CIR vs Magsaysay

Facts:

Pursuant to a government program of privatization, 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. On 3 June 1988, private respondent
Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares and the vessels. The bid was made by
Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag
Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong (collectively, private
respondents).

On 28 September 1988, 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.” By this
time, a formal request for a ruling on whether or not the sale of the vessels was subject to VAT had
already been filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar Hernandez
& Gatmaitan, presumably in behalf of private respondents.

In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14
December 1988 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 moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling No.
395-88 (dated 18 August 1988), which made a similar ruling on the sale of the same vessels in response
to an inquiry from the Chairman of the Senate Blue Ribbon Committee. Their motion was denied when
the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier VAT rulings.

On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by
a Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings No.
395-88, 568-88 and 007-89, as well as the refund of the VAT payment made amounting to
P15,120,000.00.8 The Commissioner of Internal Revenue (CIR) opposed the petition.

In a Decision dated 27 April 1992, the CTA rejected the CIR’s arguments and granted the petition. The
CTA ruled that the sale of a vessel was an “isolated transaction,” not done in the ordinary course of
NDC’s business, and was thus not subject to VAT, which under Section 99 of the Tax Code, was applied
only to sales in the course of trade or business.

The CIR appealed the CTA Decision to the Court of Appeals, which initially granted the appeal of the CIR
but reversed itself and affirming the decision of the CTA.

Hence this case.

Issue:
Whether transaction of sale of a property not in the course of trade or business or “deemed sale” is
Subject to VAT.

Held:

No, 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. 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.

Commissioner of Internal Revenue vs. Seagate Technology (Philippines)

G.R. NO. 153866, February 11, 2005

FACTS:
Respondent, Seagate Technology is registered with the Philippine Export Zone Authority (PEZA) under
Presidential Decree No. 66, as amended, to engage in the manufacture of recording components
primarily used in computers for export. Also a VAT-registered entity, it filed VAT returns for the period 1
April 1998 to 30 June 1999. However, on 4 October 1999 it filed an administrative claim for refund of
VAT input taxes in the amount of P28,369,226.38 representing the value of the taxes of the capital
goods and services it had purchased. This application for refund was not acted upon by the CIR on the
ground that Seagate failed to prove that it was entitled to the refund/credit sought so the latter filed a
Petition for Review with the CTA.

CTA’s decision: Granted the claim for refund.

CA’s decision: Affirmed the grant of refund in the reduced amount. Seagate had availed itself only of the
fiscal incentives under Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code
of 1987), not of those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA
7916. Respondent was, therefore, considered exempt only from the payment of income tax when it
opted for the income tax holiday in lieu of the 5% preferential tax on gross income earned. As a VAT-
registered entity, though, it was still subject to the payment of other national internal revenue taxes,
like the VAT.

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

RULING:
Yes, it is entitled to a refund of or credit for input VAT. Respondent, as a PEZA-registered enterprise
within a special economic zone, is entitled to the fiscal incentives and benefits provided for in PD 66. It
shall also enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA)
7227 and 7844.

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% 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 VAT
refund or credit.

NOTES:

Preferential Tax Treatment under Special Laws

Petitioner enjoys preferential tax treatment. It is not subject to internal revenue laws and regulations
and is even entitled to tax credits. The VAT on capital goods is an internal revenue tax from which
petitioner as an entity is exempt. Although the transactions involving such tax are not exempt,
petitioner as a VAT-registered person, however, is entitled to their credits.

A “VAT-registered person” is a taxable person who has registered for VAT purposes under §236 of the
Tax Code. VAT-registered persons shall pay the VAT on a monthly basis.

Nature of the VAT and the Tax Credit Method

The Tax Credit Method relies on invoices wherein an entity can credit against or subtract from the VAT
charged on its sales or outputs the VAT paid on its purchases, inputs and imports. If at the end of a
taxable quarter the output taxes charged by a seller are equal to the input taxes passed on by the
suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has
to be paid. If, however, the input taxes exceed the output taxes, the excess shall be carried over to the
succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated
transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue taxes.

Indirect tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services. While the liability is imposed on one person, the burden may be passed on to another.

“Output taxes” refer to the VAT due on the sale or lease of taxable goods, properties or services by a
VAT-registered or VAT-registrable person.

By “input taxes” is meant the VAT due from or paid by a VAT-registered person in the course of trade or
business on the importation of goods or local purchases of goods or services, including the lease or use
of property from a VAT-registered person.

Destination Principle
Under this principle, goods and services are taxed only in the country where these are consumed. Thus,
exports are zero-rated, but imports are taxed.
Distinction between Exempt Transaction and Exempt Party
An exempt transaction 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. 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. 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.

A “customs territory” means the national territory of the Philippines outside of the proclaimed
boundaries of the ecozones, except those areas specifically declared by other laws and/or presidential
proclamations to have the status of special economic zones and/or free ports.

Under the cross-border principle of the VAT system being enforced by the Bureau of Internal Revenue
(BIR), 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, then the same rule holds for such exports from the national
territory — except specifically declared areas — to an ecozone.

An ecozone — indubitably a geographical territory of the Philippines — is, however, regarded in law as
foreign soil.
G.R. No. 125355 March 30, 2000

COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS and COMMONWEALTH

MANAGEMENT AND SERVICES CORPORATION

PARDO, J.:

FACTS:
Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly
organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life
Insurance Co. (Philamlife), organized by the latter to perform collection, consultative and other technical
services, including functioning as an internal auditor, of Philamlife and its other affiliates.

Petitioner, Commissioner of the Bureau of Internal Revenue (BIR) issued an assessment to private
respondent COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable
year 1988.

With this, COMASERCO filed with the BIR, a letter-protest objecting to the latter’s finding of deficiency
VAT. In lieu however, the Commissioner of Internal Revenue sent a collection letter to COMASERCO
demanding payment of the deficiency VAT.

As a result, COMASERCO filed with the Court of Tax Appeals a petition for review contesting the
Commissioner’s assessment asserting that the services it rendered to Philamlife and its affiliates,
relating to collections, consultative and other technical assistance, including functioning as an internal
auditor, were on a “no-profit, reimbursement-of-cost-only” basis. It averred that it was not engaged in
the business of providing services to Philamlife and its affiliates. COMASERCO stressed that it was not
profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss
in taxable year 1988, hence not liable to pay VAT.

The Court of Tax Appeals rendered decision in favor of the Commissioner of Internal Revenue.

On its appeal with the Court of Appeals, the appellate court rendered decision reversing that of the
Court of Tax Appeals. The former anchored its decision on the ratiocination in another tax case involving
the same parties, where it was held that COMASERCO was not liable to pay fixed and contractor’s tax for
services rendered to Philamlife and its affiliates. The Court of Appeals, in that case, reasoned that
COMASERCO was not engaged in business of providing services to Philamlife and its affiliates. In the
same manner, the Court of Appeals held that COMASERCO was not liable to pay VAT for it was not
engaged in the business of selling services.

Hence, this case.

ISSUE: Whether or not COMASERCO was engaged in the sale of services, and thus liable to pay VAT
thereon?

RULING:

YES.

The Court agreed with the Petitioner that to “engage in business” and to “engage in the sale of services”
are two different things. Petitioner maintains that the services rendered by COMASERCO to Philamlife
and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the value added by the
performance of the service. It is immaterial whether profit is derived from rendering the service.

Pursuant to Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other sections,
Section 99 of the Tax Code, it is provided that:
Sec. 105. Persons Liable. — Any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders services, and any person who imports goods shall be
subject to the value-added tax (VAT) imposed in Sections 106 and 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing sale or
lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.

The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial
or an economic activity, including transactions incidental thereto, by any person regardless of whether
or not the person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition
of its net income and whether or not it sells exclusively to members of their guests), or government
entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade
or business.

Contrary to COMASERCO’s contention the above provision clarifies that even a non-stock, non-profit,
organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on
transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods
or property, and on the performance of services, even in the absence of profit attributable thereto. The
term “in the course of trade or business” requires the regular conduct or pursuit of a commercial or an
economic activity regardless of whether or not the entity is profit-oriented.

The definition of the term “in the course of trade or business” present law applies to all transactions
even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the
course of trade or business, sells, barters or exchanges goods and services, was already liable to pay
VAT. The present law merely stresses that even a nonstock, nonprofit organization or government entity
is liable to pay VAT for the sale of goods and services.

Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase “sale of services” as the
“performance of all kinds of services for others for a fee, remuneration or consideration.” It includes
“the supply of technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking or project.” 11

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-
98 12 emphasizing that a domestic corporation that provided technical, research, management and
technical assistance to its affiliated companies and received payments on a reimbursement-of-cost
basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if
such corporation was organized without any intention realizing profit, any income or profit generated by
the entity in the conduct of its activities was subject to income tax.

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments
for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for
purposes of determining liability for VAT on services rendered. As long as the entity provides service for
a fee, remuneration or consideration, then the service rendered is subject to VAT.