Companies that set up shops in economic zones are not fully exempt from the value-added tax (VAT), particularly on sales within the country’s territory, the Supreme Court (SC) stated in a ruling.

In a decision penned by Associate Justice Japar Dimaampao dated 5 March 2025, the SC’s Third Division partially granted Coral Bay Nickel Corp’s claim for a VAT refund.

Coral Bay, a domestic company engaged in the manufacture and export of nickel and cobalt mixed sulfide, is registered with the Philippine Economic Zone Authority (PEZA) and operates within a special economic zone in Palawan.

Reacting to the High Court’s decision, PEZA director general Tereso Panga said the SC ruling on the case involving Coral Bay Nickel Corp. is consistent with PEZA’s long-standing interpretation of the VAT law, particularly zero-VAT rating incentive as applied to qualified local purchases of PEZA Registered Business Enterprises (RBEs).

“The High Court’s clarification — that VAT zero-rating applies only to goods and services consumed or rendered within the ecozone — is aligned with the cross-border doctrine. This reinforces the principle that ecozones are considered separate customs territories, and that tax incentives, including VAT zero-rating, are applicable strictly within these zones,” he said in a statement sent to the DAILY TRIBUNE.

Panga added that zero VAT rating applies to local purchases, but this incentive can only be enjoyed by export-oriented RBEs for goods and services consumed inside the zone.

The PEZA chief disclosed that rating was precisely the principle applied in the case of Coral Bay, a pre-CREATE enterprise registered with PEZA.

Input VAT refund

Initially, the company sought a refund from the Bureau of Internal Revenue (BIR) for unutilized input VAT paid on purchases of goods and services used beyond the boundaries of the ecozone.

With the BIR not acting on its request, Coral Bay elevated the case to the CTA, which initially granted a partial refund based on a proportional allocation of purchases consumed outside the ecozone.

The CTA en banc reversed an earlier decision, treating Coral Bay as fully VAT-exempt, and ruled that since PEZA-registered companies enjoy tax incentives under Republic Act 7916, their purchases should be considered zero-rated and thus not eligible for VAT refunds.

The high bench disagreed, while acknowledging the tax incentives granted under the Special Economic Zone Act of 1995, the Tribunal emphasized that the exemption from national and local taxes does not include VAT.

It clarified that PEZA-registered companies are only entitled to zero-rated VAT on purchases if the goods or services are consumed within the ecozone, considered a foreign territory under the cross-border doctrine.

But when goods or services are consumed outside the ecozone but within the Philippines, the destination principle applies, meaning VAT is imposed where the goods are actually used.