VAT Important Doctrines

1. Abakada Guro Party List vs. Ermita

 The VAT is a tax on spending or consumption·it is levied on the sale, barter, exchange or lease
of goods or properties and services; Being an indirect tax on expenditure, the seller of goods or
services may pass on the amount of tax paid to the buyer; In contrast, a direct tax is a tax for
which a taxpayer is directly liable on the transaction or business it engages in, without
transferring the burden to someone else.
 Under the „tax credit method,‰ 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.
 Since there is no question that the revenue bill originated in the House of Representatives, the
Senate was acting within its constitutional power to introduce amendments to the House bill
when it included provisions in Senate Bill No. 1950 amending corporate income taxes,
percentage, excise and franchise taxes·Article VI, Section 24 of the Constitution does not
contain any prohibition or limitation on the extent of the amendments that may be introduced by
the Senate to the House revenue bill.
 The main purpose of the bills emanating from the House of Representatives is to bring in
sizeable revenues for the government to supplement our countryÊs serious financial problems,
and improve tax administration and control of the leakages in revenues from income taxes and
value-added taxes, and the Senate, approaching the measures from the point of national
perspective, can introduce amendments within the purposes of those bills, like providing ways
that would soften the impact of the VAT measure on the consumer.
 A logical corollary to the doctrine of separation of powers is the principle of nondelegation of
powers, a doctrine based on the ethical principle that such as delegated power constitutes not
only a right but a duty to be performed by the delegate through the instrumentality of his own
judgment and not through the intervening mind of another
 The powers which Congress is prohibited from delegating are those which are strictly, or
inherently and exclusively, legislative·appertaining exclusively to the legislative department;
Purely legislative power has been described as the authority to make a complete law·complete
as to the time when it shall take effect and as to whom it shall be applicable·and to determine
the expediency of its enactment; It is the nature of the power, and not the liability of its use or
the manner of its exercise, which determines the validity of its delegation.
 Tests of Valid Delegation; A delegation is valid only if the law (a) is complete in itself, setting
forth therein the policy to be executed, carried out, or implemented by the delegate, and (b) fixes
a standard·the limits of which are sufficiently determinate and determinable·to which the
delegate must conform in the per-formance of his functions; A sufficient standard is one which
defines legislative policy, marks its limits, maps out its boundaries and specifies the public
agency to apply it.
 While the power to tax cannot be delegated to executive agencies, details as to the enforcement
and administration of an exercise of such power may be left to them, including the power to
determine the existence of facts on which its operation depends, the rationale being that the
preliminary ascertainment of facts as basis for the enactment of legislation is not of itself a
legislative function but is simply ancillary to legislation;
 The Constitution as a continuously operative charter of government does not require that
Congress find for itself every fact upon which it desires to base legislative action or that it make
for itself detailed determinations which it has declared to be prerequisite to application of
legislative policy to particular facts and circumstances impossible for Congress itself properly to
investigate.
 The case before the Court is not a delegation of legislative power·it is simply a delegation of
ascertainment of facts upon which enforcement and administration of the increase rate under
the law is contingent; No discretion would be exercised by the President; The use of the word
„shall‰ connotes a mandatory order.·
 The principle of fiscal adequacy as a characteristic of a sound tax system, which was originally
stated by Adam Smith in his Canons of Taxation, simply means that sources of revenues must
be adequate to meet government expenditures and their variations
 Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due
from or paid by a VAT-registered person on the importation of goods or local purchase of good
 and services, including lease or use of property, in the course of trade or business, from a VAT-
registered person, and Output Tax is the value-added tax due on the sale or lease of taxable
goods or properties or services by any person registered or required to register under the law.
 The input tax is not a property or a property right within the constitutional purview of the due
process clause·a VAT-registered personÊs entitlement to the creditable input tax is a mere
statutory privilege; The right to credit input tax as against the output tax is clearly a privilege
created by law, a privilege that also the law can remove or limit; The distinction between statutory
privileges and vested rights must be borne in mind for persons have no vested rights in statutory
privileges.
 The power of the State to make reasonable and natural classifications for the purposes of
taxation has long been established.
 The rule of uniform taxation does not deprive Congress of the power to classify subjects of
taxation, and only demands uniformity within the particular class.
 Progressive taxation is built on the principle of the taxpayerÊs ability to pay·taxation is
progressive when its rate goes up depending on the resources of the person affected.
 The VAT is an antithesis of progressive taxation·by its very nature, it is regressive; The principle
of progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the
consumer or business for every goods bought or services enjoyed is the same regardless of
income.
 The Constitution does not really prohibit the imposition of indirect taxes, like the VAT.

3. Commissioner of Internal Revenue vs. Seagate Technology (Philippines)

 Tax Exemption; Value Added Tax (VAT); Petitioner is not subject to internal revenue laws and
regulations and is even entitled to tax credits.·From the above-cited laws, it is immediately clear
that 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.
 The VAT is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of
the goods, properties or services.
 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. In either
case, though, the same conclusion is arrived at.
 Zero-rated transactions generally refer to the export sale of goods and supply of services. The
tax rate is set at zero. 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,but can
claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.
 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.
 Claimants of tax refunds bear the burden of proving the factual basis of their claims; and of
showing, by words too plain to be mistaken, that the legislature intended to exempt them.
 Zero-rated transactions generally refer to the export sale of goods and supply of services. The
tax rate is set at zero.
 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, 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 or supply of services 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.
 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.
 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 to the exportation of goods, automatic zero rating 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.
 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.
But in an exemption there is only partial relief, because the purchaser is not allowed any tax
refund of or credit for input taxes paid.
 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.
 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.
 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.

4. Commissioner of Internal Revenue vs. Benguet Corporation

 Instances when retroactive application will still be allowed even if prejudicial to a taxpayer.·There
is no question, therefore, as to the prohibition against the retroactive application of the
revocation, modification or reversal, as the case maybe, of previously established Bureau on
Internal Revenue (BIR) Rulings when the taxpayerÊs interest would be prejudiced thereby. But
even if prejudicial to a taxpayer, retroactive application is still allowed where: (a) a taxpayer
deliberately misstates or omits material facts from his return or any document required by the
BIR; (b) when subsequent facts gathered by the BIR are materially different from which the ruling
is based; and (c) where the taxpayer acted in bad faith.

 Input VAT or input tax represents the actual payments, costs and expenses incurred by a VAT-
registered taxpayer in connection with his purchase of goods and services. Thus, „input tax‰
means the value-added tax paid by a VATregistered person/entity in the course of his/its trade
or business on the importation of goods or local purchases of goods or services from a VAT-
registered person. On the other hand, when that person or entity sells his/its products or
services, the VAT-registered taxpayer generally becomes liable for 10% of the selling price as
output VAT or output tax. Hence, „output tax‰ is the value-added tax on the sale of taxable
goods or services by any person registered or required to register under Section 107 of the (old)
Tax Code.

5. Contex Corporation vs. Commissioner of Internal Revenue

 At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax
paid on the goods, properties or services bought, transferred, or leased may be shifted or passed
on by the seller, transferor, or lessor to the buyer, transferee or lessee. Unlike a direct tax, such
as the income tax, which primarily taxes an individualÊs ability to pay based on his income or
net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or
certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer
expenditures.
 A seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods
or services is not necessarily the person who ultimately bears the burden of the same tax; It is
the final purchaser or consumer of such goods or services who although not directly and legally
liable for the payment thereof, ultimately bears the burden of the tax.·The amount of tax paid
may be shifted or passed on by the seller to the buyer. What is transferred in such instances is
not the liability for the tax, but the tax burden. In adding or including the VAT due to the selling
price, the seller remains the person primarily and legally liable for the payment of the tax. What
is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the
tax.
 PetitionerÊs claim for exemption from VAT for its purchases of supplies and raw materials is
incongruous with its claim that it is VAT-Exempt for only VAT-Registered entities can claim Input
VAT Credit/Refund.
 Petitioner is not the proper party to claim such VAT refund.

6. Commissioner of Internal Revenue vs. Cebu Toyo Corporation

 Value-Added Tax (VAT); Under the fiscal incentives granted to PEZA-registered enterprises
under Sec. 23 of R.A. No. 7916, the taxpayer had two options with respect to its tax burden·it
could avail of an income tax holiday pursuant to provisions of E.O. No. 226, thus exempt it from
income taxes for a number of years but not from other internal revenue taxes such as VAT, or it
could avail of the tax exemptions on all taxes, including VAT under P.D. No. 66 and pay only the
preferential tax rate of 5% under R.A. No. 7916. In fine, it is engaged in taxable rather than
exempt transactions.
 Taxable transactions are those transactions which are subject to value-added tax either at the
rate of 10% or 0%, and the seller shall be entitled to tax credit for the value-added tax paid on
purchases and leases of goods, properties or services; An exemption means that the sale of
goods, properties or services and the use or lease of properties is not subject to VAT (out- put
tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid; A VAT-
registered purchaser of goods, properties or services that are VAT-exempt, is not entitled to any
input tax on such purchases despite the issuance of a VAT invoice or receipt.
 Under the value-added tax system, a zero-rated sale by a VAT-registered person, which is a
taxable transaction for VAT purposes, shall not result in any output tax, but the input tax on his
purchase of goods, properties or services related to such zerorated sale shall be available as
tax credit or refund
 In principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is to
exempt the transaction completely from VAT previously collected on inputs.
 While the zero rating and the exemption are computationally the same, they actually differ in
several aspects, to wit: (a) A zero-rated sale is a taxable transaction but does not result in an
output tax while an exempted transaction is not subject to the output tax; (b) The input VAT on
the purchases of a VAT-registered person with zero-rated sales may be allowed as tax credits
or refunded while the seller in an exempt transaction is not entitled to any input tax on his
purchases despite the issuance of a VAT invoice or receipt; (c) Persons engaged in transactions
which are zero-rated, being subject to VAT, are required to register while registration is optional
for VAT-exempt persons.

7. Commissioner of Internal Revenue vs. American Express International, Inc. (Philippine

Branch)
 Services performed by VATregistered persons in the Philippines (other than the processing,
manufacturing or repacking of goods for persons doing business outside the Philippines) when
paid in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP, are zero-rated.
 Services rendered by respondent in the Philippines is not in the same category as „processing,
manufacturing or repacking of goods‰ and should be zero-rated.
 The VAT is a tax on consumption „expressed as a percentage of the value added to goods or
services‰ purchased by the producer or taxpayer. As an indirect tax on services, its main object
is the transaction itself or, more concretely, the performance of all kinds of services conducted
 in the course of trade or business in the Philippines. These services must be regularly conducted
in this country; undertaken in „pursuit of a commercial or an economic activity;‰ for a valuable
consideration; and not exempt under the Tax Code, other special laws, or any international
agreement.
 As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional
reach of the tax. Goods and services are taxed only in the country where they are consumed.
Thus, exports are zero-rated, while imports are taxed.
 The law clearly provides for an exception to the destination principle; that is, for a zero percent
VAT rate for services that are performed in the Philippines, „paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the [BSP].‰ Thus,
for the supply of service to be zero-rated as an exception, the law merely requires that first, the
service be performed in the Philippines; second, the service fall under any of the categories in
Section 102(b) of the Tax Code; and, third,it be paid in acceptable foreign currency accounted
for in accordance with BSP rules and regulations.
 The place where the service is rendered determines the jurisdiction to impose the VAT; The
place of payment is immaterial; much less is the place where the output of the service will be
further or ultimately used.
8. Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.), Inc.
 A VAT-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 of the party to the transaction; A VAT-exempt party is a person or entity granted VAT
exemption under the Tax Code, a special law or an international agreement to which the
Philippines is a signatory, and by virtue of which its taxable transactions become exempt from
VAT; Section 103(q) of the Tax Code of 1977, as amended, relates to VAT-exempt transactions.
 In the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines), this Court
already made such distinction ·An exempt transaction, on the one hand, involves goods or
services which, by their nature, are specifically listed in and expressly exempted from the VAT
under the Tax Code, without regard to the tax status·VAT-exempt or not·of the party to the
transaction . . . An exempt party, on the other hand, is a person or entity granted VAT exemption
under the Tax Code, a special law or an international agreement to which the Philippines is a
signatory, and by virtue of which its taxable transactions become exempt from VAT . . . Section
103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-
exempt transactions. These are transactions exempted from VAT by special laws or international
agreements to which the Philippines is a signatory. Since such transactions are not subject to
VAT, the sellers cannot pass on any output VAT to the purchasers of goods, properties, or
services, and they may not claim tax credit/refund of the input VAT they had paid thereon.
 PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-
exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, but, rather,
because of Section 8 of the same statute which establishes the fiction that ECOZONES are
foreign territory; An ECOZONE refers to selected areas with highly developed or which have the
potential to be developed into agro-industrial, industrial, tourist, recreational, commercial,
banking, investment and financial centers whose metes and bounds are fixed or delimited by
Presidential Proclamations;
 Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate
the ECOZONES as a separate customs territory, thus creating the fiction that the ECOZONE is
a foreign territory.
 The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT
shall be imposed to form part of the cost of goods destined for consumption outside of the
territorial border of the taxing authority.
 Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory
to an ECOZONE enterprise shall be treated as export sales, while sales to an ECOZONE
enterprise made by a non-VAT or unregistered supplier would only be exempt from VAT and the
supplier shall not be able to claim credit/refund of its input VAT.
 According to the old rule, Section 23 of Rep. Act No.7916, as amended, gives the PEZA-
registered enterprise the option to choose between two sets of fiscal incentives: (a) The five
percent(5%) preferential tax rate on its gross income under Rep. Act No. 7916, as amended;
and (b) the income tax holiday provided under Executive Order No. 226, otherwise known as the
 Omnibus Investment Code of 1987, as amended. The five percent (5%) preferential tax rate on
gross income under Rep. Act No. 7916, as amended, is in lieu of all taxes. Except for real
property taxes, no other national or local tax may be imposed on a PEZA-registered enterprise
availing of this particular fiscal incentive, not even an indirect tax like VAT.
 Those availing of this incentive are exempt only from income tax, but shall be subject to all other
taxes, including the ten percent (10%) VAT.
 This old rule clearly did not take into consideration the Cross Border Doctrine essential to the
VAT system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of
fiscal incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for
PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If the PEZA-
registered enterprise chose the five percent (5%) preferential tax on its gross income, in lieu of
all taxes, as provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt; (2) If
the PEZA-registered enterprise availed of the income tax holiday under Exec. Order No. 226, as
amended, it shall be subject to VAT at ten percent (10%).
 Such distinction was abolished by RMC No. 74-99, which categorically declared that all sales of
goods, properties, and services made by a VAT-registered supplier from the Customs Territory
to an ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the
latterÊs type or class of PEZA registration; and, thus, affirming the nature of a PEZAregistered
or an ECOZONE enterprise as a VAT-exempt entity.

9. Commissioner of Internal Revenue vs. Burmeister and Wain Scandinavian Contractor

Mindanao, Inc.
 The Tax Code not only requires that the services be other than „processing, manufacturing or
repacking of goods‰ and that payment for such services be in acceptable foreign currency
accounted for in accordance with BSP rules. Another essential condition for qualification to zero-
rating under Section 102(b)(2) is that the recipient of such services is doing business outside the
Philippines. While this requirement is not expressly stated in the second paragraph of Section
102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services
must be „for other persons doing business outside the Philippines.‰ The phrase „for other
persons doing business outside the Philippines‰ not only refers to the services enumerated in
the first paragraph of Section 102(b), but also pertains to the general term „services‰ appearing
in the second paragraph of Section 102(b). In short, services other than processing,
manufacturing, or repacking of goods must likewise be performed for persons doing business
outside the Philippines.
 When Section 102(b)(2) stipulates payment in „acceptable foreign currency‰ under BSP rules,
the law clearly envisions the payer-recipient of services to be doing business outside the
Philippines·only those not doing business in the Philippines can be required under BSP rules to
pay in acceptable foreign currency for their purchase of goods or services from the Philippines.
 In a domestic transaction, where the provider and recipient of services are both doing business
in the Philippines, the BSP cannot require any party to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payer-
recipient of services is doing business outside the Philippines. Under BSP rules, the proceeds
of export sales must be reported to the Bangko Sentral ng Pilipinas.
 Thus, there is reason to require the provider of services under Section 102(b) (1) and (2) to
account for the foreign currency proceeds to the BSP. The same rationale does not apply if the
provider and recipient of the services are both doing business in the Philippines since their
transaction is not in the nature of an export sale even if payment is denominated in foreign
currency.
 An essential condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the
recipient of the services is a person doing business outside the Philippines
 In this case, the recipient of the services is the Consortium, which is doing business not outside,
but within the Philippines because it has a 15-year contract to operate and maintain
NAPOCORÊs two 100-megawatt power barges in Mindanao.
 While the Court recognizes the rule that the VAT system generally follows the „destination
principle‰ (exports are zero-rated whereas imports are taxed), an exception to this rule is the
0% VAT on services enumerated in Section 102 and performed in the Philippines
 Thus, to be exempt from the destination principle under Section 102(b)(1) and (2), the services
must be (a) performed in the Philippines; (b) for a person doing business outside the Philippines;
and (c) paid in acceptable foreign currency accounted for in accordance with BSP rules.

10. Commissioner of Internal Revenue vs. Magsaysay lines, Inc.

 ·A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on
consumption, even though it is assessed on many levels of transactions on the basis of a fixed
percentage. It is the end user of consumer goods or services which ultimately shoulders the tax,
as the liability therefrom is passed on to the end users by the providers of these goods or services
who in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive
from the final consumer (or output VAT).
 VAT is not a singularminded tax on every transactional level. Its assessment bears direct
relevance to the taxpayerÊs role or link in the production chain. Hence, as affirmed by Section
99 of the Tax Code and its subsequent incarnations, the tax is levied only on the sale, barter or
exchange of goods or services by persons who engage in such activities, in the course of trade
or business. These transactions outside the course of trade or business may invariably
contribute to the production chain, but they do so only as a matter of accident or incident. As the
sales of goods or services do not occur within the course of trade or business, the providers of
such goods or services would hardly, if at all, have the opportunity to appropriately credit any
VAT liability as against their own accumulated VAT collections since the accumulation of output
VAT arises in the first place only through the ordinary course of trade or business.
 Any sale, barter or exchange of goods or services not in the course of trade or business is not
subject to Value Added Tax (VAT)