Have you ever wondered what goes through someone else’s mind when they wish to turn back time? I reckon you’d say that they likely want to rectify their past mistakes or explore whether their current circumstances might have turned out differently. You see, more often than not, people tend to imagine themselves going back in time to somehow alter their present. Personally, I tend to advise against these ideas, as dwelling on what-could-have-beens often leads to frustration and prevents us from appreciating the beauty and value of one’s current life.
Still, if you were given the chance to revisit the past to clarify certain matters, would you take it? Would you turn back time?
Just as in the case of Subic Bay Freeport Chamber of Commerce, Inc. vs. Department of Finance, etc. (Subic Bay Freeport Case), the entitlement of Registered Business Enterprises (RBEs), specifically Domestic Market Enterprises (DMEs), to VAT-zero rating for local purchases has been revisited by the Supreme Court to provide clarity in the application of the law.
In this case, Petitioners Subic Bay Freeport Chamber of Commerce (SBFCC) and Benjamin Antonio (Petitioners), as taxpayers, filed a Petition for Declaratory Relief with an Application for Writ of Temporary Restraining Order and/or Preliminary Injunction against Respondents Department of Finance (DOF), Department of Trade and Industry (DTI), Bureau of Internal Revenue (BIR), Revenue District Office No. 19 (RDO 19) of Subic Bay Freeport Zone, and Subic Bay Metropolitan Authority (SBMA), collectively referred to herein as Respondents.
The Petitioners alleged that the Implementing Rules and Regulations of Republic Act (RA) No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE IRR), particularly Rule 18, Section 5, Revenue Regulation (RR) No. 21-2021, Revenue Memorandum Circular (RMC) No. 24-2022, and RMC No. 49-2022, are invalid and unconstitutional for the subject law and BIR issuances unjustly excluded DMEs from availing of tax incentives. Specifically, it effectively limited the application of VAT zero-rating for local purchases only to Registered Export Enterprises (REEs), excluding DMEs, such as SBFCC, which provided a distinction between DMEs and REEs when in fact there is none under the CREATE Act. Mainly, the Petitioners contend that so long as an enterprise is a registered business, like SBFCC, it is entitled to a VAT-zero rating on local purchases.
Now, before we proceed with the Supreme Court’s (SC) decision, let us first walk down memory lane and recount the creation and nature of SBFCC.
As outlined in the case, the Subic Special Economic Zone was created pursuant to Section 12 of RA No. 7227, or the Bases Conversion Development Act of 1992, to be operated and managed as a separate customs territory. Pursuant to SBMA’s issued Certificate of Registration and Tax Exemption, it granted tax incentives and exemptions to these entities, subject to certain conditions. Due to these incentives, SBFCC registered with the SBMA as a freeport enterprise to conduct business within the Subic Bay Freeport Zone (SBFZ).
It should be noted that upon passage of the CREATE Act, SBFCC has been classified as an RBE, specifically a DME, being an enterprise registered with the IPA, such as the Philippine Economic Zone Authority (PEZA). This finds support under the CREATE Act, which defines RBEs as corporations or other entities organised and existing under Philippine laws and registered with an Investment Promotion Agency (IPA). Further, an RBE may be classified as a Registered Export Enterprise (REE) or a DME. DME refers to any enterprise registered with the IPA apart from export enterprises.
Under the CREATE Act, SBFCC, being an RBE, should be entitled to VAT exemption on importation and VAT zero-rating on local purchases of goods and services directly and exclusively used in its registered project or activity of the RBEs.
However, upon implementation by DTI and the DOF of the CREATE IRR, it limited the entitlement to VAT zero-rating on local purchases to REEs. As provided under Rule 18, Section 5 of the CREATE IRR, which implements Section 311 of the CREATE Act, VAT zero-rating on local purchases shall only apply to goods and services directly attributable to and exclusively used in the registered project or activity of said REE located inside the ecozones and freeports. Additionally, Revenue Regulation (RR) No. 21-2021, implementing Sections 294(E) and 295(D), Title XIII of the National Internal Revenue Code (Tax Code), as amended by the CREATE Act, RMC No. 24-2022, and RMC 49-2022, further provided that the VAT zero-rating incentives apply only to REEs, excluding DMEs.
By virtue of the subject law and subject BIR issuances, the exclusion of DMEs from the VAT zero-rating incentive on local purchases of goods and services directly attributable to the registered project or activity and limiting the incentive to export enterprises caused irreparable injury to DMEs, including SBFCC. In effect, the VAT passed on to the DMEs by local suppliers shall be absorbed as part of their cost or expenses. Further, as mentioned by the Petitioners, considering that DMEs will not be issued VAT zero-rating certificates, their sales shall be subject to the regular twelve percent (12%) VAT rate. These effects conflicted with the nature of DMEs as a separate customs territory, which should be exempted from the imposition of VAT.
Henceforth, to clarify the issue with regard to the above laws and BIR issuances, specifically the entitlement of DMEs to VAT zero-rating on their local purchases of goods and services, the SC likewise revisited the law implemented earlier than the subject law and issuances, which is the CREATE Act and RA No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN Law).
As clearly and explicitly provided under Sections 294(E) and 295(D) of the CREATE Act, all RBEs, which include REEs and DMEs, are entitled to VAT zero-rating on their local purchases of goods and services directly and exclusively used in the registered project or activity. As mentioned by the SC, the rule is consistent with the nature of SBFZ as a separate customs territory.
Also, the SC made mention of the time-old Cross Border Doctrine and Destination Principle, which states that 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. Thus, the sales made by suppliers from a customs territory to a purchaser located within the freeport zone are considered exportations; hence, they are subject to zero percent VAT.
Lastly, to further support the Court’s stand, it held that, pursuant to the TRAIN law, sales by VAT-registered persons to registered enterprises within a separate customs territory shall be subject to a zero percent rate.
Given the foregoing, the Court ruled that Rule 18, Section 5 of the CREATE IRR and RR No. 21-2022, RMC No. 24-2022, and RMC No. 49-2022, insofar as they limited the VAT zero-rating on local purchases of goods and services to REEs, are ultra vires. They altered the provisions of the existing law – the CREATE Act – by carving out DMEs from those entitled to the VAT zero-rating incentive. Hence, the said relevant provisions of the law and BIR issuances are declared void and unconstitutional.
If we are to consider the case above, reevaluating the past—such as previously implemented laws—can often lead to greater clarity and justification. However, there still exists the element of risk. In fact, this case came close to being dismissed for failure to exhaust administrative remedies. Therefore, if you were given the chance to turn back time, knowing the risk involved, would you still take it?
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 07 October 2025
