The Court of Tax Appeals (CTA) has ruled that goods and services sold to entities inside economic zones in the Philippines are not subject to the value-added tax (VAT) because such sale is considered as export sales.
In the amended decision in the case of Top Master Construction Inc. v Commissioner of Internal Revenue, the CTA Second Division affirmed the grant of P9.8 million in tax credits to the petitioner and denied the appeal of the Bureau of Internal Revenue (BIR).
The BIR’s argument is that the sales of the petitioner to the Travellers International Hotel Group Inc. should be imposed the 12-percent VAT, thus, the VAT refund asked by the petitioner on taxes paid for such sales should not be granted.
The petitioner, on the other hand, argued that the sales to Travellers International qualifies as VAT zero-rated sales under the Tax Code because Travellers International is registered with the Philippine Economic Zone Authority (Peza) and qualified to enjoy certain tax perks such as VAT-exemption. Thus, the taxes paid for sales to Travellers International must be refunded to the petitioner.
The CTA said that goods and services sold to Travellers International, a Peza-registered entity, is exempted from VAT because such sales are considered as export sales and not for local consumption.
The CTA cited the Supreme Court’s decision in Commissioner of Internal Revenue v Toshiba Information Equipment Inc., which said that the economic zones constitute a separate customs territory, “thus, creating the fiction that the economic zone is a foreign territory.”
“As a result, sales made by a supplier in the customs territory to a purchaser in the economic zone shall be treated as an exportation from the customs territory. Conversely, sales made by a supplier from the economic zone to a purchaser in the customs territory shall be considered as an importation into the customs territory,” the Supreme Court case said.
“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 VAT,” it added.
Written by David Cagahastian