COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

SEAGATE TECHNOLOGY
(PHILIPPINES), respondent.

DECISION
PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic Zone in Naga,
Cebu -- like herein respondent -- are entities exempt from all internal revenue taxes and the
implementing rules relevant thereto, including the value-added taxes or VAT. Although export
sales are not deemed exempt transactions, they are nonetheless zero-rated. Hence, in the
present case, the distinction between exempt entities and exempt transactions has 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 the input VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and the
Court of Appeals did not err in ruling that it is entitled to such refund 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 as follows:

WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of
merit.[3]

The Facts

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

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

1. [Respondent] is a resident foreign corporation duly registered with the Securities

and Exchange Commission to do business in the Philippines, with principal office
address at the new Cebu Township One, Special Economic Zone, Barangay Cantao-
an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and
empowered to perform the duties of his office, including, among others, the duty to
act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has
been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as
amended, to engage in the manufacture of recording components primarily used in
computers for export. Such registration was made on 6 June 1997;
 4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT
Registration 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 amount
of P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04 VAT
input taxes subject of this Petition for Review), was filed on 4 October 1999 with
Revenue 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 not acted 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 xx raised the following Special and Affirmative Defenses, to wit:

1. [Respondents] alleged claim for tax refund/credit is subject to administrative

routinary investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and
regulations, the [respondent] has the burden of proof that the taxes sought to be
refunded were erroneously or illegally collected x xx;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled
that:
A claimant has the burden of proof to establish the factual
basis of his or her claim for tax credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimijuris against the
taxpayer. This is due to the fact that claims for refund/credit [partake of] the nature
of 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 claims
exemption must be able to justify his claim by the clearest grant of organic or
statutory law. An exemption from the common burden cannot be permitted to exist
upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone
Authority (PEZA) registered Ecozone Enterprise, then its business is not subject to
VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section
103 of the Tax Code, as amended. As [respondents] business is not subject to VAT,
the capital goods and services it alleged to have purchased are considered not used
in VAT taxable business. As such, [respondent] is not entitled to refund of input
 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 Section 4.103 of said
regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229
of the 1997 Tax Code on filing of a written claim for refund within two (2) years
from the 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 or issuance of a tax
credit certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This
sum represented the unutilized but substantiated input VAT paid on capital goods purchased
for the period covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent 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 percent 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.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and
4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it
purchased, respondent correctly filed the administrative and judicial claims for its refund within
the two-year prescriptive period. Such payments were -- to the extent of the refundable value -
- duly supported by VAT invoices or official receipts, and were not yet offset against any 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 or issuance 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] provided for 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 Treatment

Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the 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 zone to be stored, broken up, repacked, assembled, installed, sorted,
cleaned, graded or otherwise processed, manipulated, manufactured, mixed or used directly or
indirectly in such activities.[13] Even so, respondent would enjoy a net-operating loss carry over;
accelerated depreciation; foreign exchange and financial assistance; and exemption from
export taxes, local taxes and licenses.[14]
Comparatively, the same exemption from internal revenue laws and regulations applies if
EO 226[15] is chosen. Under this law, respondent shall further be entitled to an income tax
holiday; additional deduction for labor expense; simplification of customs procedure;
unrestricted use of consigned equipment; access to a bonded manufacturing warehouse
system; privileges for foreign nationals employed; tax credits on domestic capital equipment, as
well as for taxes and duties on raw materials; and exemption from contractors taxes, wharfage
dues, taxes and duties on imported capital equipment and spare parts, export taxes, duties,
imposts and fees,[16] local taxes and licenses, and real property taxes.[17]
A privilege available to respondent under the provision in RA 7227 on tax and duty-free
importation of raw materials, capital and equipment[18] -- is, ipso facto, also accorded to the
zone[19] under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws, rules
and regulations to the contrary -- extends[20] to that zone the provision stating that no local or
national taxes shall be imposed therein.[21] No exchange control policy shall be applied; and free
markets for foreign exchange, gold, securities and future shall be allowed and
maintained.[22] Banking and finance shall also be liberalized under minimum BangkoSentral
regulation with the establishment of foreign currency depository units of local commercial
banks and offshore banking units of foreign banks.[23]
In the same vein, respondent benefits under RA 7844 from negotiable tax credits [24] for
locally-produced materials used as inputs. Aside from the other incentives possibly already
granted to it by the Board of Investments, it also enjoys preferential credit facilities[25] and
exemption from PD 1853.[26]
 From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax
treatment.[27] 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,[28] however, is entitled to their credits.

Nature of the VAT and

the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent
levied on every importation of goods, whether or not in the course of trade or business, or
imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of
services in the course of trade 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 or services 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 of the 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 the subsequent
amendments of that law, has been drawn from the tax credit method.[35] Such method adopted
the mechanics and self-enforcement features of the VAT as first implemented and practiced in
Europe and subsequently adopted in New Zealand and Canada.[36] Under the present method
that relies on invoices, 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.[37]
If at the end of a taxable quarter the output taxes[38] charged by a seller[39] are equal to the
input taxes[40] 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.[41] If, however, the input taxes exceed the
output taxes, the excess shall be carried over to the succeeding quarter or quarters. [42] Should
the input taxes result from zero-rated or effectively zero-rated transactions or from the
acquisition of capital goods,[43] any excess over the output taxes shall instead be refunded [44] to
the taxpayer or credited[45] against other internal revenue taxes.[46]

Zero-Rated and Effectively

Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from
effectively zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of
services.[47] The tax rate is set at zero.[48] 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,[49] but can claim a refund of or a tax credit certificate for the VAT previously charged
by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods[50] or supply of
services[51] to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such transactions to a
zero rate.[52] Again, as applied to the tax base, such rate does not yield any tax chargeable
against the purchaser. The seller who charges zero output tax on such transactions can also
claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Zero Rating and

Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent
of relief that results from either one of them is not.
Applying the destination principle[53] to the exportation of goods, automatic zero
rating[54] is primarily intended to be enjoyed by the seller who is directly and legally liable for
the VAT, making such seller internationally competitive by allowing the refund or credit of input
taxes that are attributable to export sales.[55] Effective zero rating, on the contrary, is intended
to benefit the purchaser who, not being directly and legally liable for the payment of the VAT,
will ultimately bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of
the tax.[56] But in an exemption there is only partial relief,[57] because the purchaser is not
allowed any tax refund of or credit for input taxes paid.[58]

Exempt Transaction
and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the
parties to the transaction.[59]
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.[60] 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.[61] 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.
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 liability is imposed on one person, the burden may be passed on to another. Therefore, if a
special law merely exempts a party as a seller from its direct liability for payment of the VAT,
but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted
to it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this
principle to the case at bar, the purchase transactions 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 the precursor of RA 7916 -- the special
law under which respondent was registered. The purchase transactions it 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 the standard rate of 10
percent,[64] depending again on the application of the 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 use or consumption in the Philippines, then
these shall be subject to 10 percent,[67] unless the purchaser is exempt from the indirect burden
of the VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is
zero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a
zero rate,[68] because the ecozone within which it is registered is managed and operated by the
PEZA as a separate customs territory.[69] This means that in such zone is created the legal 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] 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,[73] then the same rule holds for such exports from the national territory -- except
specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity
are considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a
VAT-registered person in the customs territory are deemed imports from a foreign
country.[74] An ecozone -- indubitably a geographical territory of the Philippines -- is, however,
regarded in law as foreign soil.[75] This legal fiction is necessary to give meaningful effect to the
policies of the special law creating the zone.[76]If respondent 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 as constructively exported under EO 226.[78] Considered as
export sales,[79] such purchase transactions by respondent would indeed be subject to a zero
rate.[80]

Tax Exemptions
Broad and Express
 Applying the special laws we have earlier discussed, respondent as an entity is exempt
from internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of the
VAT as a tax on consumption, for which the direct liability is imposed on one person but the
indirect burden is passed on to another. Respondent, as an exempt entity, can neither be
directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such
sales, the equivalent VAT on its purchases. Ubilex non distinguit, necnosdistingueredebemus.
Where the law does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed on business
establishments operating within the ecozone.[81] Since this law does not exclude the VAT from
the prohibition, it is deemed included. Exceptiofirmatregulam in casibus non exceptis. An
exception confirms the rule in cases not excepted; that is, a thing not being excepted must be
regarded as coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction, it may
still be passed on and, therefore, indirectly imposed on the same entity -- a patent
circumvention of the law. That no VAT shall be imposed directly upon business establishments
operating within the ecozone under RA 7916 also means that no VAT may be passed on and
imposed indirectly. Quandoaliquidprohibetur ex directoprohibeturet per obliquum. When
anything is prohibited directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied,
except for real property taxes that presently are imposed on land owned by developers.[82] This
similar and repeated prohibition is an unambiguous ratification of the laws intent in not
imposing local or national taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like shall not
be subject to x xx internal revenue laws and regulations under PD 66 [83] -- the original charter of
PEZA (then EPZA) that was later amended by RA 7916.[84] No provisions in the latter law modify
such exemption.
Although this exemption puts the government at an initial disadvantage, the reduced tax
collection ultimately redounds to the benefit of the national economy by enticing more
business investments and creating more employment opportunities.[85]
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise --
except those prohibited by law -- shall not be subject to x xx internal revenue laws and
regulations x x x[86] if brought to the ecozones restricted area[87] for manufacturing by registered
export enterprises,[88] of which respondent is one. These rules also apply to all enterprises
registered with the EPZA prior to the effectivity of such rules.[89]
Fifth, export processing zone enterprises registered[90] with the Board of Investments (BOI)
under EO 226 patently enjoy exemption from national internal revenue taxes on imported
capital equipment reasonably needed and exclusively used for the manufacture of their
products;[91] on required supplies and spare part for consigned equipment; [92] and on foreign
and domestic merchandise, raw materials, equipment and the like -- except those prohibited by
law -- brought into the zone for manufacturing.[93] In addition, they are given credits for the
value of the national internal revenue taxes imposed on domestic capital equipment also
reasonably needed and exclusively used for the 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 the
manufacture of their export products and that form part thereof.[95]
Sixth, the exemption from local and national taxes granted under RA 7227 [96] are ipso facto
accorded to ecozones.[97] In case of doubt, conflicts with respect to such tax exemption
privilege shall be resolved in favor of the ecozone.[98]
And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily
used in the production of export goods,[99] and for locally produced raw materials, capital
equipment and spare parts used by exporters of non-traditional products[100] -- shall also be
continuously enjoyed by similar exporters within the ecozone.[101] Indeed, the latter exporters
are likewise entitled to such tax exemptions and credits.

Tax Refund as
Tax 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, the claimants 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 the legislature intended to exempt them. [107] In the
present case, all the cited legal provisions are teeming with life with respect to the grant of tax
exemptions too vivid to pass unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions which are not
exempt. The end result, however, is that it is not subject to the VAT. The non-taxability of
transactions that are otherwise taxable is merely a necessary incident to the tax exemption
conferred by law upon it as an entity, not upon the transactions themselves. [108] Nonetheless,
its exemption as an entity and the non-exemption of its transactions lead to the same result for
the following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called
upon to execute or administer such laws[109] will have to be adopted. Their prior tax issuances
have held inconsistent positions brought about by their probable failure to comprehend and
fully appreciate the nature of the VAT as a tax on consumption and the application of
the destination principle.[110] Revenue Memorandum Circular No. (RMC) 74-99, however, now
clearly and correctly provides that any VAT-registered suppliers sale of goods, property or
services from the customs territory to any registered enterprise operating in the ecozone --
regardless of the class or type of the latters PEZA registration -- is legally entitled to a zero
rate.[111]
 Second, the policies of the law should prevail. Ratio legisest anima. The reason for the law
is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the
establishment of export processing zones, seeks to encourage and promote foreign commerce
as a means of x xx strengthening our export trade and foreign exchange position, of hastening
industrialization, of reducing domestic unemployment, and of accelerating the development of
the country.[112]
RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the
special economic zones, the government shall actively encourage, promote, induce and
accelerate a sound and balanced industrial, economic and social development of the country x
xx through the establishment, among others, of special economic zones x xx that shall
effectively attract legitimate and productive foreign investments.[113]
Under EO 226, the State shall encourage x xx foreign investments in industry x xx which
shall x xx meet the tests of international competitiveness[,] accelerate development of less
developed regions of the country[,] and result in increased volume and value of exports for the
economy.[114] Fiscal incentives that are cost-efficient and simple to administer shall be devised
and extended to significant projects to compensate for market imperfections, to reward
performance contributing to economic development,[115] and to stimulate the establishment
and assist initial operations of the enterprise.[116]
Wisely accorded to ecozones created under RA 7916[117] was the governments policy --
spelled out earlier in RA 7227 -- of converting into alternative productive uses[118] the former
military reservations and their extensions,[119] as well as of providing them incentives[120] to
enhance the benefits that would be derived from them[121] in promoting economic and social
development.[122]
Finally, under RA 7844, the State declares the need to evolve export development into a
national effort[123] in order to win international markets. By providing many export and tax
incentives,[124] the State is able to drive home the point that exporting is indeed the key to
national survival and the means through which the economic goals of increased employment
and enhanced incomes can most expeditiously be achieved.[125]
The Tax Code itself seeks to promote sustainable economic growth x xx; x xx increase
economic activity; and x xx create a robust environment for business to enable firms to
compete better in the regional as well as the global market.[126] After all, international
competitiveness requires economic and tax incentives to lower the cost of goods produced for
export. State actions that affect global competition need to be specific and selective in the
pricing of particular goods or services.[127]
All these statutory policies are congruent to the constitutional mandates of providing
incentives to needed investments,[128] as well as of promoting the preferential use of domestic
materials and locally produced goods and adopting measures to help make these
competitive.[129] Tax credits for domestic inputs strengthen backward linkages. Rightly so, the
rule of law and the existence of credible and efficient public institutions are essential
prerequisites for sustainable economic development.[130]

VAT Registration, Not Application

for Effective Zero Rating,
Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law.[131] Petitioner alleges that
respondent did register for VAT purposes with the appropriate Revenue District Office.
However, it is now too late in the day for petitioner to challenge the VAT-registered status of
respondent, given the latters prior representation before the lower courts and the mode of
appeal taken by petitioner before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from
internal revenue laws and regulations the equipment -- including capital goods -- that
registered enterprises will use, directly or indirectly, in manufacturing.[132] EO 226 even
reiterates this privilege among the incentives it gives to such enterprises.[133] Petitioner merely
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.[134] This is a non
sequitur. By the VATs very nature as a tax on consumption, the capital goods and services
respondent has purchased are subject to the VAT, although at zero rate. Registration does not
determine taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts. Having failed to
present evidence to support its contentions against the income tax holidayprivilege of
respondent,[135] petitioner is deemed to have conceded. It is a cardinal rule that issues and
arguments not adequately and seriously brought below cannot be raised for the first time on
appeal.[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 the party entitled to assert it either has
abandoned or declined to assert it.[139]
The BIR regulations additionally requiring an approved prior application for effective zero
rating[140] cannot prevail over the clear VAT nature of respondents transactions. The scope of
such regulations is not within the statutory authority x xx granted by the legislature.[141]
First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the
former cannot purport to do any more than interpret the latter.[142] The courts will not
countenance one that overrides the statute it seeks to apply and implement. [143]
Other than the general registration of a taxpayer the VAT status of which is aptly
determined, no provision under our VAT law requires an additional application to be made for
such taxpayers transactions to be considered effectively zero-rated. An effectively zero-rated
transaction does not and cannot become exempt simply because an application therefor was
not made or, if made, was denied. To allow the additional requirement is to give unfettered
discretion to those officials or agents who, without fluid consideration, are bent on denying a
valid application. Moreover, the State can never be estopped by the omissions, mistakes or
errors of its officials or agents.[144]
Second, grantiaargumenti that such an application is required by law, there is still the
presumption of regularity in the performance of official duty.[145] Respondents registration
carries with it the presumption that, in the absence of contradictory evidence, an application
for effective zero rating was also filed and approval thereof given. Besides, it is also presumed
that the law has been obeyed[146] by both the administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we have tackled
exempt respondent not only from internal revenue laws but also from the regulations issued
pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative,
precisely to spur economic growth in the country and attain global competitiveness as
envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing requirements,[147] is
sufficient for the effective zero rating of the transactions of a taxpayer. The nature of its
business and transactions can easily be perused from, as already clearly indicated in, its VAT
registration papers and photocopied documents attached thereto. Hence, its transactions
cannot be exempted by its mere failure to apply for their effective zero rating. Otherwise, their
VAT exemption would be determined, not by their nature, but by the taxpayers negligence -- a
result not at all contemplated. Administrative convenience cannot thwart legislative mandate.

Tax Refund or
Credit in Order

Having determined that respondents purchase transactions are subject to a zero VAT rate,
the tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal
incentives in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday
regime instead of the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA
law,[148]
for EO 226[149] also has provisions to contend with. These two regimes are in fact
incompatible and cannot be availed of simultaneously by the same entity. While EO 226 merely
exempts it from income taxes, the PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only from the
payment of income tax for a certain number of years, depending on its registration as a pioneer
or a non-pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of gross income
earned in lieu of local and national taxes imposable upon business establishments within the
ecozone cannot outrightly determine a VAT exemption. Being subject to VAT, payments
erroneously collected thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA
7916, Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that
such provision merely exempts respondent from taxes imposed on business. To repeat, the VAT
is a tax imposed on consumption, not on business. Although respondent as an entity is exempt,
the transactions it enters into are not necessarily so. The VAT payments made in excess of the
zero rate that is imposable may certainly be refunded or credited.

Compliance with All Requisites

for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for
claiming a VAT refund or credit.[150]
First, respondent is a VAT-registered entity. This fact alone distinguishes the present case
from Contex, in which this Court held that the petitioner therein was registered as a non-VAT
taxpayer.[151] Hence, for being merely VAT-exempt, the petitioner in that case cannot claim any
VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly supported by VAT
invoices and have not been offset against any output taxes. Although enterprises registered
with the BOI after December 31, 1994 would no longer enjoy the tax credit incentives on
domestic capital equipment -- as provided for under Article 39(d), Title III, Book I of EO 226[152] -
- starting January 1, 1996, respondent would still have the same benefit under a general and
express exemption contained in both Article 77(1), Book VI of EO 226; and Section 12,
paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to exempt investors in
ecozones from national and local taxes, but also to grant them tax credits. This fact was
revealed by the sponsorship speeches in Congress during the second reading of House Bill No.
14295, which later became RA 7916, as shown below:

MR. RECTO. x xxSome of the incentives that this bill provides are exemption from national and
local taxes; x xx tax credit for locally-sourced inputs x xx.

x xxxxxxxx

MR. DEL MAR. x xx To advance its cause in encouraging investments and creating an
environment conducive for investors, the bill offers incentives such as the exemption from local
and national taxes, x xx tax credits for locally sourced inputs x x x.[153]

And third, no question as to either the filing of such claims within the prescriptive period or
the validity of the VAT returns has been raised. Even if such a question were raised, the tax
exemption under all the special laws cited above is broad enough to cover even the
enforcement of internal revenue laws, including prescription.[154]

Summary
 To summarize, 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 percent 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
such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to
costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.