G.R. No.

151135

July 2, 2004

CONTEX CORPORATION, petitioner, vs. HON. COMMISSIONER OF INTERNAL REVENUE, respondent.

As an SBMA-registered firm, Contex is exempt from all local and national internal revenue taxes except for the preferential tax provided for in Section 12 (c)5 of Rep. Act No. 7227. Cpntex also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under a Certificate of Registration Contex purchased various supplies and materials necessary in the conduct of its manufacturing business. The suppliers of these goods shifted unto Contex the 10% VAT on the purchased items, which led the Contex 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, Contex filed two applications with RDO for tax refund or tax credit of the VAT it paid. Revenue District Officer DENIED. Regional Director NO RESPONSE. CTA PARTIAL GRANT. CTA ruled that Contex misread Sections 106(A)(2)(a) and 112(A) of the Tax Code. These provisions apply only to those entities registered as VAT taxpayers whose sales are zero-rated. Contex does not fall under this category, since it is a non-VAT taxpayer as evidenced by the Certificate of Registration. Nonetheless, the CTA held that the Contex is exempt from the imposition of input VAT on its purchases of supplies and materials. It pointed out that under Bases Conversion and Development Act of 1992 (RA 7227), all that Contex is required to pay as a SBFZ-registered enterprise is a 5% preferential tax. The CTA also disallowed all refunds of input VAT paid prior to June 29, 1997 for being barred by the twoyear prescriptive period under Section 229 of the Tax Code. The tax court also limited the refund only to the input VAT paid on the supplies and materials directly used in manufacture of its goods. It struck down all claims for input VAT paid on maintenance, office supplies, freight charges, and all materials and supplies shipped or delivered to the Contex s Makati and Pasay City offices. CA REVERSED. CIR maintained that the exemption of Contex 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. Court of Appeals held that the exemption from duties and taxes on the importation of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its implementing rules covers only "the VAT imposable under Section 107 of the [Tax Code], which is a direct liability of the importer, and in no way includes the value-added tax of the seller-exporter the burden of which was passed on to the importer as an additional costs of the goods."

SC - DENIED

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. Unlike a direct tax, such as the income tax, which primarily taxes an individuals 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. As earlier pointed out, 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. Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the transaction can have preferential treatment in the following ways: (a) 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.20 This is a case wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of the goods or properties). The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to any input tax on such purchase despite the issuance of a VAT invoice or receipt.21 (b) 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.22 Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only removes the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by the exempt firms business or non-retail customers.

It is for this reason that a sharp distinction must be made between zero-rating and exemption in designating a value-added tax.23 Apropos, the Contexs claim to VAT exemption in the instant case for its purchases of supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all national and local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.24 On this point, Contex rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the respondent. In fact, Contex is registered as a NON-VAT taxpayer per Certificate of Registration25 issued by the BIR. As such, it is exempt from VAT on all its sales and importations of goods and services. While it is true that the Contex 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 Contex is not the proper party to claim such VAT refund. Since the transaction is deemed a zero-rated sale, Contexs supplier may claim an Input VAT credit with no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner. Contex 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 petitioners 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 Contexs suppliers who are the proper parties to claim the tax credit and accordingly refund the Contex 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 petitioners 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.

G.R. No. 150154. August 9, 2005 COMMISSIONER OF INTERNAL REVENUE, Petitioners, vs. TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., Respondent.
Toshiba registered with the Philippine Economic Zone Authority (PEZA) as an ECOZONE Export Enterprise and it registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer and a withholding agent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996, reporting input VAT in the amount of P13,118,542.007 and P5,128,761.94,8 respectively, or a total of P18,247,303.94. It alleged that the said input VAT was from its purchases of capital goods and services which remained unutilized since it had not yet engaged in any business activity or transaction for which it may be liable for any output VAT. Toshiba filed with (DOF) applications for tax credit/refund of its unutilized input VAT. To toll the running of the two-year prescriptive period for judicially claiming a tax credit/refund Toshiba, filed with the CTA a Petition for Review. CTA ordered CIR to refund, or in the alternative, to issue a tax credit certificate to Toshiba in the amount of P16,188,045.44. CA AFFIRMED.

ISSUE: is Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods and services? YES SC An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%). It would seem that CIR failed to differentiate between VAT-exempt transactions from VAT-exempt entities.

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

CIR, bases its argument on VAT-exempt transactions. 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. This cannot apply to transactions of Toshiba because although the transactions covered by special laws may be exempt from VAT, those falling under Presidential Decree No. 66 (EPZA) are not. This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-exempt entities because ECOZONES are 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. The Philippine VAT system adheres to the Cross Border Doctrine, according to which, 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. 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 ten percent (10%) VAT. No output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. The VAT treatment of sales to it, however, varies depending on whether the supplier from the Customs Territory is VAT-registered or not.

Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be treated as export sales. If such sales are made by a VATregistered supplier, they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-registered supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. Zero-rating of export sales primarily intends to benefit the exporter (i.e., the supplier from the Customs Territory), who is directly and legally liable for the VAT, making it internationally competitive by allowing it to credit/refund the input VAT attributable to its export sales. Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT. Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VATexempt entity that could not have engaged in a VAT-taxable business, this Court still believes, given the particular circumstances of the present case, that it is entitled to a credit/refund of its input VAT. The sale of capital goods by suppliers from the Customs Territory to Toshiba took place way before the issuance of RMC No. 74-99, and when the old rule was accepted and implemented by no less than the BIR itself. Since Toshiba opted to avail itself of the income tax holiday under Exec. Order No. 226, as amended, then it was deemed subject to the ten percent (10%) VAT. It

was very likely therefore that suppliers from the Customs Territory had passed on output VAT to Toshiba, and the latter, thus, incurred input VAT. Accordingly, this Court gives due respect to and adopts herein the CTAs findings that the suppliers of capital goods from the Customs Territory did pass on output VAT to Toshiba and the amount of input VAT which Toshiba could claim as credit/refund.

G.R. No. 125355

March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents.
BIR issued an assessment to COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988. COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its operations in the amount of P6,077.00. COMASERCO filed with the BIR, a letter-protest objecting to the finding of deficiency VAT COMASERCO filed with the Court of Tax Appeals a petition for review contesting the Commissioner's assessment. COMASERCO asserted that the services it rendered to Philamlife were on a "no-profit, reimbursement-of-cost-only" basis. It was not engaged in the business of providing services to Philamlife and its affiliates. COMASERCO was established to ensure operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT. CTA favored CIR. CA reversed. CA anchored its decision on the ratiocination in another tax case involving the same parties, where it was held that COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its affiliates. COMASERCO was not engaged in business of providing services

to Philamlife and its affiliates. So COMASERCO was not liable to pay VAT for it was not engaged in the business of selling services. ISSUE: Is COMASERCO was engaged in the sale of services, and thus liable to pay VAT? YES. to "engage in business" and to "engage in the sale of services" are two different things. The services rendered by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the value added by the performance of the service. It is immaterial whether profit is derived from rendering the service. even a non-stock, non-profit, organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity regardless of whether or not the entity is profitoriented. "sale of services" as the "performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking or project." BIR Ruling: a domestic corporation that provided technical, research, management and technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without any intention realizing profit, any income or profit generated by the entity in the conduct of its activities was subject to income tax. There is no merit to COMARSERCO s contention that the Court of Appeals' decision in CA-G.R. No. 34042, declaring the COMASERCO as not engaged in business and not liable for the payment of fixed and percentage taxes, binds CIR. The issue in CA-G.R. No. 34042 is different from the present case, which involves COMASERCO's liability for VAT.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP (HK) and NATIONAL DEVELOPMENT COMPANY, respondents. 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. Among the stipulated terms and conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on the value of the vessels. Magsaysay Lines) offered to buy the shares and the vessels. contract stipulated that "[v]alue-added tax, if any, shall be for the account of the PURCHASER. 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. 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] MAGLINES filed an Appeal and Petition for Refund with the CTA, followed by a Supplemental Petition for Review. 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. the sale of the vessels could not be "deemed sale," and thus subject to VAT, as the transaction did not fall under the enumeration of transactions deemed sale. CA reversed at first. While sale was an isolated transaction, not made in the course of NDC s regular trade or business, the transaction fell within the classification of those "deemed sale" since the sale of the vessels together with the NMC shares brought about a change of ownership in NMC. CA reconsidered. the "change of ownership of business" must be a consequence of the "retirement from or cessation of business" by the owner of the goods, SC: Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT payments, and the subsequent disquisitions by the lower courts on the applicability of Section 100 of the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant.

VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the basis of a fixed percentage.15 It is the end user of consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the end users by the providers of these goods or services16 who in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the final consumer (or output VAT).17 The final purchase by the end consumer represents the final link in a production chain that itself involves several transactions and several acts of consumption. The VAT system

assures fiscal adequacy through the collection of taxes on every level of consumption,18 yet assuages the manufacturers or providers of goods and services by enabling them to pass on their respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire tax liability. Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayers role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations,19 the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business.
"carrying on business" does not mean the performance of a single disconnected act, but means conducting, prosecuting and continuing business by performing progressively all the acts normally incident thereof; while "doing business" conveys the idea of business being done, not from time to time, but all the time. "Course of business" is what is usually done in the management of trade or business. "course of business" or "doing business" connotes regularity of activity. NDC s sale was an isolated transaction. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property. Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT.

[G.R. No. 146749. June 10, 2003] CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS, and COMMISSIONER OF INTERNAL REVENUE, respondents.
CBC paid P12,354,933.00 as gross receipts tax on its income from interests on loan investments, commissions, services, collection charges, foreign exchange profits and other operating earnings during the second quarter of 1994. In a case, CTA ruled that the 20% final withholding tax on a bank s passive interest income does not form part of its taxable gross receipts. So CBC filed with CIR a formal claim for tax refund or credit of P1,140,623.82 from the P12,354,933.00 gross receipts tax that CBC paid. CBC also

filed a petition for review with the CTA. Citing Asian Bank, CBC argued that it was not liable for the gross receipts tax - amounting to P1,140,623.82 - on the sums withheld by the Bangko Sentral ng Pilipinas as final withholding tax on CBC s passive interest income. CIR argued that the final

withholding tax on a banks interest income forms part of its gross receipts in computing the gross receipts tax. The term gross receipts means the entire income or receipt, without any
deduction. CTA ruled in favor of CBC and held that the 20% final withholding tax on interest income does not form part of CBC s taxable gross receipts. The final tax, not having been received by CBC but instead went to the coffers of the government, should no longer form part of its gross receipts for the purpose of computing the GRT. the term gross receipts means all receipts of a taxpayer excluding those which have been especially earmarked by law or regulation for the government or some person other than the taxpayer. CTA granted CBC a partial refund of P123,778.73 since the evidence of CBC was sufficient only to support the payment of the gross receipts tax on its medium term investments. CA affirmed.

issues: Whether the 20% final withholding tax on interest income should form part of CBCs gross receipts in computing the gross receipts tax on banks; YES
SC: the amount of interest income withheld in payment of the 20% final withholding tax forms part of CBC s gross receipts in computing the gross receipts tax on banks. gross receipts should be interpreted as the whole amount received as interests without deductions, otherwise, if deductions are made from gross receipts, it will be considered as net receipts. term gross receipts means the entire receipts without any deduction. Deducting any amount from the gross receipts changes the result, and the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax on gross receipts, unless the law itself makes an exception. CBC s argument will create tax exemptions where none exist. If the amount of the final withholding tax is excluded from taxable gross receipts, then the amount of the creditable withholding tax should also be excluded from taxable gross receipts. For that matter, any withholding tax should be excluded from taxable gross receipts because such withholding would qualify as earmarking by regulation. Section 121 expressly states that dividends shall form part of the bank s gross receipts for purposes of the gross receipts tax on banks. This is the same treatment given to the bank s interest income that is subject to the final withholding tax.

The gross receipts tax, as opposed to the income tax, was devised to maintain simplicity in tax collection and to assure a steady source of state revenue even during periods of economic slowdown. Such a policy frowns upon erosion of the tax base. Deductions, exemptions or exclusions complicate the tax system and lessen the tax collection. By its nature, a gross receipts

tax applies to the entire receipts without any deduction, exemption or exclusion, unless the law clearly provides otherwise.
CBC owns the interest income which is the source of payment of the final withholding tax. The government subsequently becomes the owner of the money constituting the final tax when CBC pays the final withholding tax to extinguish its obligation to the government. This is the consideration for the transfer of ownership of the money from CBC to the government. Thus, the amount constituting the final tax, being originally owned by CBC as part of its interest income, should form part of its taxable gross receipts.

The concept of a withholding tax on income obviously and necessarily implies that the amount of the tax withheld comes from the income earned by the taxpayer. Since the amount of the tax withheld constitutes income earned by the taxpayer, then that amount manifestly forms part of the taxpayers gross receipts. Because the amount withheld belongs to the taxpayer, he can transfer
its ownership to the government in payment of his tax liability. The gross receipts tax falls not on the final withholding tax, but on the amount of the interest income withheld as the final tax. What is being taxed is still the interest income. The law imposes the gross receipts tax on that portion of the interest income that the depository bank withholds and remits to the government. Consequently, the entire amount of the interest income is taxable and not only the net interest income.