CIR v.

Philippine Healthcare Providers

FACTS:

Based on a VAT Ruling No. 231-88 issued by CIR in 1988 it stated that respondent, as a
provider of medical services, is exempt from the VAT coverage. In 1998, RA 8424 or the new Tax
Code was implemented it adopted the provisions of VAT and E-VAT. In 1999, the BIR sent
respondent a preliminary assessment notice for deficiency in its payment of VAT and documentary
stamp taxes for taxable years 1996 and 1997. Respondent filed a protest with the BIR. Petitioner CIR
sent respondent a letter demanding payment of "deficiency VAT" for taxable years 1996 and 1997.
Attached to the demand letter were four (4) assessment notices. Respondent filed another protest
questioning the assessment notices. Petitioner CIR did not take any action on respondent's protests.
Hence, respondent filed with the Court of Tax Appeals (CTA) a petition for review. The CTA withdrew
the VAT assessment. The CIR then filed an appeal with the CA which was denied.

ISSUE:

Whether or not the proportional allocation of tax credits stated in the law applies once the
taxpayer has proven he used the purchased capital goods in both Value-Added Tax (VAT) taxable and
non-VAT taxable business.

HELD:

Yes. In raising these matters in his motion for reconsideration, the CIR put forward the
applicability of Section 104(A) because, essentially, the applicability of the provision boils down to
the question of whether the purchased capital goods which a taxpayer paid input taxes were also
used in a VAT-taxable business, i.e., transactions that were subject to VAT, in order for them to be
refundable/creditable. Once proved that the taxpayer used the purchased capital goods in both VAT
taxable and non-VAT taxable business, the proportional allocation of tax credits stated in the law
necessarily applies. This rule is also embodied in Section 4.106-1 of Revenue Regulation No. 7-95,
entitled Consolidated Value-Added Tax Regulations.

As applied in the present case, even without the CIR raising the applicability of Section
104(A), the CTA should have considered it since all four of Eastern’s VAT returns corresponding to
each taxable quarter of 1996 clearly stated that it earned income from exempt sales, i.e., non-VAT
taxable sales. Eastern’s quarterly VAT returns are matters of record. In fact, Eastern included them in
its formal offer of evidence before the CTA “to prove that [it is] engaged in VAT taxable, VAT exempt,
and VAT zero-rated sales.” By declaring income from exempt sales, Eastern effectively admitted that
it engaged in transactions not subject to VAT. In VATexempt sales, the taxpayer/seller shall not bill
any output tax on his sales to his customers and, corollarily, is not allowed any credit or refund of
the input taxes he paid on his purchases. This non-crediting of input taxes in exempt transactions is
the underlying reason why the Tax Code adopted the rule on apportionment of tax credits under
Section 104(A) whenever a VAT-registered taxpayer engages in both VAT taxable and non-VAT
taxable sales.
CIR v. Toshiba

FACTS:

Toshiba is a domestic corporation principally engaged in the business of manufacturing and

exporting of electric machinery, equipment systems to name a few. It is registered with the
Philippine Economic Zone Authority (PEZA) as an Economic Zone (ECOZONE) export enterprise in the
Laguna. It is also registered as a VAT-taxpayer.

Toshiba filed two separate applications for tax credit/refund of its unutilized input VAT
payments. The Commissioner of Internal Revenue (CIR) opposed the claim for tax refund/credit of
Toshiba.

CTA ordered CIR to refund, or in the alternative to issue a tax credit certificate to Toshiba.

ISSUE:

Whether or not Toshiba could then claim tax credit or refund of input VAT paid on its
purchases of goods, properties, or services, directly attributable to such zero-rated sales.

HELD:

Yes. A VAT-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 of the party to the transaction; A VAT-exempt party 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 VAT; Section
103(q) of the Tax Code of 1977, as amended, relates to VAT-exempt transactions.—It would seem
that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-exempt
entities.

In the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines), this

Court already made such distinction—An exempt transaction, on the one hand, 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 .
. . 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 VAT . . . Section 103(q) of the Tax Code
of 1977, as amended, relied upon by petitioner CIR, relates to VAT-exempt transactions. These are
transactions exempted from VAT by special laws or international agreements to which the
Philippines is a signatory. Since such transactions are not subject to VAT, the sellers cannot pass on
any output VAT to the purchasers of goods, properties, or services, and they may not claim tax
credit/refund of the input VAT they had paid thereon.
Accenture v. CIR

FACTS:

Petitioner Accenture, a VAT registered entity, is a corporation engaged in the business of

providing management consulting, business strategies development, and selling and/or licensing of
software. The monthly and quarterly VAT returns of Accenture show that, notwithstanding its
application of the input VAT credits earned from its zero-rated transactions against its output VAT
liabilities, it still had excess or unutilized input VAT credits.

Accenture then filed with the DOF an administrative claim for the refund. DOF failed to act
on it prompting Accenture to file it to the CIR, where it answered that the sale by Accenture of goods
and services to its clients are not zero-rated transactions and that Accenture has failed to prove that
it is entitled to a refund, because its claim has not been fully substantiated or documented. Ruling
that Accenture’s services would qualify for zero-rating under the Tax Code only if the recipient of the
services was doing business outside of the Philippines.

ISSUE:

Whether or not the recipient of the service must be doing business outside the Philippines
for the transaction to qualify for zero-rating under Section 108(B) of the Tax Code.

HELD:

Yes. The Court ruled that the recipient of the service must be doing business outside the
Philippines for the transaction to qualify for zero-rating under Section 108(B) of the Tax Code.
Upholding the position of the CTA en banc that, because Section 108(B) of the 1997 Tax Code is a
verbatim copy of Section 102(b) of the 1977 Tax Code, any interpretation of the latter holds true for
the former.

A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual
basis of that claim. Tax refunds, like tax exemptions, are construed strictly against the taxpayer.
Accenture failed to discharge this burden. It alleged and presented evidence to prove only that its
clients were foreign entities. However, as found by both the CTA Division and the CTA En Banc, no
evidence was presented by Accenture to prove the fact that the foreign clients to whom petitioner
rendered its services were clients doing business outside the Philippines.
CIR v. Seagate

Facts:

Respondent is a resident foreign corporation duly registered with the Securities and
Exchange Commission to do business in the Philippines and is registered with the Philippine Export
Zone Authority (PEZA). The respondent is VAT-registered entity and filed for the VAT returns. An
administrative claim for refund of VAT input taxes with supporting documents inclusive of the VAT
input taxes is the subject of this Petition for Review. CIR asserts that by virtue of the PEZA
registration alone of respondent, the latter is not subject to the VAT. Consequently, the capital
goods and services respondent has purchased are not considered used in the VAT business, and no
VAT refund or credit is due.

ISSUE:

Whether or not the respondent, as a VAT-Registered PEZA Enterprise and an entity engaged
in an Automatically Zero-rated transactions, is entitled to tax credit or refund.

HELD:

Yes, respondent is entitled to refund or credit. As a PEZA-registered enterprise within a

special economic zone, respondent is entitled to the fiscal incentives and benefit provided for in
either PD 66 or EO 226. It shall, moreover, enjoy all privileges, benefits, advantages or exemptions
under both Republic Act Nos. (RA) 7227 and 7844.

While respondent is not subject to internal revenue laws and regulations it is still entitled to
tax credits. The VAT on capital goods is an internal revenue tax from which respondent 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.

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.
Diaz v. SOF

Petitioners filed this petition for declaratory relief assailing the validity of the impending
imposition of VAT by the BIR on the collections of tollway operators.

Petitioners hold the view that Congress did not, when it enacted the NIRC, 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.

ISSUE:

Whether or not the imposition of VAT on tollway operators amounts to a tax on tax and not
a tax on services.

HELD:

No. VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as
an indirect tax. In indirect taxation, a distinction is made between the liability for the tax and burden
of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on
goods, properties or services to the buyer. In such a case, what is transferred is not the seller’s
liability but merely the burden of the VAT. Thus, the seller remains directly and legally liable for
payment of the VAT, but the buyer bears its burden since the amount of VAT paid by the former is
added to the selling price. Once shifted, the VAT ceases to be a tax and simply becomes part of the
cost that the buyer must pay in order to purchase the good, property or service. Consequently, VAT
on tollway operations is not really a tax on the tollway user, but on the tollway operator.

Under Section 105 of the Code, VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the seller of services, who in this case is
the tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the
tollway user as part of the toll fees.