Subic Bay Freeport Chamber of Commerce, Inc. vs. Department of Finance

Administrative issuances implementing the CREATE Act are ultra vires and void insofar as they limit VAT zero-rating on local purchases to registered export enterprises, excluding domestic market enterprises, because the CREATE Act's Sections 294(E) and 295(D) entitle all registered business enterprises to this incentive without distinction between export and domestic market enterprises.

Section 12 of Republic Act No. 7227, the Bases Conversion Development Act of 1992, created the Subic Special Economic Zone as a separate customs territory, operated and managed by the Subic Bay Metropolitan Authority (SBMA) as the implementing arm of the Bases Conversion and Development Authority. Pursuant to the law, SBMA issued Certificates of Registration and Tax Exemption to qualified enterprises, granting them exemption from all national and local taxes — including VAT — in lieu of a final tax of five percent (5%) on gross income earned. The Subic Bay Freeport Chamber of Commerce, Inc. (SBFCC) registered with SBMA as a freeport enterprise to conduct business within the Subic Bay Freeport Zone. On March 26, 2021, Republic Act No. 11534, the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act), was enacted, providing under Sections 294(E) and 295(D) that registered business enterprises (RBEs) — a category encompassing both registered export enterprises (REEs) and domestic market enterprises (DMEs) — are entitled to VAT exemption on importation and VAT zero-rating on local purchases of goods and services directly and exclusively used in the registered project or activity. The Department of Trade and Industry and the Department of Finance thereafter issued the CREATE Implementing Rules and Regulations, and the Bureau of Internal Revenue issued subsequent revenue regulations and memorandum circulars that limited VAT zero-rating on local purchases to REEs only, excluding DMEs.

The Subic Bay Freeport Chamber of Commerce, Inc. (SBFCC) is a domestic corporation registered with the Subic Bay Metropolitan Authority (SBMA) as a freeport enterprise conducting business within the Subic Bay Freeport Zone (SBFZ). Benjamin E. Antonio III joined as a co-petitioner in his capacity as a taxpayer. Under Republic Act No. 7227 and its implementing rules, SBF Enterprises enjoyed exemption from all national and local taxes — including VAT, income tax, and franchise taxes — in lieu of a final tax of five percent (5%) on gross income earned. SBFCC held a Certificate of Registration and Tax Exemption issued by SBMA on May 12, 2022, classifying it as a Subic Bay Freeport Enterprise entitled to those incentives.

On March 26, 2021, Republic Act No. 11534, the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act), was signed into law. Sections 294(E) and 295(D) of the CREATE Act granted registered business enterprises (RBEs) VAT exemption on importation and VAT zero-rating on local purchases of goods and services directly and exclusively used in the registered project or activity. The CREATE Act defined an RBE as any entity registered with an Investment Promotion Agency, and further classified RBEs into domestic market enterprises (DMEs) and registered export enterprises (REEs). The statutory text of Section 295(D) referred to a "registered business enterprise" without distinguishing between DMEs and REEs for purposes of VAT zero-rating.

Thereafter, the Department of Trade and Industry (DTI) and the Department of Finance (DOF) issued the Implementing Rules and Regulations of the CREATE Act (CREATE IRR). Rule 2, Section 5 of the CREATE IRR limited the VAT zero-rating on local purchases to export enterprises, departing from the statute's broader language. On December 2, 2021, Rule 18, Section 5 of the CREATE IRR was amended, providing that VAT zero-rating on local purchases during the transitory period shall apply only to goods and services directly attributable to and exclusively used in the registered project or activity of export enterprises located inside the ecozones and freeports. On December 3, 2021, the Secretary of Finance issued Revenue Regulations (RR) No. 21-2021, implementing Sections 294(E) and 295(D) of the Tax Code as amended by the CREATE Act; its Section 2 confined zero-rated sales of goods to sales to a "registered export enterprise." Subsequently, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 24-2022 dated February 23, 2022 and RMC No. 49-2022 dated April 19, 2022, both clarifying that DMEs are not entitled to VAT zero-rating on local purchases and that sales to registered domestic market enterprises shall be subject to 12% VAT.

SBFCC and Antonio filed a Petition for Declaratory Relief with Application for Writ of Temporary Restraining Order and/or Preliminary Injunction before the Regional Trial Court (RTC), Branch 97, Olongapo City, against the DOF, DTI, BIR, Revenue District Office No. 19 of SBFZ, and SBMA. They alleged that the CREATE IRR, RR No. 21-2021, RMC No. 24-2022, and RMC No. 49-2022 were unconstitutional because the DTI and DOF performed a legislative act and the BIR unjustly excluded DMEs from availing of tax incentives. They contended that there is no distinction between DMEs and REEs under the CREATE Act, so all registered business enterprises enjoy the 5% tax on gross income and VAT zero-rating on local purchases. They prayed that the assailed issuances be declared invalid and unconstitutional and that BIR RDO No. 19 and SBMA be ordered to desist from implementing them.

In an Order dated March 16, 2023, the RTC dismissed the petition for lack of jurisdiction, citing Banco De Oro vs. Republic for the proposition that the Court of Tax Appeals has exclusive jurisdiction to determine the constitutionality or validity of tax laws, rules, and regulations. Petitioners then elevated the dismissal to the Supreme Court via Petition for Review on Certiorari under Rule 45. Meanwhile, on August 8, 2023, Rule 18, Section 5 of the CREATE IRR was again amended, allowing transitory DMEs to register as VAT taxpayers, and on November 10, 2023, the Secretary of Finance issued RR No. 13-2023 prescribing guidelines for optional VAT registration of DMEs. Respondents argued these amendments rendered the case moot.

• RTC Jurisdiction: Petitioners argued that the RTC erroneously dismissed the Petition for Declaratory Relief for lack of jurisdiction, maintaining that the CTA is vested only with appellate jurisdiction over tax, customs, and real estate assessment cases and that only final decisions of the Commissioner of Customs are appealable to the CTA. Since the case does not fall under Section 7 of Republic Act No. 9282, the RTC has jurisdiction.
• Unconstitutionality of Issuances: Petitioners alleged that Rule 18, Section 5 of the CREATE IRR, RR No. 21-2021, RMC No. 24-2022, and RMC No. 49-2022 are unconstitutional because the DTI and DOF performed a legislative act and the BIR unjustly excluded DMEs from availing of tax incentives.
• No Statutory Distinction Between DMEs and REEs: Petitioners maintained that there is no distinction between DMEs and REEs under the CREATE Act, such that as long as an enterprise is a registered business enterprise, it enjoys a 5% tax on gross income and VAT zero-rating on local purchases.
• Irreparable Injury to DMEs: Petitioners claimed that the exclusion of DMEs from VAT zero-rating unduly caused irreparable injury, as DMEs would absorb the VAT passed on by local suppliers as part of their cost or expenses, and would not be issued VAT Zero-Rate Certificates, subjecting their sales to the regular 12% VAT rate.

• Non-Appealability of RTC Order: Respondents, through the Office of the Solicitor General, averred that the RTC Order was not appealable under Rule 45 of the Rules of Court as it was not a final order or judgment on the merits.
• RTC Correctly Dismissed for Lack of Jurisdiction: Respondents maintained that even if an appeal were a legally viable remedy, the petition lacks merit because the RTC correctly ruled it has no jurisdiction to determine the constitutionality or validity of tax laws and rules.
• Mootness Due to Amendment: Respondents postulated that the case is moot with the amendment of Rule 18, Section 5 of the CREATE IRR on August 8, 2023.
• Lack of Legal Standing: The OSG argued that petitioners have no legal standing, as SBFCC's alleged threat of substantial financial damage from limiting VAT zero-rating to REEs is purely speculative.

• Jurisdiction: Whether the Regional Trial Court has jurisdiction over a petition for declaratory relief challenging the validity of tax regulations, or whether the Court of Tax Appeals has exclusive jurisdiction.
• Exhaustion of Administrative Remedies: Whether petitioners were required to exhaust administrative remedies — specifically by elevating the challenged BIR issuances to the Secretary of Finance — before seeking judicial intervention.
• Standing: Whether petitioners possess legal standing to bring the suit.
• Validity of Assailed Issuances: Whether Rule 18, Section 5 of the CREATE IRR, RR No. 21-2021, RMC No. 24-2022, and RMC No. 49-2022 are valid insofar as they limit VAT zero-rating on local purchases to registered export enterprises, excluding domestic market enterprises.
• Mootness: Whether the August 8, 2023 amendment to the CREATE IRR and the issuance of RR No. 13-2023 rendered the case moot.

• Jurisdiction: No, the RTC does not have jurisdiction. The Court of Tax Appeals has exclusive jurisdiction over actions directly challenging the constitutionality or validity of tax laws, regulations, and administrative issuances, pursuant to Republic Act No. 9282, as settled in Banco De Oro vs. Republic.
• Exhaustion of Administrative Remedies: Excused. While exhaustion is generally required before judicial intervention in challenges to BIR issuances, the doctrine yields when strong public interest is involved, as the shift from zero-rate to 12% VAT on local purchases by DMEs indisputably affects all DMEs registered with SBMA as freeport enterprises.
• Standing: Yes. Petitioners demonstrated locus standi by showing actual and threatened injury fairly traceable to the challenged issuances and likely redressable by a favorable decision, as SBFCC's Certificate of Registration and Tax Exemption entitled it to VAT zero-rating, which the assailed issuances directly curtailed.
• Validity of Assailed Issuances: Void. Rule 18, Section 5 of the CREATE IRR, RR No. 21-2021, RMC No. 24-2022, and RMC No. 49-2022 are ultra vires insofar as they limit VAT zero-rating to REEs, because the CREATE Act's Sections 294(E) and 295(D) entitle all RBEs — including DMEs — to the incentive without distinction.
• Mootness: No, the case is not moot. The August 8, 2023 amendment and RR No. 13-2023 merely allowed transitory DMEs to register as VAT taxpayers; they did not restore VAT zero-rating on local purchases by DMEs, so the core injury persisted.

• Jurisdiction: The Court reaffirmed the doctrine established in Banco De Oro vs. Republic, which overturned British American Tobacco vs. Camacho and held that the CTA has exclusive jurisdiction to determine the constitutionality or validity of tax laws, rules, regulations, and administrative issuances of the Commissioner of Internal Revenue. Section 7 of Republic Act No. 1125, as amended by Republic Act No. 9282 — a special and later law than Batas Pambansa Blg. 129 — provides an exception to the RTC's original jurisdiction over actions questioning the constitutionality of tax laws. Except for local tax cases, actions directly challenging the validity of a tax law, regulation, or administrative issuance may be filed directly before the CTA. This rule was reiterated in Confederation for Unity, Recognition and Advancement of Government Employees vs. Commissioner, Bureau of Internal Revenue, St. Mary's Academy of Caloocan City, Inc. vs. Henares, and Commissioner of Internal Revenue vs. Court of Tax Appeals (First Division). The RTC therefore correctly dismissed the case for lack of jurisdiction, though the Supreme Court proceeded to address the merits in the exercise of its jurisdictional prerogative.

• Exhaustion of Administrative Remedies: The doctrine of exhaustion of administrative remedies generally precludes parties from immediately seeking judicial intervention when the law provides administrative remedies. With respect to challenges to the validity of RR No. 21-2021, RMC No. 24-2022, and RMC No. 49-2022, petitioners should have first elevated the matter to the Secretary of Finance, who has review power over the Commissioner of Internal Revenue's interpretations under Section 4 of the Tax Code. However, the doctrine is not without exceptions. The Court allows direct resort when strong public interest is involved. The shift from zero-rate to the regular 12% VAT rate on local purchases by DMEs triggers strong public interest because it indisputably affects all DMEs registered with SBMA as freeport enterprises, causing them to absorb VAT passed on by local suppliers as part of their cost or expenses and denying them VAT Zero-Rate Certificates. Relying on Bloomberry Resorts and Hotels, Inc. vs. Bureau of Internal Revenue, the Court exercised its jurisdictional prerogative to dispense with exhaustion in order not to further delay disposition and to promote substantial justice.

• Standing: A party may raise a constitutional question upon showing (1) actual or threatened personal injury from the challenged government conduct, (2) injury fairly traceable to the challenged action, and (3) injury likely redressed by a favorable decision. SBFCC's Certificate of Registration and Tax Exemption, issued May 12, 2022, classified it as a Subic Bay Freeport Enterprise entitled to exemption from all local and national taxes including VAT. In Executive Secretary vs. Southwing Heavy Industries, Inc., the Court recognized the SBFZ as a separate customs territory not subject to customs duties and other taxes. As a domestic corporation registered with SBMA as a freeport enterprise, SBFCC will sustain a direct injury from the implementation of the assailed issuances. The threatened financial damage is not speculative but concrete and traceable to the challenged regulations.

• Validity of Assailed Issuances: Sections 294(E) and 295(D) of the CREATE Act are clear: all RBEs — which include both REEs and DMEs — are entitled to VAT zero-rating on local purchases of goods and services directly and exclusively used in the registered project or activity. This rule is consistent with the nature of the SBFZ as a separate customs territory. Following the Cross Border Doctrine and the Destination Principle of the Philippine VAT system, no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the taxing authority; sales by suppliers from the customs territory to a purchaser within the freeport zone are considered exportations subject to zero percent VAT, as provided in Section 106(A)(2)(a)(2)(i) of the Tax Code as amended by the TRAIN Law. The power to promulgate implementing rules is necessarily limited to what the statute provides; an administrative agency cannot amend an Act of Congress. The assailed issuances altered the CREATE Act by carving out DMEs from those entitled to VAT zero-rating — a qualification not found in the statute. They are therefore ultra vires. The Court reiterated Bureau of Customs vs. Japanese 4 x 4 Export Corp., emphasizing that lawmakers designated the SBFZ as a separate customs entity to develop it into a self-sustaining entity generating employment and attracting investment, and that the statute's intent of maintaining free flow of goods and capital must be preserved.

• Mootness: On August 8, 2023, Rule 18, Section 5 of the CREATE IRR was amended to allow transitory DMEs to register as VAT taxpayers, and on November 10, 2023, RR No. 13-2023 prescribed guidelines for optional VAT registration. These amendments did not render the case moot. The amendment allowing transitory DMEs to register as VAT taxpayers merely permits them to charge output VAT on domestic sales and apply for refunds or tax credits on input VAT attributable to zero-rated sales. The fact remains that transitory DMEs' local purchases of goods and services directly attributable to and exclusively used in their registered project or activity are not subject to VAT zero-rating. The core grievance — the unlawful exclusion of DMEs from VAT zero-rating — persists. The Court cited Purisima vs. Lazatin, emphasizing that the grant and withdrawal of tax exemption is exclusively a legislative prerogative, and that executive issuances attempting to withdraw tax incentives accorded by legislation violate the doctrine of separation of powers.

• Ultra Vires Administrative Regulations — An administrative agency's rule-making power is confined to details for regulating the mode of proceeding to carry into effect the law as enacted; it cannot amend or expand statutory requirements or embrace matters not covered by the statute. Where a discrepancy occurs between the basic law and an implementing rule, the former prevails. In this case, the CREATE IRR and BIR issuances were ultra vires because they excluded DMEs from VAT zero-rating — a limitation not found in the CREATE Act's Sections 294(E) and 295(D), which entitled all RBEs to the incentive.

• Cross Border Doctrine and Destination Principle — Under the Philippine VAT system, no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the taxing authority. Sales by suppliers from the customs territory to a purchaser located within the freeport zone are considered exportations and are subject to zero percent VAT. This doctrine supports the conclusion that all registered enterprises within the SBFZ — including DMEs — are entitled to VAT zero-rating on local purchases.

• CTA Exclusive Jurisdiction Over Tax Cases — The Court of Tax Appeals has exclusive jurisdiction to resolve all tax problems, including actions directly challenging the constitutionality or validity of tax laws, regulations, and administrative issuances. Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 129, provides an exception to the RTC's original jurisdiction over such actions, except for local tax cases. This jurisdiction does not do away with the requirement of exhausting administrative remedies.

• Doctrine of Exhaustion of Administrative Remedies — Exceptions — Parties are generally precluded from immediately seeking judicial intervention when administrative remedies are available. However, exceptions exist, including when strong public interest is involved. In this case, the shift from zero-rate to 12% VAT on local purchases by DMEs affected all DMEs registered with SBMA, constituting strong public interest sufficient to excuse exhaustion.

• Locus Standi in Constitutional Challenges — A party has standing to raise a constitutional question when (1) he or she will personally suffer actual or threatened injury from the challenged government conduct, (2) the injury is fairly traceable to the challenged action, and (3) the injury is likely redressed by a favorable decision. SBFCC satisfied all three requisites through its Certificate of Registration and Tax Exemption and the direct curtailment of its VAT zero-rating entitlement by the assailed issuances.

• Legislative Prerogative Over Tax Exemptions — The power to tax includes the power to grant tax exemptions; the imposition of taxes and the grant and withdrawal of tax exemptions are valid only pursuant to a legislative enactment. Executive issuances that attempt to withdraw tax incentives clearly accorded by legislation arrogate upon themselves a power reserved exclusively to Congress, violating the doctrine of separation of powers.

• "The power to promulgate rules in the implementation of a statute is necessarily limited to what is provided for in the legislative enactment. Its terms must be followed, for an administrative agency cannot amend an Act of Congress." — This passage articulates the ratio decidendi for declaring the assailed issuances ultra vires: the rule-making power cannot expand or amend statutory requirements.

• "Given the foregoing, the Court rules that Rule 18, Section 5 of the CREATE IRR and RR No. 21-2022, RMC No. 24-2022, and RMC No. 49-2022, in so far as they limited the VAT zero-rating on local purchases of goods and services to REEs, are ultra vires. They altered the provisions of existing law—the CREATE Act—by carving out DMEs from those entitled to the VAT zero-rating incentive." — This is the Court's direct pronouncement of invalidity, identifying the specific defect: the exclusion of DMEs from a statutory entitlement that made no such distinction.

• "The Court of Tax Appeals has undoubted jurisdiction to pass upon the constitutionality or validity of a tax law or regulation when raised by the taxpayer as a defense in disputing or contesting an assessment or claiming a refund." — This quotation from Banco De Oro vs. Republic, as adopted by the Court, establishes the CTA's jurisdictional framework for challenges to tax regulations.

• "the imposition of taxes, as well as the grant and withdrawal of tax exemptions, shall only be valid pursuant to a legislative enactment." — This formulation from Purisima vs. Lazatin, as reiterated by the Court, underscores the separation-of-powers principle that executive issuances cannot withdraw tax incentives granted by statute.

• Banco De Oro vs. Republic, 793 Phil. 97 (2016) — Controlling precedent establishing that the CTA has exclusive jurisdiction to pass upon the constitutionality or validity of tax laws, regulations, and administrative issuances, overturning British American Tobacco vs. Camacho. Followed and applied to confirm that the RTC lacked jurisdiction.

• Bloomberry Resorts and Hotels, Inc. vs. Bureau of Internal Revenue, 792 Phil. 751 (2016) — Followed for the proposition that direct recourse to the Court may be allowed in exceptional cases involving strong public interest, pure questions of law, and patently illegal acts by the BIR, without strict observance of exhaustion of administrative remedies.

• Executive Secretary vs. Southwing Heavy Industries, Inc., 518 Phil. 103 (2006) — Followed for the recognition of the SBFZ as a separate customs territory not subject to customs duties and other taxes, supporting the conclusion that registered enterprises within the zone are entitled to VAT zero-rating.

• Bureau of Customs vs. Japanese 4 x 4 Export Corp., G.R. No. 227542, May 12, 2021 — Cited to emphasize the legislative purpose of designating the SBFZ as a separate customs entity — to develop it into a self-sustaining entity generating employment and attracting investment — and the Court's commitment to preserving that statutory intent.

• Purisima vs. Lazatin, 801 Phil. 395 (2016) — Followed for the doctrine that the grant and withdrawal of tax exemptions is exclusively a legislative prerogative, and that executive issuances withdrawing tax incentives violate the separation of powers.

• Confederation for Unity, Recognition and Advancement of Government Employees vs. Commissioner, Bureau of Internal Revenue, 835 Phil. 297 (2018) — Followed as prevailing rule confirming that the CTA has exclusive jurisdiction over challenges to the validity of tax regulations, and that strong public interest may excuse exhaustion of administrative remedies.

• Coral Bay Nickel Corp. vs. Commissioner of Internal Revenue, 787 Phil. 57 (2016) — Cited for the Cross Border Doctrine and Destination Principle: no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the taxing authority.

• Sections 294(E) and 295(D), Republic Act No. 11534 (CREATE Act) — These provisions grant registered business enterprises VAT exemption on importation and VAT zero-rating on local purchases of goods and services directly and exclusively used in the registered project or activity. Section 295(D) refers to a "registered business enterprise" without distinguishing between REEs and DMEs. The Court held that these provisions entitle all RBEs — including DMEs — to VAT zero-rating, and that the assailed issuances were ultra vires for narrowing this entitlement to REEs only.

• Section 12, Republic Act No. 7227 (Bases Conversion Development Act of 1992) — Created the Subic Special Economic Zone as a separate customs territory. This provision underpins the SBFZ's special tax regime and the entitlement of registered enterprises to tax exemptions, including VAT zero-rating, consistent with the Cross Border Doctrine.

• Section 106(A)(2)(a)(2)(i), National Internal Revenue Code, as amended by Republic Act No. 10963 (TRAIN Law) — Provides zero percent VAT on sale and delivery of goods to registered enterprises within a separate customs territory as provided under special laws. Applied to confirm that sales by suppliers from the customs territory to purchasers within the SBFZ are considered exportations subject to zero percent VAT.

• Section 4, National Internal Revenue Code (Tax Code) — Empowers the Commissioner of Internal Revenue to interpret tax laws, subject to review by the Secretary of Finance. Cited to establish the administrative remedy that petitioners should ordinarily have exhausted before seeking judicial intervention.

• Section 7, Republic Act No. 1125, as amended by Republic Act No. 9282 — Vests the Court of Tax Appeals with exclusive jurisdiction over all tax problems, including actions directly challenging the constitutionality or validity of tax laws, regulations, and administrative issuances, except for local tax cases. Applied to confirm that the RTC lacked jurisdiction.

Gesmundo, C.J., Caguioa, Hernando, Lazaro-Javier, Inting, Zalameda, Gaerlan, Rosario, J. Lopez, Dimaampao, Marquez, and Kho, Jr., JJ., concurred.

Leonen, SAJ., filed a concurring opinion agreeing that the assailed issuances should be declared void as ultra vires for carving out qualifications for zero-rating of VAT beyond what the law provides. He separately elaborated on two points: first, that the exemption from the doctrine of exhaustion of administrative remedies is justified given the strong public interest involved, citing Bloomberry Resorts and Hotels, Inc. vs. BIR and Confederation for Unity, Recognition and Advancement of Government Employees vs. Commissioner, Bureau of Internal Revenue; and second, that the CREATE Act's provisions illustrate the absence of distinction between REEs and DMEs as RBEs in terms of their entitlement to VAT zero-rating incentives, and that the purpose of creating the Subic Special Economic Zone as a separate customs territory further underscores the limits of implementing rules. He voted to grant the petition.

Singh, J., was on leave.