Subic Bay Freeport Chamber of Commerce, Inc. v. DOF, G.R. No. 266016 (February 4, 2025)

Subic Bay Freeport Chamber of Commerce, Inc. v. DOF

G.R. No. 266016, February 4, 2025
EN BANC
M. Lopez, J.

DOCTRINE:

Administrative issuances promulgated by the Department of Finance (DOF) and the Bureau of Internal Revenue (BIR) are ultra vires and void if they limit the Value-Added Tax (VAT) zero-rating incentive on local purchases exclusively to Registered Export Enterprises (REEs), as this unauthorizedly amends the clear provision of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act), which grants the incentive to all Registered Business Enterprises (RBEs), including Domestic Market Enterprises (DMEs).

FACTS:

The Subic Bay Freeport Chamber of Commerce, Inc. (SBFCC), a domestic corporation registered as a freeport enterprise in the Subic Bay Freeport Zone (SBFZ), is granted full tax exemptions, including VAT, in lieu of a 5% tax on gross income, consistent with the SBFZ’s status as a separate customs territory. The CREATE Act (RA 11534) subsequently granted RBEs (defined to include both REEs and DMEs) VAT exemption on importation and VAT zero-rating on local purchases of goods and services directly and exclusively used in the registered activity.

However, the DOF and DTI issued the Implementing Rules and Regulations (IRR) of the CREATE Act, specifically Rule 2, Section 5 and the subsequent amendment to Rule 18, Section 5, which, along with the subsequent BIR issuances (RR No. 21-2021, RMC No. 24-2022, and RMC No. 49-2022), explicitly limited the entitlement to VAT zero-rating on local purchases only to REEs, thereby excluding DMEs like SBFCC. DMEs would thus absorb the 12% input VAT as part of their cost or expenses. SBFCC and a taxpayer, Antonio, filed a Petition for Declaratory Relief with the Regional Trial Court (RTC) to declare these issuances unconstitutional, but the RTC dismissed the case for lack of jurisdiction, stating the Court of Tax Appeals (CTA) had exclusive jurisdiction.

Before the Supreme Court, the petitioners argued the RTC erred on jurisdiction and maintained that the DTI, DOF, and BIR usurped legislative power by creating a distinction between RBEs not found in the CREATE Act. The respondents, through the OSG, maintained that the CTA had jurisdiction, the case was moot due to a subsequent amendment to the IRR, and the petitioners lacked legal standing. The Supreme Court found the issue to be of transcendental public importance, exempting it from the rule on exhaustion of administrative remedies.

ISSUE(S):

1. Was the Regional Trial Court correct in dismissing the Petition for Declaratory Relief for lack of jurisdiction?

2. Did the administrative issuances from the Department of Finance and the Bureau of Internal Revenue unlawfully limit the VAT zero-rating incentive on local purchases only to Registered Export Enterprises, in violation of the CREATE Act?

3. Did the subsequent amendment of Rule 18, Section 5 of the CREATE IRR and the issuance of RR No. 13-2023 render the Petition for Declaratory Relief moot?

RULING:

1. Was the Regional Trial Court correct in dismissing the Petition for Declaratory Relief for lack of jurisdiction?

YES. In Banco De Oro v. Republic, the Court already settled that the CTA has jurisdiction to rule on the constitutionality or validity of a tax law, tax regulation, or administrative issuance . . . Section 7 of Republic Act No. 1125, as amended, is explicit that, except for local taxes, appeals from the decisions of quasi-judicial agencies (Commissioner of Internal Revenue, Commissioner of Customs, Secretary of Finance, Central Board of Assessment Appeals, Secretary of Trade and Industry) on tax-related problems must be brought exclusively to the Court of Tax Appeals.

In other words, within the judicial system, the law intends the Court of Tax Appeals to have exclusive jurisdiction to resolve all tax problems. Petitions for writs of certiorari against the acts and omissions of the said quasi-judicial agencies should, thus, be filed before the Court of Tax Appeals.

Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 129 provides an exception to the original jurisdiction of the Regional Trial Courts over actions questioning the constitutionality or validity of tax laws or regulations. Except for local tax cases, actions directly challenging the constitutionality or validity of a tax law or regulation or administrative issuance may be filed directly before the Court of Tax Appeals.

2. Did the administrative issuances from the Department of Finance and the Bureau of Internal Revenue unlawfully limit the VAT zero-rating incentive on local purchases only to Registered Export Enterprises, in violation of the CREATE Act?

YES. Sections 294(E) and 295(D) of the CREATE Act are clear—all RBEs, which include REEs and DMEs, are entitled to VAT zero-rating on their local purchases of goods and services directly and exclusively used in the registered project or activity. This rule is consistent with the nature of SBFZ as a separate customs territory.

Given the foregoing, the Court rules that Rule 18, Section 5 of the CREATE IRR and RR No. 21-2022, RMC No. 24-2022, and RMC No. 49-2022, in so far as they limited the VAT zero-rating on local purchases of goods and services to REEs, are ultra vires. They altered the provisions of existing law the CREATE Act by carving out DMEs from those entitled to the VAT zero-rating incentive.

We stress that the power to promulgate rules in the implementation of a statute is necessarily limited to what is provided for in the legislative enactment. Its terms must be followed, for an administrative agency cannot amend an Act of Congress.

3. Did the subsequent amendment of Rule 18, Section 5 of the CREATE IRR and the issuance of RR No. 13-2023 render the Petition for Declaratory Relief moot?

NO. The amendment to Section 5, Rule 18 of the CREATE IRR and RR No. 13-2023, allowing transitory DMEs to register as VAT taxpayers, is just that, nothing more. Once registered for VAT, ‘such RBE shall be treated on par with regular corporations insofar as the VAT imposition and compliance is concerned.’ This means that transitory DMEs may charge output VAT on the domestic sale of goods or services and apply for a refund or tax credit from the BIR on the input VAT directly attributable to their zero-rated sales.

However, the fact remains that transitory DMEs’ local purchases of goods and services directly attributable to and exclusively used in their registered project or activity are not subject to VAT zero-rating. The foregoing issuances did not render moot the issue raised by petitioners.