TOSHIBA INFORMATION EQUIPMENT V.

CIR
G.R. NO. 157594 MARCH 9, 2010

DOCTRINE:

Based on the Cross Border Doctrine, PEZA-registered entities which are located within ECOZONES are
VAT-exempt and no VAT can be passed on to them not because of Section 24 of Rep. Act No. 7916, as amended,
which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of
all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are
foreign territory.

FACTS:

Toshiba is a domestic corporation principally engaged in the business of manufacturing and exporting of
electric machinery, equipment systems, accessories, parts, components, materials including those relating to office
automation and information technology and all types of computer hardware and software. It is registered with the
Philippine Economic Zone Authority (PEZA) as an Economic Zone (ECOZONE) export enterprise in the Laguna
Technopark. It is likewise registered with Regional District Office No. 57 of the Bureau of Internal Revenue (BIR)
in San Pedro, Laguna, as a VAT-taxpayer.

Toshiba declared input VAT payments on its domestic purchases of taxable goods and services in the
aggregate sum of ₱3,875,139.65, with no zero-rated sales. This was later amended but reported the same amount of
input VAT payments with zero-rated sales totaling ₱7,494,677,000.00. Toshiba filed at DOF One-Stop shop two
separate applications for tax credit/refund of its unutilized input VAT payments for the first half of 1997 in the total
amount of ₱3,685,446.73.

The CIR opposed the claim for tax refund/credit. Subsequently, Toshiba and CIR filed their joint
stipulation of facts issues where they both agreed that Toshiba is a (a) duly registered VAT entity; (b) subject to 0%
Value -added tax on its export sales; (c) filed its quarterly VAT returns for the first two quarters of 1997 within the
legally prescribed period; and (d) filed the instant Petition for Review within the two-year prescriptive period.

The CTA favored Toshiba, holding that export sales of Toshiba were subject to zero percent (0%) VAT
based on Section 100(a)(2)(A)(i) of the Tax Code of 1977, as amended. Toshiba could then claim tax credit or
refund of input VAT paid on its purchases of goods, properties, or services, directly attributable to such zero-rated
sales. The CTA however, reduced the amount of claim for tax refund/credit in the amount of ₱1,385,292.02.

By virtue of CTA’s denial of respondent’s Motion for Reconsideration, it later appealed to the Court of
Appeals. The Appeal was granted and reversed the ruling of the CTA. It held that the export sales of Toshiba were
VAT-exempt, not zero-rated, transactions. Following that Toshiba was a tax-exempt entity, its export sales were
VAT-exempt transactions hence, could not claim refund of its input VAT payments on its domestic purchases of
goods and services.

Toshiba then sought for the Supreme Court’s review.

ISSUE:

Whether Toshiba, being a PEZA-registered enterprise, as well as its export sales, is exempt from VAT.

RULING:

YES, Toshiba, being a PEZA-registered entity, is exempt from VAT, and its export sales transactions are
likewise covered by the exemption.

The Court shed light on the difference between a VAT-Exempt transaction and VAT-exempt party or
person. 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.

The CIR is opposing the claim for credit/refund of input VAT of Toshiba on two grounds: (1) that Toshiba
was a VAT-exempt entity; and (2) that its export sales were VAT-exempt transactions.

It is now a settled rule that based on the Cross Border Doctrine, PEZA-registered enterprises, such as
Toshiba, are VAT-exempt and no VAT can be passed on to them. The Court opined that PEZA-registered
enterprise, which would necessarily be located within ECOZONES, are VAT-exempt entities, not because of
Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%) preferential tax rate on gross
income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute
which establishes the fiction that ECOZONES are 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. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT;
while, those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) VAT.

According to the BIR’s Memorandum Circular which it issued in line with the cross border doctrine, any
sale of goods, property or services made by a VAT registered supplier 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 actually
qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to such
enterprise made by a VAT registered supplier from the Customs Territory shall be treated subject to 0% VAT while
all sales of services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be
treated effectively subject to the 0% VAT. Hence, no output VAT may be passed on to an ECOZONE enterprise
since it is a VAT-exempt entity.

WHEREFORE, the assailed Decision dated August 29, 2002 and the Resolution dated February 19, 2003
of the Court of Appeals in CA-G.R. SP No. 63047 are REVERSED and SET ASIDE, and the Decision dated
October 16, 2000 of the Court of Tax Appeals in CTA Case No. 5762 is REINSTATED. Respondent Commissioner
of Internal Revenue is ORDERED to REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in
favor of petitioner Toshiba Information Equipment (Phils.), Inc. in the amount of ₱1,385,282.08, representing the
latter’s unutilized input VAT payments for the first and second quarters of 1997.