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CIR vs Cebu Toyo Corporation Facts: Cebu Toyo Corp.

(Cebu) is a domestic subsidiary of Toyo Lens Corporation Japan, engaged in the manufacture of lenses and various optical components used in TV set, cameras, CDs, etc. Its principal office is located at the Mactan Export Processing Zone (MEPZ) as a zone export enterprise registered with the PEZA. It is also registered with the BIR as a VAT taxpayer. Cebu sells 80% of its products to its mother corporation, pursuant to an Agreement of Offsetting. The rest are sold to various enterprises doing business in the MEPZ. On March 30, 1998, it filed an application for tax credit/refund of VAT paid for the period April 1996 to December 1997 amounting to about P4.4 million representing excess VAT input payments. Cebu argues that as a VATregistered exporter of goods, it is subject to VAT at the rate of 0% on its export sales that do not result in any output tax. Hence, the unutilized VAT input taxes on its purchases of goods and services related to such zero-rated activities are available as tax credits or refund. The BIR opposed this on the following grounds: It failed to show that the tax was erroneously or illegally collected; the taxes paid and collected are presumed to have been made in accordance with law; and that claims for refund are strictly construed against the claimant. The CTA ruled that not the entire amount claimed for refund by Toyo were actually offset against its related accounts. It determined that the refund/credit amounted only to P2.1M. The same was affirmed by the CA. Issue: Whether the CA erred in affirming the CTA granting a refund representing unutilized input VAT on goods and services. Ruling: The petition is denied. Cebu is entitled to the P2.1M tax refund/credit. Petitioners contention that respondent is not entitled to refund for being exempt form VAT is untenable. This argument turns a blind eye to the fiscal incentives given to PEZA registered enterprises under RA 7916. Under this statute, Cebu has to options with respect to its tax burden. It could avail of an income tax holiday pursuant to EO 226, thus exempting it from income taxes for a number of years (in this case, 4 years) but not from other internal revenue taxes such as VAT; or it could avail of the tax exemption on all taxes, including VAT under PD 66 and pay only the preferential rate of 5% under RA 7916. Thus, availing of the first option, respondent is not exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is engaged in a taxable rather than exempt transactions. In taxable transactions, the seller (Cebu) shall be entitled to tax credit for the VAT paid on purchases and leases of goods properties or services. Under the VAT system, a zero-rate sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, input tax on his purchase of goods, properties or services related to such zero-related sale shall be available as a tax credit or refund. While a zero rating and exemption are computationally the same, they actually differ in several aspects, to wit: A) A zero-rated sale is a taxable transaction but does not result in an output tax while an exempted transaction is not subject to the output tax; B) The input VAt on the purchases of VAT-registered person with zero-rated sales may be allowed as tax credits or refunded while the seller in an exempt transaction is not entitled to any output tax on his purchases despite the issuance of a VAT invoice or receipt; C) Persons engaged in transactions which are zero-rated, being subject to VAt, are required to register while registration is optional for VAt-exempt persons.

Since Cebu did not have any output tax against which said input tax may be offset, it had the option to file a claim for tax refund/credit of its unutilized input taxes.