Carworld/MVGS wins VAT deficiency in a landmark CTA case involving sales to Freeport and Economic Zones

The Court of Tax Appeals (CTA) issued a decision declaring the sales of cars and parts to a Subic freeport enterprise as VAT zero-rated sales without any qualifications or conditions.

In a 35-page decision promulgated on 26 October 2021 and penned by Presiding Justice Ramon G. Del Rosario for the case of Carworld, Inc. v. Commissioner of Internal Revenue, CTA Case No. 9988, MVGS secured a favorable CTA decision for its client, Carworld, Inc. (Carworld). The CTA granted the Petition for Review and cancelled the assessment of the Bureau of Internal Revenue (BIR) for alleged deficiency value-added tax (VAT) of Php27.7M on the sales of cars and parts to Carworld Subic, Inc. (“CSI”), a company located within the Subic Freeport Zone (SFZ) and registered with the Subic Bay Metropolitan Authority.

The CTA struck down BIR’s reliance on Revenue Memorandum Circular (RMC) No. 50-2007 and requirement that sold “ordinary cars, vehicles, automobiles, specialized vehicles or other transportation equipment” to Freeport enterprises “be used exclusively within special freeport zones” before the sales to be treated as zero-rated sales. The CTA also dismissed the BIR’s position that the subsequent sale by CSI of vehicles to its clients who may or may not bring the vehicles outside SFZ should affect the VAT treatment of Carworld’s sales to CSI.

The CTA discussed three (3) main points, among others, in the decision. First, the CTA held that the tax- and duty-free privilege under the Bases Conversion and Development Act of 1992 (BCDA) applies in general to Freeport and Economic Zone whether with respect to the transactions that take place within its special jurisdiction or the persons/establishments within the jurisdiction. Thus, VAT may not be imposed on the transaction or passed on to Freeport Enterprises, such as CSI, who are VAT-exempt entities.

Second, the CTA held that both the Tax Code and the BCDA do not impose conditions in order for sales of VAT-registered entities from the Customs Territory to Freeport Enterprises, like CSI, to be subject to VAT zero-rating. The CTA further stated that RMC No. 50-2007 which requires vehicles to be used exclusively within SFZ cannot prevail over the laws the BIR is tasked to implement. Thus, “to qualify the VAT exempt status of Freeport enterprises by imposing conditions before transactions with them are treated as zero-rated sales is contrary to the Legislature’s intent to create a freeport where the “free flow of goods or capital within, into, and out of the zones” is ensured.” Nonetheless, the CTA noted that CSI has complied with RMC No. 50-2007 since CSI has used the vehicles exclusively within the SFZ as part of its inventories.

Lastly, the CTA affirmed Carworld’s position that the sales transactions being assessed by the BIR consists of two different transactions, namely: (1) the sales between Carworld and CSI and (2) the sales between CSI and its clients. The sales of Carworld to CSI concerns the entry of goods into the SFZ which is exempt from tax or subject to VAT zero-rating while the sales of CSI to its clients may or may not entail the movement of goods from the SFZ to the Customs Territory which may have different tax consequences. The CTA also stated that the fact that Carworld and CSI have common stockholders is immaterial in determining the tax liability of Carworld since the two entities are separate and distinct juridical entities.

Essentially, the CTA concluded that the subsequent sale of CSI to clients who may or may not bring the vehicles outside the SFZ is irrelevant to the sales of Carworld to CSI, which, upon consummation, is subject to zero-rated VAT.

Prior to this CTA decision, there has been no case resolved by either the CTA or the Supreme Court relating to the tax treatment of sales of vehicles by a VAT-registered enterprise to an enterprise within a freeport zone. Hence, the CTA’s decision is precedent setting as this will affect the similar assessments by the BIR against other car dealer companies selling vehicles to entities within the freeport zones.

Update: The BIR has filed a Motion for Reconsideration dated 22 November 2021. A plain reading of the Motion for Reconsideration reveals that the BIR failed to raise new arguments. Instead, the BIR is insisting that Carworld’s sales to CSI cannot be considered zero-rated sales since CSI sells the vehicles to customers within and outside SFZ. In other words, the BIR is still insisting that the subsequent sale of CSI is part of the sale between Carworld and CSI. Carworld will file a Comment to the Motion for Reconsideration.

Author’s Note: Carworld is represented by MVGS lawyers Attys. Mary Elizabeth M. Belmonte, Reynaldo T. Dizon, and Miguel R. Sevilla.