G.R. No. 149671 ; July 21, 2006
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEKISUI JUSHI PHILIPPINES, INC., respondent.

FACTS

Sekisui Jushi Philippines, Inc., a PEZA-registered export enterprise, filed an application for tax credit/refund of unutilized input VAT for the period covering January 1 to June 30, 1997. The company, which manufactures packaging materials for export, had availed of the income tax holiday incentive under Executive Order No. 226, thereby subjecting itself to other national internal revenue taxes, including VAT. It filed its claim, asserting that its input taxes on domestic purchases of capital goods and services remained unapplied as it had no output VAT liability, all its sales being export sales.
The Commissioner of Internal Revenue opposed the claim, arguing that as a PEZA-registered entity, Sekisui was exempt from VAT under special laws, and thus its purchases were not for use in a VAT-taxable business, disqualifying it from any input tax refund. The Court of Tax Appeals partially granted the refund, finding that only the amount of P4,377,102.26 was duly substantiated. The Court of Appeals affirmed this decision.

ISSUE

Whether a PEZA-registered enterprise that availed of the income tax holiday incentive, and whose transactions are entirely export sales, is entitled to a refund or tax credit for its unutilized input VAT on domestic purchases.

RULING

Yes, the respondent is entitled to the refund. The Supreme Court affirmed the decisions of the lower courts. The legal logic hinges on the distinction between the two fiscal incentive schemes available to PEZA enterprises. A PEZA registrant may choose to pay a 5% preferential tax on gross income, which carries exemption from all other national and local taxes. Alternatively, it may avail of an income tax holiday, which does not confer a blanket exemption from other national taxes like VAT.
By choosing the income tax holiday, Sekisui remained subject to VAT. Since all its sales were export sales, these transactions were zero-rated under Section 106(A)(2)(a)(5) of the Tax Code. Consequently, while it incurred input VAT on domestic purchases, it had no corresponding output VAT liability against which to credit these inputs. This scenario creates an excess or unutilized input tax, which, under Section 112 of the NIRC, is refundable or creditable. The Court rejected the CIR’s argument that a PEZA exemption automatically applies, ruling that the specific choice of incentive dictates the tax regime. Sekisui successfully proved its export sales and substantiated its input VAT payments, thereby fulfilling the requirements for a valid claim filed within the prescriptive period.