G.R. No.

210588 November 29, 2016

SECRETARY OF FINANCE CESAR B. PURISIMA AND COMMISSIONER OF INTERNAL REVENUE KIM S.

DECISION

BRION, J.:

This is a direct recourse to this Court from the Regional Trial Court (RTC), Branch 58, Angeles City, through
a petition for review on certiorari1 under Rule 45 of the Rules of Court on a pure question of law. The
petition seeks the reversal of the November 8, 2013 decision2 of the RTC in SCA Case No. 12-410. In the
assailed decision, the RTC declared Revenue Regulation (RR) No. 2-2012 unconstitutional and without
force and effect.

The Facts

In response to reports of smuggling of petroleum and petroleum products and to ensure the correct taxes
are paid and collected, petitioner Secretary of Finance Cesar V. Purisima - pursuant to his authority to
interpret tax laws3 and upon the recommendation of petitioner Commissioner of Internal
Revenue (CIR) Kim S. Jacinto-Henares signed RR 2-2012 on February 17, 2012.

The RR requires the payment of value-added tax (VAT) and excise tax on the importation of all petroleum
and petroleum products coming directly from abroad and brought into the Philippines, including Freeport
and economic zones (FEZs).4 It then allows the credit or refund of any VAT or excise tax paid if the taxpayer
proves that the petroleum previously brought in has been sold to a duly registered FEZ locator and used
pursuant to the registered activity of such locator.5

In other words, an FEZ locator must first pay the required taxes upon entry into the FEZ of a petroleum
product, and must thereafter prove the use of the petroleum product for the locator's registered activity
in order to secure a credit for the taxes paid.

On March 7, 2012, Carmelo F. Lazatin, in his capacity as Pampanga First District Representative, filed a
petition for prohibition and injunction6 against the petitioners to annul and set aside RR 2-2012.

Respondent’s contention (LAZATIN

Lazatin posits that Republic Act No. (RA) 94007 treats the Clark Special Economic Zone and Clark
Freeport Zone (together hereinafter referred to as Clark FEZ) as a separate customs territory and allows
tax and duty-free importations of raw materials, capital and equipment into the zone. Thus, the
imposition of VAT and excise tax, even on the importation of petroleum products into FEZs (like Clark
FEZ), directly contravenes the law.

The respondent Ecozone Plastic Enterprises Corporation (EPEC) sought to intervene in the proceedings as
a co-petitioner and accordingly entered its appearance and moved for leave of court to file its petition-in-
intervention.8
Respondent’s contention (EPEC)

EPEC claims that, as a Clark FEZ locator, it stands to suffer when RR 2-2012 is implemented. EPEC insists
that RR 2-2012's mechanism of requiring even locators to pay the tax first and to subsequently claim a
credit or to refund the taxes paid effectively removes the locators' tax-exempt status.

The RTC initially issued a temporary restraining order to stay the implementation of RR 2-2012. It
eventually issued a writ of preliminary injunction in its order dated April 4, 2012.

The petitioners questioned the issuance of the writ. On May 17, 2012, they filed a petition
for certiorari9 before the Court of Appeals (CA) assailing the RTC's order. The CA granted the petition10 and
denied the respondents' subsequent motion for reconsideration.11

The respondents stood their ground by filing a petition for review on certiorari before this Court (G.R. No.
208387) to reinstate the RTC's injunction against the implementation of RR 2-2012, and by moving for the
issuance of a temporary restraining order and/or writ of preliminary injunction. We denied the motion
but nevertheless required the petitioners to comment on the petition.

The proceedings before the RTC in the meanwhile continued. On April 18, 2012, petitioner Lazatin
amended his original petition, converting it to a petition for declaratory relief.12 The RTC admitted the
amended petition and allowed EPEC to intervene.

In its decision dated November 8, 2013, the RTC ruled in favor of Lazatin and EPEC.

First, on the procedural aspect, the RTC held that the original petition's amendment is allowed by the
rules and that amendments are largely preferred; it allowed the amendment in the exercise of its sound
judicial discretion to avoid multiplicity of suits and to give the parties an opportunity to thresh out the
issues and finally reach a conclusion.13

Second, the R TC held that Lazatin and EPEC had legal standing to question the validity of RR 2-2012.
Lazatin's allegation that RR 2-2012 effectively amends and modifies RA 9400 gave him standing as a
legislator: the amendment of a tax law is a power that belongs exclusively to Congress. Lazatin's allegation,
according to the RTC, sufficiently shows how his rights, privileges, and prerogatives as a member of
Congress were impaired by the issuance of RR 2-2012.

The RTC also ruled that the case warrants a relaxation on the rules on legal standing because the issues
touched upon are of transcendental importance. The trial court considered the encompassing effect that
RR 2- 2012 may have in the numerous freeport and economic zones in the Philippines, as well as its
potential impact on hundreds of investors operating within the zones.

The RTC then held that even if Lazatin does not have legal standing, EPEC' s intervention cured this defect:
EPEC, as a locator within the Clark FEZ, would be adversely affected by the implementation of RR 2-2012.

Finally, the RTC declared RR 2-2012 unconstitutional. RR 2-2012 violates RA 9400 because it imposes
taxes that, by law, are not due in the first place.14 Since RA 9400 clearly grants tax and duty-free incentives
to Clark FEZ locators, a revocation of these incentives by an RR directly contravenes the express intent of
the Legislature.15 In effect, the petitioners encroached upon the prerogative to enact, amend, or repeal
laws, which the Constitution exclusively granted to Congress.

The Petition
PETITIONER’S CONTENTION

The petitioners anchor their present petition on two arguments: 1) respondents have no legal
standing, and 2) RR 2-2012 is valid and constitutional.

1)

The petitioners submit that the Lazatin and EPEC do not have legal standing to assail the validity of RR 2-
2012.

First, the petitioners claim that Lazatin does not have the requisite legal standing as he failed to exactly
show how the implementation of RR 2-2012 would impair the exercise his official functions. Respondent
Lazatin merely generally alleged that his constitutional prerogatives to pass or amend laws were gravely
impaired or were about to be impaired by the issuance of RR 2-2012. He did not specify the power that
he, as a legislator, would be encroached upon.

While the Clark FEZ is within the district that respondent Lazatin represents, the petitioners emphasize
that Lazatin failed to show that he is authorized to file a case on behalf of the locators in the FEZ, the
local government unit, or his constituents in general.16 To the petitioners, if RR 2- 2012 ever caused injury
to the locators or to any of Lazatin's constituents, only these injured parties possess the personality to
question the petitioners' actions; respondent Lazatin cannot claim this right on their behalf.17

The petitioners claim, too, that the RTC should not have brushed aside the rules on standing on account
of transcendental importance. To them, this case does not involve public funds, only a speculative loss
of profits upon the implementation of RR 2-2012; nor is Lazatin a party with more direct and specific
interest to raise the issues in his petition.18 Citing Senate v. Ermita,19 the petitioners argue that the rules
on standing cannot be relaxed.

Second, petitioners also argue that EPEC does not have legal standing to intervene. That EPEC will
ultimately bear the VAT and excise tax as an end-user, is misguided.20 The burden of payment of VAT and
excise tax may be shifted to the buyer21 and this burden, from the point of view of the transferee, is no
longer a tax but merely a component of the cost of goods purchased. The statutory liability for the tax
remains with the seller. Thus, EPEC cannot say that when the burden is passed on to it, RR 2-2012
effectively imposes tax on it as a Clark FEZ locator.

The petitioners point out that RR 2-2012 imposes an "advance tax" only upon importers of petroleum
products. If EPEC is indeed a locator, then it enjoys tax and duty exemptions granted by RA 9400 so long
as it does not bring the petroleum or petroleum products to the Philippine customs territory.22

2)

The petitioners legally argue that RR 2-2012 is valid and constitutional.

First, petitioners submit that RR 2-2012's issuance and implementation are within their powers to
undertake.23 RR 2-2012 is an administrative issuance that enjoys the presumption of validity in the
manner that statutes enjoy this presumption; thus, it cannot be nullified without clear and convincing
evidence to the contrary.24

Second, petitioners contend that while RA 9400 does grant tax and customs duty incentives to Clark FEZ
locators, there are conditions before these benefits may be availed of. The locators cannot invoke
outright exemption from VAT and excise tax on its importations without first satisfying the conditions set
by RA 9400, that is, the importation must not be removed from the FEZ and introduced into the Philippine
customs territory.25

These locators enjoy what petitioners call a qualified tax exemption. They must first pay the corresponding
taxes on its imported petroleum. Then, they must submit the documents required under RR 2-2012. If
they have sufficiently shown that the imported products have not been removed from the FEZ, their
earlier payment shall be subject to a refund.

The petitioners lastly argue that RR 2-2012 does not withdraw the locators' tax exemption
privilege.1âwphi1 The regulation simply requires proof that a locator has complied with the conditions
for tax exemption. If the locator cannot show that the goods were retained and/or consumed within the
FEZ, such failure creates the presumption that the goods have been introduced into the customs territory
without the appropriate permits.26 On the other hand, if they have duly proven the disposition of the
goods within the FEZ, their "advance payment" is subject to a refund. Thus, to the petitioners, to the
extent that a refund is allowable, there is in reality a tax exemption.27

Counter-arguments

Respondents Lazatin and EPEC, maintaining that they have standing to question its validity, insist that RR
2-2012 is unconstitutional.

Respondents have standing as

The respondents argue that a member of Congress has standing to protect the prerogatives, powers, and
privileges vested by the Constitution in his office.28 As a member of Congress, his standing to question
executive issuances that infringe on the right of Congress to enact, amend, or repeal laws has already
been recognized.29He suffers substantial injury whenever the executive oversteps and intrudes into his
power as a lawmaker.30

On the other hand, the respondents point out that RR 2-2012 explicitly covers FEZs. Thus, being a Clark
FEZ locator, EPEC is among the many businesses that would have been directly affected by its
implementation.31

RR 2-2012 illegally imposes taxes

The respondents underscore that RA 9400 provides FEZ locators certain incentives, such as tax- and duty-
free importations of raw materials and capital equipment. These provisions of the law must be interpreted
in a way that will give full effect to law's policy and objective, which is to maximize the benefits derived
from the FEZs in promoting economic and social development.32

They admit that the law subjects to taxes and duties the goods that were brought into the FEZ and
subsequently introduced to the Philippine customs territory. However, contrary to petitioners' position
that locators' tax and duty exemptions are qualified, their incentives apply automatically.

According to the respondents, petitioners' interpretation of the law contravenes the policy laid down by
RA 9400, because it makes the incentives subject to a suspensive condition. They claim that the condition
- the removal of the goods from the FEZ and their subsequent introduction to the customs territory - is
resolutory; locators enjoy the granted incentives upon bringing the goods into the FEZ. It is only when the
goods are shown to have been brought into the customs territory will the proper taxes and duties have to
be paid.33 RR 2-2012 reverses this process by requiring the locators to pay "advance" taxes and duties first
and to subsequently prove that they are entitled to a refund, thereafter.34 RR 2-2012 indeed allows a
refund, but a refund of taxes that were not due in the first place.35

The respondents add that even the refund mechanism under RR 2-2012 is problematic. They claim that
RR 2-2012 only allows a refund when the petroleum products brought into the FEZ are
subsequently sold to FEZ locators or to entities that similarly enjoy exemption from direct and indirect
taxes. The issuance does not envision a situation where the petroleum products are directly brought into
the FEZ and are consumed by the same entity/locator.36 Further, the refund process takes a considerable
length of time to secure, thus requiring cash outlay on the part of locators;37 even when the claim for
refund is granted, the refund will not be in cash, but in the form of a Tax Credit Certificate (TCC).38

As the challenged regulation directly contravenes incentives legitimately granted by a legislative act, the
respondents argue that in issuing RR 2-2012, the petitioners not only encroached upon congressional
prerogatives and arrogated powers unto themselves; they also effectively violated, brushed aside, and
rendered nugatory the rigorous process required in enacting or amending laws.39

Issues

We shall decide the following issues:

I. Whether respondents Lazatin and EPEC have legal standing to bring the action of declaratory relief; and

II. Whether RR 2-2012 is valid and constitutional.

The Court's Ruling

We do not find the petition meritorious.

I. Respondents have legal

The party seeking declaratory relief must have a legal interest in the controversy for the action to
prosper.40 This interest must be material not merely incidental. It must be an interest that which will be
affected by the challenged decree, law or regulation. It must be a present substantial interest, as opposed
to a mere expectancy or a future, contingent, subordinate, or consequential interest.41

Moreover, in case the petition for declaratory relief specifically involves a question of constitutionality,
the courts will not assume jurisdiction over the case unless the person challenging the validity of the act
possesses the requisite legal standing to pose the challenge.42

Locus standi is a personal and substantial interest in a case such that the party has sustained or will sustain
direct injury as a result of the challenged governmental act. The question is whether the challenging party
alleges such personal stake in the outcome of the controversy so as to assure the existence of concrete
adverseness that would sharpen the presentation of issues and illuminate the court in ruling on the
constitutional question posed.43
We rule that the respondents satisfy these standards.

Lazatin has legal standing as

Lazatin filed the petition for declaratory relief before the RTC in his capacity as a member of
Congress.44 He alleged that RR 2-2012 was issued directly contravening RA 9400, a legislative enactment.
Thus, the regulation encroached upon the Congress' exclusive power to enact, amend, or repeal
laws.45 According to Lazatin, a member of Congress has standing to challenge the validity of an executive
issuance if it tends to impair his prerogatives as a legislator.46

We agree with Lazatin.

In Biraogo v. The Philippine Truth Commission,47 we ruled that legislators have the legal standing to ensure
that the prerogatives, powers, and privileges vested by the Constitution in their office remain inviolate.
To this end, members of Congress are allowed to question the validity of any official action that infringes
on their prerogatives as legislators.48

Thus, members of Congress possess the legal standing to question acts that amount to a usurpation of
the legislative power of Congress.49 Legislative power is exclusively vested in the Legislature. When the
implementing rules and regulations issued by the Executive contradict or add to what Congress has
provided by legislation, the issuance of these rules amounts to an undue exercise of legislative power and
an encroachment of Congress' prerogatives.

To the same extent that the Legislature cannot surrender or abdicate its legislative power without
violating the Constitution,50 so also is a constitutional violation committed when rules and regulations
implementing legislative enactments are contrary to existing statutes. No law can be amended by a mere
administrative rule issued for its implementation; administrative or executive acts are invalid if they
contravene the laws or to the Constitution.51

Thus, the allegation that RR 2-2012 - an executive issuance purporting to implement the provisions of the
Tax Code - directly contravenes RA 9400 clothes a member of Congress with legal standing to question
the issuance to prevent undue encroachment of legislative power by the executive.

EPEC has legal standing as a

EPEC intervened in the proceedings before the RTC based on the allegation that, as a Clark FEZ locator, it
will be directly affected by the implementation of RR 2-2012.52

We agree with EPEC.

It is not disputed that RR 2-2012 relates to the imposition of VAT and excise tax and applies to all
petroleum and petroleum products that are imported directly from abroad to the Philippines, including
FEZs.53

As an enterprise located in the Clark FEZ, its importations of petroleum and petroleum products will be
directly affected by RR 2-2012. Thus, its interest in the subject matter - a personal and substantial one -
gives it legal standing to question the issuance's validity.
In sum, the respondents' respective interests in this case are sufficiently substantial to be directly affected
by the implementation of RR 2-2012. The RTC therefore did not err when it gave due course to Lazatin's
petition for declaratory relief as well as EPEC's petition-in-intervention.

In light of this ruling, we see no need to rule on the claimed transcendental importance of the issues
raised.

II. RR 2-2012 is invalid and

On the merits of the case, we rule that RR 2-2012 is invalid and unconstitutional because: a) it illegally
imposes taxes upon FEZ enterprises, which, by law, enjoy tax-exempt status, and b) it effectively amends
the law (i.e., RA 7227, as amended by RA 9400) and thereby encroaches upon the legislative authority
reserved exclusively by the Constitution for Congress.

FEZ enterprises enjoy tax- and

In 1992, Congress enacted RA 7227 otherwise known as the "Bases Conversion and Development Act of
1992" to enhance the benefits to be derived from the Subic and Clark military reservations.54 RA 7227
established the Subic Special economic zone and granted such special territory various tax and duty
incentives.

To effectively extend the same benefits enjoyed in Subic to the Clark FEZ, the legislature enacted RA
9400 to amend RA 7227.55 Subsequently, the Department of Finance issued Department Order No. 3-
200856 to implement RA 9400 (Implementing Rules).

Under RA 9400 and its Implementing Rules, Clark FEZ is considered a customs
territory separate and distinct from the Philippines customs territory. Thus, as opposed
to importations into and establishments in the Philippines customs territory,57 which are fully subject to
Philippine customs and tax laws, importations into and establishments located within the Clark FEZ (FEZ
Enterprises )58 enjoy special incentives, including tax and duty-free importation.59 More specifically, Clark
FEZ enterprises shall be entitled to the freeport status of the zone and a 5% preferential income tax
rate on its gross income, in lieu of national and local taxes.60

RA 9400 and its Implementing Rules grant the following:

First, the law provides that importations of raw materials and capital equipment into the FEZs shall be tax-
and duty-free. It is the specific transaction (i.e., importation) that is exempt from taxes and duties.

Second, the law also grants FEZ enterprises tax- and duty-free importation and a preferential rate in the
payment of income tax, in lieu of all national and local taxes. These incentives exempt
the establishment itself from taxation.

Thus, the Legislature intended FEZs to enjoy tax incentives in general - whether with respect to
the transactions that take place within its special jurisdiction, or the persons/establishments within the
jurisdiction. From this perspective, the tax incentives enjoyed by FEZ enterprises must be understood
to necessarily include the tax exemption of importations of selected articles into the FEZ.
We have ruled in the past that FEZ enterprises' tax exemptions must be interpreted within the context
and in a manner that promotes the legislative intent of RA 722761 and, by extension, RA 9400. Thus, we
recognized that FEZ enterprises are exempt from both direct and indirect internal revenue taxes.62 In
particular, they are considered VAT-exempt entities.63

In line with this comprehensive interpretation, we rule that the tax exemption enjoyed by FEZ enterprises
covers internal revenue taxes imposed on goods brought into the FEZ, including the Clark FEZ, such as VAT
and excise tax.

RR 2-2012 illegally imposes VAT and excise

Section 3 of RR 2-2012 provides the following:

First, whenever petroleum and petroleum products are imported and/or brought directly to the
Philippines, the importer of these goods is required to pay the corresponding VAT and excise tax due on
the importation.

Second, the importer, as the payor of the taxes, may subsequently seek a refund of the amount previously
paid by filing a corresponding claim with the Bureau of Customs (BOC).

Third, the claim shall only be granted upon showing that the necessary condition has been fulfilled.

At first glance, this imposition - a mere tax administration measure according to the petitioners - appears
to be consistent with the taxation of similar imported articles under the Tax Code, specifically under its
Sections 10764and 14865 (in relation with Sections 12966 and 13167).

However, RR 2-2012 explicitly covers even petroleum and petroleum products imported and/or brought
into the various FEZs in the Philippines. Hence, when an FEZ enterprise brings petroleum and petroleum
products into the FEZ, under RR 2-2012, it shall be considered an importer liable for the taxes due on these
products.

The crux of the controversy can be found in this feature of the challenged regulation.

The petitioners assert that RR 2-2012 simply implements the provisions of the Tax Code on collection of
internal revenue taxes, more specifically VAT and excise tax, on the importation of petroleum and
petroleum products. To them, FEZ enterprises enjoy a qualified tax exemption such that they have to pay
the tax due on the importation first, and thereafter claim a refund, which shall be allowed only upon
showing that the goods were not introduced to the Philippine customs territory.

On the other hand, the respondents contend that RR 2-2012 imposes taxes on FEZ enterprises, which in
the first place are not liable for taxes. They emphasize that the tax incentives under RA 9400
apply automatically upon the importation of the goods. The proper taxes on the importation shall only be
due if the enterprises can later show that the goods were subsequently introduced to the Philippine
customs territory.

Since the tax exemptions enjoyed by FEZ enterprises under the law extend even to VAT and excise tax, as
we discussed above, it follows and we accordingly rule that the taxes imposed by Section 3 of RR 2-2012
directly contravene these exemptions. First, the regulation erroneously considers petroleum and
petroleum products brought into a FEZ as taxable importations. Second, it unreasonably burdens FEZ
enterprises by making them pay the corresponding taxes - an obligation from which the law specifically
exempts them - even if there is a subsequent opportunity to refund the payments made.

Petroleum and petroleum products brought

RR 2-2012 clearly imposes VAT and excise tax on the importation of petroleum and petroleum products
into FEZs. Strictly speaking, however, articles brought into these FEZs are not taxable importations under
the law based on the following considerations:

First, importation refers to bringing goods from abroad into the Philippine customs jurisdiction. It begins
from the time the goods enter the Philippine jurisdiction and is deemed terminated when the applicable
taxes and duties have been paid or the goods have left the jurisdiction of the BOC.68

Second, under the Tax Code, imported goods are subject to VAT and excise tax. These taxes shall be paid
prior to the release of the goods from customs custody.69 Also, for VAT purposes,70 an importer refers to
any person who brings goods into the Philippines.

Third, the Philippine VAT system adheres to the cross border doctrine.71 Under this rule, no VAT shall be
imposed to form part of the cost of the goods destined for consumption outside the Philippine customs
territory.72 Thus, we have already ruled before that an FEZ enterprise cannot be directly charged for the
VAT on its sales, nor can VAT be passed on to them indirectly as added cost to their purchases.73

Fourth, laws such as RA 7227, RA 7916, and RA 9400 have established certain special areas as separate
customs territories .74 In this regard, we have already held that such jurisdictions, such as the Clark FEZ,
are, by legal fiction, foreign territories.75

Fifth, the Implementing Rules provides that goods initially introduced into the FEZs and subsequently
brought out therefrom and introduced into the Philippine customs territory shall be considered
as importations and thereby subject to the VAT.76 One such instance is the sale by any FEZ enterprise to a
customer located in the customs territory, which the VAT regulations refer to as a technical importation.77

We find it clear from all these that when goods (e.g., petroleum and petroleum products) are brought into
an FEZ, the goods remain to be in foreign territory and are not therefore goods introduced into Philippine
customs territory subject to Philippine customs and tax laws.78

Stated differently, goods brought into and traded within an FEZ are generally beyond the reach of national
internal revenue taxes and customs duties enforced in the Philippine customs territory. This is consistent
with the incentive granted to FEZs exempting the importation itself from taxes and duties.

Therefore, the act of bringing the goods into an FEZ is not a taxable importation. As long as the goods
remain (e.g., sale and/or consumption of the article within the FEZ) in the FEZ or re-exported to another
foreign jurisdiction, they shall continue to be tax-free.79 However, once the goods are introduced into the
Philippine customs territory, it ceases to enjoy the tax privileges accorded to FEZs. It shall then be
considered as an importation subject to all applicable national internal revenue taxes and customs duties.
The tax exemption granted to FEZ
enterprises is an immunity from tax liability
and from the payment of the tax.

The respondents claim that when RR 2-2012 was issued, petroleum and petroleum products brought into
the FEZ by FEZ enterprises suddenly became subject to VAT and excise tax, in direct contravention of RA
9400 (with respect to Clark FEZ enterprises). Such imposition is not authorized under any law, including
the Tax Code.80

On the other hand, the petitioners argue that RR 2-2012 does not withdraw the tax exemption privileges
of FEZ enterprises.1âwphi1 As their tax exemption is merely qualified, they cannot invoke outright
exemption. Thus, FEZ enterprises are required to pay internal revenue taxes first on their imported
petroleum under RR 2-2012. They may then refund their previous payment upon showing that the
condition under RA 9400 has been satisfied - that is, the goods have not been introduced to the Philippines
customs territory.81 To the petitioners, to the extent that a refund is allowable, there is still in reality a tax
exemption.82

We disagree with this contention.

First, FEZ enterprises bringing goods into the FEZ should not be considered as importers subject to tax in
the same manner that the very act of bringing goods into these special territories does not make
them taxable importations. We emphasize that the exemption from taxes and duties under RA 9400 are
granted not only to importations into the FEZ, but also specifically to each FEZ enterprise. As discussed,
the tax exemption enjoyed by FEZ enterprises necessarily includes the tax exemption of the importations
of selected articles into the FEZ.

Second, the essence of a tax exemption is the immunity or freedom from a charge or burden to which
others are subjected.83 It is a waiver of the government's right to collect84 the amounts that would have
been collectible under our tax laws. Thus, when the law speaks of a tax exemption, it should be understood
as freedom from the imposition and payment of a particular tax.

Based on this premise, we rule that the refund mechanism provided by RR 2-2012 does not amount to a
tax exemption. Even if the possibility of a subsequent refund exists, the fact remains that FEZ enterprises
must still spend money and other resources to pay for something they should be immune to in the first
place. This completely contradicts the essence of their tax exemption.

In the same vein, we cannot agree with the view that FEZ enterprises have the duty to prove their
entitlement to tax exemption first before fully enjoying the same; we find it illogical to determine whether
a person is exempted from tax without first determining if he is subject to the tax being imposed. We have
reminded the tax authorities to determine first if a person is liable for a particular tax, applying the rule
of strict interpretation of tax laws, before asking him to prove his exemption therefrom.85 Indeed, as
entities exempted on taxes on importations, FEZ enterprises are clearly beyond the coverage of any law
imposing those very charges. There is no justifiable reason to require them to prove that they are
exempted from it.

More importantly, we have also recognized that the exemption from local and national taxes granted
under RA 7227, as amended by RA 9400, are ipso facto accorded to FEZs. In case of doubt, conflicts with
respect to such tax exemption privilege shall be resolved in favor of these special territories.86
RR 2-2012 is unconstitutional.

According to the respondents, the power to enact, amend, or repeal laws belong exclusively to
Congress.87 In passing RR 2-2012, petitioners illegally amended the law - a power solely vested on the
Legislature.

We agree with the respondents.

The power of the petitioners to interpret tax laws is not absolute. The rule is that regulations may not
enlarge, alter, restrict, or otherwise go beyond the provisions of the law they administer; administrators
and implementors cannot engraft additional requirements not contemplated by the legislature.88

It is worthy to note that RR 2-2012 does not even refer to a specific Tax Code provision it wishes to
implement. While it purportedly establishes mere administration measures for the collection of VAT and
excise tax on the importation of petroleum and petroleum products, not once did it mention the pertinent
chapters of the Tax Code on VAT and excise tax.

While we recognize petitioners' essential rationale in issuing RR 2-2012, the procedures proposed by the
issuance cannot be implemented at the expense of entities that have been clearly granted statutory tax
immunity.

REVISED PAGE

Tax exemptions are granted for specific public interests that the Legislature considers sufficient to offset
the monetary loss in the grant of exemptions.89 To limit the tax-free importation privilege of FEZ
enterprises by requiring them to pay subject to a refund clearly runs counter to the Legislature's intent to
create a free port where the "free flow of goods or capital within, into, and out of the zones" is ensured.90

Finally, the State's inherent power to tax is vested exclusively in the Legislature.91 We have since ruled
that the power to tax includes the power to grant tax exemptions.92 Thus, the imposition of taxes, as well
as the grant and withdrawal of tax exemptions, shall only be valid pursuant to a legislative enactment.

As RR 2-2012, an executive issuance, attempts to withdraw the tax incentives clearly accorded by the
legislative to FEZ enterprises, the *petitioners have arrogated upon themselves a power reserved
exclusively to Congress, in violation of the doctrine of separation of powers.

In these lights, we hereby rule and declare that RR 2-2012 is null and void.

WHEREFORE, we hereby DISMISS the petition for lack of merit, and accordingly AFFIRM decision of the
Regional Trial Court dated November 8, 2013 2001 in SCA Case No. 12-410.

SO ORDERED.

ARTURO D. BRION
Associate Justice