The Supreme Court (SC) has clarified that domestic market enterprises can enjoy the zero-rated Value-Added Tax (VAT) incentive under Republic Act No. 11534, or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.

In a Decision written by Associate Justice Mario V. Lopez (retired), the SC En Banc declared Rule 18, Section 5 of the CREATE Act’s Implementing Rules and Regulations (IRR), as well as several Bureau of Internal Revenue (BIR) issuances, void for unlawfully limiting which businesses could avail of the VAT incentive.

The CREATE Act, passed in 2021, grants registered business enterprises (RBEs) VAT exemption on importation and VAT zero-rating on local purchases of goods and services that are directly and exclusively used in their registered project or activity. RBEs include both domestic market enterprises and registered export enterprises.

However, the Department of Trade and Industry (DTI) and the Department of Finance (DOF) later issued the IRR, which excluded domestic market enterprises from enjoying zero-rated VAT incentives on their business purchases. The BIR followed with Revenue Regulations No. 21-2022 and Revenue Memorandum Circulars No. 24-2022 and 49-2022, clarifying that only registered export enterprises were entitled to the incentive.  

Under a zero-rated VAT system, businesses do not add VAT to their sales (output VAT), but they still pay VAT on their purchases (input VAT). At the end of the tax period, they can request a refund for any excess input VAT. Subic Bay Freeport Chamber of Commerce, Inc. and taxpayer Benjamin E. Antonio III filed a petition for declaratory relief, arguing that the IRR and the BIR regulations unfairly excluded domestic market enterprises from the benefits granted by the law.

The Regional Trial Court dismissed the petition for lack of jurisdiction, ruling that the Court of Tax Appeals (CTA) has exclusive jurisdiction over cases questioning the validity of tax laws and regulations.  The petitioners elevated the case to the SC.

The SC confirmed that while the CTA indeed has exclusive jurisdiction over such cases, petitioners should have first exhausted administrative remedies by questioning the regulations before the Secretary of Finance. However, due to the strong public interest involved, the SC exercised its discretion to resolve the case and avoid further delays.

The SC ruled that the IRR and the BIR regulations were invalid for adding restrictions not found in the CREATE Act. The SC stressed that the law clearly covers all RBEs, including domestic market enterprises.

The SC emphasized that government agencies like the DTI and DOF cannot go beyond what the law allows. Since the law includes domestic businesses as RBEs, the IRR cannot exclude them from receiving the incentives.

Senior Associate Justice Marvic M.V.F. Leonen, in his Concurring Opinion, agreed that the petition may be exempted from the strict application of the doctrine of exhaustion of administrative remedies due to compelling public interest and the urgent need to resolve the case. He also stated that the IRR and the BIR regulations are ultra vires (beyond legal authority) as they introduce qualifications for zero-rating on VAT beyond what the law provided. (Courtesy of the SC Office of the Spokesperson)

This press release is prepared for members of the media and the general public by the SC Office of the Spokesperson as a simplified summary of the SC’s Decision. For the SC’s complete discussion of the case, please read the full text of the Decision in G.R. No. 266016 (The Subic Bay Freeport Chamber of Commerce, Inc. and Antonio III v. Department of Finance et al.), February 4, 2025, and the Concurring Opinion of SAJ Leonen.