(G.R. No. 266016, Promulgated February 4, 2025)
The Subic Bay Freeport VAT Zero-Rating Case
(G.R. No. 266016, Promulgated February 4, 2025)
Facts
The Subic Bay Freeport Zone (SBFZ) was created by Republic Act No. 7227 and is operated as a separate customs territory. Enterprises registered in the SBFZ (like Petitioner SBFCC) are typically granted tax incentives, including exemptions from customs duties and internal revenue taxes such as VAT, in exchange for paying a final tax of 5% of gross income (in lieu of all other taxes).
When Republic Act No. 11534 (CREATE Act) took effect, it entitled Registered Business Enterprises (RBEs)—which include Domestic Market Enterprises (DMEs) and Export Enterprises (REEs) registered in Freeports—to VAT exemption on importation and VAT zero-rating on local purchases of goods and services exclusively used in the registered project or activity.
However, the Department of Finance (DOF) and the Bureau of Internal Revenue (BIR) issued implementing rules and revenue issuances (specifically Rule 18, Section 5 of the CREATE IRR, RR No. 21-2022, RMC No. 24-2022, and RMC No. 49-2022) that subsequently limited the grant of VAT zero-rating on local purchases only to Registered Export Enterprises (REEs) located inside the Freeports, thereby excluding DMEs from the benefit.
Petitioners challenged these regulations, arguing that the exclusion of DMEs from VAT zero-rating on local purchases violated the clear provisions of the CREATE Act.
Issues
- Whether the Regional Trial Court (RTC) correctly dismissed the Petition for Declaratory Relief based on lack of jurisdiction.
- Whether the doctrine of exhaustion of administrative remedies should preclude the Supreme Court from taking cognizance of the petition.
- Whether Rule 18, Section 5 of the CREATE IRR and its implementing revenue issuances are void because they limit the VAT zero-rating on local purchases to only Registered Export Enterprises (REEs).
Ruling
The CTA has jurisdiction over cases involving the validity of tax laws, rules, regulations, and administrative issuances. However, the Supreme Court took cognizance of the case by exception, given the involvement of strong public interest.
On the merits, the Supreme Court ruled:
“Rule 18, Section 5 of the Implementing Rules and Regulations of Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act, Revenue Regulations No. 21-2021, Revenue Memorandum Circular No. 24-2022, and Revenue Memorandum Circular No. 49-2022, in so far as they limit the VAT zero-rating on local purchases of goods and services directly attributable to and exclusively used in the registered project or activity to registered export enterprises are DECLARED VOID, being issued in excess of the Department of Finance’s and Bureau of Internal Revenue’s jurisdiction.”
“ACCORDINGLY, the Petition is GRANTED.”
Essential Elements of Jurisprudence
- Scope of VAT Zero-Rating under CREATE: Sections 294(E) and 295(D) of the CREATE Act grant VAT zero-rating on local purchases to all Registered Business Enterprises (RBEs), which includes both Registered Export Enterprises (REEs) and Domestic Market Enterprises (DMEs) located inside Economic Zones or Freeports that are treated as separate customs territories.
- Separate Customs Territory Principle: Sales made by suppliers from the customs territory to registered enterprises located within freeports like the SBFZ are considered constructive “export sales” and are thus subject to VAT zero-rating (0%), following the cross-border doctrine and Destination Principle.
- Ultra Vires Rule (Separation of Powers): The power to grant and withdraw tax incentives is vested exclusively in the Legislature. The power of administrative agencies to promulgate implementing rules is limited to carrying into effect the law as it has been enacted; it cannot be extended to amend or expand the statutory requirements. Administrative regulations that restrict the scope of legislative tax incentives are issued in excess of jurisdiction and are void.
- Jurisdiction over Tax Regulations: The Court of Tax Appeals (CTA) is vested with exclusive jurisdiction to resolve the constitutionality or validity of tax laws, rules, regulations, and administrative issuances, including revenue memorandum circulars.
Sample Q&A
Question: Subic Bay Free Trade Corp. (SBFTC), a registered Domestic Market Enterprise (DME) operating inside the Subic Bay Freeport Zone (SBFZ), purchases raw materials locally from a VAT-registered supplier in Manila. Pursuant to Rule 18, Section 5 of the CREATE IRR and related Revenue Regulations, the supplier charges SBFTC 12% VAT, arguing that VAT zero-rating only applies to Export Enterprises (REEs). Is the application of 12% VAT correct, and what is the legal basis for the answer? Cite relevant provisions.
Answer: The application of the 12% VAT is incorrect. The implementing rule and regulations limiting VAT zero-rating to REEs are VOID because they were issued in excess of the executive agencies’ jurisdiction. The entitlement to VAT zero-rating on local purchases stems directly from the CREATE Act (R.A. No. 11534), Sections 294(E) and 295(D), which cover all Registered Business Enterprises (RBEs)—including DMEs operating within the SBFZ. Because the SBFZ is treated as a separate customs territory (as per R.A. No. 7227, Sec. 12), the sale of goods from the customs territory to SBFTC is considered an export sale subject to a zero-percent (0%) rate of VAT, pursuant to Section 106(A)(2) of the Tax Code. The power to withdraw or limit a tax incentive belongs solely to the Legislature, and the executive branch cannot curtail the benefit clearly granted by the CREATE Act.
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