Subic Bay Freeport v. DOF: Domestic Market Enterprises Get VAT Zero-Rating Too

In The Subic Bay Freeport Chamber of Commerce, Inc. and Benjamin E. Antonio III v. Department of Finance, et al. (G.R. No. 266016, February 4, 2025), the Supreme Court En Banc struck down implementing rules and BIR circulars that limited the CREATE Act’s VAT zero-rating incentive to Registered Export Enterprises (REEs), holding that the underlying statute extends the incentive to all Registered Business Enterprises (RBEs) — including Domestic Market Enterprises (DMEs). The regulations were void for narrowing a benefit Congress had written broadly. This post is part of the Day in Court series.

Case details #

What happened #

The Subic Bay Freeport Zone (SBFZ) operates as a separate customs territory under Republic Act No. 7227 (the Bases Conversion and Development Act of 1992), and businesses registered there — including members of the Subic Bay Freeport Chamber of Commerce, Inc. (SBFCC) — historically enjoyed VAT treatment reflecting that separate-customs-territory status. When Republic Act No. 11534 (the CREATE Act) took effect in 2021, it granted VAT zero-rating on local purchases to Registered Business Enterprises (RBEs) — a class the statute defined to include both Registered Export Enterprises (REEs) and Domestic Market Enterprises (DMEs) availing of fiscal incentives.

The Department of Trade and Industry and Department of Finance’s implementing rules, however — specifically Rule 18, Section 5 of the CREATE Act’s Implementing Rules and Regulations — limited VAT zero-rating on local purchases exclusively to REEs. The BIR reinforced that limitation through Revenue Regulations No. 21-2022 and Revenue Memorandum Circulars Nos. 24-2022 and 49-2022, which excluded DMEs like many SBFCC members from the zero-rating benefit. As a result, DME locators in the freeport zone had to absorb 12% output VAT on local purchases that the CREATE Act itself did not appear to exclude them from zero-rating on.

SBFCC and its president, Benjamin E. Antonio III, filed a petition directly with the Supreme Court challenging the IRR provision and the BIR issuances as ultra vires — exceeding the rule-making authority delegated by the CREATE Act. The respondent agencies argued, among other points, that the petitioners should have exhausted administrative remedies before going to the Supreme Court.

The issue before the court #

Whether Rule 18, Section 5 of the CREATE Act’s Implementing Rules and Regulations, together with Revenue Regulations No. 21-2022 and Revenue Memorandum Circulars Nos. 24-2022 and 49-2022, validly limit VAT zero-rating on local purchases of goods and services to Registered Export Enterprises only — or whether that limitation exceeds the CREATE Act’s own text, which extends the incentive to all Registered Business Enterprises.

The ruling #

The Supreme Court En Banc granted the petition and declared the challenged regulations void.

The exhaustion doctrine yielded to the case’s public interest #

The Court first addressed the threshold procedural objection, holding that direct resort to the Supreme Court was justified given the compelling public interest in resolving a VAT rule affecting an entire class of registered enterprises, and the urgency of the ongoing tax exposure DMEs faced under the challenged issuances.

An implementing rule cannot narrow what the statute grants broadly #

On the merits, the Court held that Sections 294(E) and 295(D) of the CREATE Act expressly extend VAT zero-rating on local purchases to “all RBEs, which include REEs and DMEs” — without the export/domestic distinction the IRR and BIR issuances imposed. Applying the settled principle that administrative rule-making “is necessarily limited to what is provided for in the legislative enactment,” the Court held that Rule 18, Section 5 of the CREATE IRR, RR No. 21-2022, and RMCs Nos. 24-2022 and 49-2022 are ultra vires because they “unlawfully amended statutory language by restricting VAT zero-rating exclusively to export enterprises.” The Court reasoned that a rule which “carves out qualifications… more than what the law provides” cannot stand, since implementing regulations may clarify or fill in details but cannot add substantive restrictions the statute itself does not impose. The two conditions the CREATE Act actually requires are: (1) that the enterprise is registered under an investment promotion agency or the Fiscal Incentives Review Board, and (2) that the purchased goods or services are directly and exclusively used in the registered project or activity.

The freeport’s separate-customs-territory status reinforces the outcome #

The Court also grounded its ruling in the SBFZ’s status as a separate customs territory, applying the cross-border doctrine and destination principle to conclude that sales from mainland suppliers into the freeport zone function analogously to exports for VAT purposes — supporting zero-rating regardless of whether the buyer is classified as an REE or a DME.

Subsequent voluntary VAT registration didn’t moot the case #

The Court rejected the government’s argument that later rules allowing DMEs to optionally register for VAT (permitting output VAT charging and input tax refund claims) had mooted the dispute — that later option, the Court held, does not restore the statutory zero-rating entitlement on local purchases that the challenged issuances had wrongly stripped away.

A concurring opinion — no dissent #

Senior Associate Justice Marvic M.V.F. Leonen filed a concurring opinion, agreeing both that the exhaustion doctrine could be relaxed given the public interest at stake and that the IRR and BIR regulations were ultra vires for “carving out qualifications for zero-rating of VAT more than what the law provides.” No justice dissented; the remaining Associate Justices concurred in the result.

Our insights #

Two 2025 rulings define VAT zero-rating from different angles — who qualifies, and where it applies #

This case and Coral Bay Nickel Corporation v. CIR (G.R. Nos. 251333-34, decided about a month later on March 5, 2025) both turn on VAT zero-rating for registered zone enterprises, but they resolve different questions. Subic Bay Freeport addresses who qualifies: the Court held the CREATE Act’s zero-rating extends to all RBEs, not just export-focused ones, so a DME’s registered status is not by itself a disqualifier. Coral Bay Nickel addresses where the purchase must be consumed: even a PEZA-registered export enterprise’s purchases lose zero-rating if consumed outside the ecozone, because status alone doesn’t override the cross-border doctrine’s situs requirement. Read together, the two decisions describe a two-part test that emerges from the Court’s own 2025 jurisprudence — CREATE Act coverage turns on registration and activity, not export-versus-domestic classification, while actual zero-rating still depends on where the goods or services are consumed.

Practitioner commentary frames this as a significant restoration, not a novel expansion #

Grant Thornton Philippines titled its alert “Back to Zero,” framing the ruling as DMEs regaining an entitlement the CREATE Act had given them from the start, rather than the Court creating a new incentive. GVES Law Offices similarly frames the decision as confirming that “statutory language — not administrative interpretation — controls tax incentive eligibility,” and flags manufacturing, logistics, technology, and gaming-sector DMEs as the enterprises most likely affected. Neither alert reviewed here reported disagreement with the outcome; the practitioner commentary available is consistent in reading this as a straightforward application of the rule that implementing regulations cannot narrow what a statute grants.

The BIR has since had to update its own rules #

Since this decision, the BIR has issued further guidance adjusting VAT treatment for RBEs’ local sales under the CREATE Act framework, as amended by Republic Act No. 12066 (CREATE MORE) — including Revenue Regulations No. 1-2026, which addresses optional VAT registration and remittance mechanics for RBEs on local sales. That regulation does not itself discuss this case, but it operates in the same statutory space this ruling clarified.

What this means for taxpayers #

Domestic Market Enterprises registered with an investment promotion agency or the Fiscal Incentives Review Board should not assume they are excluded from VAT zero-rating on local purchases simply because they are not export-focused — this ruling confirms the CREATE Act’s zero-rating incentive turns on registration and on whether the purchase is directly and exclusively used in the registered activity, not on export-versus-domestic classification. That said, enterprises inside economic or freeport zones should still confirm that the specific goods or services purchased are actually consumed within the zone or used for the registered activity, since a separate line of cases addresses geography and consumption location as an independent condition for zero-rating. Enterprises that previously absorbed 12% VAT on local purchases under the now-voided issuances may want to review whether a refund claim is still within the applicable prescriptive period. For the BIR’s post-CREATE MORE rules on VAT for RBE local sales, see RR No. 1-2026: VAT on Local Sales by RBEs; for the export-side zero-rating rules, see VAT Zero-Rating for Exporters.

Summary #

Subic Bay Freeport Chamber of Commerce v. DOF holds that the CREATE Act’s VAT zero-rating incentive on local purchases extends to all Registered Business Enterprises — export and domestic market alike — because BIR and DOF rules limiting it to exporters only added a restriction the statute itself does not contain. This post is part of the Day in Court series; for the related question of where a zone enterprise’s purchases must be consumed to keep that zero-rating, see Coral Bay Nickel v. CIR.

Sources #

Primary sources

• Supreme Court E-Library — G.R. No. 266016, The Subic Bay Freeport Chamber of Commerce, Inc. and Benjamin E. Antonio, III v. Department of Finance, et al., Decision, February 4, 2025
• Supreme Court of the Philippines — Press Release: SC — Domestic Market Enterprises Entitled to Zero-Rated VAT under CREATE Act

Secondary sources

• Grant Thornton Philippines — Back to Zero: Domestic Market Enterprises Regain Their Entitlement to VAT Zero-Rating on Local Purchases of Goods
• GVES Law Offices — Supreme Court Clarifies VAT Zero-Rating Under the CREATE Act: Domestic Market Enterprises Are Entitled to Incentives
• Comania Law — Subic Bay Freeport Chamber of Commerce, Inc. v. DOF, G.R. No. 266016 (February 4, 2025)