THIRD DIVISION

G.R. No. 153866             February 11, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner, 

vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.

DECISION

PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic

Zone in Naga, Cebu -- like herein respondent -- are entities exempt from all
internal revenue taxes and the implementing rules relevant thereto, including
the value-added taxes or VAT. Although export sales are not deemed
exempt transactions, they are nonetheless zero-rated. Hence, in the present
case, the distinction between exempt entities and exempt transactions has
little significance, because the net result is that the taxpayer is not liable for
the VAT. Respondent, a VAT-registered enterprise, has complied with all
requisites for claiming a tax refund of or credit for the input VAT it paid on
capital goods it purchased. Thus, the Court of Tax Appeals and the Court of
Appeals did not err in ruling that it is entitled to such refund or credit.

The Case

Before us is a Petition for Review 1 under Rule 45 of the Rules of Court,

seeking to set aside the May 27, 2002 Decision 2 of the Court of Appeals (CA)
in CA-GR SP No. 66093. The decretal portion of the Decision reads as
follows:

"WHEREFORE, foregoing premises considered, the petition for review

is DENIED for lack of merit."3

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as
follows:

"As jointly stipulated by the parties, the pertinent facts x x x involved in this
case are as follows:

1. [Respondent] is a resident foreign corporation duly registered with the

Securities and Exchange Commission to do business in the Philippines, with
principal office address at the new Cebu Township One, Special Economic
Zone, Barangay Cantao-an, Naga, Cebu;

2. [Petitioner] is sued in his official capacity, having been duly appointed and
empowered to perform the duties of his office, including, among others, the
duty to act and approve claims for refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority
(PEZA) and has been issued PEZA Certificate No. 97-044 pursuant to
Presidential Decree No. 66, as amended, to engage in the manufacture of
recording components primarily used in computers for export. Such
registration was made on 6 June 1997;

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by

VAT Registration Certification No. 97-083-000600-V issued on 2 April 1997;

5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by
[respondent];

6. An administrative claim for refund of VAT input taxes in the amount

of P28,369,226.38 with supporting documents (inclusive of
the P12,267,981.04 VAT input taxes subject of this Petition for Review), was
filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;

7. No final action has been received by [respondent] from [petitioner] on

[respondent’s] claim for VAT refund.

"The administrative claim for refund by the [respondent] on October 4, 1999

was not acted upon by the [petitioner] prompting the [respondent] to elevate
the case to [the CTA] on July 21, 2000 by way of Petition for Review in order
to toll the running of the two-year prescriptive period.

"For his part, [petitioner] x x x raised the following Special and Affirmative
Defenses, to wit:

1. [Respondent’s] alleged claim for tax refund/credit is subject to

administrative routinary investigation/examination by [petitioner’s] Bureau;

2. Since ‘taxes are presumed to have been collected in accordance with laws
and regulations,’ the [respondent] has the burden of proof that the taxes
sought to be refunded were erroneously or illegally collected x x x;

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme
Court ruled that:

"A claimant has the burden of proof to establish the factual basis of his or her
claim for tax credit/refund."

4. Claims for tax refund/tax credit are construed in ‘strictissimi juris’ against
the taxpayer. This is due to the fact that claims for refund/credit [partake of]
the nature of an exemption from tax. Thus, it is incumbent upon the
[respondent] to prove that it is indeed entitled to the refund/credit sought.
Failure on the part of the [respondent] to prove the same is fatal to its claim
for tax credit. He who claims exemption must be able to justify his claim by the
clearest grant of organic or statutory law. An exemption from the common
burden cannot be permitted to exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic
Zone Authority (PEZA) registered Ecozone Enterprise, then its business is not
subject to VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in
relation to Section 103 of the Tax Code, as amended. As [respondent’s]
business is not subject to VAT, the capital goods and services it alleged to
have purchased are considered not used in VAT taxable business. As such,
[respondent] is not entitled to refund of input taxes on such capital goods
pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of
input taxes on services pursuant to Section 4.103 of said regulations.

6. [Respondent] must show compliance with the provisions of Section 204 (C)
and 229 of the 1997 Tax Code on filing of a written claim for refund within two
(2) years from the date of payment of tax.’

"On July 19, 2001, the Tax Court rendered a decision granting the claim for
refund."4

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or
issuance of a tax credit certificate (TCC) in favor of respondent in the reduced
amount of P12,122,922.66. This sum represented the unutilized but
substantiated input VAT paid on capital goods purchased for the period
covering April 1, 1998 to June 30, 1999.

The appellate court reasoned that respondent 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 percent 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.

Moreover, the CA held that neither Section 109 of the Tax Code nor Sections
4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the input VAT
on the capital goods it purchased, respondent correctly filed the administrative
and judicial claims for its refund within the two-year prescriptive period. Such
payments were -- to the extent of the refundable value -- duly supported by
VAT invoices or official receipts, and were not yet offset against any output
VAT liability.

Hence this Petition.5

Sole Issue

Petitioner submits this sole issue for our consideration:

"Whether or not respondent is entitled to the refund or issuance of Tax Credit

Certificate in the amount of P12,122,922.66 representing alleged unutilized
input VAT paid on capital goods purchased for the period April 1, 1998 to
June 30, 1999."6

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for

Input VAT

No doubt, as a PEZA-registered enterprise within a special economic zone, 7 

respondent is entitled to the fiscal incentives and benefits 8 provided for in
either PD 669 or EO 226.10 It shall, moreover, enjoy all privileges, benefits,
advantages or exemptions under both Republic Act Nos. (RA) 7227 11 and
7844.12

Preferential Tax Treatment Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the

contrary, respondent shall not be subject to internal revenue laws and
regulations for raw materials, supplies, articles, equipment, machineries,
spare parts and wares, except those prohibited by law, brought into the zone
to be stored, broken up, repacked, assembled, installed, sorted, cleaned,
graded or otherwise processed, manipulated, manufactured, mixed or used
directly or indirectly in such activities. 13 Even so, respondent would enjoy a
net-operating loss carry over; accelerated depreciation; foreign exchange and
financial assistance; and exemption from export taxes, local taxes and
licenses.14

Comparatively, the same exemption from internal revenue laws and

regulations applies if EO 22615 is chosen. Under this law, respondent shall
further be entitled to an income tax holiday; additional deduction for labor
expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges
for foreign nationals employed; tax credits on domestic capital equipment, as
well as for taxes and duties on raw materials; and exemption from contractors’
taxes, wharfage dues, taxes and duties on imported capital equipment and
spare parts, export taxes, duties, imposts and fees, 16 local taxes and licenses,
and real property taxes.17

A privilege available to respondent under the provision in RA 7227 on tax and

duty-free importation of raw materials, capital and equipment 18 -- is, ipso facto,
also accorded to the zone19 under RA 7916. Furthermore, the latter law --
notwithstanding other existing laws, rules and regulations to the contrary --
extends20 to that zone the provision stating that no local or national taxes shall
be imposed therein.21 No exchange control policy shall be applied; and free
markets for foreign exchange, gold, securities and future shall be allowed and
maintained.22 Banking and finance shall also be liberalized under minimum
Bangko Sentral regulation with the establishment of foreign currency
depository units of local commercial banks and offshore banking units of
foreign banks.23

In the same vein, respondent benefits under RA 7844 from negotiable tax
credits24 for locally-produced materials used as inputs. Aside from the other
incentives possibly already granted to it by the Board of Investments, it also
enjoys preferential credit facilities25 and exemption from PD 1853.26

From the above-cited laws, it is immediately clear that petitioner enjoys

preferential tax treatment.27 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,28 however, is entitled to their credits.

Nature of the VAT and the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent
to 10 percent levied on every importation of goods, whether or not in the
course of trade or business, or imposed on each sale, barter, exchange or
lease of goods or properties or on each rendition of services in the course of
trade or business29 as they pass along the production and distribution chain,
the tax being limited only to the value added 30 to such goods, properties or
services by the seller, transferor or lessor. 31 It is an indirect tax that may be
shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services.32 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. 33 In either case, though,
the same conclusion is arrived at.

The law34 that originally imposed the VAT in the country, as well as the
subsequent amendments of that law, has been drawn from the tax credit
method.35 Such method adopted the mechanics and self-enforcement
features of the VAT as first implemented and practiced in Europe and
subsequently adopted in New Zealand and Canada. 36 Under the present
method that relies on invoices, 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.37

If at the end of a taxable quarter the output taxes 38 charged by a seller39 are

equal to the input taxes40 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.41 If, however, the input taxes exceed the output taxes, the excess shall
be carried over to the succeeding quarter or quarters. 42 Should the input taxes
result from zero-rated or effectively zero-rated transactions or from the
acquisition of capital goods,43 any excess over the output taxes shall instead
be refunded44 to the taxpayer or credited 45 against other internal revenue
taxes.46
Zero-Rated and Effectively Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ
from effectively zero-rated transactions as to their source.

Zero-rated transactions generally refer to the export sale of goods and supply
of services.47 The tax rate is set at zero.48 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, 49 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 50 or

supply of services51 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. 52 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.

Zero Rating and Exemption

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 principle53 to the exportation of goods, automatic zero

rating54 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.55 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.56 But in an exemption there is only partial relief,57 because
the purchaser is not allowed any tax refund of or credit for input taxes paid. 58

Exempt Transaction >and Exempt Party

The object of exemption from the VAT may either be the transaction itself or
any of the parties to the transaction.59

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.60 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. 61 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.

As mentioned earlier, the VAT is a tax on consumption, the amount of which

may be shifted or passed on by the seller to the purchaser of the goods,
properties or services.62 While the liability is imposed on one person,
the burden may be passed on to another. Therefore, if a special law merely
exempts a party as a seller from its direct liability for payment of the VAT, but
does not relieve the same party as a purchaser from its indirect burden of the
VAT shifted to it by its VAT-registered suppliers, the purchase transaction is
not exempt. Applying this principle to the case at bar, the purchase
transactions entered into by respondent are not VAT-exempt.

Special laws may certainly exempt transactions from the VAT. 63 However, the
Tax Code provides that those falling under PD 66 are not. PD 66 is the
precursor of RA 7916 -- the special law under which respondent was
registered. The purchase transactions it entered into are, therefore, not VAT-
exempt. These are subject to the VAT; respondent is required to register.

Its sales transactions, however, will either be zero-rated or taxed at the

standard rate of 10 percent,64 depending again on the application of
the destination principle.65

If respondent enters into such sales transactions with a purchaser -- usually in

a foreign country -- for use or consumption outside the Philippines, these shall
be subject to 0 percent.66 If entered into with a purchaser for use or
consumption in the Philippines, then these shall be subject to 10 percent, 67 
unless the purchaser is exempt from the indirect burden of the VAT, in which
case it shall also be zero-rated.

Since the purchases of respondent are not exempt from the VAT, the rate to
be applied is zero. Its exemption under both PD 66 and RA 7916 effectively
subjects such transactions to a zero rate, 68 because the ecozone within which
it is registered is managed and operated by the PEZA as a separate customs
territory.69 This means that in such zone is created the legal fiction of foreign
territory.70 Under the cross-border principle71 of the VAT system being
enforced by the Bureau of Internal Revenue (BIR), 72 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, 73 then the same rule
holds for such exports from the national territory -- except specifically declared
areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-

registered entity are considered exports to a foreign country; conversely,
sales by a PEZA-registered entity to a VAT-registered person in the customs
territory are deemed imports from a foreign country. 74 An ecozone --
indubitably a geographical territory of the Philippines -- is, however, regarded
in law as foreign soil.75 This legal fiction is necessary to give meaningful effect
to the policies of the special law creating the zone. 76 If respondent is located
in an export processing zone77 within that ecozone, sales to the export
processing zone, even without being actually exported, shall in fact be viewed
as constructively exported under EO 226.78 Considered as export sales,79 
such purchase transactions by respondent would indeed be subject to a zero
rate.80

Tax Exemptions Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity

is exempt from internal revenue laws and regulations.

This exemption covers both direct and indirect taxes, stemming from the very
nature of the VAT as a tax on consumption, for which the direct liability is
imposed on one person but the indirect burden is passed on to another.
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. Ubi lex non distinguit, nec nos distinguere
debemus. Where the law does not distinguish, we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the following
reasons:

First, RA 7916 states that "no taxes, local and national, shall be imposed on
business establishments operating within the ecozone." 81 Since this law does
not exclude the VAT from the prohibition, it is deemed included. Exceptio
firmat regulam in casibus non exceptis. An exception confirms the rule in
cases not excepted; that is, a thing not being excepted must be regarded as
coming within the purview of the general rule.

Moreover, even though the VAT is not imposed on the entity but on the
transaction, it may still be passed on and, therefore, indirectly imposed on the
same entity -- a patent circumvention of the law. That no VAT shall be
imposed directly upon business establishments operating within the ecozone
under RA 7916 also means that no VAT may be passed on and imposed
indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum.
When anything is prohibited directly, it is also prohibited indirectly.

Second, when RA 8748 was enacted to amend RA 7916, the same prohibition
applied, except for real property taxes that presently are imposed on land
owned by developers.82 This similar and repeated prohibition is an
unambiguous ratification of the law’s intent in not imposing local or national
taxes on business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw materials, equipment and the
like "shall not be subject to x x x internal revenue laws and regulations" under
PD 6683 -- the original charter of PEZA (then EPZA) that was later amended
by RA 7916.84 No provisions in the latter law modify such exemption.

Although this exemption puts the government at an initial disadvantage, the

reduced tax collection ultimately redounds to the benefit of the national
economy by enticing more business investments and creating more
employment opportunities.85

Fourth, even the rules implementing the PEZA law clearly reiterate that
merchandise -- except those prohibited by law -- "shall not be subject to x x x
internal revenue laws and regulations x x x" 86 if brought to the ecozone’s
restricted area87 for manufacturing by registered export enterprises, 88 of which
respondent is one. These rules also apply to all enterprises registered with the
EPZA prior to the effectivity of such rules.89

Fifth, export processing zone enterprises registered 90 with the Board of

Investments (BOI) under EO 226 patently enjoy exemption from national
internal revenue taxes on imported capital equipment reasonably needed and
exclusively used for the manufacture of their products; 91 on required supplies
and spare part for consigned equipment; 92 and on foreign and domestic
merchandise, raw materials, equipment and the like -- except those prohibited
by law -- brought into the zone for manufacturing. 93 In addition, they are given
credits for the value of the national internal revenue taxes imposed on
domestic capital equipment also reasonably needed and exclusively used for
the manufacture of their products, 94 as well as for the value of such taxes
imposed on domestic raw materials and supplies that are used in the
manufacture of their export products and that form part thereof. 95

Sixth, the exemption from local and national taxes granted under RA 7227 96 
are ipso facto accorded to ecozones. 97In case of doubt, conflicts with respect
to such tax exemption privilege shall be resolved in favor of the ecozone. 98

And seventh, the tax credits under RA 7844 -- given for imported raw

materials primarily used in the production of export goods, 99 and for locally
produced raw materials, capital equipment and spare parts used by exporters
of non-traditional products100 -- shall also be continuously enjoyed by similar
exporters within the ecozone.101 Indeed, the latter exporters are likewise
entitled to such tax exemptions and credits.

Tax Refund as Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi

juris102 against the taxpayer103 and liberally in favor of the taxing authority. 104

Tax refunds are in the nature of such exemptions. 105 Accordingly, the

claimants of those refunds bear the burden of proving the factual basis of their
claims;106 and of showing, by words too plain to be mistaken, that the
legislature intended to exempt them. 107 In the present case, all the cited legal
provisions are teeming with life with respect to the grant of tax exemptions too
vivid to pass unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions
which are not exempt. The end result, however, is that it is not subject to the
VAT. 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. 108 Nonetheless, its exemption as an
entity and the non-exemption of its transactions lead to the same result for the
following considerations:

First, the contemporaneous construction of our tax laws by BIR authorities

who are called upon to execute or administer such laws 109 will have to be
adopted. Their prior tax issuances have held inconsistent positions brought
about by their probable failure to comprehend and fully appreciate the nature
of the VAT as a tax on consumption and the application of the destination
principle.110 Revenue Memorandum Circular No. (RMC) 74-99, however, now
clearly and correctly provides that any VAT-registered supplier’s sale of
goods, property or services from the customs territory to any registered
enterprise operating in the ecozone -- regardless of the class or type of the
latter’s PEZA registration -- is legally entitled to a zero rate. 111

Second, the policies of the law should prevail. Ratio legis est anima. The
reason for the law is its very soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well
as the establishment of export processing zones, seeks "to encourage and
promote foreign commerce as a means of x x x strengthening our export trade
and foreign exchange position, of hastening industrialization, of reducing
domestic unemployment, and of accelerating the development of the
country."112

RA 7916, as amended by RA 8748, declared that by creating the PEZA and

integrating the special economic zones, "the government shall actively
encourage, promote, induce and accelerate a sound and balanced industrial,
economic and social development of the country x x x through the
establishment, among others, of special economic zones x x x that shall
effectively attract legitimate and productive foreign investments." 113

Under EO 226, the "State shall encourage x x x foreign investments in

industry x x x which shall x x x meet the tests of international
competitiveness[,] accelerate development of less developed regions of the
country[,] and result in increased volume and value of exports for the
economy."114 Fiscal incentives that are cost-efficient and simple to administer
shall be devised and extended to significant projects "to compensate for
market imperfections, to reward performance contributing to economic
development,"115 and "to stimulate the establishment and assist initial
operations of the enterprise."116

Wisely accorded to ecozones created under RA 7916 117 was the

government’s policy -- spelled out earlier in RA 7227 -- of converting into
alternative productive uses118 the former military reservations and their
extensions,119 as well as of providing them incentives 120 to enhance the
benefits that would be derived from them 121 in promoting economic and social
development.122

Finally, under RA 7844, the State declares the need "to evolve export
development into a national effort" 123 in order to win international markets. By
providing many export and tax incentives, 124 the State is able to drive home
the point that exporting is indeed "the key to national survival and the means
through which the economic goals of increased employment and enhanced
incomes can most expeditiously be achieved." 125

The Tax Code itself seeks to "promote sustainable economic growth x x x; x x

x increase economic activity; and x x x create a robust environment for
business to enable firms to compete better in the regional as well as the
global market."126 After all, international competitiveness requires economic
and tax incentives to lower the cost of goods produced for export. State
actions that affect global competition need to be specific and selective in the
pricing of particular goods or services. 127

All these statutory policies are congruent to the constitutional mandates of

providing incentives to needed investments, 128 as well as of promoting the
preferential use of domestic materials and locally produced goods and
adopting measures to help make these competitive. 129 Tax credits for
domestic inputs strengthen backward linkages. Rightly so, "the rule of law and
the existence of credible and efficient public institutions are essential
prerequisites for sustainable economic development." 130

VAT Registration, Not Application for Effective Zero Rating, Indispensable to

VAT Refund

Registration is an indispensable requirement under our VAT law. 131 Petitioner

alleges that respondent did register for VAT purposes with the appropriate
Revenue District Office. However, it is now too late in the day for petitioner to
challenge the VAT-registered status of respondent, given the latter’s prior
representation before the lower courts and the mode of appeal taken by
petitioner before this Court.

The PEZA law, which carried over the provisions of the EPZA law, is clear in
exempting from internal revenue laws and regulations the equipment --
including capital goods -- that registered enterprises will use, directly or
indirectly, in manufacturing.132 EO 226 even reiterates this privilege among the
incentives it gives to such enterprises.133Petitioner merely asserts that by
virtue of the PEZA registration alone of respondent, the latter is not subject to
the VAT. Consequently, the capital goods and services respondent has
purchased are not considered used in the VAT business, and no VAT refund
or credit is due.134 This is a non sequitur. By the VAT’s very nature as a tax on
consumption, the capital goods and services respondent has purchased are
subject to the VAT, although at zero rate. Registration does not determine
taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts.
Having failed to present evidence to support its contentions against
the income tax holiday privilege of respondent,135 petitioner is deemed to have
conceded. It is a cardinal rule that "issues and arguments not adequately and
seriously brought below cannot be raised for the first time on appeal." 136 This
is a "matter of procedure"137 and a "question of fairness."138 Failure to assert
"within a reasonable time warrants a presumption that the party entitled to
assert it either has abandoned or declined to assert it." 139

The BIR regulations additionally requiring an approved prior application for

effective zero rating140 cannot prevail over the clear VAT nature of
respondent’s transactions. The scope of such regulations is not "within the
statutory authority x x x granted by the legislature. 141

First, a mere administrative issuance, like a BIR regulation, cannot amend the
law; the former cannot purport to do any more than interpret the latter. 142 The
courts will not countenance one that overrides the statute it seeks to apply
and implement.143

Other than the general registration of a taxpayer the VAT status of which is
aptly determined, no provision under our VAT law requires an additional
application to be made for such taxpayer’s transactions to be considered
effectively zero-rated. An effectively zero-rated transaction does not and
cannot become exempt simply because an application therefor was not made
or, if made, was denied. To allow the additional requirement is to give
unfettered discretion to those officials or agents who, without fluid
consideration, are bent on denying a valid application. Moreover, the State
can never be estopped by the omissions, mistakes or errors of its officials or
agents.144

Second, grantia argumenti that such an application is required by law, there is

still the presumption of regularity in the performance of official duty. 145 
Respondent’s registration carries with it the presumption that, in the absence
of contradictory evidence, an application for effective zero rating was also filed
and approval thereof given. Besides, it is also presumed that the law has
been obeyed146 by both the administrative officials and the applicant.

Third, even though such an application was not made, all the special laws we
have tackled exempt respondent not only from internal revenue laws but also
from the regulations issued pursuant thereto. Leniency in the implementation
of the VAT in ecozones is an imperative, precisely to spur economic growth in
the country and attain global competitiveness as envisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing

requirements,147 is sufficient for the effective zero rating of the transactions of
a taxpayer. The nature of its business and transactions can easily be perused
from, as already clearly indicated in, its VAT registration papers and
photocopied documents attached thereto. Hence, its transactions cannot be
exempted by its mere failure to apply for their effective zero rating. Otherwise,
their VAT exemption would be determined, not by their nature, but by the
taxpayer’s negligence -- a result not at all contemplated. Administrative
convenience cannot thwart legislative mandate.

Tax Refund or Credit in Order

Having determined that respondent’s purchase transactions are subject to a

zero VAT rate, the tax refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen
the fiscal incentives in EO 226 over those in RA 7916 and PD 66. It opted for
the income tax holiday regime instead of the 5 percent preferential tax
regime.

The latter scheme is not a perfunctory aftermath of a simple registration under

the PEZA law,148 for EO 226149 also has provisions to contend with. These two
regimes are in fact incompatible and cannot be availed of simultaneously by
the same entity. While EO 226 merely exempts it from income taxes, the
PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only
from the payment of income tax for a certain number of years, depending on
its registration as a pioneer or a non-pioneer enterprise. Besides, the
remittance of the aforesaid 5 percent of gross income earned in lieu of local
and national taxes imposable upon business establishments within the
ecozone cannot outrightly determine a VAT exemption. Being subject to VAT,
payments erroneously collected thereon may then be refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax

regime in RA 7916, Section 24 thereof does not preclude the VAT. One can,
therefore, counterargue that such provision merely exempts respondent from
taxes imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity is exempt,
the transactions it enters into are not necessarily so. The VAT payments
made in excess of the zero rate that is imposable may certainly be refunded
or credited.

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the
requisites for claiming a VAT refund or credit. 150

First, respondent is a VAT-registered entity. This fact alone distinguishes the

present case from Contex, in which this Court held that the petitioner therein
was registered as a non-VAT taxpayer.151 Hence, for being merely VAT-
exempt, the petitioner in that case cannot claim any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly
supported by VAT invoices and have not been offset against any output taxes.
Although enterprises registered with the BOI after December 31, 1994 would
no longer enjoy the tax credit incentives on domestic capital equipment -- as
provided for under Article 39(d), Title III, Book I of EO 226 152 -- starting
January 1, 1996, respondent would still have the same benefit under a
general and express exemption contained in both Article 77(1), Book VI of EO
226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones
by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt
investors in ecozones from national and local taxes, but also to grant them tax
credits. This fact was revealed by the sponsorship speeches in Congress
during the second reading of House Bill No. 14295, which later became RA
7916, as shown below:

"MR. RECTO. x x x Some of the incentives that this bill provides are
exemption from national and local taxes; x x x tax credit for locally-sourced
inputs x x x."

xxxxxxxxx

"MR. DEL MAR. x x x To advance its cause in encouraging investments and

creating an environment conducive for investors, the bill offers incentives such
as the exemption from local and national taxes, x x x tax credits for locally
sourced inputs x x x."153

And third, no question as to either the filing of such claims within the

prescriptive period or the validity of the VAT returns has been raised. Even if
such a question were raised, the tax exemption under all the special laws
cited above is broad enough to cover even the enforcement of internal
revenue laws, including prescription.154

Summary

To summarize, 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 percent 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 such VAT refund or credit.

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No

pronouncement as to costs.

SO ORDERED.