G.R. No.

153866             February 11, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner, 

vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.

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 Facts

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, Ceb
2. 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
3. Respondent is VAT [(Value Added Tax)]-registered entity
4. 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
5. "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.
6. Petitioners affirmative defenses:
a. 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
b. Claims for tax refund/tax credit are construed in ‘strictissimi juris’ against the
taxpayer. 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
c. 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 [respondent’s] 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.

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

Sole Issue

"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."

The Court’s Ruling

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 benefits8 provided for in either PD 669 or EO 226.10 It shall,
moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos.
(RA) 722711 and 7844

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 business29 as they pass along the production and distribution
chain, the tax being limited only to the value added30 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.

If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input
taxes40 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 refunded44 to the taxpayer or
credited45 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 services51 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 principle53 to the exportation of goods, automatic zero rating54 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.

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 principle71 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 zone77 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 

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 

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY

(PHILIPPINES), respondent. (G.R. No. 153866; February 11, 2005)

PRINCIPLE:
Business companies registered in and operating from the Special Economic Zone in Naga,
Cebu 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, 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. A VAT-registered enterprise may comply with all requisites to claim a tax
refund of or credit for the input VAT it paid on capital goods it purchased. In short, after
compliance with all requisites, such enterprise is entitled to refund or credit.

FACTS:
A VAT-registered enterprise, STP has principal office address at the new Cebu Township One,
Special Economic Zone, Barangay Cantao-an, Naga, Cebu. STP is registered with the Philippine
Export Zone Authority (PEZA) and certified to engage in the manufacture of recording
components primarily used in computers for export. VAT returns were filed for the period 1
April 1998 to 30 June 1999. With supporting documents, a claim for refund of VAT input taxes
in the amount of 28 million pesos (inclusive of the 12-million VAT input taxes subject of this
Petition for Review) was filed on 4 October 1999.

CIR did not act promptly upon STP's claim so the latter elevated the case to the CTA for review
in order to toll the running of the two-year prescriptive period.

On appeal, CIR asserted that by virtue of the PEZA registration alone of STP, the latter is not
subject to the VAT. According to CIR, STP's sales transactions intended for export are not
exempt.

ISSUE:
[1] Is STP entitled to refund or tax credit for puchases?

HELD:
[1] Yes, STP is entitled to refund or tax credit

As a PEZA-registered enterprise within a special economic zone, STP is entitled to the fiscal
incentives and benefit provided for in either PD 66 or EO 226. It shall, moreover, enjoy all
privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and
7844.
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, STP is entitled to such VAT refund or credit.

STP, 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.