Subic Bay Freeport Chamber of Commerce, Inc. and Benjamin Antonio III vs Department of Fice

Factual Background and Legislative Framework

Section 12 of Republic Act No. 7227 created the Subic Special Economic Zone, to be operated and managed as a separate customs territory, while SBMA served as its operating and implementing arm. Under the law and related rules, SBMA issued certificates of registration and tax exemption to qualified enterprises. The implementing rules for the Subic zone provided a broad tax exemption, including exemptions from national and local taxes and, in lieu of paying taxes, payment of a final tax of five percent (5%) of gross income earned by SBF enterprises.

After the enactment of the CREATE Act on March 26, 2021, Sections 294(E) and 295(D) granted registered business enterprises VAT exemption on importation and VAT zero-rating on local purchases, subject to conditions. The CREATE Act defined RBEs and distinguished between domestic market enterprises (DMEs) and registered export enterprises (REEs). The statute’s text made clear that VAT incentives were tied to goods and services directly and exclusively used in the registered project or activity of the registered business enterprise.

Subsequently, the DTI and DOF issued the CREATE IRR. As initially framed, the CREATE IRR, Rule 2, Section 5 limited VAT zero-rating on local purchases to goods and services used in the registered project or activity of export enterprises, thereby excluding DMEs. Later amendments followed. On December 2, 2021, Rule 18, Section 5 of the CREATE IRR was amended to provide that only certain benefits would apply in a manner consistent with “registered export enterprises” during the relevant transitory period, and that specific importations by existing enterprises would be treated under defined conditions. On December 3, 2021, the Secretary of Finance issued Revenue Regulations (RR) No. 21-2021 to implement Sections 294(E) and 295(D) of the Tax Code, as amended by the CREATE Act. Thereafter, the BIR issued Revenue Memorandum Circular (RMC) No. 24-2022 and RMC No. 49-2022, which clarified that VAT zero-rating applied only to REEs, excluding DMEs.

Petitioners’ Declaratory Relief and Prayer for Injunctive Relief

SBFCC and Antonio filed with the RTC a Petition for Declaratory Relief with an application for a writ of temporary restraining order and/or preliminary injunction, naming as respondents DOF, DTI, the BIR’s Revenue District Office No. 19 for the Subic Bay Freeport Zone, and SBMA. They alleged that the assailed issuances—particularly the CREATE IRR provisions (including Rule 18, Section 5), RR No. 21-2021, and the BIR issuances (RMC No. 24-2022 and RMC No. 49-2022)—were unconstitutional. They contended that the issuances effectively limited VAT zero-rating on local purchases to REEs and unlawfully excluded DMEs such as SBFCC. Petitioners asserted that the CREATE Act made no distinction that would justify excluding DMEs from the VAT zero-rating incentive for local purchases, so long as an enterprise was registered as an RBE and entitled to the regime of incentives.

Petitioners accordingly asked the RTC to declare the assailed rules and BIR issuances invalid and unconstitutional and to order respondents, particularly the BIR and SBMA, to desist from implementing the challenged issuances.

RTC Disposition: Dismissal for Lack of Jurisdiction

On March 16, 2023, the RTC dismissed the petition for lack of jurisdiction. The RTC reasoned that the Court of Tax Appeals (CTA) has jurisdiction over cases involving the constitutionality or validity of tax laws, rules, and regulations, and other administrative issuances of the Commissioner of Internal Revenue. It invoked jurisprudence to support dismissal for want of jurisdiction where a case was filed in a court that lacked authority. The RTC relied on the line of rulings that recognized CTA jurisdiction and the principle that courts must dismiss cases improperly filed for want of jurisdiction.

Issues Raised Before the Supreme Court

Petitioners elevated the dismissal, insisting that the RTC erred in dismissing the petition for lack of jurisdiction. They argued that the CTA’s jurisdiction was appellate in nature and that it covered only certain tax-related appeals, with final decisions of the Commissioner of Customs being appealable to the CTA. They also argued that the controversy did not fall under Section 7 of Republic Act No. 9282, so the RTC should have had jurisdiction. Petitioners also prayed again for invalidation of the assailed provisions—Rule 18, Section 5 of the CREATE IRR, RR No. 21-2021, and RMC Nos. 24-2022 and 49-2022.

Respondents, through the OSG, opposed the petition on two main grounds. First, they argued that the RTC’s dismissal order was not appealable under Rule 45 because it was not a final judgment on the merits. Second, they maintained that the RTC correctly held that it had no jurisdiction over the constitutionality or validity of tax laws and regulations. They further asserted that the case had become moot due to later amendments to the CREATE IRR on August 8, 2023.

Supreme Court’s Jurisdictional Treatment and the Doctrine of Exhaustion of Administrative Remedies

The Supreme Court framed the core question as whether the RTC properly dismissed the case for lack of jurisdiction and, in resolving that, discussed the CTA’s role in passing upon the validity of tax laws and tax-related issuances. It reiterated that the CTA has undoubted jurisdiction to determine the constitutionality or validity of a tax law, regulation, or administrative issuance when raised by the taxpayer as a defense, and it may also take cognizance of direct challenges to such validity. It cited Banco De Oro v. Republic, which emphasized the statutory framework under Republic Act No. 1125, as amended by Republic Act No. 9282, that directs tax-related appeals and challenges to the CTA, except for local tax cases.

The Court likewise stressed that CTA’s authority does not dispense with the requirement to exhaust available administrative remedies. It held that where the assailed issuances fall within administrative interpretation functions, petitioners generally should first seek recourse before the competent administrative authority. It relied on Section 4 of the Tax Code, which vests the Commissioner of Internal Revenue with exclusive and original power to interpret tax laws and decide tax cases, subject to review by the Secretary of Finance. Thus, petitioners should ordinarily elevate the challenge on the validity of the issuances to the Secretary of Finance before resorting to the courts.

However, the Court treated the case as falling within an exception. It relied on jurisprudence recognizing that direct resort to courts may be allowed in exceptional cases where strong public interest and urgent need for judicial intervention justify setting aside procedural infirmities, even when exhaustion and hierarchy rules would otherwise require dismissal or postponement. Using this framework, the Court found that the shift from VAT zero-rating to the regular 12% VAT rate for DMEs significantly affected all DMEs registered with SBMA as freeport enterprises. It characterized this as an indisputable trigger of strong public interest. Accordingly, the Court exempted the petition from strict application of exhaustion of administrative remedies.

Petitioners’ Standing and Claim of Direct Injury

The Court addressed petitioners’ locus standi against the OSG’s contention that any alleged injury was speculative. It applied standing doctrine in constitutional and public-law challenges, requiring personal stake in the outcome, traceability of injury to government action, and redressability by favorable action. The Court found these requirements satisfied.

It noted that SBFCC possessed a Certificate of Registration and Tax Exemption issued on May 12, 2022, classifying it as a Subic Bay Freeport Enterprise with tax incentives including exemption from local and national taxes that included VAT on certain transactions. The Court also referenced the recognition that the SBFZ operates as a separate customs territory not subject to customs duties and other taxes, consistent with jurisprudence such as Executive Secretary v. Southwing Heavy Industries, Inc. It concluded that, as a domestic corporation registered with SBMA as a freeport enterprise, SBFCC would directly sustain injury upon implementation of the assailed rules and issuances that excluded DMEs from VAT zero-rating on local purchases.

The Court reasoned that petitioners were sufficiently affected because the challenged limitations forced DMEs to absorb VAT passed on by local suppliers as cost or expense and implicated their VAT compliance posture. It thus treated petitioners as having standing to question the validity of the assailed issuances.

Merits: Ultra Vires Limitation of VAT Zero-Rating to Export Enterprises

On the merits, the Court identified the assailed validity determinations as involving Rule 18, Section 5 of the CREATE IRR, RR No. 21-2021, RMC No. 24-2022, and RMC No. 49-2022, insofar as they limited VAT zero-rating on local purchases to REEs and excluded DMEs.

The Court held that the exclusion of DMEs was unlawful. It reasoned from the CREATE Act provisions that both DMEs and REEs are registered business enterprises, and the statute’s incentive provision keyed VAT zero-rating on the character of the registered project or activity and the requirement that goods and services be directly and exclusively used in that project or activity. It emphasized that the administrative rulemaking power could not amend the law’s substantive grants. Administrative agencies could only promulgate rules implementing the statute’s legislative policy; they could not expand or carve out qualifications that the law did not impose.

The Court invoked the constitutional limits on delegated rulemaking. It declared that where there is a discrepancy between the basic law and an implementing regulation, the statute prevails. It therefore ruled that the admini