CASE DIGEST: CIR vs. Seagate Tech (G.R. No. 153866; February 11, 2005)

CASE DIGEST: COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY (PHILIPPINES), respondent. (G.R. No. 153866; February 11, 2005)

PRINCIPLE:
Business companies registered in and operating from the Special Economic Zone in Naga, Cebu 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, 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. A VAT-registered enterprise may comply with all requisites to claim a tax refund of or credit for the input VAT it paid on capital goods it purchased. In short, after compliance with all requisites, such enterprise is entitled to refund or credit.

FACTS:
A VAT-registered enterprise, STP has principal office address at the new Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu. STP is registered with the Philippine Export Zone Authority (PEZA) and certified to engage in the manufacture of recording components primarily used in computers for export. VAT returns were filed for the period 1 April 1998 to 30 June 1999. With supporting documents, a claim for refund of VAT input taxes in the amount of 28 million pesos (inclusive of the 12-million VAT input taxes subject of this Petition for Review) was filed on 4 October 1999.

CIR did not act promptly upon STP's claim so the latter elevated the case to the CTA for review in order to toll the running of the two-year prescriptive period.

On appeal, CIR asserted that by virtue of the PEZA registration alone of STP, the latter is not subject to the VAT. According to CIR, STP's sales transactions intended for export are not exempt.

ISSUE:
[1] Is STP entitled to refund or tax credit for puchases?

HELD:
[1] Yes, STP is entitled to refund or tax credit

As a PEZA-registered enterprise within a special economic zone, STP is entitled to the fiscal incentives and benefit provided for in either PD 66 or EO 226. It shall, moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844.
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, STP is entitled to such VAT refund or credit.

STP, 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.

LAWS MENTIONED IN THIS CASE:

PD 66 = exemption from internal revenue laws and regulations for raw materials, etc. brough into the zone to be stored, broken up, etc.

Despite availment of PD 66 benefits, the following will still apply: net-operating loss carry over; accelerated depreciation; foreign exchange and financial assistance; and exemption from export taxes, local taxes and licenses.

EO 226 = 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, local taxes and licenses, and real property taxes.

Despite availment of EO 226 benefits, the following will still apply: net-operating loss carry over; accelerated depreciation; foreign exchange and financial assistance; and exemption from export taxes, local taxes and licenses.

RA 7227 = tax and duty-free importation of raw materials, capital and equipment. Availment of RA 7227 benefits does not stop the ecozone benefits under RA 7916.

RA 7227 = no local or national taxes shall be imposed in the zone. 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.

RA 7844 = negotiable tax credits for locally-produced materials used as inputs

PD 1853 = preferential credit facilities

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