38 CIR Vs SEA GATE

Digest for Tax 2
latter filed a Petition for Review with the

CIR vs SEAGATE
CTA.
DOCTRINE/S: CTA’s decision: Granted the claim for

Business companies registered in and refund.
operating from the Special Economic Zone
in Naga, Cebu -- like herein respondent -- CA’s decision: Affirmed the grant of refund
are entities exempt from all internal revenue in the reduced amount. Seagate had availed
taxes and the implementing rules relevant itself only of the fiscal incentives under
thereto, including the value-added taxes or Executive Order No. (EO) 226 (otherwise
VAT. Although export sales are not deemed known as the Omnibus Investment Code of
exempt transactions, they are nonetheless 1987), not of those under both Presidential
zero-rated. Hence, in the present case, the Decree No. (PD) 66, as amended, and
distinction between exempt entities and Section 24 of RA 7916. Respondent was,
exempt transactions has little significance, therefore, considered exempt only from the
because the net result is that the taxpayer is payment of income tax when it opted for the
not liable for the VAT. Respondent, a VAT- income tax holiday in lieu of the 5%
registered enterprise, has complied with all preferential tax on gross income earned. As
requisites for claiming a tax refund of or a VAT-registered entity, though, it was still
credit for the input VAT it paid on capital subject to the payment of other national
goods it purchased internal revenue taxes, like the VAT.
FACTS: ISSUE:
Respondent, Seagate Technology is Whether or not Seagate Technology is
registered with the Philippine Export Zone entitled to the refund or issuance of Tax
Authority (PEZA) under Presidential Decree Credit Certificate in the amount of
No. 66, as amended, to engage in the P12,122,922.66 representing its unutilized
manufacture of recording components input VAT paid on capital goods purchased
primarily used in computers for export. Also for the period April 1, 1998 to June 30,
a VAT-registered entity, it filed VAT 1999.
returns for the period 1 April 1998 to 30
June 1999. However, on 4 October 1999 it RULING:
filed an administrative claim for refund of Yes, it is entitled to a refund of or credit for
VAT input taxes in the amount of input VAT. Respondent, as a PEZA-
P28,369,226.38 representing the value of the registered enterprise within a special
taxes of the capital goods and services it had economic zone, is entitled to the fiscal
purchased. This application for refund was incentives and benefits provided for in PD
not acted upon by the CIR on the ground 66. It shall also enjoy all privileges, benefits,
that Seagate failed to prove that it was advantages or exemptions under both
entitled to the refund/credit sought so the Republic Act Nos. (RA) 7227 and 7844.
Page 1 of 4
Digest for Tax 2
registered persons shall pay the VAT on a

Special laws expressly grant preferential tax monthly basis.
treatment to business establishments
registered and operating within an ecozone, Nature of the VAT and the Tax Credit
which by law is considered as a separate Method
customs territory. As such, respondent is The Tax Credit Method relies on invoices
exempt from all internal revenue taxes, wherein an entity can credit against or
including the VAT, and regulations subtract from the VAT charged on its sales
pertaining thereto. It has opted for or outputs the VAT paid on its purchases,
the income tax holiday regime, instead of the inputs and imports. If at the end of a taxable
5% preferential tax regime. As a matter of quarter the output taxes charged by a seller
law and procedure, its registration status are equal to the input taxes passed on by the
entitling it to such tax holiday can no longer suppliers, no payment is required. It is when
be questioned. Its sales transactions intended the output taxes exceed the input taxes that
for export may not be exempt, but like its the excess has to be paid. If, however, the
purchase transactions, they are zero-rated. input taxes exceed the output taxes, the
No prior application for the effective zero excess shall be carried over to the
rating of its transactions is necessary. Being succeeding quarter or quarters. Should the
VAT-registered and having satisfactorily input taxes result from zero-rated or
complied with all the requisites for claiming effectively zero-rated transactions or from
a tax refund of or credit for the input VAT the acquisition of capital goods, any excess
paid on capital goods purchased, respondent over the output taxes shall instead be
is entitled to VAT refund or credit. refunded to the taxpayer or credited against
other internal revenue taxes.
NOTES:
Preferential Tax Treatment Under Indirect tax may be shifted or passed on to
Special Laws the buyer, transferee or lessee of the goods,
Petitioner enjoys preferential tax treatment. properties or services. While the liability is
It is not subject to internal revenue laws and imposed on one person, the burden may be
regulations and is even entitled to tax passed on to another.
credits. The VAT on capital goods is an
internal revenue tax from which petitioner as “Output taxes” refer to the VAT due on the
an entity is exempt. Although the sale or lease of taxable goods, properties or
transactions involving such tax are not services by a VAT-registered or VAT-
exempt, petitioner as a VAT-registered registrable person.
person, however, is entitled to their credits.
By “input taxes” is meant the VAT due from
A “VAT-registered person” is a taxable or paid by a VAT-registered person in the
person who has registered for VAT purposes course of trade or business on the
under §236 of the Tax Code. VAT- importation of goods or local purchases of
Page 2 of 4
Digest for Tax 2
goods or services, including the lease or use Under the cross-border principle of the
of property from a VAT-registered person. VAT system being enforced by the Bureau
of Internal Revenue (BIR), no VAT shall be
Destination Principle imposed to form part of the cost of goods
Under this principle, goods and services are destined for consumption outside of the
taxed only in the country where these are territorial border of the taxing authority. If
consumed. Thus, exports are zero-rated, but exports of goods and services from the
imports are taxed. Philippines to a foreign country are free of
the VAT, then the same rule holds for such
Distinction between Exempt exports from the national territory — except
Transaction and Exempt Party specifically declared areas — to an ecozone.
An exempt transaction involves goods or An ecozone — indubitably a geographical
services which, by their nature, are territory of the Philippines — is, however,
specifically listed in and expressly exempted regarded in law as foreign soil.
from the VAT under the Tax Code, without
regard to the tax status –VAT-exempt or not
— of the party to the transaction. Indeed,
such transaction is not subject to the VAT,
but the seller is not allowed any tax refund
of or credit for any input taxes paid.
An exempt party, on the other hand, is a
person or entity granted VAT exemption
under the Tax Code, a special law or an
international agreement to which the
Philippines is a signatory, and by virtue of
which its taxable transactions become
exempt from the VAT. Such party is also
not subject to the VAT, but may be allowed
a tax refund of or credit for input taxes paid,
depending on its registration as a VAT or
non-VAT taxpayer.
A “customs territory” means the national

territory of the Philippines outside of the
proclaimed boundaries of the ecozones,
except those areas specifically declared by
other laws and/or presidential proclamations
to have the status of special economic zones
and/or free ports.
Page 3 of 4
Digest for Tax 2
Page 4 of 4

38 CIR Vs SEA GATE

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38 CIR Vs SEA GATE

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Digest for Tax 2

latter filed a Petition for Review with the

DOCTRINE/S: CTA’s decision: Granted the claim for

registered persons shall pay the VAT on a

A “customs territory” means the national

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