FACTS:

Acesite (Philippines) Hotel Corporation filed a Petition for Review on Certiorari seeking the reversal of the Court of Appeals' decision affirming the refund of their Value Added Tax (VAT) payments. Acesite owns and operates the Holiday Inn Manila Pavilion Hotel, which leases a portion of its premises to the Philippine Amusement and Gaming Corporation (PAGCOR) for casino operations. Acesite also provides food and beverages to PAGCOR's casino patrons. Acesite incurred VAT amounting to P30,152,892.02 from its rental income and sale of food and beverages to PAGCOR. Initially, Acesite tried to have PAGCOR assume the tax burden, but PAGCOR refused due to its tax-exempt status. PAGCOR paid Acesite the amount due minus the VAT, and Acesite paid the VAT to the Commissioner of Internal Revenue (CIR) to avoid legal consequences. Later, Acesite realized that their transactions with PAGCOR should be subject to zero-rated VAT due to PAGCOR's tax-exempt status. Acesite filed a claim for refund with the CIR, but the CIR failed to resolve the claim. The Court of Tax Appeals (CTA) granted the refund, determining that Acesite was entitled to P30,054,148.64. The CIR appealed to the Court of Appeals (CA), but the CA affirmed the CTA's decision, ruling that PAGCOR's tax exemption privilege includes VAT. The CIR filed a petition for review, questioning whether PAGCOR's tax exemption privilege covers VAT and whether Acesite is entitled to zero-rated VAT.

ISSUES:

1. Whether PAGCOR's tax exemption privilege includes the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate

2. Whether the zero percent (0%) VAT rate under then Section 102 (b)(3) of the Tax Code (now Section 108 (B)(3) of the Tax Code of 1997) legally applies to Acesite

RULING:

1. The Court ruled in favor of Acesite. PAGCOR's tax exemption privilege includes the indirect tax of VAT, entitling Acesite to a zero percent (0%) VAT rate. The Court held that P.D. 1869, the charter creating PAGCOR, grants a blanket exemption to taxes without distinction as to whether they are direct or indirect. Therefore, the transactions between Acesite and PAGCOR are effectively zero-rated because they involve the rendition of services to an entity exempt from indirect taxes. Acesite is entitled to a refund of PHP 30,054,148.64.

PRINCIPLES:

• P.D. 1869 grants PAGCOR an exemption from payment of taxes, including indirect taxes like VAT.

• PAGCOR's exemption from indirect taxes extends to entities and individuals with whom PAGCOR has contractual relationships in connection with its operations.

• Transactions involving the rendition of services to an entity exempt from indirect taxes are effectively zero-rated.