or tax credit is contingent upon compliance with VAT
registration and the satisfactory fulfillment of all necessary requisites for claiming such refund or credit.

Facts:
Seagate Technology (Philippines), a resident foreign corporation duly registered to operate in the Special
Economic Zone in Naga, Cebu, and a VAT-registered entity, filed an administrative claim for a refund of
VAT input taxes amounting to P28,369,226.38 with the Revenue District Office No. 83, Talisay, Cebu on
October 4, 1999. This claim included VAT input taxes for the period April 1, 1998 to June 30, 1999. The
Commissioner of Internal Revenue did not act on this claim, prompting Seagate to elevate the case to
the Court of Tax Appeals (CTA) on July 21, 2000, to toll the running of the two-year prescriptive period.
The CTA ruled in favor of Seagate, a decision affirmed by the Court of Appeals (CA), leading to this
appeal to the Supreme Court by the Commissioner of Internal Revenue.

Issues:

Whether or not Seagate, as a PEZA-registered enterprise and VAT-registered entity, is entitled to a

refund or issuance of a Tax Credit Certificate for the alleged unutilized input VAT paid on capital goods
purchased for the period April 1, 1998 to June 30, 1999.

RULING:

The Supreme Court denied the petition, affirming the decisions of the CTA and the CA, holding that
Seagate is entitled to the refund or tax credit. The Court clarified that as a PEZA-registered enterprise
operating within a special economic zone, Seagate is exempt from internal revenue laws and
regulations, including VAT. However, its transactions qualified for zero-rated VAT since the entity is VAT-
registered and has fully complied with requisites for claiming a tax refund or credit for the input VAT
paid on capital goods. The Court emphasized the difference between exempt entities and exempt
transactions under VAT laws, noting that Seagate’s transactions are effectively zero-rated, entitling it to
a refund or credit.

BIR Ruling No.750-2018 – applying Toshiba

CIR vs. Toshiba Information Equipment GR No. 150154 dated August 9, 2005
DOCTRINE

Cross Border Doctrine in VAT: No VAT shall be imposed to form part of the cost of goods destined for
consumption outside the territorial border of the taxing authority.

VAT is not applicable on goods or services specifically listed in and expressly exempted from VAT under
the Tax Code, regardless of the tax status of the party to the transaction. Meanwhile, a VAT-exempt
party is a person or entity granted VAT exemption under a special law or international agreement,
making its taxable transactions exempt from VAT.

Facts:

Toshiba Information Equipment (Phils.), Inc. (Toshiba), registered as a domestic corporation on July 7,
1995, with the primary purpose of manufacturing and exporting various technology products, also
registered with the Philippine Economic Zone Authority (PEZA) as an ECOZONE Export Enterprise on
September 27, 1995, and with the Bureau of Internal Revenue (BIR) as a VAT taxpayer on December 29,
1995. Toshiba filed its VAT returns for the first and second quarters of 1996, claiming unutilized input
VAT due to the lack of engaged business activities generating output VAT. Toshiba filed applications for
tax credit/refund of its unutilized input VAT totaling P19,338,422.07, for the first semester of 1996, with
the Department of Finance (DOF) and the Court of Tax Appeals (CTA) to prevent the prescriptive period
lapse. The CTA, after evaluating evidence, ordered the Commissioner of Internal Revenue (CIR) to refund
or issue a tax credit certificate to Toshiba amounting to P16,188,045.44. The CIR’s motion for
reconsideration was denied, and the Court of Appeals affirmed the CTA’s decision, prompting the CIR to
bring the case to the Supreme Court under Rule 45 of the Rules of Court.

Issues:

1. Whether the Court of Appeals erred in holding that the CIR’s failure to raise certain arguments in the
Tax Court was fatal to its cause.

2. Whether the Court of Appeals erred in not recognizing that Toshiba, being registered with PEZA and
subject to 5% preferential tax rate, is not subject to VAT, thus not entitled to a tax refund or credit for
input taxes.

3. Whether Toshiba’s purchases of capital goods and services, being not in VAT taxable business, qualify
for input tax refund pursuant to Revenue Regulations.

RULING:

The Supreme Court affirmed the decisions of the Court of Appeals and the CTA, granting Toshiba’s claim
for a tax refund or credit. The Court distinguished between VAT-exempt transactions and entities,
explaining that Toshiba’s sales by its VAT-registered suppliers from the Customs Territory are considered
export sales and are subject to VAT at zero percent. Despite being a VAT-exempt entity registered with
PEZA, Toshiba is entitled to a tax refund or credit for its unutilized input VAT from its purchases of
capital goods and services due to the application of the Cross Border Doctrine and considering the facts
before the issuance of Revenue Memorandum Circular (RMC) No. 74-99.

Destination principle and cross border doctrine

CIR vs. American Express GR No. 152609 dated June 29, 2005

DOCTRINE:

The Supreme Court reiterates the doctrine that services performed in the Philippines by VAT-registered
entities, paid for in acceptable foreign currency and accounted for in accordance with BSP rules and
regulations, qualify for zero-rated VAT under Section 102(b) of the Tax Code.

Facts:

American Express International, Inc. (Philippine Branch), herein referred to as American Express
Philippines or the respondent, is a branch of American Express International, Inc., a corporation
established under the laws of Delaware, USA. This branch is primarily engaged in facilitating collections
of receivables and payments to service establishments in the Philippines on behalf of the American
Express International, Inc. – Hong Kong Branch (Amex-HK).

For the year 1997, American Express Philippines filed its quarterly VAT returns and subsequently
amended these returns declaring significant zero-rated sales and domestic purchases. On April 13, 1999,
it submitted a request for a refund of its excess input VAT for 1997, amounting to P3,751,067.04, based
on Section 110(B) of the 1997 Tax Code. The Commissioner of Internal Revenue did not take immediate
action, prompting American Express Philippines to file a petition with the Court of Tax Appeals (CTA).

The CTA ruled in favor of American Express Philippines, affirming its entitlement to a refund. The
Commissioner of Internal Revenue appealed to the Court of Appeals (CA), which also upheld the CTA’s
decision. The case was then elevated to the Philippine Supreme Court on the grounds that the CA
committed a reversible error in its judgment.

Issues:

1. Whether American Express Philippines’ services, which were paid for in acceptable foreign currency
inwardly remitted and accounted for according to Bangko Sentral ng Pilipinas (BSP) regulations, should
be zero-rated under the VAT system.
2. Whether the Court of Appeals erred in upholding the decision granting a refund to American Express
Philippines for the excess input VAT paid for the year 1997.

RULING:

The Supreme Court denied the petition, affirming the decision of the CA. The Court ruled that American
Express Philippines’ services qualified for zero-rating under Section 102(b) of the Tax Code, as they were
performed in the Philippines, fell under the specified categories, and were paid for in acceptable foreign
currency duly accounted for according to BSP rules. Hence, American Express Philippines was entitled to
the VAT refund.

Zero Rated Sales vs. Exempt Sales

CIR vs. Cebu Toyo Corp. GR No. 149073 dated February 16, 2005

DOCTRINE:

This case reiterates the doctrine that a VAT-registered entity engaged in export sales at a 0% rate is
entitled to a refund or tax credit for unutilized input VAT, reflecting the VAT system’s objective of
avoiding cascading taxes on exports. It distinguishes between zerorated transactions, which are taxable
but at a 0% rate permitting input tax recovery, and exempt transactions, where no VAT is chargeable
and no input tax credit is allowed.

Facts:

The respondent, Cebu Toyo Corporation, engaged in manufacturing optical components, is a domestic
corporation operating in the Mactan Export Processing Zone (MEPZ), Cebu, and registered with the
Philippine Economic Zone Authority (PEZA). It sells most of its products to its parent company in Japan
and the remainder to businesses within MEPZ, all considered export sales subject to 0% Value-Added
Tax (VAT) rate. Between April 1, 1996, and December 31, 1997, Cebu Toyo filed its quarterly VAT
returns, showing a total input VAT of P4,462,412.63. On March 30, 1998, Cebu Toyo applied for a tax
refund of P4,439,827.21 for excess VAT input payments. Subsequently, to prevent the running of the
two-year prescriptive period, it filed a Petition for Review with the Court of Tax Appeals (CTA) on June
26, 1998. The CTA initially denied the claim due to insufficient evidence but, upon reconsideration,
granted a partial refund of P2,158,714.46, rejecting the Commissioner of Internal Revenue’s (CIR)
contention that Cebu Toyo, being a PEZA-registered enterprise, was not subject to VAT and thus
ineligible for a refund. The CIR’s subsequent Motion for Reconsideration was denied by the CTA, leading
to an appeal to the Court of Appeals, which affirmed the CTA’s decision. The CIR then elevated the case
to the Supreme Court, contending that Cebu Toyo was not entitled to a VAT refund as it was exempt
from VAT, being a PEZA-registered enterprise.

ISSUE:

1. Whether Cebu Toyo Corporation is entitled to a refund or tax credit for unutilized input VAT payments
for the period April 1, 1996, to December 31, 1997.

2. Whether being a PEZA-registered enterprise exempts Cebu Toyo from VAT and disqualifies it from
claiming a refund or tax credit for input VAT.

RULING:
The Supreme Court found the petition bereft of merit, ruling that Cebu Toyo is entitled to the refund of
unutilized input VAT payments amounting to P2,158,714.46, as determined by the CTA. The Court
clarified that Cebu Toyo, opting for an income tax holiday under Executive Order No. 226, was not
exempt from VAT but subject to it at a 0% rate on its export sales. Therefore, its registration as a VAT
taxpayer was proper, and it could claim a refund or credit for input taxes attributable to its zero-rated
sales. The Court also underscored the difference between zero-rated and exempt transactions,
particularly in terms of input tax recovery, affirming that Cebu Toyo rightly availed of input tax credits
due to its taxable transactions. Hence, the CA’s decision, in affirming the CTA, was upheld.

h. Exempt Persons vs. Exempt Transactions

CIR vs. Seagate Technology (Phils) GR No. 153866 February 11, 2005

IV. Transitional & Presumptive Input Taxes a. Sec. 4.111-1 of RR No. 16-05 (Section 111 of the Tax
Code)

Fort Bonifacio Development vs. CIR GR No. 158885 dated April 2, 2009