FACTS:

This case involves a petition for review seeking to set aside the decision of the Court of Appeals (CA) in favor of the respondent's claim for refund or tax credit. The respondent is a VAT-registered enterprise operating in the Special Economic Zone in Naga, Cebu. It is exempt from all internal revenue taxes, including value-added taxes (VAT). However, export sales are not considered exempt transactions but are zero-rated.

The respondent complied with all the requirements for claiming a refund or credit for the input VAT it paid on capital goods purchased. The administrative claim for refund was filed but not acted upon by the petitioner, prompting the respondent to elevate the case to the Court of Tax Appeals (CTA). The CTA ruled in favor of the respondent's claim for refund, a decision affirmed by the CA.

The sole issue brought before the Supreme Court is whether the respondent is entitled to the refund or issuance of a tax credit certificate for the alleged unutilized input VAT paid on capital goods.

ISSUES:

1. Whether zero rating and exemption are the same in terms of VAT computation.

2. Whether the purchase transactions of the respondent are VAT-exempt.

3. Whether the sales transactions of the respondent are subject to zero rating or the standard rate of 10 percent.

4. Whether the purchases of the respondent are subject to zero rating.

5. Whether the transactions of the respondent are subject to zero-rated value added tax (VAT).

6. Whether the respondent, as an entity, is exempt from internal revenue laws and regulations.

7. Whether the VAT-registered status of the respondent can be challenged at this point in the proceedings.

8. Whether the capital goods and services purchased by the respondent are subject to VAT.

9. Whether an additional application for effective zero rating is required for a taxpayer's transactions to be considered effectively zero-rated.

10. Whether the failure to apply for effective zero rating exempts the taxpayer's transactions from VAT.

11. Whether leniency should be applied in the implementation of VAT in ecozones.

12. Whether or not the business establishment registered and operating within an ecozone is exempt from all internal revenue taxes, including the value-added tax (VAT).

13. Whether or not prior application for the effective zero rating of sales transactions intended for export is necessary.

14. Whether or not the business establishment is entitled to claim a VAT refund or credit for the input VAT paid on capital goods purchased.

RULING:

1. Zero rating and exemption may be the same in terms of VAT computation, but the extent of relief that results from either one of them is not.

2. The purchase transactions of the respondent are not VAT-exempt. The respondent is required to register and its purchases are subject to the VAT at a zero rate.

3. The sales transactions of the respondent will either be subject to zero rating or the standard rate of 10 percent, depending on whether they are for use or consumption outside the Philippines or in the Philippines, respectively. If the purchaser is exempt from the indirect burden of the VAT, the sales transactions shall also be zero-rated.

4. The purchases of the respondent are subject to zero rating, considering that the respondent is located in an export processing zone within an ecozone which is regarded as foreign territory under the law.

5. The transactions of the respondent are subject to zero-rated VAT. Although the respondent, as an entity, is exempt from internal revenue laws and regulations, 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. Therefore, the respondent cannot be directly charged for VAT on its sales or indirectly made to bear the equivalent VAT on its purchases.

6. The respondent, as an entity, is exempt from internal revenue laws and regulations. This exemption is both broad and express, stemming from the nature of VAT as a tax on consumption. The exemption is provided under special laws and covers both direct and indirect taxes.

7. The challenge to the VAT-registered status of the respondent is not allowed at this stage of the proceedings as it was not adequately raised and argued before the lower courts.

8. The capital goods and services purchased by the respondent are subject to VAT, although at a zero rate. Registration does not determine the taxability under the VAT law.

9. No, an additional application for effective zero rating is not required for a taxpayer's transactions to be considered effectively zero-rated. The VAT status of a taxpayer is determined through general registration, and no provision in the VAT law requires an additional application for effective zero rating. The failure to make such an application or, if made, its denial, does not exempt the taxpayer's transactions from VAT.

10. The transactions of a taxpayer cannot be exempted from VAT merely due to the taxpayer's failure to apply for effective zero rating. The VAT-registered status and compliance with invoicing requirements are sufficient for the effective zero rating of transactions. The VAT exemption should be determined by the nature of the transactions, not by the taxpayer's negligence.

11. Leniency should be applied in the implementation of VAT in ecozones to promote economic growth and attain global competitiveness. Special laws exempt the taxpayer from not only internal revenue laws but also regulations issued pursuant to such laws. Administrative convenience should not thwart the legislative mandate of granting leniency in the implementation of VAT in ecozones.

12. Yes, the business establishment registered and operating within an ecozone is exempt from all internal revenue taxes, including the VAT, and regulations pertaining thereto.

13. No, prior application for the effective zero rating of sales transactions intended for export is not necessary.

14. Yes, the business establishment is entitled to claim a VAT refund or credit for the input VAT paid on capital goods purchased.

PRINCIPLES:

• As a PEZA-registered enterprise, the respondent is entitled to fiscal incentives and benefits provided for in the law.

• Preferential tax treatment is given to PEZA-registered enterprises under special laws such as PD 66 and EO 226.

• A privilege available to PEZA-registered enterprises under RA 7227 on tax and duty-free importation of raw materials, capital, and equipment is also accorded to the special economic zone under RA 7916.

• The VAT on capital goods is an internal revenue tax from which a PEZA-registered enterprise is exempt, although the transactions involving such tax are not exempt.

• The VAT is a uniform tax levied on every importation of goods or each sale, barter, exchange, or lease of goods or properties in the course of trade or business.

• The VAT operates under the tax credit method, where an entity can credit against or subtract from the VAT charged on its sales the VAT paid on its purchases, inputs, and imports.

• Any excess input VAT resulting from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods shall be refunded or credited against other internal revenue taxes.

• Zero rating and exemption have different effects in terms of relief from the burden of the VAT.

• An exempt transaction refers to goods or services that are specifically listed in and exempted from the VAT under the Tax Code, regardless of the tax status of the party to the transaction, while an exempt party refers to a person or entity granted VAT exemption under the Tax Code, a special law, or an international agreement.

• The VAT is a tax on consumption, and while the liability is imposed on one person, the burden may be passed on to another.

• Special laws may exempt transactions from the VAT, but transactions falling under PD 66 (precursor of RA 7916) are not exempt.

• The application of the destination principle determines whether sales transactions are subject to zero rating or the standard rate of 10 percent.

• Broad and express exemptions from tax laws are upheld and construed in favor of the taxpayer.

• Tax refunds are in the nature of tax exemptions and are construed strictly against the taxpayer and liberally in favor of the taxing authority.

• The non-taxability of transactions that are otherwise taxable is a necessary incident to the tax exemption granted to an exempt entity, and both lead to the same result.

• The contemporaneous construction of tax laws by BIR authorities is adopted and given weight in interpreting tax laws.

• The policies of the law should prevail and the reason for the law is its soul.

• The creation of export processing zones seeks to encourage and promote foreign commerce, hasten industrialization, reduce unemployment, and accelerate the development of the country.

• The government shall actively encourage, promote, induce, and accelerate industrial, economic, and social development through the establishment of special economic zones.

• The State shall encourage foreign investments in industry that meet the tests of international competitiveness, accelerate development of less developed regions, and result in increased volume and value of exports for the economy.

• Ecozones created under RA 7916 aim to convert former military reservations into alternative productive uses and provide incentives to enhance economic and social development.

• The State needs to evolve export development into a national effort to win international markets.

• Tax credits for domestic inputs strengthen backward linkages.

• The rule of law and the existence of credible and efficient public institutions are essential prerequisites for sustainable economic development.

• VAT registration is an indispensable requirement for VAT refund.

• The capital goods and services purchased by a VAT-registered entity are subject to VAT, although at a zero rate. Registration does not determine taxability under the VAT law.

• A mere administrative issuance, like a BIR regulation, cannot amend the law; it can only interpret the law. It cannot override the statute it seeks to apply and implement.

• The presumption of regularity in the performance of official duty applies to taxpayer registration, presuming that an application for effective zero rating was also filed and approved.

• The State cannot be estopped by the omissions, mistakes, or errors of its officials or agents.

• The VAT is a tax imposed on consumption, not on business. While a taxpayer may be exempt, the transactions it enters into may still be subject to VAT.

• Compliance with all requisites, such as VAT registration, supported input taxes, and proper documentation, is necessary for claiming a VAT refund or credit.

• Special laws expressly grant preferential tax treatment to business establishments registered and operating within an ecozone.

• Business establishments registered and operating within an ecozone are considered separate customs territories.

• The tax exemption under special laws is broad enough to cover the enforcement of internal revenue laws, including prescription.

• The registration status entitling a business establishment to tax benefits cannot be questioned as a matter of law and procedure.

• Sales transactions intended for export may not be exempt from VAT, but they are zero-rated for tax purposes.

• VAT-registered business establishments that have complied with all the requisites are entitled to claim a VAT refund or credit for input VAT paid on capital goods purchased.