Diaz vs. Secretary of Finance

Toll fees collected by tollway operators are subject to value-added tax as they constitute the "sale of services" by "franchise grantees" under Section 108 of the NIRC.

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol, regular users of tollways, challenged the BIR's plan to impose VAT on tollway operations scheduled to take effect on August 16, 2010. The BIR had previously attempted to impose the tax during the Arroyo administration but deferred the implementation due to opposition. Upon the assumption of the Aquino administration, the BIR revived the imposition. Diaz, a former Representative who sponsored the EVAT Law and the NIRC, and Timbol, a former Department of Trade and Industry Assistant Secretary and TRB consultant, filed a petition for declaratory relief, later treated as prohibition, arguing that Congress never intended to include toll fees within the VAT base and that the imposition amounted to an unlawful tax on a tax.

• Petitioners' Profile: Renato V. Diaz, a former Representative who sponsored the approval of R.A. 7716 (EVAT Law) and R.A. 8424 (NIRC), and Aurora Ma. F. Timbol, a former DTI Assistant Secretary and TRB consultant, instituted the action as regular tollway users.
• BIR Imposition: The BIR sought to impose VAT on tollway operations, a move previously deferred during the Arroyo administration due to opposition. Upon President Benigno C. Aquino III’s assumption of office in 2010, the BIR revived the imposition, scheduling it for August 16, 2010.
• Procedural Action: Petitioners filed a petition for declaratory relief, which the Court later treated as a petition for prohibition, seeking to enjoin the VAT imposition.

• Statutory Construction: Petitioners argued that Congress did not intend to include toll fees within the meaning of "sale of services" under Section 108 of the NIRC.
• Nature of Toll Fees: Petitioners maintained that toll fees are "user's taxes," making the VAT imposition a tax on tax rather than a tax on services.
• Franchise Grantees: Petitioners contended that tollway operators are not franchise grantees under Section 108 because they do not hold legislative franchises.
• Public Service: Petitioners asserted that imposing VAT on toll fees amounts to a tax on public service.
• Non-Impairment Clause: Petitioners argued that since VAT was never factored into the parametric formula for computing toll fees, its imposition violates the constitutional non-impairment clause.
• Administrative Feasibility: Petitioners claimed that substantiation requirements for claiming input VAT and the BIR's rounding-off implementation scheme render the tax impractical and incapable of implementation.
• Transitional Input VAT: Petitioners maintained that BIR RMC 63-2010 violates Section 111 of the NIRC by directing a zero accumulated input VAT balance, thereby denying the 2% transitional input tax credit.

• Statutory Coverage: Respondents countered that the NIRC imposes VAT on all kinds of services of franchise grantees, including tollway operations, unless otherwise provided by law.
• Plain Meaning: Respondents argued that statutory intent must be derived from the plain words of the law.
• Prior Rulings: Respondents pointed out that the VAT imposition on tollway operations has been the subject of BIR rulings and circulars since 2003.
• Non-Impairment: Respondents contended that petitioners lack personal interest in the Toll Operating Agreements (TOAs) to invoke the non-impairment clause, and that the State's sovereign taxing power is generally read into contracts.
• Parametric Formula: Respondents argued that the non-inclusion of VAT in the toll rate formula does not exempt operators, as VAT is imposed on top of the toll rate and does not impair the operators' right to a reasonable return.

• Remedy: Whether the Court may treat a petition for declaratory relief as one for prohibition.
• Standing: Whether petitioners have legal standing to file the action.
• VAT Coverage: Whether the government is unlawfully expanding VAT coverage by including tollway operators and operations in the terms "franchise grantees" and "sale of services" under Section 108 of the NIRC.
• Tax on Tax: Whether the imposition of VAT on tollway operators amounts to a tax on tax.
• Non-Impairment: Whether the VAT impairs the tollway operators' right to a reasonable return of investment under their TOAs.
• Administrative Feasibility: Whether the VAT on tollway operations is administratively feasible and legally implementable, particularly regarding BIR RMC 63-2010.

• Remedy: A petition for declaratory relief may be treated as one for prohibition when the case has far-reaching implications and raises questions that need to be resolved for the public good, particularly to nullify acts of executive officials that usurp legislative authority. Dismissing the petition on procedural grounds would cause mischief to both the tax-paying public and the government, as a belated declaration of nullity would make refunds an administrative nightmare.
• Standing: The requirement of locus standi may be waived when the legal questions to be resolved are of great importance to the public.
• VAT Coverage: Tollway operations fall under the "sale of services" by "franchise grantees" under Section 108. The phrase "all kinds of services" is all-encompassing, and the enumeration in Section 108 is not exclusive. Tollway operators render services for a fee by allowing motorists to use their facilities, analogous to lessors of property or operators of hotels and transportation. Tollway operators are franchise grantees because a franchise broadly covers government grants of a special right to do an act of public concern, including those granted by administrative agencies like the TRB pursuant to delegated powers under P.D. 1112. The public nature of the service does not exclude it from VAT; Section 108 expressly includes public utilities like electric utilities and broadcasting companies.
• Tax on Tax: Toll fees are not "user's taxes." The characterization of terminal fees as a "user's tax" in the MIAA case was merely obiter dictum to establish that airport lands are of public dominion, not to classify toll fees as taxes. Taxes are sovereign exactions for public revenue assessed by the BIR, whereas toll fees are collected by private operators as reimbursement for costs and expenses. Furthermore, VAT is an indirect tax imposed on the operator's gross receipts; the burden merely shifts to the user as part of the price. Once shifted, the VAT ceases to be a tax and becomes part of the cost, precluding the tax-on-tax argument.
• Non-Impairment: Petitioners lack personality to invoke the non-impairment clause on behalf of private investors, and the alleged adverse effect on the rate of return is speculative. The sovereign taxing power is generally read into contracts.
• Administrative Feasibility: Non-observance of the canon of administrative feasibility does not render a tax imposition invalid unless specific constitutional or statutory limitations are impaired. Any declaration on the BIR's implementation scheme or the validity of BIR RMC 63-2010 is premature, as the right to challenge the circular belongs to the tollway operators who agreed to waive the transitional input VAT in exchange for the cancellation of past due VAT liabilities.

• Indirect Taxation / VAT as an Indirect Tax — In indirect taxation, a distinction exists between the liability for the tax and the burden of the tax. The seller is directly liable for the VAT but may shift or pass on the burden to the buyer. Once shifted, the VAT ceases to be a tax and simply becomes part of the cost of the good or service.
• Franchise (Broad Construction) — The term "franchise" broadly covers government grants of a special right to do an act or series of acts of public concern. It includes not only authorizations directly issued by Congress via special law, but also those granted by administrative agencies to which the power to grant franchises has been delegated.
• Tax Exemptions — Tax exemptions must be justified by a clear statutory grant and based on language in the law too plain to be mistaken. They are not presumed.
• Administrative Feasibility — While administrative feasibility is a canon of a sound tax system, its non-observance will not render a tax imposition invalid unless specific constitutional or statutory limitations are impaired.

• "The phrase ‘sale or exchange of services’ means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration... regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties." — Defines the broad scope of VAT on services under Section 108 of the NIRC.
• "Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR and do not go to the general coffers of the government." — Distinguishes toll fees from taxes, refuting the tax-on-tax argument.
• "In indirect taxation, a distinction is made between the liability for the tax and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the seller’s liability but merely the burden of the VAT." — Explains the mechanism of VAT shifting and why the VAT on tollways is not a tax on the user's tax.

• Manila International Airport Authority (MIAA) v. Court of Appeals, G.R. No. 155650, July 20, 2006 — Distinguished. The statement in MIAA equating terminal fees to a "user's tax" was obiter dictum, made solely to establish that airport lands are of public dominion, and not to classify toll fees as taxes for VAT purposes.
• Macasiano v. National Housing Authority, G.R. No. 107921, July 1, 1993 — Followed. Cited as precedent for treating a petition for declaratory relief as one for prohibition when the case has far-reaching implications and raises questions for the public good.
• Commissioner of Internal Revenue v. SM Primeholdings, Inc., G.R. No. 183505, February 26, 2010 — Followed. Cited for the principle that the enumeration of affected services in Section 108 of the NIRC is not exclusive.
• South African Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010 — Followed. Cited for the rule that statements made by individual members of Congress during deliberations are not controlling in the interpretation of law.

• Section 108, National Internal Revenue Code (NIRC) — Defines "sale or exchange of services" subject to VAT. Applied to include tollway operations as services rendered by franchise grantees for a fee.
• Section 119, NIRC — Lists exceptions to VAT for franchise grantees (low-income broadcasting companies, gas and water utilities). Applied to show that tollway operators do not fall under these exceptions.
• Section 105, NIRC — Defines persons liable for VAT. Applied to establish that the tollway operator, not the user, is the person liable for the VAT.
• Section 111(A), NIRC — Grants a transitional input tax credit of 2% on beginning inventory for first-time VAT payers. Cited by petitioners regarding the alleged illegality of BIR RMC 63-2010.
• Presidential Decree No. 1112 (Toll Operation Decree) — Establishes the legal basis for tollway operations. Applied to define the nature of tollway operator services and the TRB's delegated power to grant franchises.
• Article 420, Civil Code — Defines property of public dominion. Referenced in distinguishing the MIAA case.

Renato C. Corona (C.J.), Antonio T. Carpio, Presbitero J. Velasco, Jr., Teresita J. Leonardo-De Castro, Arturo D. Brion, Diosdado M. Peralta, Lucas P. Bersamin, Mariano C. Del Castillo, Martin S. Villarama, Jr., Jose Portugal Perez, Jose Catral Mendoza, Maria Lourdes P. A. Sereno