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CIR v. CEBU TOYO CORPORATION

FACTS:

Cebu Toyo Corporation, a domestic corporation engaged in the manufacture of lenses and optical components, filed an application for tax credit/refund of VAT paid for the period April 1, 1996 to December 31, 1997, amounting to P4,439,827.21. The company claimed that, as a VAT-registered exporter, it should be entitled to a refund or tax credit for unutilized VAT input taxes on its purchases of goods and services related to zero-rated activities.

The Commissioner of Internal Revenue (CIR), however, argued that Cebu Toyo Corporation was not entitled to a refund or tax credit because it failed to show that the tax was erroneously or illegally collected. The CIR also claimed that claims for refund should be strictly construed against the claimant.

Initially, the Court of Tax Appeals denied Cebu Toyo Corporation's petition. However, after the company filed a motion for reconsideration, the court partially granted it, ordering the CIR to refund or issue a tax credit certificate in the amount of P2,158,714.46 representing unutilized input tax payments.

The CIR filed a motion for reconsideration, contending that Cebu Toyo Corporation, as a PEZA-registered enterprise, was not subject to VAT and therefore not entitled to a refund of input taxes.

ISSUES:

  1. Whether the respondent, as a PEZA-registered enterprise, is exempt from VAT under Section 24 of Republic Act No. 7916.

  2. Whether the respondent, being VAT-exempt, is entitled to a refund of input taxes.

  3. Whether the respondent is exempt from value-added tax (VAT) considering its availment of the income tax holiday under E.O. No. 226.

  4. Whether the respondent is subject to VAT at the rate of 10% or 0%.

RULING:

  1. The Court of Appeals affirmed the Court of Tax Appeals' resolution granting a refund of input taxes to the respondent. The appellate court held that the respondent, as a VAT-registered enterprise, is subject to VAT at the rate of 0% and is entitled to a refund of unutilized input VAT. It also ruled that the respondent's availing of the income tax holiday under E.O. No. 226 does not exempt it from VAT.

  2. The respondent is not exempt from VAT despite its availment of the income tax holiday. As reflected in its Annual Corporate Income Tax Returns, the respondent specifically stated that it was availing the tax relief under E.O. No. 226. Therefore, the respondent is engaged in taxable transactions and is correctly registered as a VAT taxpayer.

  3. The respondent is subject to VAT at the rate of 0% because it is engaged in export sales and is registered as a VAT taxpayer. The input tax on the respondent's purchases related to its zero-rated sales shall be available as tax credit or refund.

PRINCIPLES:

  • PEZA-registered enterprises, while exempt from income taxes, are not exempt from other taxes, including VAT. The incentives granted to PEZA-registered enterprises under Section 23 of Rep. Act No. 7916 allow them to choose between an income tax holiday and the 0% VAT rate.

  • A VAT-registered enterprise subject to VAT at the rate of 0% is entitled to a refund of unutilized input VAT if it can establish that the input taxes are directly attributable to its VAT-registered activities.

  • Taxable transactions are subject to VAT either at the rate of 10% or 0%. The seller is entitled to tax credit for the VAT 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, and the seller is not allowed any tax credit for VAT previously paid.

  • Zero-rated sales are taxable transactions that do not result in an output tax, and the input VAT on purchases related to such sales may be allowed as tax credits or refunded.

  • The Court of Tax Appeals has expertise in resolving tax problems, and its conclusions are not set aside unless there is an abuse or improvident exercise of authority.