CIR v.

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

Facts:

For equipment, machineries and spare parts it imported for its business on different dates from
October 1, 1992 to May 31, 1994, PLDT paid the BIR the amount of P164,510,953.00, broken down as
follows: (a) compensating tax of P126,713,037.00; advance sales tax of

P12,460,219.00 and other internal revenue taxes of P25,337,697.00. For similar importations made
between March 1994 to May 31, 1994, PLDT paid P116,041,333.00 value-added tax (VAT).

On March 15, 1994, PLDT addressed a letter to the BIR seeking a confirmatory ruling on its tax
exemption privilege under Section 12 of R.A. 7082

Responding, the BIR issued on April 19, 1994 Ruling No. UN-140-94,[3] pertinently reading, as follows:

PLDT shall be subject only to the following taxes, to wit:... xxx xxx xxx

The 3% franchise tax on gross receipts which shall be in lieu of all taxes on its franchise or earnings
thereof.

The "in lieu of all taxes" provision under Section 12 of RA 7082 clearly exempts PLDT from all taxes
including the 10% value-added tax (VAT) prescribed by Section 101 (a) of the same Code on its
importations of equipment, machineries and spare parts necessary in the conduct of... its business
covered by the franchise, except the aforementioned enumerated taxes for which PLDT is expressly
made liable.

In view thereof, this Office ... hereby holds that PLDT, is exempt from VAT on its importation of
equipment, machineries and spare parts ... needed in its franchise operations.

On February 18, 1998, the CTA rendered a decision[6] granting PLDT's petition

In time, the BIR Commissioner moved for a reconsideration but the CTA, in its Resolution[8] of May 7,
1998, denied the motion, with Judge Amancio Q. Saga reiterating his dissent.[9]

Unable to accept the CTA decision, the BIR Commissioner elevated the matter to the Court of Appeals
(CA) by way of petition for review

As stated at the outset hereof, the appellate court, in the herein challenged Decision[10] dated
September 17, 1999, dismissed the BIR's petition, thereby effectively affirming the CTA's judgment.

Issues:

Whether or not PLDT, given the tax component of its franchise, is exempt from paying VAT,
compensating taxes, advance sales taxes and internal revenue taxes on its importations.
Ruling:

Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of
taxation, taxes may be classified into either direct tax or indirect tax.

In context, direct taxes are those that are exacted from the very person who, it is intended or desired,
should pay them;[19] they are impositions for which a taxpayer is directly liable on the transaction or
business he is engaged in.[20]

On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are paid
by, one person in the expectation and intention that he can shift the burden to someone else.[21]
Stated elsewise, indirect taxes are taxes wherein the... liability for the payment of the tax falls on one
person but the burden thereof can be shifted or passed on to another person, such as when the tax is
imposed upon goods before reaching the consumer who ultimately pays for it. When the seller passes
on the tax to his buyer, he,... in effect, shifts the tax burden, not the liability to pay it, to the purchaser as
part of the price of goods sold or services rendered.

To put the situation in graphic terms, by tacking the VAT due to the selling price, the seller remains the
person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate
buyer and ultimately to the final purchaser is the burden of... the tax.[22] Stated differently, a seller who
is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services, is not
necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser... or
end-user of such goods or services who, although not directly and legally liable for the payment thereof,
ultimately bears the burden of the tax.[23]

There can be no serious argument that PLDT, vis-à-vis its payment of internal revenue taxes on its
importations in question, is effectively claiming exemption from taxes not falling under the category of
direct taxes. The claim covers VAT, advance sales tax and compensating... tax.

The NIRC classifies VAT as "an indirect tax ... the amount of [which] may be shifted or passed on to the
buyer, transferee or lessee of the goods".[24]

Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods for sale
or of raw materials to be processed into merchandise can shift the tax or, to borrow from Philippine
Acetylene Co, Inc. vs. Commissioner of Internal

Revenue,[26] lay the "economic burden of the tax", on the purchaser, by subsequently adding the tax to
the selling price of the imported article or finished product.

Compensating tax also partakes of the nature of an excise tax payable by all persons who import articles,
whether in the course of business or not.[27] The rationale for compensating tax is to place, for tax
purposes, persons purchasing from merchants in... the Philippines on a more or less equal basis with
those who buy directly from foreign countries.[28]
It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of the
goods or services, not in the buyer thereof. Thus, one cannot invoke one's exemption privilege to avoid
the passing on or the shifting of the VAT to him by the... manufacturers/suppliers of the goods he
purchased.[29] Hence, it is important to determine if the tax exemption granted to a taxpayer
specifically includes the indirect tax which is shifted to him as part of the purchase price, otherwise it is...
presumed that the tax exemption embraces only those taxes for which the buyer is directly liable.[30]

As may be noted, the clause "in lieu of all taxes" in Section 12 of RA 7082 is immediately followed by the
limiting or qualifying clause "on this franchise or earnings thereof", suggesting that the exemption is
limited to taxes imposed directly on

PLDT since taxes pertaining to PLDT's franchise or earnings are its direct liability. Accordingly, indirect
taxes, not being taxes on PLDT's franchise or earnings, are outside the purview of the "in lieu" provision.

It cannot be over-emphasized that tax exemption represents a loss of revenue to the government and
must, therefore, not rest on vague inference. When claimed, it must be strictly construed against the
taxpayer who must prove that he falls under the exception. And, if an... exemption is found to exist, it
must not be enlarged by construction, since the reasonable presumption is that the state has granted in
express terms all it intended to grant at all, and that, unless the privilege is limited to the very terms of
the statute the favor would... be extended beyond dispute in ordinary cases.[39]

All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT blanket exemption from
payment of indirect taxes, which, in the ultimate analysis, are not taxes on its franchise or earnings.
PLDT has not shown its eligibility for the desired exemption. None... should be granted.