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Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 146984 July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP (HK) andNATIONAL DEVELOPMENT COMPANY, respondents.

D E C I S I O N

TINGA, J.:

The issue in this present petition is whether the sale by the National Development Company (NDC) of five (5) of itsvessels to the private respondents is subject to value-added tax (VAT) under the National Internal Revenue Code of1986 (Tax Code) then prevailing at the time of the sale. The Court of Tax Appeals (CTA) and the Court of Appeals

commonly ruled that the sale is not subject to VAT. We affirm, though on a more unequivocal rationale than thatutilized by the rulings under review. The fact that the sale was not in the course of the trade or business of NDC issufficient in itself to declare the sale as outside the coverage of VAT.

The facts are culled primarily from the ruling of the CTA.

Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its shares in itswholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC sharesand five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels.1The vessels wereconstructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also itswholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC.2

The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for thepublic auction was that the winning bidder was to pay "a value added tax of 10% on the value of the vessels."3On 3June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares and the vesselsfor P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new company still to be formedcomposed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong (collectively,private respondents).4The bid was approved by the Committee on Privatization, and a Notice of Award dated 1 July1988 was issued to Magsaysay Lines.

On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand, andMagsaysay 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."5Per arrangement, an irrevocable confirmedLetter of Credit previously filed as bidders bond was accepted by NDC as security for the payment of VAT, if any. Bythis time, a formal request for a ruling on whether or not the sale of the vessels was subject to VAT had already beenfiled with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan, presumablyin behalf of private respondents. Thus, the parties agreed that should no favorable ruling be received from the BIR,NDC was authorized to draw on the Letter of Credit upon written demand the amount needed for the payment of the

VAT on the stipulated due date, 20 December 1988.6

In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14 December 1988from the BIR, holding that the sale of the vessels was subject to the 10% VAT. The ruling cited the fact that NDC wasa VAT-registered enterprise, and thus its "transactions incident to its normal VAT registered activity of leasing outpersonal property including sale of its own assets that are movable, tangible objects which are appropriable ortransferable are subject to the 10% [VAT]."7

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
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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. At this point, NDC drew on the Letter of Credit topay for the VAT, and the amount of P15,120,000.00 in taxes was paid on 16 March 1989.

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

Internal Revenue (CIR) opposed the petition, first arguing that private respondents were not the real parties in interestas they were not the transferors or sellers as contemplated in Sections 99 and 100 of the then Tax Code. The CIRalso squarely defended the VAT rulings holding the sale of the vessels liable for VAT, especially citing Section 3 ofRevenue Regulation No. 5-87 (R.R. No. 5-87), which provided that "[VAT] is imposed on any sale or transactionsdeemed sale of taxable goods (including capital goods, irrespective of the date of acquisition)." The CIR argued thatthe sale of the vessels were among those transactions "deemed sale," as enumerated in Section 4 of R.R. No. 5 -87.It seems that the CIR particularly emphasized Section 4(E)(i) of the Regulation, which classified "change ofownership of business" as a circumstance that gave rise to a transaction "deemed sale."

In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and granted the petition.9The CTA ruledthat the sale of a vessel was an "isolated transaction," not done in the ordinary course of NDCs business, and wasthus not subject to VAT, which under Section 99 of the Tax Code, was applied only to sales in the course of tradeor business. The CTA further held that 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 as listed either in Section 100(b) of

the Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt should be resolved in favorof private respondents since Section 99 of the Tax Code which implemented VAT is not an exemption provision, but aclassification provision which warranted the resolution of doubts in favor of the taxpayer.

The CIR appealed the CTA Decision to the Court of Appeals,10which on 11 March 1997, rendered a Decisionreversing the CTA.11While the appellate court agreed that the sale was an isolated transaction, not made in thecourse of NDCs regular trade or business, it nonetheless found that the transaction fell within the classification ofthose "deemed sale" under R.R. No. 5-87, since the sale of the vessels together with the NMC shares brought abouta change of ownership in NMC. The Court of Appeals also applied the principle governing tax exemptions that suchshould be strictly construed against the taxpayer, and liberally in favor of the government.12

However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5 February2001.13This time, the appellate court ruled that the "change of ownership of business" as contemplated in R.R. No. 5 -87 must be a consequence of the "retirement from or cessation of business" by the owner of the goods, as provided

for in Section 100 of the Tax Code. The Court of Appeals also agreed with the CTA that the classification oftransactions "deemed sale" was a classification statute, and not an exemption statute, thus warranting the resolutionof any doubt in favor of the taxpayer.14

To the mind of the Court, the arguments raised in the present petition have already been adequately discussed andrefuted in the rulings assailed before us. Evidently, the petition should be denied. Yet the Court finds that Section 99of the Tax Code is sufficient reason for upholding the refund of VAT payments, and the subsequent disquisitions bythe lower courts on the applicability of Section 100 of the Tax Code and Section 4 of R.R. No. 5-87 are ultimatelyirrelevant.

A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, eventhough it is assessed on many levels of transactions on the basis of a fixed percentage.15It is the end user ofconsumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the endusers by the providers of these goods or services16who 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 consumerrepresents the final link in a production chain that itself involves several transactions and several acts ofconsumption. The VAT system assures fiscal adequacy through the collection of taxes on every level ofconsumption,18yet assuages the manufacturers or providers of goods and services by enabling them to pass on theirrespective 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 thetaxpayers role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequentincarnations,19the tax is levied only on the sale, barter or exchange of goods or services by persons who engage insuch activities, in the course of trade or business. These transactions outside the course of trade or business mayinvariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of
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goods or services do not occur within the course of trade or business, the providers of such goods or services wouldhardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VATcollections since the accumulation of output VAT arises in the first place only through the ordinary course of trade orbusiness.

That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by both theCTA and the Court of Appeals, the latter doing so even in its first decision which it eventually reconsidered.20We cite

with approval the CTAs explanation on this point:

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), theterm "carrying on business" does not mean the performance of a single disconnected act, but meansconducting, prosecuting and continuing business by performing progressively all the acts normally incidentthereof; while "doing business" conveys the idea of business being done, not from time to time, but all thetime. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9(1988)]. "Course of business" is what is usually done in the management of trade or business. [Idmi v.Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].

What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doingbusiness" connotes regularity of activity. In the instant case, the sale was an isolated transaction. The salewhich was involuntary and made pursuant to the declared policy of Government for privatization could nolonger be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered

activity of NDC is leasing personal property.21

This finding is confirmed by the Revised Charter22of the NDC which bears no indication that the NDC was created forthe primary purpose of selling real property.23

The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before thisCourt,24should have definitively settled the matter. Any sale, barter or exchange of goods or services not in thecourse of trade or business is not subject to VAT.

Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon by the CIR, iscaptioned "Value-added tax on sale of goods," and it expressly states that "[t]here shall be levied, assessed andcollected on every sale, barter or exchange of goods, a value added tax x x x." Section 100 should be read in light ofSection 99, which lays down the general rule on which persons are liable for VAT in the first place and on whattransaction if at all. It may even be noted that Section 99 is the very first provision in Title IV of the Tax Code, the Titlethat covers VAT in the law. Before any portion of Section 100, or the rest of the law for that matter, may be applied inorder to subject a transaction to VAT, it must first be satisfied that the taxpayer and transaction involved is liable forVAT in the first place under Section 99.

It would have been a different matter if Section 100 purported to define the phrase "in the course of trade orbusiness" as expressed in Section 99. If that were so, reference to Section 100 would have been necessary as ameans of ascertaining whether the sale of the vessels was "in the course of trade or business," and thus subject to

VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the meaningof "in the course of trade or business," but instead the identification of the transactions which may be deemed assale. It would become necessary to ascertain whether under those two provisions the transaction may be deemed asale, only if it is settled that the transaction occurred in the course of trade or business in the first place. If thetransaction transpired outside the course of trade or business, it would be irrelevant for the purpose of determiningVAT liability whether the transaction may be deemed sale, since it anyway is not subject to VAT.

Accordingly, the Court rules that given the undisputed finding that the transaction in question was not made in thecourse of trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of the TaxCode, no matter how the said sale may hew to those transactions deemed sale as defined under Section 100.

In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the Court findsthe discussions offered on this point by the CTA and the Court of Appeals (in its subsequent Resolution) essentiallycorrect. Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions deemed sale those involving"change of ownership of business." However, Section 4(E) of R.R. No. 5-87, reflecting Section 100 of the Tax Code,clarifies that such "change of ownership" is only an attending circumstance to "retirement from or cessation of
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business[, ] with respect to all goods on hand [as] of the date of such retirement or cessation."25Indeed, Section 4(E)of R.R. No. 5-87 expressly characterizes the "change of ownership of business" as only a "circumstance" that attendsthose transactions "deemed sale," which are otherwise stated in the same section.26

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.

[G.R. No. 153866. February 11, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATETECHNOLOGY (PHILIPPINES), respondent.

D E C I S I O N

PANGANIBAN, J.:

Business companies registered in and operating from the SpecialEconomic Zone in Naga, Cebu -- like herein respondent -- are entitiesexemptfrom all internal revenue taxes and the implementing rules relevant thereto,including the value-added taxes or VAT. Although export sales are notdeemed exempt transactions, they are nonetheless zero-rated. Hence, in thepresent case, the distinction between exempt entitiesandexempt transactionshas little significance, because the net result is that the

taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise,has complied with all requisites for claiming a tax refund of or credit for theinput VAT it paid on capital goods it purchased. Thus, the Court of TaxAppeals and the Court of Appeals did not err in ruling that it is entitled to suchrefund or credit.

The Case

Before us is a Petition for Review[1]under Rule 45 of the Rules of Court,seeking to set aside the May 27, 2002 Decision[2]of the Court of Appeals (CA)

in CA-GR SP No. 66093. The decretal portion of the Decision reads asfollows:

WHEREFORE, foregoing premises considered, the petition for review

is DENIEDfor lack of merit.[3]

The Facts
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The CA quoted the facts narrated by the Court of Tax Appeals (CTA), asfollows:

As jointly stipulated by the parties, the pertinent facts x x x involved in this case areas follows:

1. [Respondent] is a resident foreign corporation duly registered with the Securitiesand Exchange Commission to do business in the Philippines, with principal officeaddress at the new Cebu Township One, Special Economic Zone, BarangayCantao-an, Naga, Cebu;

2. [Petitioner] is sued in his official capacity, having been duly appointed andempowered to perform the duties of his office, including, among others, the duty toact and approve claims for refund or tax credit;

3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) andhas been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No.66, as amended, to engage in the manufacture of recording components primarilyused in computers for export. Such registration was made on 6 June 1997;

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VATRegistration Certification No. 97-083-000600-V issued on 2 April 1997;

5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by[respondent];

6. An administrative claim for refund of VAT input taxes in the amountof P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04 VATinput taxes subject of this Petition for Review), was filed on 4 October 1999 withRevenue District Office No. 83, Talisay Cebu;

7. No final action has been received by [respondent] from [petitioner] on [respondents]claim for VAT refund.

The administrative claim for refund by the [respondent] on October 4, 1999 was notacted upon by the [petitioner] prompting the [respondent] to elevate the case to [the

CTA] on July 21, 2000 by way of Petition for Review in order to toll the running of

the two-year prescriptive period.

For his part, [petitioner] x x x raised the following Special and Affirmative Defenses,

to wit:

1. [Respondents] alleged claim for tax refund/credit is subject to administrativeroutinary investigation/examination by [petitioners] Bureau;

2. Since taxes are presumed to have been collected in accordance with laws andregulations, the [respondent] has the burden of proof that the taxes sought to berefunded were erroneously or illegally collected x x x;

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Courtruled that:


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A claimant has the burden of proof to establish the factualbasis of his or her claim for tax credit/refund.

4. Claims for tax refund/tax credit are construed in strictissimi juris against thetaxpayer. This is due to the fact that claims for refund/credit [partake of] the natureof an exemption from tax. Thus, it is incumbent upon the [respondent] to prove that

it is indeed entitled to the refund/credit sought. Failure on the part of the[respondent] to prove the same is fatal to its claim for tax credit. He who claimsexemption must be able to justify his claim by the clearest grant of organic orstatutory law. An exemption from the common burden cannot be permitted to existupon vague implications;

5. Granting, without admitting, that [respondent] is a Philippine Economic ZoneAuthority (PEZA) registered Ecozone Enterprise, then its business is not subject toVAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section103 of the Tax Code, as amended. As [respondents] business is not subject toVAT, the capital goods and services it alleged to have purchased are considered notused in VAT taxable business. As such, [respondent] is not entitled to refund ofinput taxes on such capital goods pursuant to Section 4.106.1 of Revenue

Regulations No. ([RR])7-95, and of input taxes on services pursuant to Section4.103 of said regulations.

6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229of the 1997 Tax Code on filing of a written claim for refund within two (2) years fromthe date of payment of tax.

On July 19, 2001, the Tax Court rendered a decision granting the claim for refund.[4]

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund orissuance of a tax credit certificate (TCC) in favor of respondent in the reducedamount of P12,122,922.66. This sum represented the unutilized butsubstantiated input VAT paid on capital goods purchased for the periodcovering April 1, 1998 to June 30, 1999.

The appellate court reasoned that respondent had availed itself only of thefiscal incentives under Executive Order No. (EO) 226 (otherwise known as theOmnibus Investment Code of 1987), not of those under both PresidentialDecree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondentwas, therefore, considered exempt only from the payment of income tax whenit opted for the income tax holiday in lieu of the 5 percent preferential tax ongross income earned. As a VAT-registered entity, though, it was still subjectto the payment of other national internal revenue taxes, like the VAT.

Moreover, the CA held that neither Section 109 of the Tax Code norSections 4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid theinput VAT on the capital goods it purchased, respondent correctly filed the
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administrative and judicial claims for its refund within the two-year prescriptiveperiod. Such payments were -- to the extent of the refundable value -- dulysupported by VAT invoices or official receipts, and were not yet offset againstany output VAT liability.

Hence this Petition.[5]

Sole Issue

Petitioner submits this sole issue for our consideration:

Whether or not respondent is entitled to the refund orissuance of Tax Credit

Certificate in the amount of P12,122,922.66 representing alleged unutilized input

VAT paid on capital goods purchased for the period April 1, 1998 to June 30, 1999.[6]

The Courts Ruling

The Petition is unmeritorious.

Sole Issue:Entitlement of a VAT-Registered PEZA Enterprise to

a Refund of or Credit for Input VAT

No doubt, as a PEZA-registered enterprise within a special economic

zone,[7]respondent is entitled to the fiscal incentives and benefits [8]providedfor in either PD 66[9]or EO 226.[10]It shall, moreover, enjoy all privileges,benefits, advantages or exemptions under both Republic Act Nos. (RA)7227[11]and 7844.[12]

Preferential Tax TreatmentUnder Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws tothe contrary, respondent shall not be subject to internal revenue laws and

regulations for raw materials, supplies, articles, equipment, machineries,spare parts and wares, except those prohibited by law, brought into the zoneto be stored, broken up, repacked, assembled, installed, sorted, cleaned,graded or otherwise processed, manipulated, manufactured, mixed or useddirectly or indirectly in such activities.[13]Even so, respondent would enjoy anet-operating loss carry over; accelerated depreciation; foreign exchange and
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financial assistance; and exemption from export taxes, local taxes andlicenses.[14]

Comparatively, the same exemption from internal revenue laws andregulations applies if EO 226[15]is chosen. Under this law, respondent shall

further be entitled to an income tax holiday; additional deduction for laborexpense; simplification of customs procedure; unrestricted use of consignedequipment; access to a bonded manufacturing warehouse system; privilegesfor foreign nationals employed; tax credits on domestic capital equipment, aswell as for taxes and duties on raw materials; and exemption from contractorstaxes, wharfage dues, taxes and duties on imported capital equipment andspare parts, export taxes, duties, imposts and fees,[16]local taxes andlicenses, and real property taxes.[17]

A privilege available to respondent under the provision in RA 7227 on taxand duty-free importation of raw materials, capital and equipment[18]-- is, ipsofacto, also accorded to the zone[19]under RA 7916. Furthermore, the latterlaw -- notwithstanding other existing laws, rules and regulations to thecontrary -- extends[20]to that zone the provision stating that no local or nationaltaxes shall be imposed therein.[21] No exchange control policy shall beapplied; and free markets for foreign exchange, gold, securities and futureshall be allowed and maintained.[22]Banking and finance shall also beliberalized under minimum Bangko Sentral regulation with the establishmentof foreign currency depository units of local commercial banks and offshorebanking units of foreign banks.[23]

In the same vein, respondent benefits under RA 7844 from negotiable taxcredits[24]for locally-produced materials used as inputs. Aside from the otherincentives possibly already granted to it by the Board of Investments, it alsoenjoys preferential credit facilities[25]and exemption from PD 1853.[26]

From the above-cited laws, it is immediately clear that petitioner enjoyspreferential tax treatment.[27]It is not subject to internal revenue laws andregulations and is even entitled to tax credits. The VAT on capital goods is aninternal revenue tax from which petitioner as an entity is exempt. Althoughthe transactionsinvolving such tax are not exempt, petitioner as a VAT-

registered person,

[28]

however, is entitled to their credits.

Nature of the VAT andthe Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0percent to 10 percent levied on every importation of goods, whether or not in
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the course of trade or business, or imposed on each sale, barter, exchange orlease of goods or properties or on each rendition of services in the course oftrade or business[29]as they pass along the production and distribution chain,the tax being limited only to the value added[30]to such goods, properties orservices by the seller, transferor or lessor.[31]It is an indirect tax that may be

shifted or passed on to the buyer, transferee or lessee of the goods,properties or services.[32]As such, it should be understood not in the context ofthe person or entity that is primarily, directly and legally liable for its payment,but in terms of its nature as a tax on consumption.[33] In either case, though,the same conclusion is arrived at.

The law[34]that originally imposed the VAT in the country, as well as thesubsequent amendments of that law, has been drawn from the tax creditmethod.[35]Such method adopted the mechanics and self-enforcementfeatures of the VAT as first implemented and practiced in Europe and

subsequently adopted in New Zealand and Canada.[36]

Under the presentmethod that relies on invoices, an entity can credit against or subtract from theVAT charged on its sales or outputs the VAT paid on its purchases, inputs andimports.[37]

If at the end of a taxable quarter the output taxes [38]charged by aseller[39]are equal to the input taxes[40]passed on by the suppliers, no paymentis required. It is when the output taxes exceed the input taxes that the excesshas to be paid.[41]If, however, the input taxes exceed the output taxes, theexcess shall be carried over to the succeeding quarter or quarters.[42]Should

the input taxes result from zero-rated or effectively zero-rated transactions orfrom the acquisition of capital goods,[43]any excess over the output taxes shallinstead be refunded[44]to the taxpayer or credited[45]against other internalrevenue taxes.[46]

Zero-Rated and EffectivelyZero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactionsdiffer from effectively zero-rated transactions as to their source.

Zero-rated transactions generally refer to the export sale of goods andsupply of services.[47]The tax rate is set at zero.[48]When applied to the taxbase, such rate obviously results in no tax chargeable against the purchaser.The seller of such transactions charges no output tax,[49]but can claim arefund of or a tax credit certificate for the VAT previously charged bysuppliers.
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Effectively zero-rated transactions, however, refer to the sale ofgoods[50]or supply of services[51]to persons or entities whose exemption underspecial laws or international agreements to which the Philippines is asignatory effectively subjects such transactions to a zero rate.[52]Again, asapplied to the tax base, such rate does not yield any tax chargeable against

the purchaser. The seller who charges zero output tax on such transactionscan also claim a refund of or a tax credit certificate for the VAT previouslycharged by suppliers.

Zero Rating andExemption

In terms of the VAT computation, zero rating and exemption are the same,but the extent of reliefthat results from either one of them is not.

Applying the destination principle[53]

to the exportation of goods, automaticzero rating[54]is primarily intended to be enjoyed by the seller who is directlyand legally liable for the VAT, making such seller internationally competitiveby allowing the refund or credit of input taxes that are attributable to exportsales.[55]Effective zero rating, on the contrary, is intended to benefit thepurchaser who, not being directly and legally liable for the payment of theVAT, will ultimately bear the burden of the tax shifted by the suppliers.

In both instances of zero rating, there is total relieffor the purchaser fromthe burden of the tax.[56]But in an exemption there is only partialrelief,[57]because the purchaser is not allowed any tax refund of or credit forinput taxes paid.[58]

Exempt Transactionand Exempt Party

The object of exemption from the VAT may either be the transaction itselfor any of the parties to the transaction.[59]

An exempt transaction, on the one hand, involves goods or serviceswhich, by their nature, are specifically listed in and expressly exempted from

the VAT under the Tax Code, without regard to the tax status -- VAT-exemptor not -- of the party to the transaction.[60]Indeed, such transaction is notsubject to the VAT, but the seller is not allowed any tax refund of or credit forany input taxes paid.

An exempt party, on the other hand, is a person or entity granted VATexemption under the Tax Code, a special law or an international agreement towhich the Philippines is a signatory, and by virtue of which its taxable
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transactions become exempt from the VAT.[61]Such partyis also not subject tothe 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.

As mentioned earlier, the VAT is a tax on consumption, the amount of

which may be shifted or passed on by the seller to the purchaser of the goods,properties or services.[62]While the liabilityis imposed on one person,theburdenmay be passed on to another. Therefore, if a special law merelyexempts a party as a seller from its direct liability for payment of the VAT, butdoes not relieve the same party as a purchaser from its indirect burden of theVAT shifted to it by its VAT-registered suppliers, the purchase transaction isnot exempt. Applying this principle to the case at bar, the purchasetransactions entered into by respondent are not VAT-exempt.

Special laws may certainly exempt transactions from the VAT.[63]However,the Tax Code provides that those falling under PD 66 are not. PD 66 is theprecursor of RA 7916 -- the special law under which respondent wasregistered. The purchase transactionsit entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register.

Its sales transactions, however, will either be zero-rated or taxed at thestandard rate of 10 percent,[64]depending again on the application ofthe destination principle.[65]

If respondent enters into such sales transactions with a purchaser --usually in a foreign country -- for use or consumption outside the Philippines,these shall be subject to 0 percent.[66]If entered into with a purchaser for useor consumption in the Philippines, then these shall be subject to 10percent,[67]unless the purchaser is exempt from the indirect burden of theVAT, in which case it shall also be zero-rated.

Since the purchases of respondent are not exempt from the VAT, the rateto be applied is zero. Its exemption under both PD 66 and RA 7916effectively subjects such transactions to a zero rate,[68]because the ecozonewithin which it is registered is managed and operated by the PEZA asa separate customs territory.[69]This means that in such zone is created thelegal fiction of foreign territory.[70]Under the cross-border principle[71]of the

VAT system being enforced by the Bureau of Internal Revenue (BIR),[72]noVAT shall be imposed to form part of the cost of goods destined forconsumption outside of the territorial border of the taxing authority. If exportsof goods and services from the Philippines to a foreign country are free of theVAT,[73]then the same rule holds for such exports from the national territory --except specifically declared areas -- to an ecozone.
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Sales made by a VAT-registered person in the customs territory to aPEZA-registered entity are considered exports to a foreign country;conversely, sales by a PEZA-registered entity to a VAT-registered person inthe customs territory are deemed imports from a foreign country.[74]Anecozone -- indubitably a geographical territory of the Philippines -- is,

however, regarded in law as foreign soil.[75]This legal fiction is necessary togive meaningful effect to the policies of the special law creating the zone.[76]Ifrespondent is located in an export processing zone [77]within that ecozone,sales to the export processing zone, even without being actually exported,shall in fact be viewed asconstructively exportedunder EO 226.[78]Consideredas export sales,[79]such purchase transactions by respondent would indeed besubject to a zero rate.[80]

Tax ExemptionsBroad and Express

Applying the special laws we have earlier discussed, respondent as anentity is exempt from internal revenue laws and regulations.

This exemption covers bothdirect and indirect taxes, stemming from thevery nature of the VAT as a tax on consumption, for which the direct liabilityisimposed on one person but the indirect burdenis passed on to another.Respondent, as an exempt entity, can neither be directly charged for the VATon its sales nor indirectly made to bear, as added cost to such sales, theequivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere

debemus. Where the law does not distinguish, we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the followingreasons:

First, RA 7916 states that no taxes, local and national, shall be imposedon business establishments operating within the ecozone.[81]Since this lawdoes not exclude the VAT from the prohibition, it is deemed included. Exceptiofirmat regulam in casibus non exceptis. An exception confirms the rule incases not excepted; that is, a thing not being excepted must be regarded ascoming within the purview of the general rule.

Moreover, even though the VAT is not imposed on the entity but on thetransaction, it may still be passed on and, therefore, indirectly imposed on thesame entity -- a patent circumvention of the law. That no VAT shall beimposed directly upon business establishments operating within the ecozoneunder RA 7916 also means that no VAT may be passed on and imposed
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indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum.When anything is prohibited directly, it is also prohibited indirectly.

Second, when RA 8748 was enacted to amend RA 7916, the sameprohibition applied, except for real property taxes that presently are imposed

on land owned by developers.[82]

This similar and repeated prohibition is anunambiguous ratification of the laws intent in not imposing local or nationaltaxes on business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw materials, equipment andthe like shall not be subject to x x x internal revenue laws and regulationsunder PD 66[83]-- the original charter of PEZA (then EPZA) that was lateramended by RA 7916.[84] No provisions in the latter law modify suchexemption.

Although this exemption puts the government at an initial disadvantage,

the reduced tax collection ultimately redounds to the benefit of the nationaleconomy by enticing more business investments and creating moreemployment opportunities.[85]

Fourth, even the rules implementing the PEZA law clearly reiterate thatmerchandise -- except those prohibited by law -- shall not be subject to x x xinternal revenue laws and regulations x x x[86]if brought to the ecozonesrestricted area[87]for manufacturing by registered export enterprises,[88]ofwhich respondent is one. These rules also apply to all enterprises registeredwith the EPZA prior to the effectivity of such rules.[89]

Fifth, export processing zone enterprises registered[90]

with the Board ofInvestments (BOI) under EO 226 patently enjoy exemption from nationalinternal revenue taxes on imported capital equipment reasonably needed andexclusively used for the manufacture of their products;[91]on required suppliesand spare part for consigned equipment;[92]and on foreign and domesticmerchandise, raw materials, equipment and the like -- except those prohibitedby law -- brought into the zone for manufacturing.[93] In addition, they aregiven credits for the value of the national internal revenue taxes imposed ondomestic capital equipment also reasonably needed and exclusively used forthe manufacture of their products,[94]as well as for the value of such taxes

imposed on domestic raw materials and supplies that are used in themanufacture of their export products and that form part thereof.[95]

Sixth, the exemption from local and national taxes granted under RA7227[96]are ipso facto accorded to ecozones.[97]In case of doubt, conflicts withrespect to such tax exemption privilege shall be resolved in favor of theecozone.[98]
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And seventh, the tax credits under RA 7844 -- given for imported rawmaterials primarily used in the production of export goods,[99]and for locallyproduced raw materials, capital equipment and spare parts used by exportersof non-traditional products[100]-- shall also be continuously enjoyed by similarexporters within the ecozone.[101] Indeed, the latter exporters are likewise

entitled to such tax exemptions and credits.

Tax Refund asTax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimijuris[102]against the taxpayer[103]and liberally in favor of the taxing authority.[104]

Tax refunds are in the nature of such exemptions.[105]Accordingly, theclaimants of those refunds bear the burden of proving the factual basis of their

claims;[106]

and of showing, by words too plain to be mistaken, that thelegislature intended to exempt them.[107]In the present case, all the cited legalprovisions are teeming with life with respect to the grant of tax exemptions toovivid to pass unnoticed. In addition, respondent easily meets the challenge.

Respondent, which as an entity is exempt, is different from its transactionswhich are not exempt. The end result, however, is that it is not subject to theVAT. The non-taxability of transactions that are otherwise taxable is merely anecessary incident to the tax exemption conferred by law upon it as an entity,not upon the transactions themselves.[108] Nonetheless, its exemption as anentity and the non-exemption of its transactions lead to the same result for thefollowing considerations:

First, the contemporaneous construction of our tax laws by BIR authoritieswho are called upon to execute or administer such laws [109]will have to beadopted. Their prior tax issuances have held inconsistent positions broughtabout by their probable failure to comprehend and fully appreciate the natureof the VAT as a tax on consumption and the application of the destinationprinciple.[110]Revenue Memorandum Circular No. (RMC) 74-99, however, nowclearly and correctly provides that any VAT-registered suppliers sale ofgoods, property or services from the customs territory to any registered

enterprise operating in the ecozone -- regardless of the class or type of thelatters PEZA registration -- is legally entitled to a zero rate.[111]

Second, the policies of the law should prevail. Ratio legis est anima. Thereason for the law is its very soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, aswell as the establishment of export processing zones, seeks to encourage
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and promote foreign commerce as a means of x x x strengthening our exporttrade and foreign exchange position, of hastening industrialization, of reducingdomestic unemployment, and of accelerating the development of thecountry.[112]

RA 7916, as amended by RA 8748, declared that by creating the PEZAand integrating the special economic zones, the government shall activelyencourage, promote, induce and accelerate a sound and balanced industrial,economic and social development of the country x x x through theestablishment, among others, of special economic zones x x x that shalleffectively attract legitimate and productive foreign investments.[113]

Under EO 226, the State shall encourage x x x foreign investments inindustry x x x which shall x x x meet the tests of internationalcompetitiveness[,] accelerate development of less developed regions of thecountry[,] and result in increased volume and value of exports for theeconomy.[114]Fiscal incentives that are cost-efficient and simple to administershall be devised and extended to significant projects to compensate formarket imperfections, to reward performance contributing to economicdevelopment,[115]and to stimulate the establishment and assist initialoperations of the enterprise.[116]

Wisely accorded to ecozones created under RA 7916 [117]was thegovernments policy -- spelled out earlier in RA 7227 -- of converting intoalternative productive uses[118]the former military reservations and theirextensions,[119]as well as of providing them incentives[120]to enhance the

benefits that would be derived from them[121]in promoting economic and socialdevelopment.[122]

Finally, under RA 7844, the State declares the need to evolve exportdevelopment into a national effort[123]in order to win international markets. Byproviding many export and tax incentives,[124]the State is able to drive homethe point that exporting is indeed the key to national survival and the meansthrough which the economic goals of increased employment and enhancedincomes can most expeditiously be achieved.[125]

The Tax Code itself seeks to promote sustainable economic growth x x x;

x x x increase economic activity; and x x x create a robust environment forbusiness to enable firms to compete better in the regional as well as theglobal market.[126]After all, international competitiveness requires economicand tax incentives to lower the cost of goods produced for export. Stateactions that affect global competition need to be specific and selective in thepricing of particular goods or services.[127]
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All these statutory policies are congruent to the constitutional mandates ofproviding incentives to needed investments,[128]as well as of promoting thepreferential use of domestic materials and locally produced goods andadopting measures to help make these competitive.[129]Tax credits fordomestic inputs strengthen backward linkages. Rightly so, the rule of law

and the existence of credible and efficient public institutions are essentialprerequisites for sustainable economic development.[130]

VAT Registration, Not Applicationfor Effective Zero Rating,Indispensable to VAT Refund

Registration is an indispensable requirement under our VATlaw.[131]Petitioner alleges that respondent did register for VAT purposes withthe appropriate Revenue District Office. However, it is now too late in the dayfor petitioner to challenge the VAT-registered status of respondent, given thelatters prior representation before the lower courts and the mode of appealtaken by petitioner before this Court.

The PEZA law, which carried over the provisions of the EPZA law, is clearin exempting from internal revenue laws and regulations the equipment --including capital goods -- that registered enterprises will use, directly orindirectly, in manufacturing.[132] EO 226 even reiterates this privilege amongthe incentives it gives to such enterprises.[133]Petitioner merely asserts that byvirtue of the PEZA registration alone of respondent, the latter is not subject to

the VAT. Consequently, the capital goods and services respondent haspurchased are not considered used in the VAT business, and no VAT refundor credit is due.[134]This is a non sequitur. By the VATs very nature as a taxon consumption, the capital goods and services respondent has purchasedare subject to the VAT, although at zero rate. Registration does not determinetaxability under the VAT law.

Moreover, the facts have already been determined by the lower courts.Having failed to present evidence to support its contentions againstthe income tax holidayprivilege of respondent,[135]petitioner is deemed to

have conceded. It is a cardinal rule that issues and arguments notadequately and seriously brought below cannot be raised for the first time onappeal.[136]This is a matter of procedure[137]and a question of fairness.[138]Failure to assert within a reasonable time warrants a presumption that theparty entitled to assert it either has abandoned or declined to assert it.[139]

The BIR regulations additionally requiring an approved prior application foreffective zero rating[140]cannot prevail over the clear VAT nature of
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