ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS

SAMSON S. ALCANTARA and ED VINCENT S. ALBANO, vs THE

HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE
SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and
HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,

FACTS:

G.R. No. 168056

ABAKADA GURO filed a petition for prohibition, questioning the
constitutionality of Sections 4, 5 and 6 of RA 9337 which amended Sections
106,107 and 108 of the NIRC. The three sections imposed a 10% VAT on sale
of goods and properties, importation of goods and sales of services and use
or lease of properties.
The said provisions contained a uniform proviso authorizing the president to
raise the VAT rate to 12% effective January 1, 2006 if the following requisites
are satisfied: (1) VAT collection as percentage of the GDP of the previous year
exceeds 2 4/5 % or (2) National government deficit as a percentage of GDP
of the previous year exceeds 1 ½ %.

They claim that such constitutes abandonment by Congress of its exclusive

authority to fix the rate of taxes.

G.R. No. 168207

Senator Pimentel filed a petition for certiorari likewise assailing the same
provisions of RA 9337. He contends that the increase in the VAT rate to 12%,
being contingent to conditions, violates the due process clause as it imposes
an unfair and additional tax burden on the people. That the 12% is ambiguous
because it does not state if the rate would be returned to 10% if the conditions
are no longer satisfied and that the rate is unfair and unreasonable.

G.R. No. 168461

Association of Pilipinas Shell Dealers Inc. assailed Sections 8 and 12 of RA
9337.

Section 8, amending Section 110 (A)(2) of the NIRC, requiring

that the input tax on depreciable goods shall be amortized over a
60-month period, if the acquisition, excluding the VAT
components, exceeds One Million Pesos (P1, 000,000.00);

Section 8, amending Section 110 (B) of the NIRC, imposing a 70%

limit on the amount of input tax to be credited against the output
tax; and
 Section 12, amending Section 114 (c) of the NIRC, authorizing the
Government or any of its political subdivisions, instrumentalities
or agencies, including GOCCs, to deduct a 5% final withholding
tax on gross payments of goods and services, which are subject
to 10% VAT under Sections 106 (sale of goods and properties)
and 108 (sale of services and use or lease of properties) of the
NIRC.

They are contending that the provisions are unconstitutional for being
arbitrary, oppressive, excessive and confiscatory.

G.R. No. 168463

The House of Representatives led by Rep. Francis Escudero questioned
the constitutionality of the law on the ground that Sections 4,5 and 6
constitutes undue delegation of legislative power, that the insertions by
the Bicameral Conference Committee violates the constitution which
provides that all appropriation, revenue or tariff bills shall originate
exclusively in the house of representatives.

G.R. No. 168730

Governor Garcia alleged the unconstitutionality of the law on the ground
that the limitation on the creditable input tax allows VAT registered
establishments to retain a portion of the taxes they collect, violating the
principle that tax collection should solely be allocated for public purpose
and expenditures.

ISSUES:

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106,

107 and 108 of the NIRC, violate the following provisions of the
Constitution

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and

110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section
114(C) of the NIRC, violate the following provisions of the Constitution

RULING:
No.
(1.)

A. No Undue Delegation of Legislative Power

The powers which Congress is prohibited from delegating are those
which are strictly, or inherently and exclusively, legislative. Purely
legislative power, which can never be delegated, has been described as
the authority to make a complete law complete as to the time when it shall
take effect and as to whom it shall be applicable and to determine the
expediency of its enactment.

The rule is that in order that a court may be justified in holding a statute
unconstitutional as a delegation of legislative power, it must appear that the
power involved is purely legislative in nature that is, one appertaining
exclusively to the legislative department.

As held in Edu v Ericta:

To determine whether or not there is an undue delegation of legislative

power, the inquiry must be directed to the scope and definiteness of the
measure enacted. The legislative does not abdicate its functions
when it describes what job must be done, who is to do it, and
what is the scope of his authority. For a complex economy, that may
be the only way in which the legislative process can go forward. A
distinction has rightfully been made between delegation of
power to make the laws which necessarily involves a discretion
as to what it shall be, which constitutionally may not be done,
and delegation of authority or discretion as to its execution to
be exercised under and in pursuance of the law, to which no valid
objection can be made. The Constitution is thus not to be regarded
as denying the legislature the necessary resources of flexibility and
practicability.

In this case, it is not a delegation of legislative power. It is simply a

delegation of ascertainment of facts upon which enforcement and
administration of the increase rate under the law is contingent. The
legislature has made the operation of the 12% rate effective January 1, 2006,
contingent upon a specified fact or condition. It leaves the entire operation
or non-operation of the 12% rate upon factual matters outside of the
control of the executive. No discretion would be exercised by the President.
It is the ministerial duty of the President to immediately impose the
12% rate upon the existence of any of the conditions specified by
Congress. This is a duty which cannot be evaded by the President.

B. The 12% Increase VAT Rate Does Not Impose an Unfair and
Unnecessary Additional Tax Burden
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of
the two conditions set forth therein are satisfied, the President shall increase
the VAT rate to 12%. The provisions of the law are clear. It does not provide
for a return to the 10% rate nor does it empower the President to so
revert if, after the conditions are no longer satisfied.

(2.)

A. Due Process and Equal Protection Clauses

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a
limitation on the amount of input tax that may be credited against the output
tax. It states, in part: [P]rovided, that the input tax inclusive of the input VAT
carried over from the previous quarter that may be credited in every quarter
shall not exceed seventy percent (70%) of the output VAT

Petitioners claim that the contested sections impose limitations on the amount
of input tax that may be claimed. In effect, a portion of the input tax that has
already been paid cannot now be credited against the output tax.

Petitioners argument is not absolute. It assumes that the input tax

exceeds 70% of the output tax, and therefore, the input tax in excess of 70%
remains uncredited. However, to the extent that the input tax is less than
70% of the output tax, then 100% of such input tax is still creditable.

The excess input tax, if any, is retained in a business books of

accounts and remains creditable in the succeeding quarter/s. This is
explicitly allowed by Section 110(B), which provides that if the input tax
exceeds the output tax, the excess shall be carried over to the succeeding
quarter or quarters. In addition, Section 112(B) allows a VAT-registered
person to apply for the issuance of a tax credit certificate or refund for any
unused input taxes, to the extent that such input taxes have not been applied
against the output taxes. Such unused input tax may be used in payment of
his other internal revenue taxes.

Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input
tax. Thus, a person can credit his input tax only up to the extent of 70% of
the output tax. In layman’s term, the value-added taxes that a
person/taxpayer paid and passed on to him by a seller can only be
credited up to 70% of the value-added taxes that is due to him on a
taxable transaction. There is no retention of any tax collection because the
person/taxpayer has already previously paid the input tax to a seller, and the
seller will subsequently remit such input tax to the BIR. The party directly
liable for the payment of the tax is the seller.

The input tax is not a property or a property right within the constitutional
purview of the due process clause. A VAT-registered persons’ entitlement
to the creditable input tax is a mere statutory privilege. The distinction
between statutory privileges and vested rights must be borne in mind for
persons have no vested rights in statutory privileges. The state may change
or take away rights, which were created by the law of the state, although it
may not take away property, which was vested by virtue of such rights.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory,

Section 8 of R.A. No. 9337, amending Section 110(A) of the NIRC.

The section imposes a 60-month period within which to amortize the creditable
input tax on purchase or importation of capital goods with acquisition cost
of P1 Million pesos, exclusive of the VAT component. Such spread out only
poses a delay in the crediting of the input tax. Petitioners argument is
without basis because the taxpayer is not permanently deprived of his
privilege to credit the input tax.

With regard to the 5% creditable withholding tax imposed on payments

made by the government for taxable transactions, Section 12 of R.A.
No. 9337, which amended Section 114 of the NIRC merely provides a method
of collection, or as stated by respondents, a more simplified VAT withholding
system. The government in this case is constituted as a withholding
agent with respect to their payments for goods and services.

Prior to its amendment, Section 114(C) provided for different rates of value-
added taxes to be withheld -- 3% on gross payments for purchases of goods;
6% on gross payments for services supplied by contractors other than by
public works contractors; 8.5% on gross payments for services supplied by
public work contractors; or 10% on payment for the lease or use of properties
or property rights to nonresident owners. Under the present Section 114(C),
these different rates, except for the 10% on lease or property rights payment
to nonresidents, were deleted, and a uniform rate of 5% is applied.

The Court observes, however, that the law the used the word final. In tax
usage, final, as opposed to creditable, means full. Thus, it is provided in
Section 114(C): final value-added tax at the rate of five percent (5%).

In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax
Reform Act of 1997), the concept of final withholding tax on income was
explained, his means that taxable transactions with the government
are subject to a 5% rate, which constitutes as full payment of the tax
payable on the transaction. This represents the net VAT payable of the
seller. The other 5% effectively accounts for the standard input VAT (deemed
input VAT), in lieu of the actual input VAT directly or attributable to the taxable
transaction.

B. Uniformity and Equitability of Taxation

Here, the tax law is uniform as it provides a standard rate of 0% or

10% (or 12%) on all goods and services. Sections 4, 5 and 6 of R.A. No.
9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide
for a rate of 10% (or 12%) on sale of goods and properties, importation of
goods, and sale of services and use or lease of properties. These same sections
also provide for a 0% rate on certain sales and transaction.

R.A. No. 9337 is also equitable. The law is equipped with a threshold
margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of
goods or services with gross annual sales or receipts not
exceeding P1,500,000.00.

C. Progressivity of Taxation

The VAT is an antithesis of progressive taxation. By its very nature, it is

regressive. The principle of progressive taxation has no relation with the VAT
system inasmuch as the VAT paid by the consumer or business for every goods
bought or services enjoyed is the same regardless of income.

In other words, the VAT paid eats the same portion of an income,
whether big or small. The disparity lies in the income earned by a person
or profit margin marked by a business, such that the higher the income or
profit margin, the smaller the portion of the income or profit that is eaten by
VAT. A converso, the lower the income or profit margin, the bigger the part
that the VAT eats away. At the end of the day, it is really the lower income
group or businesses with low-profit margins that is always hardest hit.

The Constitution does not really prohibit the imposition of indirect

taxes, like the VAT. What it simply provides is that Congress shall
"evolve a progressive system of taxation."
Tolentino v Sec. of Finance

FACTS:
Petitioners (Tolentino, Kilosbayan, Inc., Philippine Airlines, Roco, and
Chamber of Real Estate and Builders Association) seek reconsideration of the
Court’s previous ruling dismissing the petitions filed for the declaration of
unconstitutionality of R.A. No. 7716, the Expanded Value-Added Tax Law.
Petitioners contend that the R.A. did not “originate exclusively” in the HoR as
required by Article 6, Section 24 of the Constitution. The Senate allegedly did
not pass it on second and third readings, instead passing its own version.
Petitioners contend that it should have amended the House bill by striking out
the text of the bill and substituting it with the text of its own bill, so as to
conform with the Constitution.

Issue:
1. WON RA 7716 originated exclusively from the House of Rep. in
accordance with sec 24, art 6 of Consti
2. WON the Senate bill violated the “three readings on separate days”
requirement of the Consti
3. WON RA 7716 violated sec 26(1), art 6 - one subject, one title rule.

NOTE: This case was filed by PAL because before the EVAT Law, they were
exempt from taxes. After the passage of EVAT, they were already included.
PAL contended that neither the House or Senate bill provided for the removal
of the exemption from taxes of PAL and that it was inly made after the
meeting of the Conference Committee w/c was not expressed in the title of
RA 7166

Held:
(1) YES! Petition is unmeritorious. The enactment of the Senate bill has
not been the first instance where the Senate, in the exercise of its
power to propose amendments to bills (required to originate in the
House), passed its own version. An amendment by substitution
(striking out the text and substituting it), as urged by petitioners,
concerns a mere matter of form, and considering the petitioner has not
shown what substantial difference it would make if Senate applied such
substitution in the case, it cannot be applied to the case at bar. While
the aforementioned Constitutional provision states that bills must
“originate exclusively in the HoR,” it also adds, “but the Senate may
propose or concur with amendments.” The Senate may then propose
an entirely new bill as a substitute measure. Petitioners erred in
assuming the Senate version to be an independent and distinct bill.
Without the House bill, Senate could not have enacted the Senate bill,
 as the latter was a mere amendment of the former. As such, it did not
have to pass the Senate on second and third readings.
(2) NO. The Pres. certified that the Senate bill was urgent. Presidential
certification dispensed the requirement not only of printing but also
reading the bill in 3 separate days. In fact, the Senate accepted the
Pres. Certification
(3) No. Court said that the title states that the purpose of the statute is to
expand the VAT system and one way of doing this is to widen its base
by withdrawing some of the exemptions granted before. It is also in
the power of Congress to amend, alter, repeal grant of franchises for
operation of public utility when the common good so requires.

One subject rule is intended to prevent surprise upon Congress members and
inform people of pending legislation. In the case of PAL, they did not know of
their situation not because of any defect in title but because they might have
not noticed its publication until some event calls attention to its existence.

ADD INFO:
Petitioners question the signing of the President on both bills, to support their
contention that such are separate and distinct. The President certified the bills
separately only because the certification had to be made of the version of the
same revenue bill which AT THE MOMENT was being considered.

Petitioners question the power of the Conference Committee to insert new

provisions. The jurisdiction of the conference committee is not limited to
resolving differences between the Senate and the House. It may propose an
entirely new provision, given that such are germane to the subject of the
conference, and that the respective houses of Congress subsequently approve
its report.

Petitioner PAL contends that the amendment of its franchise by the withdrawal
of its exemption from VAT is not expressed in the title of the law, thereby
violating the Constitution. The Court believes that the title of the R.A. satisfies
the Constitutional Requirement.

Petitioners claim that the R.A. violates their press freedom and religious
liberty, having removed them from the exemption to pay VAT. Suffice it to say
that since the law granted the press a privilege, the law could take back the
privilege anytime without offense to the Constitution. By granting exemptions,
the State does not forever waive the exercise of its sovereign prerogative.

Lastly, petitioners contend that the R.A. violates due process, equal protection
and contract clauses and the rule on taxation. Petitioners fail to take into
consideration the fact that the VAT was already provided for in E.O. No. 273
long before the R.A. was enacted. The latter merely EXPANDS the base of the
tax. Equality and uniformity in taxation means that all taxable articles or kinds
of property of the same class be taxed at the same rate, the taxing power
having authority to make reasonable and natural classifications for purposes
of taxation. It is enough that the statute applies equally to all persons, forms
and corporations placed in s similar situation
Tolentino vs. Secretary of Finance,
(235 SCRA 630, 249 SCRA 628)

August 25, 1994; October 30, 1995

Facts:
There are various suits challenging the constitutionality of RA 7716 on various
grounds. The value-added tax (VAT) is levied on the sale, barter or exchange
of good sand properties as well as on the sale or exchange of services. It is
equivalent to 10% of the gross selling price or gross value in money of goods
or properties sold, bartered or exchanged or of the gross receipts from the
sale or exchange of services. Republic Act No. 7716 seeks to widen the tax
base of the existing VAT system and enhance its administration by amending
the National Internal Revenue Code. Among the Petitioners was the Philippine
Press Institute which claim that R.A.7716 violates their press freedom and
religious liberty, having removed them from the exemption to pay Value
Added Tax. It is contended by the PPI that by removing the exemption of the
press from the VAT while maintaining those granted to others, the law
discriminates against the press. At any rate, it is averred, "even non-
discriminatory taxation of constitutionally guaranteed freedom is
unconstitutional." PPI argued that the VAT is in the nature of a license tax.

Issue:
1. Whether or not the purpose of the VAT is the same as that of a license tax.
2. WON the enactment of R.A. 7716 is unconstitutional considering that the
House of representatives passed H. NO. 11197 and sent to the senate however
the senate passed S. NO. 1630 and with their own version on it. Thus, as
alleged by petitioner a clear violation of Art. VI, sec. 24 of the constitution.

Ruling:
1. A license tax, which, unlike an ordinary tax, is mainly for regulation. Its
imposition on the press is unconstitutional because it lays a prior restraint on
the exercise of its right. Hence, although its application to others, such those
selling goods, is valid, its application to the press or to religious groups, such
as the Jehovah’s Witnesses, in connection with the latter’s sale of religious
books and pamphlets, is unconstitutional. As the U.S. Supreme Court put it,
―it is one thing to impose a tax on income or property of a preacher. It is
quite another thing to exact a tax on him for delivering a sermon.‖
The VAT is, however, different.
It is not a license tax.

It is not a tax on the exercise of a privilege, much less a constitutional right.

It is imposed on the sale, barter, lease or exchange of goods or properties or
the sale or exchange of services and the lease of properties purely for revenue
purposes. To subject the press to its payment is not to burden the exercise of
its right any more than to make the press pay income tax or subject it to
general regulation is not to violate its freedom under the Constitution.

2. The contention has no merit.

The enactment of S. No. 1630 is not the only instance in which the Senate
proposed an amendment to a House revenue bill by enacting its own version
of a revenue bill. On at least two occasions during the Eighth Congress, the
Senate passed its own version of revenue bills, which, in consolidation with
House bills earlier passed, became the enrolled bills.
Thus, the enactment of S. No. 1630 is not the only instance in which the
Senate, in the exercise of its power to propose amendments to bills required
to originate in the House, passed its own version of a House revenue measure.
It is noteworthy that, in the particular case of S. No. 1630, petitioners
Tolentino and Roco, as members of the Senate, voted to approve it on second
and third readings.
xxx
Art. VI, §24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing increase of the public
debt, bills of local application, and private bills shall originate exclusively in
the House of Representatives, but the Senate may propose or concur with
amendments.
The addition of the word "exclusively" in the Philippine Constitution and the
decision to drop the phrase "as on other Bills" in the American version,
according to petitioners, shows the intention of the framers of our Constitution
to restrict the Senate's power to propose amendments to revenue bills.
The history of this provision does not support this contention. The supposed
indicia of constitutional intent are nothing but the relics of an unsuccessful
attempt to limit the power of the Senate.
Considering the defeat of the proposal, the power of the Senate to propose
amendments must be understood to be full, plenary and complete "as on other
Bills." Thus, because revenue bills are required to originate exclusively in the
House of Representatives, the Senate cannot enact revenue measures of its
own without such bills. After a revenue bill is passed and sent over to it by the
House, however, the Senate certainly can pass its own version on the same
subject matter. This follows from the coequality of the two chambers of
Congress.
CIR vs. Magsaysay Lines – GR No. 146984, July 28, 2006

Facts:
Pursuant to a government program of privatization, NDC decided to sell to
private enterprise all of its shares in its wholly-owned subsidiary the National
Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares
and five (5) of its ships.

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

On 28 September 1988, the implementing Contract of Sale was executed

between NDC, on one hand, and Magsaysay Lines, Baliwag Navigation, and
FIM Limited, on the other. Paragraph 11.02 of the contract stipulated that
“[v]alue-added tax, if any, shall be for the account of the PURCHASER.” By
this time, a formal request for a ruling on whether or not the sale of the vessels
was subject to VAT had already been filed with the Bureau of Internal Revenue
(BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan, presumably in
behalf of private respondents.

In January of 1989, private respondents through counsel received VAT Ruling

No. 568-88 dated 14 December 1988 from the BIR, holding that the sale of
the vessels was subject to the 10% VAT. The ruling cited the fact that NDC
was a VAT-registered enterprise, and thus its “transactions incident to its
normal VAT registered activity of leasing out personal property including sale
of its own assets that are movable, tangible objects which are appropriable or
transferable are subject to the 10% [VAT].”

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

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

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

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

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

Held:
No, The conclusion that the sale was not in the course of trade or business,
which the CIR does not dispute before this Court, should have definitively
settled the matter. Any sale, barter or exchange of goods or services not in
the course of trade or business is not subject to VAT. Accordingly, the Court
rules that given the undisputed finding that the transaction in question was
not made in the course of trade or business of the seller, NDC that is, the sale
is not subject to VAT pursuant to Section 99 of the Tax Code, no matter how
the said sale may hew to those transactions deemed sale as defined under
Section 100.
PHILIPPINE ACETYLENE CO. INC vs. CIR

FACTS:
Philippine Acetylene Co. Inc. is engaged in the manufacture and sale of oxygen
and acetylene gases. It sold its products to the National Power Corporation
(Napocor), an agency of the Philippine Government, and the Voice of America
(VOA), an agency of the United States Government. When the commissioner
assessed deficiency sales tax and surcharges against the company, the
company denied liability for the payment of tax on the ground that both
Napocor and VOA are exempt from taxes.

ISSUE:
WON Philippine Acetylene Co. is liable for tax.

HELD:
YES. Sales tax are paid by the manufacturer or producer who must make a
true and complete return of the amount of his, her or its gross monthly sales,
receipts or earnings or gross value of output actually removed from the factory
or mill, warehouse and to pay the tax due thereon. The tax imposed by Section
186 of the Tax Code is a tax on the manufacturer or producer and not a tax
on the purchaser except probably in a very remote and inconsequential sense.
Accordingly, its levy on the sales made to tax- exempt entities like the Napocor
is permissible.

On the other hand, there is nothing in the language of the Military Bases
Agreement to warrant the general exemption granted by General Circular V-
41 (1947). Thus, the expansive construction of the tax exemption is void; and
the sales to the VOA are subject to the payment of percentage taxes under
Section 186 of the Tax Code. Therefore, tax exemption is strictly construed
and exemption will not be held to conferred unless the terms under which it
is granted clearly and distinctly show that such was the intention.
COMMISSIONER OF INTERNAL REVENUE- AMERICAN RUBBER
COMPANY

The sales tax is by law imposed directly, not on the thing sold, but on the act
(sale) of the
manufacturer, producer or importer, who is exclusively made liable for its
timely payment. There is no proof that the tax paid by plaintiff is the very
money paid by its customers. Where the tax money paid by the plaintiff came
from is really no concern of the Government, but solely a matter between the
plaintiff and its customers. Anyway, once recovered, the plaintiff must hold
the refund taxes in trust for the individual purchasers who advanced payment
thereof, and whose names must appear in plaintiff's records.

FACTS:
Petitioner, American Rubber Company, a domestic corporation, from January
1, 1955 to December 1, 1958, was engaged in producing rubber from its
approximately 900 hectare rubber tree plantation, which it owned and
operated in Latuan, Isabela, City of Basilan. Its products, known in the market
as Preserved Latex, Pale Crepe No. 1, Pale Crepe No. 2, Ribbed Smoked
Sheets Nos. 1 and 2, Flat Bark Rubber, 2X Brown Crepe and 3X Brown Crepe.

Petitioner during the said period sold its foregoing rubber products locally and
as prescribed by the respondent's regulations declared same for tax purposes
which respondent accordingly assessed.

Petitioner paid, under protest, the corresponding sales taxes thereon claiming
exemption therefrom under Section 188 (b) of the National Internal Revenue
Code.
It is further stipulated that the sales tax collected from petitioner American
Rubber Company on the local sales of its rubber products, following Internal
Revenue General Circulars Nos. 431 and 440, had been separately itemized
and billed by petitioner Company in the invoices issued to the customers, that
paid both the value of the rubber articles and the separately itemized sales
tax,
from January 1, 1955 to August 2, 1957.

After paying under protest, the petitioner claimed refund of the sales taxes
paid by it on the ground that under section 188, paragraph b, of the Internal
Revenue Code, as amended, its rubber products were agricultural products
exempt from sales tax, and upon refusal of the Commissioner of Internal
Revenue, brought the case on appeal to the Court of Tax Appeals.

The respondent Commissioner interposed defenses, denying that petitioner's

products were agricultural ones within the exemption and argued that the
sales tax having been passed to the buyers during the period that elapsed
from January 1, 1955 to August 2, 1957, the petitioner did
not have personality to demand, sue for and recover the aforesaid sales taxes,
plus interest.

In its decision, now under appeal, the Tax Court held Preserved Latex, Flat
Bark Rubber, and 3X
Brown Crepe to be agricultural products, "because the labor employed in the
processing thereof is agricultural labor", and hence, the sales of such products
were exempt from sales tax, but declared Pale Crepe No. 1, Ribbed Smoked
Sheets Nos. 1 and 3, as well as 2X Brown Crepe (which is obtained from rolling
excess pieces of Smoked Sheets) to be manufactured products, sales of which
were subject to the tax. It upheld the Revenue Commissioner's stand that
petitioner Company was not entitled to recover the sales tax that had been
separately billed to its customers, and paid by the latter.

ISSUE:
Whether plaintiff is or is not entitled to recover the sales tax paid by it, but
passed on to and paid by the buyers of its products.

RULING:
The Court of Tax Appeals held that the plaintiff Company is not entitled to
recover the sales tax paid by it from January, 1955 to August 2, 1957, because
during that period the plaintiff had separately invoiced and billed the
corresponding sales tax to the buyers of its products. In so holding, the Tax
Court relied on our decisions in Medina vs. City of Baguio, 91 Phil. 854;
Mendoza, Santos & Co. vs. Municipality of Meycawayan, L-6069-6070, April
30, 1954 (94 Phil. 1047); and Zosimo Rojas & Bros. vs. City of Cavite, L-
10730, May 27, 1958.

The basic ruling is that of Medina vs. City of Baguio, supra, where this Court
affirmed the ruling of
the court of First Instance to the effect that —

"The amount collected from the theatergoers as additional price of

admission tickets is not theproperty of plaintiffs or any of them. It is
paid by the public. If anybody has the right to claim it, it is those who
paid it. Only owners of property has the right to claim said property. The
cine owner acted as mere agents of the city in collecting additional price
charged in the sale of admission tickets." (Medina vs. City of Baguio, 91
Phil. 854) (Emphasis supplied)

We agree with the plaintiff-appellant that the Medina ruling is not applicable
to the present case, since the municipal taxes therein imposed were taxes on
the admission tickets sold, so that, in effect, they were levies upon the
theatergoers who bought them; so much so that (as the decision expressly
ruled) the tax was collected by the theater owners as agents of the respective
municipal treasurers. This does not obtain in the case at bar. The Medina ruling
was merely followed in Rojas & Bros. vs. Cavite, supra; and in Mendoza,
Santos & Co. vs. Municipality of Meycawayan, 94 Phil. 1047.

By contrast with the municipal taxes involved in the preceding cases, the sales
tax is by law imposed directly, not on the thing sold, but on the act (sale) of
the manufacturer, producer or importer (Op. of the Secretary of Justice, June
15, 1946; 47 C.J.S., p. 1141), who is exclusively made liable for its timely
payment. There is no proof that the tax paid by plaintiff is the very money
paid by its customers. Where the tax money paid by the plaintiff came from
is really no concern of the Government, but solely a matter between the
plaintiff and its customers. Anyway, once recovered, the plaintiff must hold
the refund taxes in trust for the individual purchasers who advanced payment
thereof, and whose names must appear in plaintiff's records.

Moreover, the separate billing of the sales tax in appellant's invoices was a
direct result of the respondent Commissioner's General Circular No. 440,
providing that — if a manufacturer, producer, or importer, in fixing the gross
selling price of an article sold by him, has included an amount intended to
cover the sales tax in the gross selling price of the article, the sales tax shall
be based on the gross selling price less the amount intended to cover the tax,
if the same is billed to the purchaser as a separate item in the invoice.

In other words, the separate itemization of the sales tax in the invoices was
permitted to avoid the taxpayer being compelled to pay a sales tax on the tax
itself. It does not seem either just or proper that a step suggested by the
Internal Revenue authorities themselves to protect the taxpayer from paying
a double tax should now be used to block his action to recover taxes collected
without legal sanction.

Finally, a more important reason that militates against extensive and

indiscriminate application of the Medina vs. City of Baguio ruling is that it
would tend to perpetuate illegal taxation; for the individual customers to
whom the tax is ultimately shifted will ordinarily not care to sue for its
recovery, in view of the small amount paid by each and the high cost of
litigation for the reclaiming of an illegal tax. In so far, therefore, as it favors
the imposition, collection and retention of illegal taxes, and encourages a
multiplicity of suits, the Tax Court's ruling under appeal violates morals
and public policy.
G.R. No. L-31092 February 27, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. JOHN
GOTAMCO & SONS, INC. and THE COURT OF TAX APPEALS, respondents.

Facts:
The World Health Organization (WHO), an international organization, entered
into a Host Agreement with the Republic of the Philippines on July 22, 1951.
In the agreement, WHO’S assets, income and other properties shall be exempt
from all direct and indirect taxes. WHO decided to construct a building to
house its own offices, as well as the other United Nations offices stationed in
Manila. In inviting bids for the construction of the building, WHO informed the
bidders that the building to be constructed belonged to an international
organization with diplomatic status and thus exempt from the payment of all
fees, licenses, and taxes, and that therefore their bids "must take this into
account and should not include items for such taxes, licenses and other
payments to Government agencies." The construction contract was awarded
to respondent John Gotamco & Sons, Inc. on February 10, 1958.

On June 3, 1958, the Commissioner of Internal Revenue stated that "as the
3% contractor's tax is not a direct nor an indirect tax on the WHO, but a tax
that is primarily due from the contractor, the same is not covered by . . . the
Host Agreement."
On January 2, 1960, the WHO issued a certification that the bid of Gotamco
should be exempted from any taxes in connection with the construction of the
WHO office building because taxes or fees in connection with the construction
of the building is an indirect tax to WHO.

On January 17, 1961, the Commissioner of Internal Revenue sent a letter of

demand to Gotamco demanding payment of P 16,970.40, representing the
3% contractor's tax plus surcharges on the gross receipts it received from the
WHO in the construction of the latter's building.
Respondent Gotamco appealed the Commissioner's decision to the Court of
Tax Appeals, which after trial rendered a decision, in favor of Gotamco and
reversed the Commissioner's decision.

Issues:

a) Whether or not the 3% contractor’s tax assessed on Gotamco is an

“indirect tax”.
b) Whether respondent John Gotamco & Sons, Inc. should pay the 3%
contractor's tax under Section 191 of the National Internal Revenue Code on
the gross receipts it realized from the construction of the World Health
Organization office building in Manila.
RULING:

a) NO.

The Petitioner’s position is that the contractor's tax "is in the nature of an
excise tax which is a charge imposed upon the performance of an act, the
enjoyment of a privilege or the engaging in an occupation. . . It is a tax due
primarily and directly on the contractor, not on the owner of the building.
Since this tax has no bearing upon the WHO, it cannot be deemed an indirect
taxation upon it."

The Court agreed with the Court of Tax Appeals in rejecting this contention of
the petitioner. The CA stated: The contractor's tax is of course payable by the
contractor but in the last analysis it is the owner of the building that shoulders
the burden of the tax because the same is shifted by the contractor to the
owner as a matter of self-preservation. Thus, it is an indirect tax. And it is an
indirect tax on the WHO because, although it is payable by the petitioner, the
latter can shift its burden on the WHO. In the last analysis it is the WHO that
will pay the tax indirectly through the contractor and it certainly cannot be
said that 'this tax has no bearing upon the World Health Organization.

b) YES.

The Host Agreement, in specifically exempting the WHO from "indirect taxes,"
contemplates taxes which, although not imposed upon or paid by the
Organization directly, form part of the price paid or to be paid by it. The 3%
contractor's tax would be within this category and should be viewed as a form
of an "indirect tax" On the Organization, as the payment thereof or its
inclusion in the bid price would have meant an increase in the construction
cost of the building.
APPEALED DECISION AFFIRMED.
CONTEX CORPORATION, petitioner, vs. HON. COMMISSIONER OF
INTERNAL REVENUE, respondent. G.R. No. 151135, July 2, 2004

Topic: forms of escape from taxation

Facts:
 Contex Corporation 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 under
Certificate of Registration RDO Control No. 95-180-000133.

 Contex 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.

 Contex, on the belief that it was exempt from all national and local
taxes, including VAT, pursuant to RA 7227, it filed two applications for
tax refund or tax credit of the VAT it paid. Revenue district officer of
BIR RDO No. 19, denied the first application letter.

 Petitioner filed another application for tax refund/credit, this time

directly with the regional director of BIR Revenue Region No. 4. When
no response was forthcoming from the BIR Regional Director, petitioner
then elevated the matter to the Court of Tax Appeals. The CTA ordered
to refund or in the alternative to issue a tax credit certificate in favor of
Petitioner the sum of P683,061.90, representing erroneously paid input
VAT.

 The CIR filed a petition for review of the decision of the CTA before the
CA. Respondent CIR maintained that the exemption of Contex Corp.
under RA 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. CA reversed the decision
of CTA.
Issues:
1. Whether or not the VAT exemption embodied in RA 7227 does not apply
to petitioner as a purchaser.
2. Whether or not petitioner is entitled to a tax refund on its purchases of
supplies and raw materials for 1997 and 1998.

Argument of Contex: petitioner argues that the appellate courts restrictive

interpretation of petitioners VAT exemption as limited to those covered by
Section 107 of the Tax Code is erroneous and devoid of legal basis. It contends
that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate
that no local and national taxes shall be imposed upon SBFZ-registered firms
and hence, said law should govern the case. Petitioner calls our attention to
regulations issued by both the SBMA and BIR clearly and categorically
providing that the tax exemption provided for by Rep. Act No.
7227 includes exemption from the imposition of VAT on purchases of supplies
and materials.

Argument of CIR: while RA7227 does grant tax exemptions, such grant is
not all-encompassing but is limited only to those taxes for which aSBFZ-
registered business may be directly liable. Hence, SBFZ locators are not
relieved from the indirect taxes that may be shifted to them by a VAT-
registered seller.

Ruling:
1. Petitioners VAT exemption under Rep. Act No. 7227 is limited to the
VAT on which it is directly liable as a seller. The VAT is an indirect
tax. As such, the amount of tax paid on the goods, properties or services
bought, transferred, or leased may be shifted or passed on by the seller,
transferor, or lessor to the buyer, transferee or lessee.

 A direct tax, such as the income tax, primarily taxes an individual’s

ability to pay based on his income or net wealth,
 An indirect tax, such as the VAT, is a tax on consumption of goods,
services, or certain transactions involving the same. The VAT, thus,
forms a substantial portion of consumer expenditures.

Further, in indirect taxation, there is a need to distinguish between the liability

for the tax and the burden of the tax. The amount of tax paid may be shifted
or passed on by the seller to the buyer. What is transferred in such instances
is not the liability for the tax, but the tax burden. In adding or including the
VAT due to the selling price, the seller remains the person primarily and legally
liable for the payment of the tax. What is shifted only to the intermediate
buyer and ultimately to the final purchaser is the burden of the tax.

 VAT Exemption. An exemption means that the sale of goods or

properties and/or services and the use or lease of properties is not
subject to VAT (output tax) and the seller is not allowed any tax credit
on VAT (input tax) previously paid.
 Zero-rated Sales. These are sales by VAT-registered persons
which are subject to 0% rate, meaning the tax burden is not passed on
to the purchaser. 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 purchases of goods, properties or
services related to such zero-rated sale shall be available as tax credit
or refund in accordance with these regulations.

While it is true that the petitioner should not have been liable for the
VAT inadvertently passed on to it by its supplier since such is a zero-
rated sale on the part of the supplier, the petitioner is not the proper
party to claim such VAT refund.

Since the transaction is deemed a zero-rated sale, petitioners supplier may

claim an Input VAT credit with no corresponding Output VAT liability.
Congruently, no Output VAT may be passed on to the petitioner.

2. Contex cannot claim any refund or exemption for any input VAT it
paid, if any, on its purchases of raw materials and supplies. 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.

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 petitioners 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.
Commissioner of Internal Revenue vs. Seagate Technology
(Philippines)
G.R. NO. 153866, February 11, 2005

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

CTA’s decision: Granted the claim for refund.

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

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

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

Special laws expressly grant preferential tax treatment to business

establishments registered and operating within an ecozone, which by law is
considered as a separate customs territory. As such, respondent is exempt
from all internal revenue taxes, including the VAT, and regulations pertaining
thereto. It has opted for the income tax holiday regime, instead of the 5%
preferential tax regime. As a matter of law and procedure, its registration
status entitling it to such tax holiday can no longer be questioned. Its sales
transactions intended for export may not be exempt, but like its purchase
transactions, they are zero-rated. No prior application for the effective zero
rating of its transactions is necessary. Being VAT-registered and having
satisfactorily complied with all the requisites for claiming a tax refund of or
credit for the input VAT paid on capital goods purchased, respondent is entitled
to VAT refund or credit.

NOTES:

Preferential Tax Treatment Under Special Laws

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

A “VAT-registered person” is a taxable person who has registered for VAT

purposes under §236 of the Tax Code. VAT-registered persons shall pay the
VAT on a monthly basis.

Nature of the VAT and the Tax Credit Method

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

Indirect tax may be shifted or passed on to the buyer, transferee or lessee of

the goods, properties or services. While the liability is imposed on one person,
the burden may be passed on to another.

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

Destination Principle
Under this principle, goods and services are taxed only in the country where
these are consumed. Thus, exports are zero-rated, but imports are taxed.

Distinction between Exempt Transaction and Exempt Party

An exempt transaction involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code,
without regard to the tax status –VAT-exempt or not — of the party to the
transaction. Indeed, such transaction is not subject to the VAT, but the seller
is not allowed any tax refund of or credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT

exemption under the Tax Code, a special law or an international agreement
to which the Philippines is a signatory, and by virtue of which its taxable
transactions become exempt from the VAT. Such party is also not subject to
the VAT, but may be allowed a tax refund of or credit for input taxes paid,
depending on its registration as a VAT or non-VAT taxpayer.

A “customs territory” means the national territory of the Philippines outside of

the proclaimed boundaries of the ecozones, except those areas specifically
declared by other laws and/or presidential proclamations to have the status
of special economic zones and/or free ports.

Under the cross-border principle of the VAT system being enforced by the
Bureau of Internal Revenue (BIR), no VAT shall be imposed to form part of
the cost of goods destined for consumption outside of the territorial border of
the taxing authority. If exports of goods and services from the Philippines to
a foreign country are free of the VAT, then the same rule holds for such
exports from the national territory — except specifically declared areas — to
an ecozone.

An ecozone — indubitably a geographical territory of the Philippines — is,

however, regarded in law as foreign soil.
THE COMMISIONER OF INTERNAL REVENUE, Petitioner, vs. ACESITE
(PHILIPPINES) HOTEL CORPORATION, Respondent.

FACTS:
1. Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel.
It leases 6,768.53 square meters of the hotel’s premises to the Philippine
Amusement and Gaming Corporation for casino operations and caters food
and beverages to PAGCOR’s casino patrons through the hotel’s restaurant
outlets.

2.For the period January 96 to April 1997, Acesite incurred VAT amounting to
P30,152,892.02 from its rental income and sale of food and beverages to
PAGCOR during said period. Acesite tried to shift the said taxes to PAGCOR by
incorporating it in the amount assessed to PAGCOR but the latter refused to
pay the taxes on account of its tax exempt status.1awphi1.net

3. PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT
while the latter paid the VAT to the Commissioner of Internal Revenue.

4.However, Acesite belatedly arrived at the conclusion that its transaction with
PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity.

5. Acesite filed an administrative claim for refund with the CIR but the latter
failed to resolve the same. Acesite filed a petition with the Court of Tax Appeals

CTA Decision: Petitioner is subject to zero percent tax insofar as its gross
income from rentals and sales to PAGCOR, a tax exempt entity by
virtue of a special law. Accordingly, the amounts of P21,413,026.78 and
P8,739,865.24, representing the 10% EVAT on its sales of food and services
and gross rentals, respectively from PAGCOR shall be refunded to the
petitioner..

CA Decision: PAGCOR was not only exempt from direct taxes but was
also exempt from indirect taxes like the VAT and consequently, the
transactions between respondent Acesite and PAGCOR were "effectively zero-
rated" because they involved the rendition of services to an entity exempt
from indirect taxes.
ISSUE/S:

1. Whether PAGCOR’s tax exemption privilege includes the indirect tax of

VAT to entitle Acesite to zero percent (0%) VAT rate;
2. Whether the zero percent (0%) VAT rate under then Section 102 (b)(3)
of the Tax Code (now Section 108 (B)(3) of the Tax Code of 1997) legally
applies to Acesite.
HELD:
1. Yes. PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter
an exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently
provides exemption.

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term
"Corporation" or operator refers to PAGCOR. Although the law does not
specifically mention PAGCOR’s exemption from indirect taxes, PAGCOR is
undoubtedly exempt from such taxes because the law exempts from
taxes persons or entities contracting with PAGCOR in casino
operations. Although, differently worded, the provision clearly exempts
PAGCOR from indirect taxes. In fact, it goes one step further by granting
tax exempt status to persons dealing with PAGCOR in casino
operations. The unmistakable conclusion is that PAGCOR is not liable for the
P30,152,892.02 VAT and neither is Acesite as the latter is effectively subject
to zero percent rate under Sec. 108 B (3). R.A. 8424. (Emphasis supplied.)

2. The manner of charging VAT does not make PAGCOR liable to said
tax
It is true that VAT can either be incorporated in the value of the goods,
properties, or services sold or leased, in which case it is computed as 1/11 of
such value, or charged as an additional 10% to the value. Verily, the seller or
lessor has the option to follow either way in charging its clients and customer.
In the instant case, Acesite followed the latter method, that is, charging an
additional 10% of the gross sales and rentals. Be that as it may, the use of
either method, and in particular, the first method, does not denigrate the fact
that PAGCOR is exempt from an indirect tax, like VAT.

3. Yes. VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by
Acesite, the latter is not liable for the payment of it as it is exempt in this
particular transaction by operation of law to pay the indirect tax. Such
exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code,
as amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services – (a) Rate and base of tax –
There shall be levied, assessed and collected, a value-added tax equivalent to
10% of gross receipts derived by any person engaged in the sale of services
x x x; Provided, that the following services performed in the Philippines by
VAT-registered persons shall be subject to 0%

(3) Services rendered to persons or entities whose exemption under

special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero (0%) rate
(emphasis supplied).

4. Acesite paid VAT by mistake

Considering the foregoing discussion, there are undoubtedly erroneous
payments of the VAT pertaining to the effectively zero-rate transactions
between Acesite and PAGCOR. Verily, Acesite has clearly shown that it paid
the subject taxes under a mistake of fact, that is, when it was not aware that
the transactions it had with PAGCOR were zero-rated at the time it made the
payments.

Solutio indebiti applies to the Government

Tax refunds are based on the principle of quasi-contract or solutio indebiti and
the pertinent laws governing this principle are found in Arts. 2142 and 2154
of the Civil Code. When money is paid to another under the influence of a
mistake of fact, that is to say, on the mistaken supposition of the existence of
a specific fact, where it would not have been known that the fact was
otherwise, it may be recovered.

Action for refund strictly construed; Acesite discharged the burden of

proof
Since an action for a tax refund partakes of the nature of an exemption, which
cannot be allowed unless granted in the most explicit and categorical
language, it is strictly construed against the claimant who must discharge such
burden convincingly.
Fort Bonifacio Dev't Corp v CIR GR No. 173425; September 4, 2012

Doctrine:
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.

Facts:
Petitioner Fort Bonifacio Development Corporation (FBDC) is a duly registered
domestic corporation engaged in the development and sale of real property.
The Bases Conversion Development Authority (BCDA), a wholly owned
government corporation created under Republic Act (RA) No. 7227, owns 45%
of petitioner’s issued and outstanding capital stock; while the Bonifacio Land
Corporation, a consortium of private domestic corporations, owns the
remaining 55%.

In 1995 by virtue of RA 7227 and Executive Order No. 40,6 dated December
8, 1992, petitioner purchased from the national government a portion of the
Fort Bonifacio reservation, now known as the Fort Bonifacio Global City (Global
City).

On January 1, 1996, RA 77168 restructured the Value-Added Tax (VAT)

system by amending certain provisions of the old National Internal Revenue
Code (NIRC). 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. On the same year, petitioner started selling Global City lots to
interested buyers.

For the first quarter of 1997, petitioner generated a total amount of ₱

3,685,356,539.50 from its sales and lease of lots, on which the output VAT
payable was ₱ 368,535,653.95.14 Petitioner paid the output VAT by making
cash payments to the BIR totalling ₱ 359,652,009.47 and crediting its
unutilized input tax credit on purchases of goods and services of ₱
8,883,644.48.15

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.
Issue:
Whether petitioner is entitled to a refund of ₱ 359,652,009.47 erroneously
paid as output VAT for the first quarter of 1997.

Law applied:
Section 105 of the old NIRC reads:
SEC. 105. Transitional input tax credits. – A person who becomes liable to
value-added tax or any person who elects to be a VAT-registered person shall,
subject to the filing of an inventory as prescribed by regulations, be allowed
input tax on his beginning inventory of goods, materials and supplies
equivalent to 8% of the value of such inventory or the actual value-added tax
paid on such goods, materials and supplies, whichever is higher, which shall
be creditable against the output tax.

Ruling:
Yes.
Contrary to the view of the CTA and the CA, there is nothing in the above-
quoted provision to indicate 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, as proposed in the Dissent 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. Clearly, limiting the value of the beginning
inventory only to goods, materials, and supplies, where prior taxes were paid,
was not the intention of the law. Otherwise, it would have specifically stated
that the beginning inventory excludes goods, materials, and supplies where
no taxes were paid.

Moreover, 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.40 Tax credit,
on the other hand, is an amount subtracted directly from one’s total tax
liability.41 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. In fact, in Commissioner
of Internal Revenue v. Central Luzon Drug Corp.,42 we declared that prior
payment of taxes is not required in order to avail of a tax credit.

In this case, when petitioner realized that its transitional input tax credit was
not applied in computing its output VAT for the 1st quarter of 1997, it filed a
claim for refund to recover the output VAT it erroneously or excessively paid
for the 1st quarter of 1997. In filing a claim for tax refund, petitioner is simply
applying its transitional input tax credit against the output VAT it has paid.
Hence, it is merely availing of the tax credit incentive given by law to first time
VAT taxpayers. As we have said in the earlier case of Fort Bonifacio, the
provision on transitional input tax credit was enacted to benefit first time VAT
taxpayers by mitigating the impact of VAT on the taxpayer.45 Thus, contrary
to the view of Justice Carpio, the granting of a transitional input tax credit in
favor of petitioner, which would be paid out of the general fund of the
government, would be an appropriation authorized by law, specifically Section
105 of the old NIRC.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision dated
July 7, 2006 of the Court of Appeals in CA-G.R. SP No. 61436 is REVERSED
and SET ASIDE. Respondent Commissioner of Internal Revenue is ordered to
refund to petitioner Fort Bonifacio Development Corporation.