THE Supreme Court (SC) has declared as unconstitutional a revenue regulation (RR) issued by the Department of Finance (DOF) and the Bureau of Internal Revenue (BIR) imposing value-added tax (VAT) and excise tax on petroleum and petroleum products imported by locators of economic zones.
The ruling effectively freed companies operating inside ecozones from the need to prove first that the petroleum products they imported will not land in the domestic market before they could avail themselves of the tax-exemption privilege.
In a 20-page decision penned by Associate Justice Arturo D. Brion, the SC en banc denied the petition filed by the DOF and the BIR seeking the reversal of the order issued by Regional Trial Court (RTC) in Angeles City that declared Revenue Regulation (RR) 2-2012 “unconstitutional and without force and effect.”
The RR prescribes the tax-administration treatment of petroleum and petroleum products imported into the Philippines, including those coming in through freeport zones and economic zones, and registration of all storage tanks, facilities, depots and terminals.
The case stemmed from the complaint filed by former Pampanga First District Rep. Carmelo Lazatin and Ecozone Plastic Enterprises Corp. (Epec), a locator at Clark Freeport Economic
Zone (FEZ).
In junking the petition filed by the DOF and the BIR, the SC upheld the arguments of the respondents that RR 2-2012 is invalid and unconstitutional, as it illegally imposes taxes upon FEZ enterprises that enjoy tax-exempt status under RA 7227, or the Bases Conversion and Development Act of 1992, as amended by RA 9400.
The imposition of the regulation, according to the High Court, also amends RA 7227, thus, an encroachment of the duty and powers of the legislative branch.
“Finally, the state’s inherent power to tax is vested exclusively in the Legislature…. Thus, the imposition of taxes, as well as the grant and withdrawal of tax exemptions, shall only be valid pursuant to a legislative enactment,” the SC ruled.
“As RR 2-2012, an executive issuance, attempts to withdraw the tax incentives clearly
accorded by the Legislative to FEZ enterprises, the respondents have arrogated upon themselves a power reserved exclusively to Congress, in violation of the doctrine of separation of powers. In these lights, we hereby rule and declare that RR 2-2012 is null and void,” it pointed out.
The Court explained that under RA 9400 and its implementing rules, Clark FEZ is considered a customs territory separate and distinct from the Philippine customs territory.
Thus, it added importations into and establishments within the Clark FEZ enjoy special incentives, including tax and duty-free privilege, as opposed to importations into and establishments in other customs territory.
The SC did not give credence to the argument of the DOF and the BIR that RR 2-2012 simply implements the provisions of the Tax Code on collection of internal revenue taxes, more specifically VAT and excise tax, on the importation of petroleum and petroleum products.
The petitioners further argued that FEZ enterprises enjoy a qualified tax exemption, such that they have to pay the tax due on the importation first, and may later claim a refund, which shall be allowed only upon showing that the goods were not introduced to the Philippine customs territory.
However, the High Tribunal agreed with the respondents that RR 2-2012 imposes taxes on FEZ enterprises, which, in the first place, are not liable for taxes.
It upheld the argument of the respondents that the tax incentives under RA 9400 apply automatically upon the importation of the goods, and that the proper taxes on the importation shall only be due if the enterprises can later show that the goods were subsequently introduced to the Philippine customs territory.
“We cannot agree with the view that FEZ enterprises have the duty to prove their entitlement to tax exemption first before fully enjoying the same; we find it illogical to determine whether a person is exempted from tax without first determining if he is subject to the tax being imposed,” the SC pointed out.
“We have reminded the tax authorities to determine first if a person is liable for a particular tax, applying the rule of strict interpretation of tax laws, before asking him to prove his exemption therefrom. Indeed, as entities exempted on taxes on importations, FEZ enterprises are clearly beyond the coverage of any law imposing those very charges. There is no justifiable reason to require them to prove that they are exempted from it,” it added.