Companies under the Philippine Economic Zone Authority (PEZA) are not fully exempt from the Value-Added Tax (VAT), particularly on goods and services consumed outside the ecozone but still within Philippine territory, the Supreme Court (SC) ruled.

In a decision penned by Associate Justice Japar Dimaampao dated March 5, 2025, the SC’s Third Division partially granted Coral Bay Nickel Corporation’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 PEZA and operates within a special economic zone in Palawan.

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 failing to act on its request, Coral Bay elevated the case to the Court of Tax Appeals (CTA), which initially granted a partial refund based on a proportional allocation of purchases consumed outside the ecozone.

But the CTA En Banc reversed the earlier decision, treating Coral Bay as fully VAT-exempt and ruled that since PEZA-registered companies enjoy tax incentives under Republic Act No. 7916, their purchases should be considered zero-rated and thus not eligible for VAT refunds.

The high court disagreed. While acknowledging the tax incentives granted under the Special Economic Zone Act of 1995, the Court 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.

The SC said that goods consumed outside the ecozone are not covered by the cross-border doctrine and are thus subject to VAT, adding that Coral Bay was entitled to a refund of unutilized input VAT, but only to the extent of its proven consumption outside the ecozone.