ESTATE TAX

1. Dizon v. Court of Tax Appeals, G.R. No. 140944, 30 April 2008

FACTS: Jose Fernandez died and a petition for the probate for his will was filed. The
probate court appointed retired Supreme Court Justice Dizon and petitioner, Atty. Dizon
as Special and Assistant Special Administrator, respectively, of the Estate of Jose.
Petitioner alleged that several requests for extension of the period to file the required
estate tax return were granted by the BIR since the assets of the estate, as well as the
claims against it, had yet to be collated, determined and identified. Justice Dizon
authorized Atty. Jesus M. Gonzales to sign and file on behalf of the Estate the required
estate tax return and to represent the same in securing a Certificate of Tax Clearance.
The BIR Director issued Certifications stating that the taxes due on the transfer of real
and personal properties of Jose had been fully paid and said properties may be
transferred to his heirs. However, the Assistant Commissioner for Collection of the BIR
issued an Estate Tax Assessment Notice demanding the payment.

ISSUE: Whether the actual claims of creditors may be fully allowed as deductions from
the gross estate of Jose despite the fact that the said claims were reduced or condoned
through compromise agreements entered into by the Estate with its creditors.

RULING: No. It is admitted that the claims of the Estate's aforementioned creditors have
been condoned.

However, there is no law, nor do we discern any legislative intent in our tax laws, which
disregards the date-of-death valuation principle and particularly provides that post-death
developments must be considered in determining the net value of the estate. It bears
emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond
what the statute expressly and clearly imports, tax statutes being construed strictissimi
juris against the government. Any doubt on whether a person, article or activity is taxable
is generally resolved against taxation. Such construction finds relevance and consistency
in our Rules on Special Proceedings wherein the term "claims" required to be presented
against a decedent's estate is generally construed to mean debts or demands of a
pecuniary nature which could have been enforced against the deceased in his lifetime, or
liability contracted by the deceased before his death. Therefore, the claims existing at the
time of death are significant to, and should be made the basis of, the determination of
allowable deductions.
Estate Tax Return

1. CIR vs. Fisher, GR No. L-11622, 28 January 1961

DOCTRINE: Reciprocity must be total. If any of the two states collects or imposes or does
not exempt any transfer, death, legacy or succession tax of any character, the reciprocity
does not work.

FACTS:

1. Walter G. Stevenson born in the Philippines of British parents and married to Beatrice
Mauricia Stevenson (another British subject) died on February 22, 1951 in San
Francisco, California, U.S.A. whereto he and his wife moved and established their
permanent residence since May 10, 1945.
2. In his will Stevenson instituted his wife Beatrice as his sole heiress to real and personal
properties acquired by the spouses while residing in the Philippines.
3. Ian Murray Statt was appointed ancillary administrator of the estate, he filed a
preliminary estate and inheritance tax return with the reservation of having the
properties declared therein finally appraised at their values six months after the death
of Stevenson.
4. On December 1, 1952, Beatrice Mauricia Stevenson assigned all her rights and
interests in the estate to the spouses, Douglas and Bettina Fisher, respondents herein.
5. Statt filed an amended estate and inheritance tax return claiming ADDITIONAL
EXEMPTIONS, one of which is the estate and inheritance tax on the Mines’ shares of
stock pursuant to a reciprocity proviso in the NIRC,hence, warranting a refund from
what he initially paid. The collector denied the claim. He then filed in the CFI of Manila
for the said amount.
6. CFI ruled that (a) the ½ share of Beatrice should be deducted from the net estate of
Walter, (b) the intangible personal property belonging to the estate of Walter is exempt
from inheritance tax pursuant to the reciprocity proviso

ISSUE: Whether or not the estate can avail itself of the reciprocity proviso in the NIRC
granting exemption from the payment of taxes for the Mines’ shares of stock.

RULING: NO. Reciprocity must be total. If any of the two states collects or imposes or
does not exempt any transfer, death, legacy or succession tax of any character, the
reciprocity does not work.

In the Philippines, upon the death of any citizen or resident, or non-resident with
properties, there are imposed upon his estate, both an estate and an inheritance tax. But,
under the laws of California, only inheritance tax is imposed.
Also, although the Federal Internal Revenue Code imposes an estate tax, it does not
grant exemption on the basis of reciprocity. Thus, a Filipino citizen shall always be at a
disadvantage. This is not what the legislators intended.
 2. US v. Wells, 283 US 102
FACTS:

As early as the year 1901, John W. Wells, a resident of Menominee, Michigan, began the
making of advancements of money and other property to his children. In 1918, 1919,
January 1, 1921, January 26, 1921, he transferred stocks to his children. May 1919: he
went to a hospital in Chicago for treatment of asthma and remained there for 11 days.
April, 1920: he had ulcerative colitis (inflamed large intestine).June, 1920: physicians in
California found him to have cancer of the intestines. September 14, 1920: physicians
told him he can be absolutely cured if he is careful. September 22, 1920: he was
discharged and is in excellent condition. January 14, 1921: medical examination showed
his ulcerative colitis 90% normal. April, 1921: he had a recurrence and was advised for
operation because he might have cancer. June, 1921: reentered hospital in Chicago as
his viral infection failed to yield to treatment. August 17, 1921 : he died at the age of 73
survived by his wife and 5 children. The Commissioner of Internal Revenue assessed
additional estate taxes, upon the ground that certain transfers by the decedent WITHIN 2
years prior to his death, were made in contemplation of death and should be included in
the taxable estate. The additional estate tax for the transfer in 1919, January 1, 1921,
January 26, 1921 was paid by the executors and claim for refund was filed but rejected.
Court of Claims: Favored the executors since immediate and moving cause of the
transfers was the carrying out of a policy, long followed by decedent in dealing with his
children of making liberal gifts to them during his lifetime. They filed a Court granted a writ
of certiorari.

ISSUE: W/N it was a donation in contemplation of death

HELD: NO. Judgment affirmed.

The best evidence of the state of the decedent's health at the time the transfers were
made is the statement of his doctor. The best evidence of the decedent's state of mind at
that time and the reasons actuating him in making the transfers are the statements and
expressions of the decedent himself, supported as such statements are by all the
circumstances concerning the transfers. Death must be "contemplated" -- that is, the
motive which induces the transfer must be of the sort which leads to testamentary
disposition. The natural and reasonable inference which may be drawn from the fact that
but a short period intervenes between the transfer and death is recognized by the
statutory provision creating a presumption in the case of gifts WITHIN 2 years prior to
death. BUT this presumption, by the statute before us, is expressly stated to be a
rebuttable. It is contemplation of death, not necessarily contemplation of imminent death,
to which the statute refers. The words "in contemplation of death" mean that the thought
of death is the impelling cause of the transfer, and, while the belief in the imminence of
death may afford convincing evidence, the statute is not to be limited, and its purpose
thwarted, by a rule of construction which, in place of contemplation of death, makes the
final criterion to be an apprehension that death is near at hand.
 3. CIR vs. CA and Pajonar, GR No. 123206, 22 March 2000

TOPIC: ESTATE TAX

DOCTRINE: Judicial expenses are expenses of administration. Administration expenses,

as an allowable deduction from the gross estate of the decedent for purposes of arriving
at the value of the net estate, have been construed by the federal and state courts of the
United States to include all expenses "essential to the collection of the assets, payment
of debts or the distribution of the property to the persons entitled to it.

FACTS: Pajonar, a member of the Philippine Scout, Bataan Contingent, during the
second World War, was a part of the infamous Death March by reason of which he
suffered shock and became insane. His sister Josefina Pajonar became the guardian
over his person, while his property was placed under the guardianship of the Philippine
National Bank (PNB) by the Regional Trial Court of Dumaguete City. He died on January
10, 1988. He was survived by his two brothers Isidro P. Pajonar and Gregorio Pajonar,
his sister Josefina Pajonar, nephews Concordio Jandog and Mario Jandog and niece
Conchita Jandog.

On May 11, 1988, the PNB filed an accounting of the decedent's property under
guardianship valued at P3,037,672.09 in Special Proceedings No. 1254. However, the
PNB did not file an estate tax return, instead it advised Pedro Pajonar's heirs to execute
an extrajudicial settlement and to pay the taxes on his estate. The Commissioner of
Internal Revenue filed a motion for reconsideration of the CTA's May 6, 1993 decision
asserting, among others, that the notarial fee for the Extrajudicial Settlement and the
attorney's fees in the guardianship proceedings are not deductible expenses

ISSUE: Whether the notarial fee is a deductible expense.

RULING: Yes. The court ruled that the notarial fee paid for the extrajudicial settlement is
clearly a deductible expense since such settlement effected a distribution of Pedro
Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to PNB for acting as
the guardian of Pedro Pajonar's property during his lifetime should also be considered as
a deductible administration expense. PNB provided a detailed accounting of decedent's
property and gave advice as to the proper settlement of the latter's estate, acts which
contributed towards the collection of decedent's assets and the subsequent settlement of
the estate.
 4. CIR vs. Pineda, GR No. L-22734, 15 September 1967

FACTS: Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children,
the eldest of whom is Atty. Manuel Pineda. Estate proceedings were had in Court so that
the estate was divided among and awarded to the heirs. Atty Pineda's share amounted
to about P2,500.00. After the estate proceedings were closed, the BIR investigated the
income tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found
that the corresponding income tax returns were not filed. Thereupon, the representative
of the Collector of Internal Revenue filed said returns for the estate issued an assessment
and charged the full amount to the inheritance due to Atty. Pineda who argued that he is
liable only to extent of his proportional share in the inheritance.

ISSUE: Can BIR collect the full amount of estate taxes from an heir's inheritance.

HELD: Yes. The Government can require Atty. Pineda to pay the full amount of the taxes
assessed.

The reason is that the Government has a lien on the P2,500.00 received by him from the
estate as his share in the inheritance, for unpaid income taxes for which said estate is
liable. By virtue of such lien, the Government has the right to subject the property in
Pineda's possession to satisfy the income tax assessment. After such payment, Pineda
will have a right of contribution from his co-heirs, to achieve an adjustment of the proper
share of each heir in the distributable estate.

All told, the Government has two ways of collecting the tax in question. One, by going
after all the heirs and collecting from each one of them the amount of the tax proportionate
to the inheritance received; and second, is by subjecting said property of the estate which
is in the hands of an heir or transferee to the payment of the tax due. This second remedy
is the very avenue the Government took in this case to collect the tax. The Bureau of
Internal Revenue should be given, in instances like the case at bar, the necessary
discretion to avail itself of the most expeditious way to collect the tax as may be
envisioned in the particular provision of the Tax Code above quoted, because taxes are
the lifeblood of government and their prompt and certain availability is an imperious need.
 DONOR’S TAX
Concepts

1. Lladoc v. Commissioner of Internal Revenue, G.R. No. L-19201, 16 June 1965

DOCTRINE: A gift tax is not within the exemptions under Section 22(3), Article VI of the
Constitution. It is not a property tax but an excise tax imposed on the transfer of property
by inter vivos, the imposition of which on property used exclusively for religious purposes
does not impair the Constitution.

FACTS:

1. In 1957, M.B. Estate Inc. of Bacolod City donated ₱10,000.00 to Fr. Crispin Ruiz,
the parish priest of Victorias, Negros Occidental who was the predecessor of F.
Lladoc. The said amount is for the construction of a new Catholic church in the
locality where the total amount was actually spent for the purpose intended.
2. M.B. Estate, Inc. filed the donor’s gift tax return a year later.
3. The CIR issued an assessment for donee’s gift tax against the Catholic Parish of
Victorias of which the Fr. Lladoc was the parish priest.
4. Lladoc filed an appeal with the CTA citing that the assessment is unconstitutional
on the ground that he was not the parish priest at the time of donation, there is no
legal entity or juridical person known as “Catholic Parish Priest of Victorias”, hence,
he should not be liable for the donee’s gift tax.

ISSUE: Whether or not the Fr. Lladoc and the parish are liable for the donee’s gift tax

RULING: The Head of the Diocese and not Fr. Lladoc is the real party in interest in the
imposition of the donee’s tax on the church for religious purposes.

Under Section 22(3) Article VI of the Constitution, the exemption is only from the payment
of taxes assessed on the properties enumerated therein, 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 property themselves. It did not rest upon
general ownership; it was an excise upon the use made of the properties, upon exercise
of the privilege of receiving the properties.

The phrase “exempt from taxation” as employed in the Constitution should not be
interpreted to mean exemption from all kinds of taxes.
 2. Bromley v. McCaughs, 280 US 124

Doctrine: While taxes levied upon or collected from persons because of their general
ownership of property may be taken to be direct, a tax imposed upon a particular use
of property or the exercise of a single power over property incidental to ownership
is an excise which need not be apportioned.

Facts: Bromley, a resident of the United States, brought the present suit in the district
court for Eastern Pennsylvania to recover a tax alleged to have been illegally exacted,
upon gifts made by him after the effective date of Section 319 of the Revenue Act of 1924,
as amended. This section imposes a graduated tax "upon the transfer by a resident by
gift" during the calendar year "of any property wherever situated".

Issue: Whether or not the tax imposed upon transfers of property by gift is a direct tax
and has to be apportioned.

Ruling: No, The tax imposed by Revenue Act of 1924, as amended, upon transfers of
property by gift, is not a direct tax, but an excise on the exercise of one of the powers
incident to ownership, and need not be apportioned.
Donor’s Tax Return

1. Philamlife Company vs. SOF, GR No. 210987, 24 November 2014

DOCTRINE: Donative intent is unnecessary for the imposition of donor’s tax when
property, other than realty, is transferred for less than full consideration in money. The
tax base would then be the amount by which the fair market value of the property
exceeded the value of the consideration.
FACTS: Philamlife sold its shares in PhilamCare for P104,259,330 to STI Investments,
Inc. After that, Philamlife sought a BIR ruling to confirm that the sale was not subject to
donor’s tax. It argued that there was no donative intent and that the shares were sold at
their fair market value and at arm’s length. This was for a certificate authorizing
registration/tax clearance.
The BIR ruled otherwise. According to the Commissioner, the selling price of the shares
were actually lower than the book value. Under Section 100 of the NIRC, donor’s tax
became imposable on the price difference. Philamlife later appealed to the Secretary of
Finance and the CA. Its argument is that Section 7(c.2.2) of RR 06-08 altered the
meaning of Section 100, making the former inapplicable.
ISSUE: Whether the price difference is subject to donor’s tax.
RULING: Yes. The absence of donative intent does not exempt the sale of stocks from
donor’s tax. This is because Section 100 states that the amount by which the fair market
value of the property exceeded the value of the consideration is deemed a gift. Section
7(c.2.2.) of RR 06-08 did not alter this section; all it did was set the parameters for
determining the “fair market value” of a sale of stocks.
 VALUE-ADDED TAX
Concepts

1. Toshiba Information Equipment (Phils.), Inc. v. CIR, 157594, 9 March 2010

DOCTRINE: The Philippine VAT system adheres to the Cross Border Doctrine, wherein
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. Thus, 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 VAT.
However, sales made to ECOZONE enterprises are subject to zero percent (0%) VAT.

FACTS: Toshiba is registered with the PEZA as an ECOZONE export enterprise and is
a registered VAT taxpayer. In its VAT returns for the first and second quarters of 1997,
Toshiba declared input VAT payments on its domestic purchases of taxable goods and
services, with no zero-rated sales. It subsequently filed its amended VAT returns reporting
the same amount of input VAT payments but, this time, with zero-rated sales. In 1999, it
filed two separate applications for tax credit/refund of its unutilized input VAT payments
for the first half of 1997.

The CIR opposed the claim for tax refund/credit of Toshiba on the ground that it failed to
show that the VAT input taxes were erroneously or illegally collected, or that the same
are properly documented. The CTA decided in favor of Toshiba, stating that the export
sales of Toshiba were subject to zero percent (0%) VAT and that it can claim tax credit
or refund of input VAT paid on its purchases of goods, properties, or services, directly
attributable to such zero-rated sales. The CTA pointed out that Toshiba availed itself of
the income tax holiday under the Omnibus Investments Code of 1987, so Toshiba was
exempt only from income tax but not from other taxes such as VAT. As a result, Toshiba
was liable for output VAT on its export sales, but at zero percent (0%) rate, and entitled
to the credit/refund of the input VAT paid on its purchases of goods and services relative
to such zero-rated export sales.

However, the CA reversed the CTA decision and held that Toshiba was not entitled to the
refund because it was a tax-exempt entity under Section 24 of Republic Act No. 7916. As
a PEZA-registered corporation, Toshiba should remit the 5% preferential rate on its gross
income earned within the ECOZONE, in lieu of all other national and local taxes, including
VAT. It also held that the export sales of Toshiba were VAT-exempt, not zero-rated,
transactions. Thus, it could not claim refund of its input VAT payments.

ISSUE: Whether or not Toshiba is entitled to the tax credit or refund of input VAT
RULING: Yes. Based on the Cross Border Doctrine, PEZA-registered enterprises,
such as Toshiba, are VAT-exempt and no VAT can be passed on to them. Applying
said doctrine, BIR issued Revenue Memorandum Circular (RMC) No. 74-99, on 15
October 1999 which gives such supplier of goods, property or services the benefit of the
zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises.
Thus, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-
exempt entity.

Under the old rule (prior to Oct 15 1999), PEZA-registered enterprises had the option to
choose between two sets of fiscal incentives – either a 5% preferential tax on its gross
income in lieu of all taxes, or avail income tax holiday but it will be subjected to 10% or
0% VAT. However, the old rule did not consider the fact that ecozones are considered as
foreign territory. Recall that in this case, the claims of Toshiba were made before the
issuance of RMC 74-99, so it was acceptable for Toshiba to avail of the income tax holiday
option. However, in 2003, BIR issued RMC No. 42-2003 which allowed PEZA-
registered enterprises which availed themselves of the income tax holiday to file
for credit/refund of input VAT on purchases prior to RMC No. 74-99. Thus, by virtue
of RMC 42-03, there were PEZA-registered enterprises liable for VAT and entitled to
credit/refund of input VAT paid under certain conditions.
 2. CIR vs. American Express International, Inc., G.R. No. 152609, 29 June 2005

DOCTRINE:

As a general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax. Goods and services are taxed only in the country where
they are consumed. Thus, exports are zero-rated, while imports are taxed.

In the present case, the facilitation of the collection of receivables is different from the
utilization of consumption of the outcome of such service. While the facilitation is done
in the Philippines, the consumption is not. The services rendered by respondent are
performed upon its sending to its foreign client the drafts and bulls it has gathered from
service establishments here, and are therefore, services also consumed in the
Philippines. Under the destination principle, such service is subject to 10% VAT.

However, the law clearly provides for an exception to the destination principle; that is
0% VAT rate for services that are performed in the Philippines, “paid for in acceptable
foreign currency and accounted for in accordance with the R&R of BSP.”

FACTS OF THE CASE:

Panganiban, J.:

Respondent, a VAT taxpayer, is the Philippine Branch of AMEX USA and was tasked
with servicing a unit of AMEX-Hongkong Branch and facilitating the collections of
AMEX-HK receivables from card members situated in the Philippines and payment to
service establishments in the Philippines.

It filed with BIR a letter-request for the refund of its 1997 excess input taxes, citing as
basis Section 110B of the 1997 Tax Code, which held that “xxx 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.”

In addition, respondent relied on VAT Ruling No. 080-89, which read, “In Reply, please
be informed that, as a VAT registered entity whose service is paid for in acceptable
foreign currency which is remitted inwardly to the Philippine and accounted for in
accordance with the rules and regulations of the Central Bank of the Philippines, your
service income is automatically zero rated xxx”

Petitioner claimed, among others, that the claim for refund should be construed strictly
against the claimant as they partake of the nature of tax exemption.
CTA rendered a decision in favor of respondent, holding that its services are subject to
zero-rate. CA affirmed this decision and further held that respondent’s services were
“services other than the processing, manufacturing or repackaging of goods for persons
doing business outside the Philippines” and paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of BSP.

ISSUE OF THE CASE:

W American Express, Philippines is entitled to refund

RULING:

YES.

Section 102 of the Tax Code provides for the VAT on sale of services and use or lease
of properties. Section 102B particularly provides for the services or transactions subject
to 0% rate:

(1) Processing, manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, where the services are
paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the BSP;

(2) Services other than those mentioned in the preceding subparagraph, e.g. those
rendered by hotels and other service establishments, the consideration for which is paid
for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP

Under subparagraph 2, services performed by VAT-registered persons in the

Philippines (other than the processing, manufacturing or repackaging of goods for
persons doing business outside the Philippines), when paid in acceptable foreign
currency and accounted for in accordance with the R&R of BSP, are zero-rated.
Respondent renders service falling under the category of zero rating.

The respondent meets the following requirements for exemption, and thus should be
zero-rated:

1. Service be performed in the Philippines

2. The service fall under any of the categories in Section 102B of the Tax Code
3. It be paid in acceptable foreign currency accounted for in accordance with BSP
R&R
 3. CIR vs. Seagate Technology (Philippines), G.R. No. 153866, 11 February 2005

DOCTRINE: Business companies registered in and operating from the Special Economic
Zone in Naga, Cebu 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.

FACTS: A VAT-registered enterprise, STP has principal office address at the new
Special Economic Zone, Cebu. STP is registered with the Philippine Export Zone
Authority (PEZA) and certified to engage in the manufacture of recording components
primarily used in computers for export. VAT returns were filed for the period 1 April 1998
to 30 June 1999. With supporting documents, a claim for refund of VAT input taxes in the
amount of 28 million pesos inclusive of the 12-million VAT input taxes subject of this
Petition for Review was filed on 4 October 1999.

CIR did not act promptly upon STP's claim. CIR asserted that by virtue of the PEZA
registration alone of STP, the latter is not subject to the VAT. According to CIR, STP's
sales transactions intended for export are not exempt.

ISSUE: Whether or not STP is entitled to refund or tax credit for purchases.

HELD: Yes, STP is entitled to refund or tax credit.

As a PEZA-registered enterprise within a special economic zone, STP is entitled to the

fiscal incentives and benefit provided for in either PD 66 or EO 226. 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, STP is entitled
to such VAT refund or credit.

STP, 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.
Imposition of VAT

1. CIR v. Sony Phils., Inc., 635 SCRA 234

DOCTRINE: A Letter of Authority should cover a taxable period not exceeding one year
and to indicate that it covers ‘unverified prior years’ should be enough to invalidate it.

FACTS: Sony Philippines was ordered examined for “the period 1997 and unverified prior
years” as indicated in the Letter of Authority. The audit yielded assessments against Sony
Philippines for deficiency Value Added Tax and Final Withholding Tax, particularly:

(1) late remittance of Final Withholding Tax on royalties for the period January to March
1998 and

(2) deficiency VAT on reimbursable income received by Sony Philippines from its offshore
affiliate, Sony International Singapore (SIS).

ISSUES:

(1) Is the Petitioner liable for deficiency Value Added Tax?

(2) Was the investigation of its 1998 Final Withholding Tax return valid?

RULING:

(1) NO. Sony Philippines did in fact incur expenses supported by valid VAT invoices
when it paid for certain advertising costs. This is sufficient to accord it the benefit of input
VAT credits and where the money came from to satisfy said advertising billings is another
matter but does not alter the VAT effect. In the same way, Sony Philippines cannot be
deemed to have received the reimbursable as a fee for a VAT-taxable activity. The
reimbursable was couched as an aid for Sony Philippines by Sony International
Singapore in view of the company’s “dire or adverse economic conditions”.

More importantly, the absence of a sale, barter or exchange of goods or properties

supports the non-VAT nature of the reimbursement. This was distinguished from the
COMASERCO case where even if there was similarly a reimbursement-on-cost
arrangement between affiliates, there was in fact an underlying service. Here, the
advertising services were rendered in favor of Sony Philippines not Sony International
Singapore.

(2) NO. A Letter of Authority should cover a taxable period not exceeding one year and
to indicate that it covers ‘unverified prior years’ should be enough to invalidate it. In
addition, even if the Final Withholding Tax was covered by Sony Philippines’ fiscal year
ending March 1998, the same fell outside of ‘the period 1997’ and was thus not validly
covered by the Letter of Authority. A Letter of Authority should cover a taxable period not
exceeding one taxable year. The practice of issuing L/As covering audit of "unverified
prior years is hereby prohibited. If the audit of a taxpayer shall include more than one
taxable period, the other periods or years shall be specifically indicated in the Letter of
Authority. Revenue Memorandum Order No. 43-90 dated September 20, 1990, amending
Revenue Memorandum Order No. 37-90 prescribing revised guidelines for Examination
of Returns and Issuance of Letters of Authority to Audit.
 2. Mindanao Geothermal II Partnership vs. CIR, GR No. 193301, 11 March 2013

DOCTRINE: It does not follow that an isolated transaction cannot be an incidental

transaction for purposes of VAT liability. A transaction "in the course of trade or business"
includes "transactions incidental thereto."

FACTS: Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into
electricity and to deliver the electricity to NPC. In the course of its business, Mindanao II
bought and eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part
of Mindanao II’s property, plant, and equipment.

ISSUE: Whether or not the sale of the Nissan Patrol is subject to VAT

RULING: Yes. The sale of the Nissan Patrol is an incidental transaction made in the
course of Mindanao II’s business which should be liable for VAT.
 3. CIR vs. CA and COMASERCO, GR No. 125355, 30 March 2000

FACTS:

1. On January 24, 1992, the BIR issued an assessment to Commonwealth Management

and Services Corp. (COMASERCO) for deficiency value-added tax (VAT) amounting to
P351,851.01, for taxable year 1988

2. On September 29,1992, COMASERCO filed with the CTA a petition for review
contesting the Commissioner's assessment. Its arguments are as follows:

● 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;
● That it was not engaged in the business of providing services to Philamlife and its
affiliates and that it was established to ensure operational orderliness and
administrative efficiency of Philamlife and its affiliates, and not in the sale of
services; and
● 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. Since it was not
engaged in business, it was not liable to pay VAT.

ISSUE: Whether COMASERCO was engaged in the sale of services, and thus liable to
pay VAT thereon.

HELD:

Yes

1. Who are the persons liable for VAT?

"Section 99, NIRC. Persons liable. - Any person who, in the course of trade or business,
sells, barters or exchanges goods, renders services, or engages in similar transactions
and any person who imports goods shall be subject to the value-added tax (VAT) imposed
in Sections 100 to 102 of this Code.""

2. What does "in the course of trade or business" mean?

COMASERCO: The term "in the course of trade or business" requires that the "business"
is carried on with a view to profit or livelihood. In other words, the activities of the entity
must be profit-oriented.

SC: Under Sec. 105 (Persons Liable) of R.A. No. 7716, or the Expanded VAT Law
(EVAT), 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.

This definition applies to all transactions even to those made prior to the enactment of the
EVAT Law, which merely stresses that even a nonstock, nonprofit organization or
government entity is liable to pay VAT for the sale of goods and services.

3. Are non-stock, nonprofit organizations or government entities (such as COMASERCO)

liable to pay VAT for the sale of goods and services?

COMASERCO: No, profit motive is material in ascertaining who to tax for purposes of
determining liability for VAT.

SC: Yes, even a non-stock, non-profit, organization or government entity, is liable to pay
VAT on the sale of goods or services.

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.
 4. MEDICARD Phils., Inc. vs, CIR, GR No. 222743, 5 April 2017

DOCTRINES:

• Congress limited the scope of the term gross receipts for VAT purposes only to the
amount that the taxpayer received for the services it performed or to the amount it
received as advance payment for the services it will render in the future for another
person.

• The VAT is a tax on the value added by the performance of the service by the
taxpayer. It is, thus, this service and the value charged thereof by the taxpayer that is
taxable under the NIRC.

• A tax cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be
extended by implication.

• For purposes of determining the VAT liability of an HMO, the amounts earmarked
and actually spent for medical utilization of its members should not be included in the
computation of its gross receipts.

FACTS OF THE CASE:

MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health

and medical insurance coverage to its clients. 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 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.

Petitioner filed its quarterly VAT Returns for 2006. CIR found some discrepancies
between Medicard’s ITR and VAT returns and informed MEDICARD and issued a Letter
Notice (LN). The CIR subsequently issued PAN and FAN against Medicard. (P196M
deficiency): Tax base of HMOs for VAT purposes should be gross receipts without any
deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005.

Medicard protested that the processing fees amounting to P11.5 Million should be
excluded from gross receipts because P5.6 Million of which represent advances
for professional fees due from clients which were paid by MEDICARD the
professional fees in the amount of P11 Million should also be excluded because it
represents the amount of medical services actually and directly rendered by
MEDICARD and/or its subsidiary company;
Medicard explains that upon receipt of the membership fee it actually issues two official
receipts, one pertaining to the VATable portion – 20%, representing compensation for
its services, and the other represents the non-vatable portion pertaining to the amount
earmarked for medical utilization- 80%. Its taxable base with regards to VAT should only
be the 20%.

Protest was denied. CTA affirmed with modification ruling of CIR. MEDICARD’s earnings
from its clinics and laboratory facilities cannot be excluded from its gross receipts
because the operation of these clinics and laboratory is merely an incident to
MEDICARD’s main line of business as an HMO. CTA Third Division – ordered petitioner
Medicard Philippines, Inc. (MEDICARD), to pay respondent Commissioner of Internal
Revenue (CIR) the deficiency VAT) assessment in the aggregate amount of P220M
, plus 20% interest per annum. CTA en banc – Affirmed with modification (some portion
was taxed at 10% VAT instead of 12% due to timing when incurred); MR denied

ISSUE: Whether the amounts that MEDICARD earmarked and eventually paid to the
medical service providers still form part of its gross receipts for VAT purposes.

RULING: No. The amounts earmarked and eventually paid by MEDICARD to the medical
service providers do not form part of gross receipts for VAT purposes.

Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its
equivalent representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and deposits
applied as payments for services rendered, and advance payments actually or
constructively received during the taxable period for the services performed or to be
performed for another person, excluding the VAT.

The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of
the NIRC that would extend the definition of gross receipts even to amounts that do not
only pertain to the services to be performed: by another person, other than the taxpayer,
but even to amounts that were indisputably utilized not by MED ICARD itself but by the
medical service providers.

The CTA en banc overlooked that the definition of gross receipts under RR No. 16-2005
merely presumed that the amount received by an HMO as membership fee is the HMO's
compensation for their services. As a mere presumption, an HMO is, thus, allowed to
establish that a portion of the amount it received as membership fee does NOT actually
compensate it but some other person, which in this case are the medical service providers
themselves.

As to the CIR's argument that the act of earmarking or allocation is by itself an act of
ownership and management over the funds, the Court does not agree. On the contrary,
it is MEDICARD's act of earmarking or allocating 80% of the amount it received as
membership fee at the time of payment that weakens the ownership imputed to it. By
earmarking or allocating 80% of the amount, MEDICARD unequivocally recognizes that
its possession of the funds is not in the concept of owner but as a mere administrator of
the same. For this reason, at most, MEDICARD's right in relation to these amounts is a
mere inchoate owner which would ripen into actual ownership if, and only if, there is
underutilization of the membership fees at the end of the fiscal year. Prior to that, MEDI
CARD is bound to pay from the amounts it had allocated as an administrator once its
members avail of the medical services of MEDICARD's healthcare providers.
 5. TFS, Inc. vs. CIR, GR No. 166829, 19 April 2010 , DEL CASTILLO, J.

DOCTRINE: Imposition of VAT on pawnshops for the tax years 1996 to 2002 was
deferred. Hence, non-bank financial intermediaries, being specifically deferred by law,
are not liable for VAT during these tax years.

FACTS: TFS, Incorporated is a duly organized domestic corporation engaged in the

pawnshop business. TFS, Incorporated received a Preliminary Assessment Notice (PAN)
for deficiency value added tax (VAT), expanded withholding tax (EWT), and compromise
penalty for the taxable year 1998. TFS, Incorporated requested the Bureau of Internal
Revenue (BIR) to withdraw and set aside the assessments. TFS, Incorporated claims that
the deficiency VAT assessment issued by the BIR has no legal basis because pawnshops
are not subject to VAT as they are not included in the enumeration of services under
Section 108(A) of the NIRC.

CIR opines that TFS, Incorporated’s liability is a matter of law; and in the absence of any
provision providing for a tax exemption, TFS, Incorporated’s pawnshop business is
subject to VAT.

ISSUE: Is TFS, Incorporated subject to 10% VAT?

RULING: NO, TFS, Incorporated is not subject to 10% VAT.

Imposition of VAT on pawnshops for the tax years 1996 to 2002 was deferred.

In First Planters Pawnshop, Inc. v. Commissioner of Internal Revenue, it was held that
since First Planters Pawnshop, Inc. is a non-bank financial intermediary, it is subject to
10% VAT for the tax years 1996 to 2002; however, with the levy, assessment and
collection of VAT from non-bank financial intermediaries being specifically deferred by
law, then First Planters Pawnshop is not liable for VAT during these tax years. But with
the full implementation of the VAT system on non-bank financial intermediaries starting
January 1, 2003, petitioner is liable for 10% VAT for said tax year. And beginning 2004
up to the present, by virtue of R.A. No. 9238, petitioner is no longer liable for VAT but it
is subject to percentage tax on gross receipts from 0% to 5%, as the case may be.

Guided by the foregoing, TFS, Incorporated is not liable for VAT for the year 1998.
Consequently, the VAT deficiency assessment issued by the BIR against TFS,
Incorporated has no legal basis and must therefore be cancelled. In the same vein, the
imposition of surcharge and interest must be deleted.
 6. CIR vs. SM Prime Holdings, Inc., GR No. 183505, 26 February 2010

DOCTRINE: The Local Tax Code, in transferring the power to tax gross receipts derived
by cinema/theater operators or proprietor from admission tickets to the local government,
did not intend to treat cinema/theater houses as a separate class.

FACTS: Respondents SM Prime Holdings and First Asia Realty Development

Corporation are domestic corporations engaged in the business of operating cinema
houses BIR issued a Preliminary Assessment Notice against SM Prime Holdings for the
taxable year 2000 for value added tax (VAT) deficiency on cinema ticket sales and issued
the same against First Asia for taxable years 1999, 2000, 2002 and 2003. CIR argues
that the enumeration of services subject to VAT in Section 108 of the NIRC is not
exhaustive because it covers all sales of services unless exempted by the law. SM Prime
filed a Petition for Review before the CTA. CTA granted the petition stating that the activity
of showing cinematographic films is not a service covered by VAT under the National
Internal Revenue Code (NIRC) of 1997, as amended, but an activity subject to
amusement tax under RA 7160, otherwise known as the Local Government Code (LGC)
of 1991. CTA En Banc affirmed CTA First Division’s ruling.

ISSUE: Whether the gross receipts derived by operators or proprietors of cinema/theater

houses from admission tickets are subject to VAT.

HELD: No, the gross receipts derived by operators or proprietors of cinema/theater

houses from admission tickets are not subject to VAT.

The enumeration on Section 108 enumeration of the "sale or exchange of services"

subject to VAT is not exhaustive. The words, "including," "similar services," and "shall
likewise include," indicate that the enumeration is by way of example only. While the
"lease of motion picture films, films, tapes and discs is among the enumerated items
under Section 108 on the VAT-taxable services, it is not the same as the showing or
exhibition of motion pictures or films. The legislature never intended operators or
proprietors of cinema/theater houses to be covered by VAT.

The VAT law was intended to replace the percentage tax on certain services. The mere
fact that they are taxed by the local government unit and not by the national government
is immaterial. The Local Tax Code, in transferring the power to tax gross receipts derived
by cinema/theater operators or proprietor from admission tickets to the local government,
did not intend to treat cinema/theater houses as a separate class. No distinction must,
therefore, be made between the places of amusement taxed by the national government
and those taxed by the local government.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition
of VAT on the gross receipts of cinema/theater operators or proprietors derived from
admission tickets. The removal of the prohibition under the Local Tax Code did not grant
nor restore to the national government the power to impose amusement tax on
cinema/theater operators or proprietors. Neither did it expand the coverage of VAT. Since
the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it be
extended by implication. A law will not be construed as imposing a tax unless it does so
clearly, expressly, and unambiguously. As it is, the power to impose amusement tax on
cinema/theater operators or proprietors remains with the local government.
 7. Diaz vs. The Secretary of Finance, GR No. 193007, 19 July 2011

DOCTRINE: The enumeration under Section 108 of the NIRC is not exclusive. By
qualifying "services" with the words "all kinds," Congress has given the term "services"
an all-encompassing meaning. Thus, every activity that can be imagined as a form of
"service" rendered for a fee should be deemed included unless some provision of law
especially excludes it.

FACTS: Petitioners filed a petition for declaratory relief assailing the validity of the
impending imposition of VAT by the BIR on the collections of tollway operators. They held
the view that Congress did not intend to include toll fees within the meaning of "sale of
services" that are subject to VAT; that a toll fee is a "user’s tax," not a sale of services;
that to impose VAT on toll fees would amount to a tax on public service; and that, since
VAT was never factored into the formula for computing toll fees, its imposition would
violate the non-impairment clause of the constitution.

The government averred that the NIRC imposes VAT on all kinds of services of franchise
grantees, including tollway operations, except where the law provides otherwise; that the
Court should seek the meaning and intent of the law from the words used in the statute;
and that the imposition of VAT on tollway operations has been the subject as early as
2003 of several BIR rulings and circulars.

ISSUE: Whether toll fees are within the meaning of sale of services and thus subject to
VAT

RULING: Yes. Section 108 of the NIRC imposes VAT on "all kinds of services" rendered
in the Philippines for a fee. The enumeration of affected services is not exclusive. By
qualifying "services" with the words "all kinds," Congress has given the term "services"
an all-encompassing meaning. Thus, every activity that can be imagined as a form of
"service" rendered for a fee should be deemed included unless some provision of law
especially excludes it.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s
use of the tollway facilities over which the operator enjoys private proprietary rights that
its contract and the law recognize. In this sense, the tollway operator is no different from
the following service providers under Section 108 who allow others to use their properties
or facilities for a fee: 1.) Lessors of property, whether personal or real; 2.) Warehousing
service operators; 3.) Lessors or distributors of cinematographic films; 4.) Proprietors,
operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; 5.)
Lending investors; 6.) Transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire; and 7.) Common carriers by
air and sea relative to their transport of passengers, goods or cargoes from one place in
the Philippines to another place in the Philippines.
Section 108 subjects to VAT "all kinds of services" rendered for a fee "regardless of
whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties." This means that "services" to be subject to VAT need not fall under the
traditional concept of services, the personal or professional kinds that require the use of
human knowledge and skills.
 8. PSALM v. Commissioner of Internal Revenue, G.R. No. 226556, 3 July 2019

FACTS: Through the EPIRA Law, PSALM was created to facilitate the sale and
privatization of the National Power Corporation. Two power plants were sold by PSALM.
The BIR assessed the petitioner with VAT for the said sale. Petitioner then paid the
assessed tax in protest and raised the issue with the DOJ. The DOJ rendered its judgment
in favor of the Petitioner. The respondent appealed to the CA who reversed the DOJ's
resolution. Petitioner then appealed to the SC, hence this case.

ISSUE: Whether the sale of the power plants is subject to VAT?

RULING: NO

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
private organization (irrespective of the disposition of its net income and whether or not it
sells exclusively to members or their guests), or government entity. The sale of the power
plants is not “in the course of trade or business” as contemplated under Section 105 of
the NIRC, and thus, not subject to VAT.

The sale of the power plants is not in pursuit of a commercial or economic activity but a
governmental function mandated by law to privatize NPC generation assets. PSALM was
created primarily to liquidate all NPC financial obligations and stranded contract costs in
an optimal manner. The purpose and objective of PSALM are explicitly stated in Section
50 of the EPIRA law.

PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale of NPC
assets by PSALM is not “in the course of trade or business” but purely for the specific
purpose of privatizing NPC assets in order to liquidate all NPC financial obligations.
PSALM is tasked to sell and privatize the NPC assets within the term of its existence.
 9. PSALM v. Commissioner of Internal Revenue, G.R. No. 198146, 8 August 2017

DOCTRINE: The sale of the power plants is not in pursuit of a commercial or economic
activity but a governmental function mandated by law to privatize NPC generation assets.
PSALM was created primarily to liquidate all NPC financial obligations and stranded
contract costs in an optimal manner.

FACTS: Petitioner Power Sector Assets and Liabilities Management Corporation

(PSALM) is a government-owned and controlled corporation created under Republic Act
No. 9136 (RA 9136), also known as the Electric Power Industry Reform Act of 2001
(EPIRA).

Section 50 of RA 9136 states that the principal purpose of PSALM is to manage the
orderly sale, disposition, and privatization of the National Power Corporation (NPC)
generation assets, real estate and other disposable assets, and Independent Power
Producer (IPP) contracts with the objective of liquidating all NPC financial obligations and
stranded contract costs in an optimal manner.

Two power plants were sold by PSALM. The BIR assessed the petitioner with VAT for the
said sale. Petitioner then paid the assessed tax in protest and raised the issue with the
DOJ.

The DOJ rendered its judgement in favor of the Petitioner. The respondent appealed to
the CA who reversed DOJ’s resolution. Petitioner then appealed to the SC, hence this
case.

ISSUE: Whether the sale of the power plants is subject to VAT?

RULING: No. 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 private organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members or their guests), or government entity.
The sale of the power plants is not “in the course of trade or business” as contemplated
under Section 105 of the NIRC, and thus, not subject to VAT.

The sale of the power plants is not in pursuit of a commercial or economic activity but a
governmental function mandated by law to privatize NPC generation assets. PSALM was
created primarily to liquidate all NPC financial obligations and stranded contract costs in
an optimal manner. The purpose and objective of PSALM are explicitly stated in Section
50 of the EPIRA law.
PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale of NPC
assets by PSALM is not “in the course of trade or business” but purely for the specific
purpose of privatizing NPC assets in order to liquidate all NPC financial obligations.
PSALM is tasked to sell and privatize the NPC assets within the term of its existence.
 10. Association of Non-Profit Clubs, Inc. (ANPC), herein represented by its
authorized representative, Ms. Felicidad M. Del Rosario Vs. Bureau of Internal
Revenue (BIR), herein represented by Hon. Commissioner Kim S. Jacinto-
Henares, G.R. No. 228539, 26 June 2019

DOCTRINE: 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.

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
private organization (irrespective of the disposition of its net income and whether or not it
sells exclusively to members or their guests), or government entity.

FACTS: In a revenue memorandum circular, the BIR provided that "the gross receipts of
recreational clubs including but not limited to membership fees, assessment dues, rental
income, and service fees are subject to VAT." It relied on the NIRC which states that even
a nonstock, nonprofit private organization or government entity is liable to pay VAT on the
sale of goods or services.

ANPC submitted a position paper requesting the non-application of the RMC for income
tax and VAT liability on membership fees, association dues, and fees of similar nature
collected by the exclusive membership clubs from their members which are used to defray
the expenses of the said clubs. However, despite the lapse of 2 years, the BIR has not
acted upon the request, and all the member clubs of ANPC were subjected to income tax
and VAT.

ANPC also filed a petition for declaratory relief, seeking to declare the RMC invalid, unjust,
oppressive, confiscatory, and in violation of the due process clause of the Constitution.

ISSUE: Is the BIR’s interpretation that membership fees, assessment dues, and the like
are part of "the gross receipts of recreational clubs" that are "subject to VAT" valid?

RULING: NO. As ANPC aptly pointed out, membership fees, assessment dues, and the
like are not subject to VAT because in collecting such fees, the club is not selling its
service to the members. Conversely, the members are not buying services from the club
when dues are paid; hence, there is no economic or commercial activity to speak of as
these dues are devoted for the operations/maintenance of the facilities of the
organization. As such, there could be no "sale, barter or exchange of goods or properties,
or sale of a service" to speak of, which would then be subject to VAT under the 1997
NIRC.
 11. In The Matter Of Declaratory Relief On The Validity Of Bir Revenue
Memorandum Circular No. 65-2012 "Clarifying The Taxability Of Association
Dues, Membership Fees And Other Assessments/Charges Collected By
Condominium Corporations, G.R. No. 215801, 15 January 2020

DOCTRINE: Association dues, membership fees, and other assessments/charges are

not subject to income tax, VAT and withholding tax.

They are not subject to income tax because they do not constitute profit or gain. To repeat,
they are collected purely for the benefit of the condominium owners and are the incidental
consequence of a condominium corporation's responsibility to effectively oversee,
maintain, or even improve the common areas of the condominium as well as its
governance.

FACTS: The First E-Bank Tower Condominium Corp. (First E-Bank) filed a petition to
declare as invalid BIR Revenue Memorandum Circular No. 65-2012 (RMC No. 65-2012)
dated October 2012 entitled "Clarifying the Taxability of Association Dues, Membership
Fees and Other Assessments/ Charges Collected by Condominium Corporations".

First E-Bank in its Petition alleged that: it is a non-stock non-profit condominium

corporation; RMC No. 65-2012 burdened the owners of the condominium units with
income tax and Value-Added Tax (VAT) on their own money which they exclusively used
for the maintenance and preservation of the building and its premises; RMC No. 65-2012
was oppressive and confiscatory because it required condominium unit owners to
produce additional amounts for the thirty-two percent (32%) income tax and twelve
percent (12%) VAT.

ISSUE/S: Is RMC No. 65-2012 valid?

a) Is a condominium corporation engaged in trade or business?

b) Are association dues, membership fees, and other assessments/charges subject to

income tax, value-added tax, and withholding tax?

RULING: No, RMC No. 65-2012 is invalid.

a) A condominium corporation is not engaged in trade or business. Even though the

Corporation is empowered to levy assessments or dues from the unit owners, these
amounts collected are not intended for the incurrence of profit by the Corporation or its
members, but to shoulder the multitude of necessary expenses that arise from the
maintenance of the Condominium Project.[1] More, a condominium corporation is
especially formed for the purpose of holding title to the common area and exists only for
the benefit of the condominium owners. Nothing more.
b) Association dues, membership fees, and other assessments/charges are not subject
to income tax, VAT and withholding tax.

They are not subject to income tax because they do not constitute profit or gain. To repeat,
they are collected purely for the benefit of the condominium owners and are the incidental
consequence of a condominium corporation's responsibility to effectively oversee,
maintain, or even improve the common areas of the condominium as well as its
governance. Further, association dues, membership fees, and other
assessments/charges do not arise from transactions involving the sale, barter, or
exchange of goods or property. Nor are they generated by the performance of services.
As such, they are not subject to VAT which is a burden 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, so much
so that even a non-stock, non-profit organization or government entity, is liable to pay
value-added tax on the sale of goods or services.
Zero-Rated Sales

1. Coral Bay Nickel Corporation vs. CIR, GR No. 190506, 13 June 2016

DOCTRINE: PEZA shall manage and operate the ECOZONES as a separate customs
territory; thus, creating the fiction that the ECOZONE is a 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.

FACTS: Coral Bay Nickel Corporation is a VAT entity and is also registered with the
Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise. Coral has
purchased from a custom territory and claims a refund for unutilized input VAT from these
purchases.

ISSUE: Whether Coral Bay is entitled to the VAT refund from a purchase on a zero-rated
sale?

RULING: RMC No. 74-99 categorically declared that all sales of goods, properties, and
services made by a VAT-registered supplier from the Customs Territory to an ECOZONE
enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter's
type or class of PEZA registration.

As such, the purchases of goods and services by Coral Bay Nickel 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.
 2. COMMISSIONER OF INTERNAL REVENUE v. CEBU TOYO CORPORATION
G.R. No. 149073, February 16, 2005

DOCTRINE: Export sales, or sales outside the Philippines, shall be subject to value-
added tax at 0% if made by a VAT-registered person. Under the value-added tax system,
a zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his purchase of
goods, properties or services related to such zero-rated sale shall be available as tax
credit or refund.

FACTS:

1. Respondent Cebu Toyo Corporation is a domestic corporation engaged in the

manufacture of lenses and various optical components used in television sets,
cameras, compact discs and other similar devices.
2. It is a subsidiary of Toyo Lens Corporation, a non-resident corporation organized
under the laws of Japan. Also, Respondent is a zone export enterprise registered
with the Philippine Economic Zone Authority (PEZA)
3. As an export enterprise, respondent sells 80% of its products to its mother
corporation, the Japan-based Toyo Lens Corporation, pursuant to an Agreement
of Offsetting. The rest are sold to various enterprises doing business in the MEPZ.
4. Considering that these transactions of the respondent are export sales, which is
subject to VAT at 0% rate, the respondent filed for tax credit/refund on its excess
VAT input payments.
5. However, the petitioner contend that the respondent is not entitled to a refund or
tax credit since: (a) it failed to show that the tax was erroneously or illegally
collected; (b) the taxes paid and collected are presumed to have been made in
accordance with law; and (c) claims for refund are strictly construed against the
claimant as these partake of the nature of tax exemption.
6. When the CTA partially grant the tax credit/refund filed by the respondent, the
petitioner further contend that respondent being registered with the PEZA as an
ecozone enterprise is not subject to VAT and since respondent’s business is not
subject to VAT, the capital goods it purchased are considered not used in a VAT
taxable business and therefore is not entitled to a refund of input taxes.

ISSUE: Whether or not the respondent is entitled for tax credit/refund.

HELD: Yes, the Supreme Court held that Petitioner’s contention that respondent is not
entitled to refund for being exempt from VAT is untenable. This argument turns a blind
eye to the fiscal incentives granted to PEZA-registered enterprises under Section 23 of
Rep. Act No. 7916. Note that under said statute, the respondent had two options with
respect to its tax burden. It could avail of an income tax holiday pursuant to provisions of
E.O. No. 226, thus exempt it from income taxes for a number of years but not from other
internal revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes,
including VAT under P.D. No. 66 and pay only the preferential tax rate of 5% under Rep.
Act No. 7916. Both the Court of Appeals and the Court of Tax Appeals found that
respondent availed of the income tax holiday for four (4) years starting from August 7,
1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax Returns,
where respondent specified that it was availing of the tax relief under E.O. No. 226.
Hence, respondent is not exempt from VAT and it correctly registered itself as a VAT
taxpayer. In fine, it is engaged in taxable rather than exempt transactions.

Hence, in this case, it is undisputed that respondent is engaged in the export business
and is registered as a VAT taxpayer per Certificate of Registration of the BIR. Further, the
records show that the respondent is subject to VAT as it availed of the income tax holiday
under E.O. No. 226. Perforce, respondent is subject to VAT at 0% rate and is entitled to
a refund or credit of the unutilized input taxes.

NOTE: Distinction of Zero Percent (0%) rate on a taxable transaction and VAT exempt
transaction:

(a) A zero-rated sale is a taxable transaction but does not result in an output tax while an
exempted transaction is not subject to the output tax;

(b) The input VAT on the purchases of a VAT-registered person with zero-rated sales
may be allowed as tax credits or refunded while the seller in an exempt transaction is not
entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt.

(c) Persons engaged in transactions which are zero-rated, being subject to VAT, are
required to register while registration is optional for VAT-exempt persons.
 3. CIR vs. Seagate Technology (Philippines), GR No. 153866, 11 February 2005

FACTS:

1. Seagate is a resident foreign corporation duly registered with the Securities and
Exchange Commission to do business in the Philippines, with principal office
address at the new Cebu Township One, Special Economic Zone, Barangay
Cantao-an, Naga, Cebu;
2. CIR is sued in his official capacity, having been duly appointed and empowered to
perform the duties of his office, including, among others, the duty to act and
approve claims for refund or tax credit;
3. Seagate is registered with the Philippine Export Zone Authority (PEZA);
4. Seagate is VAT [(Value Added Tax)]-registered entity;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by
Seagate;
6. An administrative claim for refund of VAT input taxes with supporting documents
was filed on 4 October 1999;
7. The administrative claim for refund was not acted upon by the CIR prompting
Seagate to elevate the case to [the CTA] on July 21, 2000 by way of Petition for
Review.
8. Tax Court rendered a decision granting the claim for refund. Hence, this petition.

ISSUE: Whether or not respondent is entitled to the refund or issuance of Tax Credit
Certificate.

RULING: Yes. 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. 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, it is entitled to such refund or credit.
 4. Sitel v. Commissioner, G.R. No. 201326, 8 February 2017

Doctrines: 1. The 120-day period granted to the CIR is mandatory and jurisdictional, the
non-observance of which is fatal to the filing of a judicial claim with the CTA.

2. To be entitled to refund from zero-rated transactions, the service-recipient must be

doing business outside the Philippines.

3. The creditable input VAT should be evidenced by a VAT invoice or official receipt,
which may only be considered as such when the TIN-VAT is printed thereon.

Facts: Sitel, a domestic corporation, is engaged in providing call center services from the
Philippines to domestic and offshore businesses. It is registered with the Bureau of
Internal Revenue (BIR) as a VAT taxpayer. It filed separate formal claims for refund or
issuance of tax credit with 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 and a judicial claim for refund or tax credit via a
petition for review before the CTA.

The CTA Division partially granted Sitel' s claim for VAT refund or tax credit. It denied
Sitel's claim for unutilized input VAT attributable to its zero-rated sales. It also disallowed
the amount representing input VAT paid on capital goods purchased for failure to comply
with the invoicing requirements.

The CTA En Banc reversed and set aside the ruling of the CTA Division because Sitel
filed its judicial claim for VAT refund or credit without waiting for the lapse of the 120-day
period for the CIR to act on its administrative claim; hence, the CTA did not acquire
jurisdiction.

Issues: 1. Whether Sitel's Judicial Claim or VAT Refund was timely filed.

2. Whether Sitel is entitled to refund from its input VAT attributable to zero-rated sales.

3. Whether Sitel is entitled to refund from the amount representing input taxes claimed on
Sitel's domestic purchases of goods and services which are supported by
invoices/receipts with pre-printed TIN-V.

Ruling: 1. Yes. In Aichi, 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. However, in San Roque, the Court clarified that the 120-day period does not
apply to claims for refund that were prematurely filed during the period from the issuance
of BIR Ruling No. DA-489-03, on December 10, 2003, until October 6, 2010, when Aichi
was promulgated. The Court explained that BIR Ruling No. DA-489-03, which expressly
allowed the filing of judicial claims with the CTA even before the lapse of the 120-day
period, provided for a valid claim of equitable estoppel because the CIR had misled
taxpayers into prematurely filing their judicial claims before the CTA. Records show that
Sitel filed its administrative and judicial claim for refund on March 28, 2006 and March 30,
2006, respectively, or after the issuance of BIR Ruling No. DA-489-03, but before the date
when Aichi was promulgated.

2. No. Sitel's claim for refund is anchored on Section 112(A) of the NIRC, which allows
the refund or credit of input VAT attributable to zero-rated or effectively zero-rated sales.
In relation thereto, Sitel points to Section 108(B)(2) of the NIRC [formerly Section
102(b)(2) of the NIRC of 1977, as amended] as legal basis for treating its sale of services
as zero-rated or effectively zero-rated. An essential condition to qualify for zero-rating
under the aforequoted provision is that the service-recipient must be doing business
outside the Philippines. Sitel fell short of proving that the recipients of its call services
were foreign corporations doing business outside the Philippines. 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.

3. No. 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, which may
only be considered as such when the TIN-VAT is printed thereon, as required by Section
4.108-1 of RR 7-95. Considering that the subject invoice/official receipts are not imprinted
with the taxpayer's TIN followed by the word VAT, these would not be considered as VAT
invoices/official receipts and would not give rise to any creditable input VAT in favor of
Sitel.
 5. Commissioner v. Euro-Philippines Airline Services, Inc.
G.R. No. 222436, 23 July 2018

DOCTRINE: Nowhere in Section 113 of the NIRC of 1997 is a presumption created by

law that the non-imprintment of the word "zero rated" in the official receipt deems the
transaction subject to 12% VAT.

FACTS: Euro-Philippines Airline Services, Inc. (Euro-Phil) is an exclusive passenger

sales agent of British Airways, PLC, an off-line international airline in the Philippines to
service the latter's passengers in the Philippines.

Euro-Phil is assessed for deficiency VAT for services it rendered as passenger sales
agent of British Airways PLC. However, respondent invokes that services rendered by
VAT-registered persons to persons engaged in international air transport operations is
subject to zero percent (0%) rate, pursuant to Section 108 of the National Internal
Revenue Code (NIRC) of 1997, as amended. The CTA granted and canceled the FAN
issued against the respondent.

CIR, for the first time in the appeal, insisted that the presentation of VAT official receipts
with the words "zero-rated" imprinted thereon is indispensable to cancel the value-added
tax (VAT) assessment against Euro-Phil.

ISSUES:
1. Whether or not the issue of non-compliance of the invoicing requirements by Euro-
Phil must be recognized despite being raised only on appeal; and
2. Whether or not the Court of Tax Appeals En Banc erred in finding that the
transaction sale made by respondent is entitled to the benefit of zero-rated VAT
despite its failure to comply with invoicing requirements as mandated by law.

RULING:

1. No. Well-settled rule is that issues may not be raised for the first time on appeal,
CIR should not be allowed by this Court to raise this matter.
2. The law is clear on the matter. Section 108 of the NIRC of 1997 imposes zero
percent (0%) value-added tax on services performed in the Philippines by VAT-
registered persons to persons engaged in international air transport operations.

As dictated by Section 113 of the NIRC of 1997, on the said provisions on the
"Consequences of Issuing Erroneous VAT Invoice of VAT Official Receipt”,
nowhere therein is a presumption created by law that the non-imprintment of the
word "zero rated" deems the transaction subject to 12 % VAT. In addition, Section
4. 113-4 of Revenue Regulations 16-2005, Consolidated Value-Added Tax
Regulations of 2005, also does not state that the non-imprintment of the word "zero
rated" deems the transaction subject to 12 %VAT. Thus, in this case, failure to
comply with invoicing requirements as mandated by law does not deem the
transaction subject to 12% VAT.
Other Types of Input Tax - Transitional Input Tax Credits; Presumptive Input Tax
Credits

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

DOCTRINE: Since the law does not make any differentiation between the treatment of a
real-estate dealer from those engaged in other transactions such as, for example, sellers
of commercial goods, the transitional input tax credit also applies not only to the
improvements on the real property but also to the value of the entire real property.

FACTS: The petitioner Fort Bonifacio Development Corporation (FBDC) was a real estate
developer that bought from the national government a parcel of land that used to be the
Fort Bonifacio military reservation. At the time of the said sale there was as yet no VAT
imposed so FBDC did not pay any VAT on its purchase. However, R.A. No. 7716 took
effect, which imposes Value-added tax on real estate transactions such as those regularly
engaged in by FBDC. Subsequently, upon the effectivity of the said law, FBDC sold two
parcels of land to Metro Pacific Corporation. As the vendor, FBDC from thereon has
become obliged to remit to the Bureau of Internal Revenue (BIR) the output VAT
payments it received from the sale of its properties. In reporting the said sale for VAT
purposes, FBDC claimed transitional input VAT corresponding to its inventory of land.
The BIR disallowed the claim of presumptive input VAT and thereby assessed FBDC for
deficiency VAT. The CIR argued that the transitional input tax credit cannot be granted
citing Section 100 of the Old NIRC. According to CIR, in determining the 10% value-added
tax on the sale of real properties by real estate dealers, the 8% transitional input tax credit
as provided in Section 105 applies only to the improvements on the real property and not
on the value of the entire real property.

ISSUE: Whether or not the petitioner is entitled to claim the transitional input VAT on its
sale of real properties given its nature as a real estate dealer

RULING: Yes. Petitioner is entitled to claim transitional input VAT based on the value of
not only the improvements but on the value of the entire real property and regardless of
whether there was in fact actual payment on the purchase of the real property or not. The
amendments to the VAT law do not show any intention to make those in the real estate
business subject to a different treatment from those engaged in the sale of other goods
or properties or in any other commercial trade or business. Despite the amendments
introduced by R.A. No. 7716 to Section 100 and without amending the provisions of
Section 105 regarding transitional input tax credit, it shows the lack of any legislative
intention to make persons or entities in the real estate business subject to a VAT
treatment different from those engaged in the sale of other goods or properties or in any
other commercial trade or business. Thus, the CIR has no power to limit the meaning and
coverage of the term "goods" as defined in the Tax Code on the scope of the basis for
determining the available transitional input VAT, without statutory authority or basis.
 2. Fort Bonifacio Development Corporation vs. CIR
G.R. No. 173425, 4 September 2012

DOCTRINE: While a tax liability is essential to the availment or use of any tax credit, prior
tax payments are not. On the contrary, for the existence or grant solely of such credit,
neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact replete
with provisions granting or allowing tax credits, even though no taxes have been
previously paid.

FACTS:

1. Fort Bonifacio Development Corporation (FBDC), a domestic corporation engaged

in the development and sale of real property. FBDC later purchased from the
national government a portion of the Fort Bonifacio reservation, now known as the
Fort Bonifacio Global City (Global City).
2. On January 1, 1996, RA 7716 extended the coverage of VAT to real properties
held primarily for sale to customers or held for lease in the ordinary course of trade
or business. Thus, FBDC sought to register by submitting to the BIR an inventory
of all its real properties, the book value of which aggregated to about
P71,227,503,200. Based on this value, petitioner claimed that it is entitled to a
transitional input tax credit of ₱ 5,698,200,256, pursuant to Section 10512 of the old
NIRC.
3. In October 1996, FBDC started selling Global City lots to interested buyers where
it generated P3,685,539.50 for the first quarter of 1997. By making cash payment
and crediting its untilized input tax credit, FBDC paid ₱ 359,652,009.47. later,
realizing that its transitional input tax credit was not applied in computing its output
VAT for the first quarter of 1997, petitioner on November 17, 1998 filed with the
BIR a claim for refund of the amount of ₱ 359,652,009.47 erroneously paid as
output VAT for the said period.
4. The CTA denied refund on the ground that “the benefit of transitional input tax
credit comes with the condition that business taxes should have been paid first.” It
contends that since FBDC acquired the Global City property under a VAT-free sale
transaction, it cannot avail of the transitional input tax credit. The CTA likewise
pointed out that under RR 7-95, implementing Section 105 of the old NIRC, the 8%
transitional input tax credit should be based on the value of the improvements on
land such as buildings, roads, drainage system and other similar structures,
constructed on or after January 1, 1998, and not on the book value of the real
property.

ISSUES:
 1. Whether Prior payment of taxes is not required for a taxpayer to avail of the 8%
transitional input tax credit.
2. Whether Section 4.105-1 of RR 7-95 is inconsistent with Section 105 of the old
NIRC.

RULING:

Petition is meritorious.

I. Prior payment of taxes is not required for a taxpayer to avail of the 8% transitional
input tax credit.

1. First, there is no indication in section 105 of the old NIRC that prior payment of
taxes is necessary for the availment of the 8% transitional input tax credit.
Obviously, all that is required is for the taxpayer to file a beginning inventory with
the BIR.
To require prior payment of taxes is not only tantamount to judicial legislation but
would also render nugatory the provision in Section 105 of the old NIRC that the
transitional input tax credit shall be "8% of the value of [the beginning] inventory or
the actual [VAT] paid on such goods, materials and supplies, whichever is higher"
because the actual VAT (now 12%) paid on the goods, materials, and supplies
would always be higher than the 8% (now 2%) of the beginning inventory which,
following the view of Justice Carpio, would have to exclude all goods, materials,
and supplies where no taxes were paid.

Second, prior payment of taxes is not required to avail of the transitional input tax
credit because it is not a tax refund per se but a tax credit. Tax credit is not
synonymous to tax refund. Tax refund is defined as the money that a taxpayer
overpaid and is thus returned by the taxing authority. Tax credit, on the other hand,
is an amount subtracted directly from one’s total tax liability. It is any amount given
to a taxpayer as a subsidy, a refund, or an incentive to encourage investment.
Thus, unlike a tax refund, prior payment of taxes is not a prerequisite to avail of a
tax credit.

Third, there are also tax treaties and special laws that grant or allow tax credits,
even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double
taxation, income that is taxed in the state of source is also taxable in the state of
residence, but the tax paid in the former is merely allowed as a credit against the
 tax levied in the latter. Apparently, payment is made to the state of source, not the
state of residence. No tax, therefore, has been previously paid to the latter.

2. It is apparent that the transitional input tax credit operates to benefit newly VAT-
registered persons, whether or not they previously paid taxes in the acquisition of
their beginning inventory of goods, materials and supplies. During that period of
transition from non-VAT to VAT status, the transitional input tax credit serves to
alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-
registered taxpayer is obliged to remit a significant portion of the income it derived
from its sales as output VAT. The transitional input tax credit mitigates this initial
diminution of the taxpayer's income by affording the opportunity to offset the losses
incurred through the remittance of the output VAT at a stage when the person is
yet unable to credit input VAT payments.
3. In view of the foregoing, we find petitioner entitled to the 8% transitional input tax
credit provided in Section 105 of the old NIRC. The fact that it acquired the Global
City property under a tax-free transaction makes no difference as prior payment of
taxes is not a pre-requisite.

II. Section 4.105-1 of RR 7-95 is inconsistent with Section 105 of the old NIRC

1. In a resolution dated October 2, 2009, in the related case of Fort Bonifacio, the SC
ruled that Section 4.105-1 of RR 7-95, insofar as it limits the transitional input tax
credit to the value of the improvement of the real properties, is a nullity. Pertinent
portions of the Resolution read:

RR 7-95 is inconsistent with Section 105 insofar as the definition of the term
"goods" is concerned. This is a legislative act beyond the authority of the
CIR and the Secretary of Finance. The rules and regulations that
administrative agencies promulgate, which are the product of a delegated
legislative power to create new and additional legal provisions that have the
effect of law, should be within the scope of the statutory authority granted
by the legislature to the objects and purposes of the law, and should not be
in contradiction to, but in conformity with, the standards prescribed by law.
To be valid, an administrative rule or regulation must conform, not
contradict, the provisions of the enabling law.1âwphi1 An implementing rule
or regulation cannot modify, expand, or subtract from the law it is intended
to implement. Any rule that is not consistent with the statute itself is null and
void.

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of

transitional input tax credit under Section 105 is a nullity. The 8% transitional input tax
credit should not be limited to the value of the improvements on the real properties but
should include the value of the real properties as well.
Refunds or Tax Credit of Input Tax

1. CONTEX CORPORATION vs. HON. COMMISSIONER OF INTERNAL REVENUE

G.R. No. 151135 July 2, 2004

DOCTRINE: Claims for refund are strictly construed against the taxpayer.

FACTS: Petitioner is a domestic corporation engaged in the business of manufacturing

hospital textiles and garments and other hospital supplies for export. Petitioner’s place of
business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered with the Subic
Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the
provisions of Republic Act No. 7227. As an SBMA-registered firm, petitioner is exempt
from all local and national internal revenue taxes except for the preferential tax provided
for in Section 12 (c) of Rep. Act No. 7227. Petitioner also registered with the Bureau of
Internal Revenue (BIR) as a non-VAT taxpayer.

From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and
materials necessary in the conduct of its manufacturing business. The suppliers of these
goods shifted unto petitioner the 10% VAT on the purchased items, which led the
petitioner to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997
and 1998, respectively.

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

Unfazed by the denial, the petitioner filed another application for tax refund/credit, this
time directly with the regional director of BIR Revenue Region No. 4. The second letter
sought a refund or issuance of a tax credit certificate representing erroneously paid input
VAT for the period January 1, 1997 to November 30, 1998.

When no response was forthcoming from the BIR Regional Director, petitioner then
elevated the matter to the Court of Tax Appeals, in a petition for review. Petitioner
stressed that Section 112(A) if read in relation to Section 106(A)(2)(a) of the National
Internal Revenue Code, as amended and Section 12(b) and (c) of Rep. Act No. 7227
would show that it was not liable in any way for any value-added tax.

In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule
that claims for refund are strictly construed against the taxpayer. Since petitioner failed to
establish both its right to a tax refund or tax credit and its compliance with the rules on
tax refund as provided for in the Tax Code, its claim should be denied, according to the
BIR.
CTA ORDERED BIR to REFUND or in the alternative to ISSUE A TAX CREDIT
CERTIFICATE in favor of Contex. The CTA ruled that the petitioner misread Sections
106(A)(2)(a) and 112(A) of the Tax Code. The tax court stressed that these provisions
apply only to those entities registered as VAT taxpayers whose sales are zero-rated.
Petitioner does not fall under this category, since it is a non-VAT taxpayer as evidenced
by the Certificate of Registration of the Subic Bay Freeport Zone and thus it is exempt
from VAT.

CIR then filed a petition for review of the CTA decision by the Court of Appeals. CIR
maintained that the exemption of Contex Corp. under Rep. Act No. 7227 was limited only
to direct taxes and not to indirect taxes such as the input component of the VAT. The
Commissioner pointed out that from its very nature, the value-added tax is a burden
passed on by a VAT registered person to the end users; hence, the direct liability for the
tax lies with the suppliers and not Contex.

ISSUE: Whether Contex Corp may claim a refund on the VAT input erroneously passed
on to its suppliers.

RULING: No. it may not be amiss to re-emphasize that the petitioner is registered as a
NON-VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not
allowed any tax credit on VAT (input tax) previously paid. In fine, even if we are to assume
that exemption from the burden of VAT on petitioner’s purchases did exist, petitioner is
still not entitled to any tax credit or refund on the input tax previously paid as petitioner is
an exempt VAT taxpayer.

Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit
and accordingly refund the petitioner of the VAT erroneously passed on to the latter.
Accordingly, we find that the Court of Appeals did not commit any reversible error of law
in holding that petitioner’s VAT exemption under Rep. Act No. 7227 is limited to the VAT
on which it is directly liable as a seller and hence, it cannot claim any refund or exemption
for any input VAT it paid, if any, on its purchases of raw materials and supplies.

WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of
Appeals as well as its Resolution are AFFIRMED.
 2. Philippine Geothermal v. CIR, 154028, 29 July 2005

Doctrine: Under the principle of solutio indebiti, the government has to restore to
petitioner the sums representing erroneous payments of taxes. It is of no moment whether
NPC had already reimbursed the petitioner or not because in this case, there should have
been no VAT paid at all.

FACTS: Petitioner is a resident foreign corporation licensed by the Securities and

Exchange Commission (SEC) to engage in the exploration, development and exploitation
of geothermal energy and resources in the Philippines. In September 1971, it entered into
a service contract with the National Power Corporation (NPC) to supply steam to the
latter. From September 1995 to February 1996, petitioner billed NPC, Value Added Tax
(VAT) computed at ten percent of the service fee charged on the supply of steam. NPC
did not pay the VAT. To avoid any possible tax deficiency, petitioner remitted VAT
equivalent to 1/11 of the fees received from NPC or ₱39,328,775.41. Petitioner filed an
administrative claim for refund with the Bureau of Internal Revenue on July 10, 1996.
According to petitioner, the sale of steam to NPC is a VAT-exempt transaction under Sec.
103 of the Tax Code.

ISSUE: Whether the petitioner is entitled to the refund.

RULING: Yes. In Maceda v. Macaraig, Jr., the Supreme Court ruled that Republic Act
No. 358 exempts the NPC from all taxes, duties, fees, imposts, charges, and restrictions
of the Republic of the Philippines, and its provinces, cities and municipalities. This
exemption is broad enough to include both direct and indirect taxes the NPC may be
required to pay. To limit the exemption granted the NPC to direct taxes, notwithstanding
the general and broad language of the statute, will be to thwart the legislative intention in
giving exemption from all forms of taxes and impositions, without distinguishing between
those that are direct and those that are not.

The amount of refund should have been based on the VAT Returns filed by the taxpayer.

Petitioner has the legal personality to apply for a refund since it is the one who made the
erroneous VAT payments and who will suffer financially by paying in good faith what it
had believed to be its potential VAT liability.

Under the principle of solutio indebiti, the government has to restore to petitioner the sums
representing erroneous payments of taxes. It is of no moment whether NPC had already
reimbursed petitioner or not because in this case, there should have been no VAT paid
at all.
The presentation of the VAT Returns is considered sufficient to ascertain the amount of
the refund. Thus, upon finding that the supply of steam to NPC is exempt from VAT, the
CTA should have ordered respondent to reimburse petitioner the full amount of
₱39,328,775.41 as erroneously paid VAT.
 3. SAN ROQUE POWER CORPORATION vs. COMMISSIONER OF INTERNAL
REVENUE, G.R. No. 180345

DOCTRINE: Section 112(A) of the NIRC does not limit the definition of "sale" to
commercial transactions in the normal course of business.

FACTS: San Roque Power Corp. never made a commercial sale during the period.

ISSUE: Without a commercial sale, can it claim a refund?

The main issue in this case is whether or not petitioner may claim a tax refund or credit
in the amount of ₱249,397,620.18 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.

After reviewing the records, this Court finds that petitioner’s claim for refund or credit is
justified under Section 112(A) of the NIRC which states that:

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.

To claim refund or tax credit under Section 112(A), petitioner must comply with the
following criteria: (1) the taxpayer is VAT registered;

(2) the taxpayer is engaged in zero-rated or effectively zero-rated sales;

(3) the input taxes are due or paid;

(4) the input taxes are not transitional input taxes;

 (5) the input taxes have not been applied against output taxes during and in the
succeeding quarters;

(6) the input taxes claimed are attributable to zero-rated or effectively zero-rated sales;

(7) for zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and
(2), the acceptable foreign currency exchange proceeds have been duly accounted for
in accordance with BSP rules and regulations;

(8) where there are both zero-rated or effectively zero-rated sales and taxable or
exempt sales, and the input taxes cannot be directly and entirely attributable to any of
these sales, the input taxes shall be proportionately allocated on the basis of sales
volume; and

(9) the claim is filed within two years after the close of the taxable quarter when such
sales were made.

Based on the evidence presented, petitioner complied with the abovementioned

requirements.

The main dispute in this case is whether or not petitioner’s claim complied with the sixth
requirement—the existence of zero-rated or effectively zero-rated sales, to which
creditable input taxes may be attributed. The CTA in Division and en banc denied
petitioner’s claim solely on this ground. The tax courts based this conclusion on the
audited report stating that petitioner made no sale of electricity to NPC in 2002.
Moreover, the affidavit of petitioner contained an admission that no commercial sale of
electricity had been made in favor of NPC in 2002 since the project was still under
construction at that time.

However, upon closer examination of the records, it appears that in 2002, petitioner
carried out a "sale" of electricity to NPC. The fourth quarter return for the year 2002,
which petitioner filed, reported a zero-rated sale in the amount of ₱42,500,000.00. The
affiant stated that although no commercial sale was made in 2002, petitioner produced
and transferred electricity to NPC during the testing period in exchange for the amount
of ₱42,500,000.00, to wit: A: San Roque Power Corporation has had no sale yet during
2002. The ₱42,500,000.00 which was paid to us by Napocor was something similar to a
more cost recovery scheme. The pre-agreed amount would be about equal to our costs
for producing the electricity during the testing period and we just reflected this in our 4th
quarter return as a zero-rated sale. x x x.

The Court is not unmindful of the fact that the transaction described hereinabove was
not a commercial sale. In granting the tax benefit to VAT-registered zero-rated or
effectively zero-rated taxpayers, Section 112(A) of the NIRC does not limit the definition
of "sale" to commercial transactions in the normal course of business. Conspicuously,
Section 106(B) of the NIRC, which deals with the imposition of the VAT, does not limit
the term "sale" to commercial sales, rather it extends the term to transactions that are
"deemed" sale, which are thus enumerated:

SEC 106. Value-Added Tax on Sale of Goods or Properties.

xxxx

(B) Transactions Deemed Sale. —The following transactions shall be deemed sale:

(1) Transfer, use or consumption not in the course of business of goods or

properties originally intended for sale or for use in the course of business;

(2) Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VAT-registered

persons; or

(b) Creditors in payment of debt;

(3) Consignment of goods if actual sale is not made within sixty (60) days
following the date such goods were consigned; and

(4) Retirement from or cessation of business, with respect to inventories of

taxable goods existing as of such retirement or cessation. (Our emphasis.)

After carefully examining this provision, this 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 a transaction is deemed as a sale under the law.
 4. CIR v. Aichi Forging Co. of Asia, Inc., G.R. No. 184823, 6 October 2010

DOCTRINE: A taxpayer is entitled to a refund either by authority of a statute expressly

granting such right, privilege, or incentive in his favor or under the principle of solutio
indebiti requiring the return of taxes erroneously or illegally collected. In both cases, a
taxpayer must prove not only his entitlement to a refund but also his compliance with the
procedural due process as non-observance of the prescriptive periods within which to file
the administrative and the judicial claims would result in the denial of his claim.

● A taxpayer must wait for the decision of the CIR on the refund before filing a judicial
claim with the CTA. Otherwise, the judicial claim may be dismissed for being
premature.

FACTS:

1. Aichi filed, on September 30, 2004, a claim for refund/credit of input VAT for the
period July 1, 2002 to September 30, 2002 with the CIR. On even date, Aichi filed
a Petition for Review with the CTA for the refund/credit of the same input VAT.

2. Respondent Aichi contends that non-observance of the 120-day period given to

the CIR to act on the claim for tax refund/credit in Section 112(D) is not fatal
because what is important is that both claims are filed within the two-year
prescriptive period.

3. The CIR argued that Section 112(A) of the NIRC, which specifically provides for
the period within which a claim for tax refund/ credit, should apply, and the
simultaneous filing of the administrative and the judicial claims contravenes
Section 229 of the NIRC, which requires the prior filing of an administrative claim.

ISSUE: Whether or not judicial and administrative claims for tax refund/credit filed
simultaneously may be granted. (NO)

RULING: Section 112(A) of the NIRC is the applicable provision in determining the start
of the two-year period for claiming a refund/credit of unutilized input VAT, and that
Sections 204(C) and 229 of the NIRC are inapplicable as "both provisions apply only to
instances of erroneous payment or illegal collection of internal revenue taxes." Section
112 is the pertinent provision for the refund/credit of input VAT. Thus, the two-year period
should be reckoned from the close of the taxable quarter when the sales were made.

Aichi’s filing of the judicial claim with the CTA was premature. Section 112(D) of the NIRC
already provides for a specific period (30 days) within which a taxpayer should appeal the
decision or inaction of the CIR.
 5. Commissioner of Internal Revenue v. San Roque Power Corporation
G.R. No. 187485, 12 February 2013

DOCTRINE:

1. A claim for tax refund or credit, like a claim for tax exemption, is construed strictly
against the taxpayer.

2. One of the conditions for a judicial claim of refund or credit under the VAT System is
compliance with the 120+30 day mandatory and jurisdictional periods.

FACTS:

1. San Roque is incorporated to design, construct, erect, assemble, own, commission

and operate power-generating plants and related facilities pursuant to and under
contract with the Government of the Republic of the Philippines, or any subdivision,
instrumentality or agency thereof, or any government owned or controlled
corporation, or other entity engaged in the development, supply, or distribution of
energy.
2. On the construction and development of the San Roque Multi- Purpose Project
which comprises of the dam, spillway and power plant, San Roque allegedly
incurred, excess input VAT in the amount of ₱559,709,337.54. San Roque duly
filed with the BIR separate claims for refund, in the total amount of
₱559,709,337.54 but on March 28, 2003 it amended its quarterly vat return.
3. CIR’s inaction on the subject claims led to the filing by San Roque of the Petition
for Review with the Court of Tax Appeals in Division on April 10, 2003.
4. The Court of Tax Appeals in Division partially granted San Roque’s motion for new
trial and/or reconsideration.
5. The Court of Tax Appeals En Banc affirmed CTA’s division ruling.

ISSUE: Whether the claims of San Roque were prematurely filed.

RULING: Yes, it was prematurely filed. On 10 April 2003, a mere 13 days after it filed its
amended administrative claim with the Commissioner on 28 March 2003, San Roque filed
a Petition for Review. Clearly, San Roque failed to comply with the 120-day waiting period,
the time expressly given by law to the Commissioner to decide whether to grant or deny
San Roque’s application for tax refund or credit. It is indisputable that compliance with the
120-day waiting period is mandatory and jurisdictional.

Failure to comply with the 120-day waiting period violates a mandatory provision of law.
It violates the doctrine of exhaustion of administrative remedies and renders the petition
premature and thus without a cause of action, with the effect that the CTA does not
acquire jurisdiction over the taxpayer’s petition. Philippine jurisprudence is replete with
cases upholding and reiterating these doctrinal principles.

San Roque’s failure to comply with the 120-day mandatory period renders its petition for
review with the CTA void. Well-settled is the rule that tax refunds or credits, just like tax
exemptions, are strictly construed against the taxpayer. The burden is on the taxpayer to
show that he has strictly complied with the conditions for the grant of the tax refund or
credit.

This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine,
this law should be applied exactly as worded since it is clear, plain, and unequivocal. As
this law states, the taxpayer may, if he wishes, appeal the decision of the Commissioner
to the CTA within 30 days from receipt of the Commissioner’s decision, or if the
Commissioner does not act on the taxpayer’s claim within the 120-day period, the
taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day period
 6. San Roque Power Corporation v. Commissioner of Internal Revenue
G.R. No. 203249, 23 July 2018

DOCTRINE:

1. The 120-30 day period is generally mandatory and jurisdictional from the effectivity
of the 1997 NIRC up to the present.
2. By way of exception, judicial claims filed during the window period from December
10, 2003 to October 6, 2010, need not wait for the exhaustion of the 120 day
period.

FACTS:

1. Petitioner San Roque Power is a VAT-Registered taxpayer which was granted a

zero-rating on its sales of electricity to NPC from January 14, 2004 to December
31, 2004.
2. Petitioner then filed on December 22, 2005 and February 27, 2006 two separate
administrative claims for refund of the unutilized input tax for January 1, 2004 to
March 31, 2004 and April 1, 2004 to December 31, 2004.
3. Upon CIR’s inaction, petitioner filed a petition for review with CTA. CTA Division
partially granted its petition, but CTA En Banc noted that the filing of the judicial
claim was prematurely filed.

ISSUE: Whether petitioner timely filed the judicial claim

RULING:
1. Yes. The administrative claim was filed within the two-year prescriptive period, but
the judicial claim was indeed filed prematurely.
2. However, BIR Ruling DA 489-03 is an exception to the mandatory 120-30 day
period laid down in Section 112 of the NIR, which states that taxpayers need not
wait for the lapse of the 120 day period before resorting to judicial relief by way of
Petition for Review, and such BIR Ruling was available during the window of
December 10, 2003 to October 6, 2010.
VAT - Other Cases

1. CIR v. Seagate Technology Phils., G.R. No. 153866, 11 February 2005

DOCTRINE:

1. A VAT-registered enterprise may comply with all requisites to claim a tax refund of
or credit for the input VAT it paid on capital goods it purchased.
2. In short, after compliance with all requisites, such enterprise is entitled to refund or
credit.

FACTS:

1. A VAT-registered enterprise, Seagate Technology Phils. (STP) has a principal

office address at the new Cebu Township One, Special Economic Zone, Barangay
Cantao-an, Naga, Cebu. STP is registered with the Philippine Export Zone
Authority (PEZA) and certified to engage in the manufacture of recording
components primarily used in computers for export. VAT returns were filed for the
period 1 April 1998 to 30 June 1999. With supporting documents, a claim for refund
of VAT input taxes in the amount of 28 million pesos (inclusive of the 12-million
VAT input taxes subject of this Petition for Review) was filed on 4 October 1999.
2. Seagate Technology was claiming a refund for the input tax it paid on the unutilized
capital goods purchased. It asserted that it is exempt from all internal revenue
taxes including VAT since it is registered in and operating from the Special
Economic Zone in Naga, Cebu
3. CIR did not act promptly upon STP's claim so the latter elevated the case to the
CTA for review in order to toll the running of the two-year prescriptive period.
4. On appeal, CIR asserted that by virtue of the PEZA registration alone of STP, the
latter is not subject to the VAT. According to CIR, STP's sales transactions
intended for export are not exempt.

ISSUE: Whether STP, an entity registered and operating within an ecozone is exempt
from all revenue taxes including VAT.

RULING:

1. Yes. Special laws expressly grant preferential tax treatment to business

establishments registered and operating within an ecozone. Ecozone is
considered by law as a separate customs authority. It means that in such a zone
is created the legal fiction of foreign authority although it is a geographical territory
of the Philippines. Under the cross border principle of the VAT system, no VAT
shall be imposed to form part of the cost of the goods destined for consumption
outside of the territorial border of the taxing authority. If exports of goods and
services from the Philippines to a foreign authority are free of VAT, then the same
rule holds for such exports from the national territory to an ecozone.
 2. This is to encourage foreign investments in order to win international markets and
to promote sustainable economic growth.
3. STP is entitled to refund or tax credit. It is entitled to the fiscal incentives and
benefits provided for in either PD 66 or EO 226 as a PEZA-registered enterprise
within a special economic zone. It shall, moreover, enjoy all privileges, benefits,
advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844.
4. 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. As enunciated by the Tax Court, respondent
complied with all the requisites for claiming a VAT refund or credit. First, the
respondent is a VAT-registered entity. Second, the input taxes paid on the capital
goods of the respondent are duly supported by VAT invoices and have not been
offset against any output taxes. 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, STP is entitled to such VAT refund or credit.
STP, 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.
 2. CIR v. Mirant Pagbilao Corp., G.R. 172129, 12 September 2008

DOCTRINE: Unutilized input VAT payments not otherwise used for any internal revenue
tax due the taxpayer must be claimed within two (2) years reckoned from the close of the
taxable quarter when the relevant sales were made pertaining to the input VAT regardless
of whether said tax was paid or not.

FACTS: Mirant Pagbilao Corp. secured the services of Mitsubishi Corp. of Japan but
opted not to immediately pay the VAT component of the progress billings from Mitsubishi
upon its belief that it is zero-rated. This prompted Mitsubishi to advance the VAT
component. Mirant Pagbilao Corp. paid Mitsubishi the VAT component for said progress
billings on 14 April 1998.

On 25 August 1998, Mirant Pagbilao Corp. filed its quarterly VAT return for the second
quarter of 1998 where it reflected an input VAT, including that which was paid on 14 April
1998. Thereafter on 28 December 1999, respondent filed an administrative claim for
refund of unutilized input vat.

Mirant Pagbilao Corp. now claims for refund or tax credit for creditable input VAT
payments.

ISSUE:Has Mirant Pagbilao Corp’s claim for refund or tax credit for creditable input VAT
payments prescribed?

RULING: Yes.

When a zero-rated VAT taxpayer pays its input VAT a year after the pertinent transaction,
said taxpayer only has a year to file a claim for refund or tax credit of the unutilized
creditable input VAT. The reckoning frame would always be the end of the quarter when
the pertinent sales or transaction was made, regardless of when the input VAT was paid.

Mirant Pagbilao Corp. cannot avail itself of either Sec. 204(C) or 229 of the NIRC which,
for the purpose of refund, prescribes that the starting point for the two-year prescriptive
limit for the filing of a claim therefor is two (2) years after the payment of the tax or penalty.
Both provisions apply only to instances of erroneous payment or illegal collection of
internal revenue taxes.

Here, Migrant Pagbilao Corp’s creditable input VAT was not erroneously paid.

Under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can be shifted
or passed on to the buyer, transferee, or lessee of the goods, properties, or services of
the taxpayer. The fact that the subsequent sale or transaction involves a wholly-tax
exempt client, resulting in a zero-rated or effectively zero-rated transaction, does not,
standing alone, deprive the taxpayer of its right to a refund for any unutilized creditable
input VAT, albeit the erroneous, illegal, or wrongful payment angle does not enter the
equation.

Zero-rated transactions generally refer to the export sale of goods and supply of services.
The tax rate is set at zero. 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, but can claim a refund of or a tax credit certificate for the VAT previously
charged by suppliers.

Sec. 112(A) of the NIRC, providing a two-year prescriptive period reckoned from the close
of the taxable quarter when the relevant sales or transactions were made pertaining to
the creditable input VAT, applies to the instant case, and not to the other actions which
refer to erroneous payment of taxes.
 3. Atlas Consolidated v. CIR, G.R. Nos. 141104 & 148763, June 8, 2007

DOCTRINE: “Merchandise purchased by a registered zone enterprise from the

customs territory and subsequently brought into the zone, shall be considered as
export sales and the exporter thereof shall be entitled to the benefits allowed by
law for such transaction.”
FACTS: Atlas Consolidated Mining corporation (petitioner) 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 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 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 interrogation 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 implication
 4. CIR vs. Sony Philippines, Inc., GR No. 178697 dated November 17, 2010

FACTS:

The CIR issued a LOA authorizing certain revenue officers to examine Sony’s books of
accounts and other accounting records regarding revenue taxes for "the period 1997 and
unverified prior years." A preliminary assessment for 1997 deficiency taxes and penalties
was issued by the CIR which Sony protested. Thereafter, acting on the protest, the CIR
issued final assessment notices, the formal letter of demand and the details of
discrepancies.

The CTA-First Division disallowed the deficiency VAT assessment because the
subsidized advertising expense paid by Sony which was duly covered by a VAT invoice
resulted in an input VAT credit. As regards the EWT, the CTA-First Division maintained
the deficiency EWT assessment on Sony’s motor vehicles and on professional fees paid
to general professional partnerships. It also assessed the amounts paid to sales agents
as commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue
Regulations No. 6-85. The CTA-First Division, however, disallowed the EWT assessment
on rental expense since it found that the total rental deposit of ₱10,523,821.99 was
incurred from January to March 1998 which was again beyond the coverage of LOA
19734. Except for the compromise penalties, the CTA-First Division also upheld the
penalties for the late payment of VAT on royalties, for late remittance of final withholding
tax on royalty as of December 1997 and for the late remittance of EWT by some of Sony’s
branches. In sum, the CTA-First Division partly granted Sony’s petition by cancelling the
deficiency VAT assessment but upheld a modified deficiency EWT assessment as well
as the penalties.

ISSUE:

1. Whether the "the period 1997 and unverified prior years," should be understood to
mean the fiscal year ending in March 31, 1998.

2. Whether Sony’s advertising expense could not be considered as an input VAT credit.

RULING:

1. No. A Letter of Authority should cover a taxable period not exceeding one taxable year.
The practice of issuing L/As covering audit of "unverified prior years is hereby prohibited.
If the audit of a taxpayer shall include more than one taxable period, the other periods or
years shall be specifically indicated in the L/A.

On this point alone, the deficiency VAT assessment should have been disallowed.
2. No. The CIR’s argument, that Sony’s advertising expense could not be considered as
an input VAT credit because the same was eventually reimbursed by Sony International
Singapore (SIS), is also erroneous.

The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the
former never incurred any advertising expense. As a result, Sony is not entitled to a tax
credit. At most, the CIR continues, the said advertising expense should be for the account
of SIS, and not Sony.

Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input
VAT credits that should have been realized from the advertising expense of the latter. It
is evident under Section 11019 of the 1997 Tax Code that an advertising expense duly
covered by a VAT invoice is a legitimate business expense.
 5. Commissioner of Internal Revenue v. Negros Consolidated
G.R. No. 212735, 5 December 2018

DOCTRINE: If the sale of the sugar, whether raw or refined, was made by an agricultural
cooperative to its members or non-members, such transaction is still VAT-exempt.

Exemption from the payment of VAT on sales made by the agricultural cooperatives to
members or to non-members necessarily includes exemption from the payment of
"advance VAT"

FACTS:

1. Negros Consolidated Farmers Multi-Purpose Cooperative (COFA) is a multi-purpose

agricultural cooperative organized under Republic Act (RA) No. 6938.

2. COFA's farmer-members deliver the sugarcane produce to be milled and processed in

COFA's name with the sugar mill/refinery. Before the refined sugar is released by the
sugar mill, however, an Authorization Allowing the Release of Refined Sugar (AARRS)
from the BIR is required from COFA. For several instances, upon COFA's application, the
BIR issued the AARRS without requiring COFA to pay advance VAT pursuant to COFA's
tax exemption. As such, COFA was issued Certificates of Tax Exemption dated May 24,
1999 and April 23, 2003 by the BIR.

3. However, from February 3, 2009, the BIR, through the Regional Director of Region 12-
Bacolod City, required as a condition for the issuance of the AARRS the payment of
"advance VAT" on the premise that COFA, as an agricultural cooperative, does not fall
under the term "producer."

4. In a Ruling dated January 11, 2008, the BIR stated that the sales of sugar produce by
COFA to its members and non-members are exempt from VAT pursuant to Section 109(L)
of RA 9337, as implemented by Revenue Regulations (RR) No. 4-2007.

5. COFA filed with the CIR an administrative claim for refund at P11,172,570.00 for the
advance VAT it paid on the 109,535 LKG bags of refined sugar computed at P102.00
VAT per bag for the period covering February 3, 2009 to July 22, 2009.

6. In its Answer, the CIR raised as sole point COFA's alleged failure to comply with the
requisites for recovery of tax erroneously or illegally collected as spelled under Section
229 of RA 8424, specifically, the lack of a prior claim for refund or credit with the CIR.

ISSUES:
1. Whether the sale of refined sugar made by an agricultural cooperative to its members
or non-members is considered VAT-exempt.

2. Whether COFA, at the time of the subject transactions, i.e., from May 12, 2009 to July
22, 2009, is VAT-exempt and therefore entitled to a tax refund for the advance VAT it
paid.

RULING:

1. Yes. There are certain transactions exempt from VAT such as the sale of agricultural
products in their original state, including those which underwent simple processes of
preparation or preservation for the market, such as raw cane sugar.

While the sale of raw sugar, by express provision of law, is exempt from VAT, the sale
of refined sugar, on the other hand, is not so exempted as refined sugar already
underwent several refining processes and as such, is no longer considered to be in its
original state. However, if the sale of the sugar, whether raw or refined, was made by
an agricultural cooperative to its members or non-members, such transaction is still
VAT-exempt. Section 7 of RA 9337 amending Section 109 (L) of RA 8424, the law
applicable at the time material to the claimed tax refund.

2. YES. For an agricultural cooperative to be exempted from the payment of advance

VAT on refined sugar, it must be (a) a cooperative in good standing duly accredited and
registered with the CDA; and (b) the producer of the sugar.

In the case at bar, COFA is a VAT-exempt agricultural cooperative. Having established

that COFA is a cooperative in good standing and duly registered with the CDA and the-
producer of the sugar, its sale then of refined sugar whether sold to members or non-
members, following the express provisions of Section 109(L) of RA 8424, as amended,
is exempt from VAT. As a logical and necessary consequence then of its established VAT
exemption, COFA is likewise exempted from the payment of advance VAT required under
RR No. 13-2008.
 PERCENTAGE TAX
CIR vs. Citytrust Investment Phils., Inc., GR No. 139786, 27 September 2006

FACTS:

28 May 1991

The Court of Tax Appeals (CTA) ordered the Commissioner of Internal

Revenue (CIR) to grant Citytrust Banking Corporation (Citytrust) a refund in the amount
of around Php13.3 million, representing Citytrust’s overpaid income taxes for 1984 and
1985. In its supplemental MR, the CIR alleged an additional ground: that Citytrust had
outstanding deficiency income and business tax liabilities of around Php4.5 million for
1984, thus, the claim for refund was not in order.

CA and SC proceedings

The Court of Appeals (CA) affirmed the CTA’s ruling.

On petition for review on certiorari to the Supreme Court (SC), however, the SC ruled that
there was an apparent contradiction between the claim for refund and the deficiency
assessments against City trust, and that the government could not be held in estoppel
due to the negligence of its officials or employees, especially in cases involving taxes.
For that reason, the case was remanded to the CTA for further reception of evidencefor
Citytrust. CTA proceedings One of the exhibits presented and offered by the CIR in the
CTA hearings was a letter dated 28 February 1995, signed by the CIR, where the CIR
demanded the following sums from Citytrust for 1984:

1. deficiency income tax of around Php3.3 million

2. deficiency gross receipts tax of around Php1.2 million

3. deficiency fixed tax as real estate dealer of Php14,625 Citytrust paid these deficiency
tax liabilities. Thus, Citytrust considered all its deficiency tax liabilities for 1984 fully
settled. The CIR objected to Citytrust’s above allegation, arguing that Citytrust still had
unpaid deficiency income, business and withholding taxes for the year 1985, as
evidenced by Exhibit 5 of the CIR.

16 Oct 1997

The CTA set aside the CIR’s objections and g ranted the refund.
21 May 2001

CA affirmed the CTA’s decision. G.R. No. 150812 On petition for review on certiorari
before the SC, the CIR contended that Citytrust is not entitled to the refund of Php13.3
million as alleged overpaid income taxes for 1984 and 1985. The CIR claims that the CA
erred in not holding that payment by Citytrust of its deficiency income tax was an
admission of its tax liability and, thus, a bar to its entitlement to a refund of income tax for
the same taxable year. Due to the 1985 deficiency assessments, the CIR insists that
Citytrust is not entitled to any tax refund.

ISSUE:

Is Citytrust entitled to a tax refund despite the 1985 deficiency tax assessments

contained in Exhibit 5? In other words, should there be a set off or legal compensation of
the taxes involved?

HELD: No.

In resolving this case, the CTA, as affirmed by the SC, did not allow a set off

or legal compensation of the taxes involved, reasoning:

1. The SC directed the CTA to conduct further proceedings for the reception of
Citytrust’s evidence, and the disposition of the present case. Thus, the evidence
presented should pertain only to the 1984 assessments which were the only assessments
raised as a defense on appeal to the CA and the SC. The assessments in Exhibit 5 of the
CIR were never raised on appeal to the higher courts. Hence, evidence related to said
assessments should not be allowed.

2. The CTA has no jurisdiction to try an assessment case which was never appealed
to it. In hearing a refund case, the CTA cannot hear in the same case an assessment
dispute even if the parties involved are the same parties.
 EXCISE TAX
Chevron Philippines, Inc. vs. CIR, G.R. No. 210836, 1 September 2015

DOCTRINE: Excise tax on petroleum products is essentially a tax on property, the direct
liability for which pertains to the statutory taxpayer (i.e., manufacturer, producer or
importer). Any excise tax paid by the statutory taxpayer on petroleum products sold to
any of the entities or agencies named in Section 135 of the National Internal Revenue
Code (NIRC) exempt from excise tax is deemed illegal or erroneous, and should be
credited or refunded to the payor pursuant to Section 204 of the NIRC. This is because
the exemption granted under Section 135 of the NIRC must be construed in favor of the
property itself, that is, the petroleum products.

FACTS: Chevron sold and delivered petroleum products to CDC in the period from
August 2007 to December 2007.5 Chevron did not pass on to CDC the excise taxes paid
on the importation of the petroleum products sold to CDC in taxable year 2007;6 hence,
on June 26, 2009, it filed an administrative claim for tax refund or issuance of tax credit
certificate in the amount of P6,542,400. Accordingly, petitioner is not entitled to any refund
or issuance of tax credit certificate on excise taxes paid on its importation of petroleum
products sold to CDC pursuant to the doctrine laid down by the Supreme Court in the
Shell case. Chevron sought reconsideration, but the CTA En Banc denied its motion for
that purpose in the resolution dated January 7, 2014. Chevron appealed to the Court, but
the Court (Second Division) denied the petition for review on certiorari through the
resolution promulgated on March 19, 2014 for failure to show any reversible error on the
part of the CTA En Banc. Hence, Chevron has filed the Motion for Reconsideration,
submitting that it was entitled to the tax refund or tax credit.

ISSUE: Whether Chevron was entitled to the tax refund or the tax credit for the excise
taxes paid on the importation of petroleum products that it had sold to CDC in 2007.

RULING: YES. In cases involving excise tax exemptions on petroleum products under
Section 135 of the NIRC, the Court has consistently held that it is the statutory taxpayer,
not the party who only bears the economic burden, who is entitled to claim the tax refund
or tax credit. But the Court has also made clear that this rule does not apply where the
law grants the party to whom the economic burden of the tax is shifted by virtue of an
exemption from both direct and indirect taxes. In which case, such party must be allowed
to claim the tax refund or tax credit even if it is not considered as the statutory taxpayer
under the law. The general rule applies here because Chevron did not pass on to CDC
the excise taxes paid on the importation of the petroleum products, the latter being exempt
from indirect taxes by virtue of Section 24 of Republic Act No. 7916, in relation to Section
15 of Republic Act No. 9400, not because Section 135(c) of the NIRC exempted CDC
from the payment of excise tax.
 DOCUMENTARY STAMP TAX
1. Philippine Banking Corporation v. Commissioner of Internal Revenue
G.R. No. 170574, 30 January 2009

DOCTRINE: "For as long as there is some written memorandum of the fact that the bank
accepted a deposit of a sum of moneyfrom a depositor, the writing constitutes a certificate
of deposit and is subject to DST.”

FACTS: PBC is a domestic corporation duly licensed as a banking institution. In 1996

and1997, PBC offered its "Special/Super Savings Deposit Account" (SSDA) to its
depositors. The SSDA is a form of asavings deposit evidenced by a passbook and earning
a higher interest rate than a regular savings account. On 10January 2000, CIR assessed
a deficiency DST for 1996 and 1997. These assessments were based on the outstanding
balances of the SSDA appearing in the audited financialstatements for the taxable years
1996 and 1997.

PBC insists that the SSDA, being issued in the form of a passbook, cannot be construed
as a certificate of depositsubject to DST under Section 180 of the 1977 NIRC.
PHILIPPINE BANKING CORPORATION points out the differencesbetween the SSDA
and time deposits; that SSDA is a necessary offshoot of the deregulated interest rate
regime inbank deposits. Unlike a time deposit account, SSDA comes in the form of a
passbook, hence need not be formallyrenewed in the manner that a time deposit
certificate has to be formally surrendered and renewed upon maturity.

However, CIR claims that the SSDA is in the nature of a regular savings account since
both types of accounts have thefollowing common features: a passbook; depositors can
make deposits or withdrawals anytime which are not subjectto penalty; and both can have
an Automatic Transfer Agreement (ATA) with the depositor's current or checkingaccount;
and that the applicable provision is Section 180 of the 1977 NIRC and not Section 217 of
the oldNIRC.Section 180 of the 1977 NIRC provides that the following are subject to DST,
to wit: (1) Loan Agreements; (2)Bills of Exchange; (3) Drafts; (4) Instruments and
Securities issued by the Government or any of its instrumentalities;(5) Certificates of
Deposits drawing interest; (6) Orders for the payment of any sum of money otherwise
than at sightor on demand; and (7) Promissory Notes, whether negotiable or non-
negotiable. Therefore, the DST is imposed on allcertificates of deposit drawing interest
without any qualification.

ISSUE: Whether a Special/Super Savings Account is subject to DST under Section 180
of the 1977 NIRC prior to thepassage of RA 9243 in 2004.

HELD: YES. A certificate of deposit as "a written acknowledgment by a bank or banker

of the receipt of a sum of money on deposit which the bank or bankerpromises to pay to
the depositor, to the order of the depositor, or to some other person or his order, whereby
therelation of debtor and creditor between the bank and the depositor is created." A
certificate of deposit is alsodefined as "a receipt issued by a bank for an interest-bearing
time deposit coming due at a specified future date. "DST is imposed on Certificates of
Deposits Bearing Interest including a special savings account evidenced by apassbook.

The argument that Section 180 of the 1977 NIRC imposes the DST only on negotiable
certificates of deposit asimplied from the old tax provision is erroneous. Documentary
stamp tax is a tax on documents, instruments, loan agreements, and papers evidencing
theacceptance, assignment, sale or transfer of an obligation, right or property incident
thereto. A DST is actually anexcise tax because it is imposed on the transaction rather
than on the document. A DST is also levied on the exerciseby persons of certain privileges
conferred by law for the creation, revision, or termination of specific legalrelationships
through the execution of specific instruments. Hence, in imposing the DST, the Court
considers not onlythe document but also the nature and character of the transaction.
 2. Philippine Veterans Bank v. Commissioner of Internal Revenue
G.R. No. 205261, 26 April 2021

DOCTRINE: Documentary Stamp Tax (DST) is a tax on documents, instruments, loan

agreements, and papers evidencing the acceptance, assignment, sale or transfer of an
obligation, right, or property incident thereto. It is levied on the exercise by persons of
certain privileges conferred by law for the creation, revision, or termination of specific
legal relationships though the execution of specific instruments. In its imposition, the
Court considers not only the document but also the nature and character of the
transaction.

FACTS:

a. CIR issued a Formal Letter of Demand requiring Philippine Veterans Bank

(petitioner) to pay deficiency DST on the Special Savings Accounts for taxable year 1996.

b. Petitioner claims that its Special Savings Accounts are not subject to DST citing
Section 180 of the NIRC of 1997 prior to the amendment by R.A. No. 9243. DST is
imposed only on “certificates of deposits drawing interest, orders for the payment of any
sum of money otherwise than at sight or on demand”, and not on those that are payable
at sight or on demand. The Special Savings Accounts of the petitioner are payable at
sight or on demand, considering that they are withdrawable at any time through the
presentation of a passbook, hence exempt from DST.

c. CIR argued that based on Section 180 of the NIRC of 1977 provides that certificates
of deposits drawing interest are subject to DST regardless whether the deposits are
withdrawable through the presentation of a passbook. Hence, the Special Savings
Accounts are considered certificates of deposits drawing interest.

ISSUE: Whether or not the Special Savings Account (SSA) is subject to DST

RULING: The Special Savings Account is subject to DST. In imposing DST, the Court
considers not only the document but also the nature and character of the transaction. The
imposition of DST on bank deposits depends on the classification and features of such
deposits. If the bank deposit is a regular savings deposit (withdrawable on demand), it is
exempt from DST. If it is a time deposit (with maturity period), it is subject to DST. If the
bank deposit combines the features of the two, the same is subject to tax.

While the SSA are withdrawable and evidenced by a passbook, it has been ruled in many
cases that these factors do not detract from the nature of the special savings deposit as
a certificate of deposit drawing interest.
In this case, the Special Savings Account, while not technically considered time deposits,
combine the features of a regular savings deposit and time deposit, thus they are subject
to DST.