CIR vs. Seagate Technology

CIR vs.
Seagate Technology
Commissioner of Internal Revenue vs. Seagate Technology (Philippines)
G.R. NO. 153866, February 11, 2005
FACTS:
Respondent, Seagate Technology is registered with the Philippine Export Zone Authority
(PEZA) under Presidential Decree No. 66, as amended, to engage in the manufacture of
recording components primarily used in computers for export. Also a VAT-registered entity, it
filed VAT returns for the period 1 April 1998 to 30 June 1999. However, on 4 October 1999 it
filed an administrative claim for refund of VAT input taxes in the amount of P28,369,226.38
representing the value of the taxes of the capital goods and services it had purchased. This
application for refund was not acted upon by the CIR on the ground that Seagate failed to prove
that it was entitled to the refund/credit sought so the latter filed a Petition for Review with the
CTA.
CTA’s decision: Granted the claim for refund.
CA’s decision: Affirmed the grant of refund in the reduced amount. Seagate 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% 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.
ISSUE:
Whether or not Seagate Technology is entitled to the refund or issuance of Tax Credit Certificate
in the amount of P12,122,922.66 representing its unutilized input VAT paid on capital goods
purchased for the period April 1, 1998 to June 30, 1999.
RULING:
Yes, it is entitled to a refund of or credit for input VAT. Respondent, as a PEZA-registered
enterprise within a special economic zone, is entitled to the fiscal incentives and benefits
provided for in PD 66. It shall also enjoy all privileges, benefits, advantages or exemptions under
both Republic Act Nos. (RA) 7227 and 7844.
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% 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 VAT refund or credit.
NOTES:
Preferential Tax Treatment Under Special Laws
Petitioner enjoys preferential tax treatment. 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, however, is entitled to their credits.
A “VAT-registered person” is a taxable person who has registered for VAT purposes under §236
of the Tax Code. VAT-registered persons shall pay the VAT on a monthly basis.
Nature of the VAT and the Tax Credit Method
The Tax Credit Method relies on invoices wherein 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. If at
the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes
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. If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result
from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods,
any excess over the output taxes shall instead be refunded to the taxpayer or credited against
other internal revenue taxes.
Indirect tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties
or services. While the liability is imposed on one person, the burden may be passed on to
another.
“Output taxes” refer to the VAT due on the sale or lease of taxable goods, properties or services
by a VAT-registered or VAT-registrable person.
By “input taxes” is meant the VAT due from or paid by a VAT-registered person in the course of
trade or business on the importation of goods or local purchases of goods or services, including
the lease or use of property from a VAT-registered person.
Destination Principle
Under this principle, goods and services are taxed only in the country where these are consumed.
Thus, exports are zero-rated, but imports are taxed.
Distinction between Exempt Transaction and Exempt Party
An exempt transaction involves goods or services which, by their nature, are specifically listed in
and expressly exempted from the VAT under the Tax Code, without regard to the tax status –
VAT-exempt or not — of the party to the transaction. 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. 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.
A “customs territory” means the national territory of the Philippines outside of the proclaimed
boundaries of the ecozones, except those areas specifically declared by other laws and/or
presidential proclamations to have the status of special economic zones and/or free ports.
Under the cross-border principle of the VAT system being enforced by the Bureau of Internal
Revenue (BIR), 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, then the same rule holds
for such exports from the national territory — except specifically declared areas — to an
ecozone.
An ecozone — indubitably a geographical territory of the Philippines — is, however, regarded in
law as foreign soil.

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