In an Order²⁷ dated March 16, 2023, the RTC ruled that it does not have jurisdiction over the case. The RTC explained that the Court of Tax Appeals (CTA) has jurisdiction over cases involving the constitutionality or validity of tax laws and regulations. The RTC elucidates:

In Banco De Oro v. Republic, G.R. No. 198756, August 16, 2016, the Supreme Court overturned the ruling in British American Tobacco v. Camacho, G.R. No. 163583, August 20, 2008, that the regular courts have jurisdiction to pass upon the constitutionality or validity of tax laws and regulations. It held that the Court of Tax Appeals has exclusive jurisdiction to determine the constitutionality or validity of tax laws, rules and regulations, and other administrative issuances of the Commissioner of Internal Revenue.

 

…….

 

When a case is filed with a court which has no jurisdiction over the action, the court shall motu proprio dismiss the case. (Non v. Office of the Ombudsman, G.R. No. 251177, September 08, 2020).

 

WHEREFORE, the petition is ordered DISMISSED.

 

SO ORDERED.²⁸ (Emphasis in the original)

Hence, this recourse.

Petitioners allege that the RTC erroneously dismissed its Petition for Declaratory Relief because of lack of jurisdiction. They maintain that the CTA is vested only with appellate jurisdiction over all tax, customs, and real estate assessment cases. Only the final decisions of the Commissioner of Customs are appealable to the CTA. Since the case involves a matter that does not fall under Section 7 of Republic Act No. 9282, the RTC has jurisdiction. Petitioners pray that Rule 18, Section 5 of the CREATE IRR, RR No. 21-2021, and RMC Nos. 24-2022 and 49-2022 be declared unconstitutional.²⁹

In their Comment, respondents, through the Office of the Solicitor General (OSG), aver that the Order of the RTC is not appealable under Rule 45 of the Rules of Court as it was not a final order or judgment on the merits. Respondents add that even if an appeal is a legally viable remedy, the petition lacks merit because the RTC correctly ruled that it does not have jurisdiction to determine the constitutionality or validity of tax laws and rules. Further, respondents postulate that the case is moot with the amendment of Rule 18, Section 5 of the CREATE IRR on August 8, 2023.

Ruling

The CTA has jurisdiction over cases involving the validity of tax laws, rules, regulations, and administrative issuances; Doctrine of exhaustion of administrative remedies

The subject matter of this case involves the validity of: (1) Rule 18, Section 5 of the CREATE IRR; (2) RR No. 21-2022; (3) RMC No. 24-2022; and (3) RMC No. 49-2022.

In Banco De Oro v. Republic,³⁰ 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:

The Court of Tax Appeals has undoubted jurisdiction to pass upon the constitutionality or validity of a tax law or regulation when raised by the taxpayer as a defense in disputing or contesting an assessment or claiming a refund. It is only in the lawful exercise of its power to pass upon all matters brought before it, as sanctioned by Section 7 of Republic Act No. 1125, as amended.

 

This Court, however, declares that the Court of Tax Appeals may likewise take cognizance of cases directly challenging the constitutionality or validity of a tax law or regulation or administrative issuance (revenue orders, revenue memorandum circulars, rulings).

 

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.³¹

Within the judicial system, the law intends for the CTA to have exclusive jurisdiction in resolving all tax problems. Direct and indirect challenges to the validity of tax regulations or administrative issuances, as in this case, should be filed before the CTA.³² This is the prevailing rule, as the Court has declared in Confederation for Unity, Recognition and Advancement of Government Employees v. Commissioner, Bureau of Internal Revenue,³³ St. Mary’s Academy of Caloocan City, Inc. v. Henares,³⁴ and Commissioner of Internal Revenue v. Court of Tax Appeals (First Division).³⁵

It should be stressed, however, that the CTA’s authority to rule on the validity or constitutionality of a tax law or regulation “does not do away with the requirement of exhausting the available administrative remedies.”³⁶ “Parties are generally precluded from immediately seeking the intervention of courts when ‘the law provides for remedies against the action of an administrative board, body, or officer.’”³⁷

With respect to the challenge on the validity of RR No. 21-2022, RMC No. 24-2022, and RMC No. 49-2022, petitioners should have first elevated it to the Secretary of Finance before going to the courts. Section 4³⁸ of the Tax Code empowers the Commissioner of Internal Revenue to interpret tax laws, which may be in the form of implementing rules and revenue issuances,³⁹ subject to review by the Secretary of Finance.

The doctrine of exhaustion of administrative remedies is not without exceptions.⁴⁰ The Court allows direct resort to it when strong public interest is involved, as in this case. In Bloomberry Resorts and Hotels, Inc. v. Bureau of Internal Revenue,⁴¹ We ruled:

At the outset, although it is true that direct recourse before this Court is occasionally allowed in exceptional cases without strict observance of the rules on hierarchy of courts and on exhaustion of administrative remedies, we find the imperious need to first determine whether or not this case falls within the said exceptions, before we delve into the merits of the instant petition.

 

We thus find the need to look back at the dispositions rendered in Asia International Auctioneers, Inc., et al. v. Parayno, Jr., wherein we ruled that revenue memorandum circulars are considered administrative rulings issued from time to time by the CIR. It has been explained that these are actually rulings or opinions of the CIR issued pursuant to her power under Section 4 of the NIRC of 1997, as amended, to make rulings or opinions in connection with the implementation of the provisions of internal revenue laws, including ruling on the classification of articles of sales and similar purposes. Therefore, it was held that under [Republic Act] No. 1125, which was thereafter amended by [Republic Act] No. 9282, such rulings of the CIR (including revenue memorandum circulars) are appealable to the Court of Tax Appeals (CTA), and not to any other courts.

 

In the same case, we further declared that “failure to ask the CIR for a reconsideration of the assailed revenue regulations and RMCs is another reason why a case directly filed before us should be dismissed. It is settled that the premature invocation of the court’s intervention is fatal to one’s cause of action. If a remedy within the administrative machinery can still be resorted to by giving the administrative officer every opportunity to decide on a matter that comes within his jurisdiction, then such remedy must first be exhausted before the court’s power of judicial review can be sought. The party with an administrative remedy must not only initiate the prescribed administrative procedure to obtain relief but also to pursue it to its appropriate conclusion before seeking judicial intervention in order to give the administrative agency an opportunity to decide the matter itself correctly and prevent unnecessary and premature resort to the court.”

 

Then, in The Philippine American Life and General Insurance Company v. Secretary of Finance, we had the occasion to elucidate that the CIR’s power to interpret the provisions of the Tax Code and other tax laws is subject to the review by the Secretary of Finance; and thereafter, the latter’s ruling may be appealed to the CTA, having the technical knowledge over the subject controversies. Also, the Court held that “the power of the CTA includes that of determining whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the [regional trial court] in issuing an interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by constitutional mandate, is vested with jurisdiction to issue writs of certiorari in these cases.” Stated differently, the CTA “can now rule not only on the propriety of an assessment or tax treatment of a certain transaction, but also on the validity of the revenue regulation or revenue memorandum circular on which the said assessment is based.”

 

From the foregoing jurisprudential pronouncements, it would appear that in questioning the validity of the subject revenue memorandum circular, petitioner should not have resorted directly before this Court considering that it appears to have failed to comply with the doctrine of exhaustion of administrative remedies and the rule on hierarchy of courts, a clear indication that the case was not yet ripe for judicial remedy. Notably, however, in addition to the justifiable grounds relied upon by petitioner for its immediate recourse (i.e., pure question of law, patently illegal act by the BIR, national interest, and prevention of multiplicity of suits), we intend to avail of our jurisdictional prerogative in order not to further delay the disposition of the issues at hand, and also to promote the vital interest of substantial justice. To add, in recent years, this Court has consistently acted on direct actions assailing the validity of various revenue regulations, revenue memorandum circulars, and the likes, issued by the CIR.  The position we now take is more in accord with latest jurisprudence. Upon the exercise of this prerogative, we are ushered into the merits of the case.⁴² (Emphasis supplied, citations omitted)

Petitioners claim that the exclusion of DMEs on the VAT zero-rating incentive on local purchases of goods and services directly attributable to the registered project or activity by the CREATE IRR and the subsequent issuances by the BIR, and limiting it to export enterprises unduly caused irreparable injury to DMEs, including SBFCC, as they would absorb the VAT passed on to them by local suppliers as part of their cost or expenses.⁴³ In addition, DMEs will not be issued VAT Zero-Rate Certificates,⁴⁴ hence, their sales shall be subject to the regular 12% VAT rate. Indeed, the shift from zero-rate to the regular 12% VAT rate on local purchases made by DMEs triggers a strong public interest as it indisputably affects all DMEs registered with the SBMA as freeport enterprises. Accordingly, the Court exempts this case from the rule on exhaustion of administrative remedies.

Petitioners have the legal capacity to sue

The OSG argues that petitioners have no legal standing as SBFCC’s alleged threat of substantial financial damage by limiting the VAT zero-rating incentive to REEs is purely speculative.⁴⁵ We do not agree. Petitioners have shown their locus standi.

A party is allowed to raise a constitutional question when (1) he or she can show that he or she will personally suffer some actual or threatened injury because of the allegedly illegal conduct of the government; (2) the injury is fairly traceable to the challenged action; and (3) the injury is likely to be redressed by a favorable action.⁴⁶ We have ruled in Kilosbayan, Inc. v. Morato:⁴⁷

Standing is a special concern in constitutional law because in some cases suits are brought not by parties who have been personally injured by the operation of a law or by official action taken, but by concerned citizens, taxpayers[,] or voters who actually sue in the public interest. Hence the question in standing is whether such parties have “alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of difficult constitutional questions.” (Baker v. Carr, 369 U.S. 186, 7 L. Ed. 2d 633 (1962))⁴⁸

The Certificate of Registration and Tax Exemption⁴⁹ issued to SBFCC on May 12, 2022, classified, it as a Subic Bay Freeport Enterprise entitled to the following incentives, among others:

c. The exemption from all local and national taxes, including but not limited to the following: i) Customs and import duties and national revenue taxes, such as VAT, excise and ad valorem taxes on foreign articles; ii) Internal revenue taxes, such as VAT, ad valorem and excise taxes on the Company’s sales of goods and services for which the Company is directly liable; iii) Income tax on all income from sources within the Subic Bay Freeport Zone and foreign countries, Export Processing Zones, Bonded Warehouses and other Special Economic Zones within the Philippines, as well as all other areas that may now or hereafter be considered to be outside the Customs Territory, whether or not payment of such income is actually received, made or collected within such areas; provided, that the Company shall, as withholding agents for the National Government, withhold tax on compensation and income payments to persons or individuals subject to expanded withholding tax; and iv) Franchise, common carrier or value taxes and other percentage taxes on public and service utilities and enterprises within Subic Bay Freeport Zone.

In Executive Secretary v. Southwing Heavy Industries, Inc.,⁵⁰ the Court recognized the SBFZ as a separate customs territory not subject to customs duties and other taxes.⁵¹ Further, Sections 294(E) and 295(D) of the CREATE Act allow VAT zero-rating on local purchases used in the registered project or activity of an RBE. As a domestic corporation registered with the SBMA as a freeport enterprise, SBFCC, therefore, will sustain a direct injury with the implementation of Rule 18, Section 5 of the CREATE IRR, RR No. 21-2022, RMC No. 24-2022, and RMC No. 49-2022.

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 the
VAT zero-rating on sale of goods and
services applies only to REEs,
are unconstitutional

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.⁵² Following the Philippine VAT system’s adherence to the Cross Border Doctrine and Destination Principle,⁵³ the VAT implications are that 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. Thus, the sales made by suppliers from a customs territory to a purchaser located within the freeport zone are considered exportations;⁵⁴ hence, they are subject to zero percent VAT.⁵⁵ Section 106(A) of the Tax Code, as amended by Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN), provides:

SEC. 106. Value-Added Tax on Sale of Goods or Properties.

 

(A) Rate and Base of Tax. There shall be levied, assessed[,] and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to twelve percent (12%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.

……

(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:

(a) Export Sales. The term ‘export sales’ means:

…….

(2) Sale and delivery of goods to:

(i) Registered enterprises within a separate customs territory as provided under special laws[.]

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.⁵⁶ Its terms must be followed, for an administrative agency cannot amend an Act of Congress. Thus, the rule-making power must be confined to details for regulating the mode or proceedings to carry into effect the law as it has been enacted, and it cannot be extended to amend or expand the statutory requirements or to embrace matters not covered by the statute. If a discrepancy occurs between the basic law and an implementing rule or regulation, the former prevails.

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 repeat the Court’s pronouncement in Bureau of Customs v. Japanese 4 x 4 Export Corp.:⁵⁷

Our lawmakers have their reasons and purposes in designating the Subic Bay Freeport Zone as a separate customs entity and in granting privileges and incentives to the enterprises registered with the SBMA. Mainly, their aim is to develop the Subic Bay Freeport Zone into a self-sustaining entity that will generate employment and attract foreign and local investment. To this end, the Court will keep the statute’s intent of carving a territory out of the former military reservation in Subic Bay where free flow of goods and capital will always be maintained.