G.R. Nos. 251333-34 - CORAL BAY NICKEL CORPORATION, VS. COMMISSIONER OF INTERNAL REVENUE.

Ruling

Accordingly, all sales of goods or property to such enterprise made by a VAT[-]registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to [Section] 106(A)(2)(a)(5), NIRC, in relation to [Article] 77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT[-]registered suppliers from the Customs Territory, shall be treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions of [Republic Act No.] 7916 and the "Cross[-]Border Doctrine" of the VAT system. (Emphasis in the original; emphasis supplied) On one hand, the cross-border doctrine mandates "that no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the taxing authority." [33] On the other hand, the destination principle requires that "goods and services are taxed only in the country where these are consumed." [34] In fact, in the very same above-quoted case of Seagate Technology , the Court emphasized that purchases of PEZA-registered enterprises may be subject to VAT but are zero-rated because of the fiction created by the establishment of separate customs territories: Special laws may certainly exempt transactions from the VAT. However, the Tax Code provides that those falling under [Presidential Decree No.] 66 are not. [Presidential Decree No.] 66 is the precursor of [Republic Act No.] 7916 the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. . . . . Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both [Presidential Decree No.] 66 and [Republic Act No.] 7916 effectively subjects such transactions to a zero rate, because the ecozone within which it is registered is managed and operated by the PEZA as a separate customs territory . This means that in such zone is created the legal fiction of foreign territory. Under the cross-border principle of the VAT system being enforced by the [BIR], 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. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory except specifically declared areas to an ecozone. Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-registered person in the customs territory are deemed imports from a foreign country . An ecozone indubitably a geographical territory of the Philippines is, however, regarded in law as foreign soil. This legal fiction is necessary to give meaningful effect to the