Setting things straight: The treatment of denied VAT refund claims
The need for clear and definitive rules on the proper treatment of input value-added tax ( VAT) from zero-rated/export sales in case of denial has never been as important as today. As more VAT refunds are denied by the Bureau of Internal Revenue (BIR), the taxpayers’ clamor to address the issue on the recovery of VAT for zero-rated/export sales becomes inevitable.
The flip- flopping rules of the BIR caused many taxpayers to doubt whether input VAT attributable to zero-rated sales can be recovered in case of denial. Further, the 1997 Tax Code, which provides no express provision for expensing unutilized input VAT, cast doubt on whether there is truly a legal basis to expense a denied input VAT.
The rules and procedures on the filing of the VAT refund have evolved with Revenue Memorandum Circular No. (RMC) 54-2014 in place. Because of the “deemed-denial rule” and mandatory documentary requirements introduced by RMC 54- 2014, it is not surprising that most of the claims for VAT refund will not be processed within the 120-day period, thus, resulting in a denial.
In RMC 57-2013, the BIR circularized a ruling saying that the Tax Code does not provide for other modes of recovering input VAT from zero-rated transactions except through refund for cash or tax credit. In the ruling, the BIR declared as having no legal basis and denied the request to expense input VAT upon expiration of the two-year period to refund. Under the RMC, the BIR also enjoined BIR officers engaged in the audit and review of audit cases to disallow unutilized creditable input VAT attributable to zero-rated sales that is claimed as deduction for income tax purposes.
In view of this 2013 RMC, taxpayers who were denied millions in VAT claims are now at a loss on whether they can still claim these amounts as deductible expense for income tax purposes.
As the current rules and policies of the BIR were structured in such a way that VAT refunds are likely to be denied, the BIR should have been more conscientious to ensure that taxpayers are well-informed of available remedies by issuing clear and definitive rules on the proper treatment of excess input VAT in case of denial.
Under Section 110( B) of the Tax Code, there are only two instances when excess input VAT may be recovered: (a) by carry over to the next quarters to offset against output VAT; and or ( b) refund as cash or tax credit when input VAT arises from zero-rated or effectively zero-rated sales, or upon cancellation of VAT registration due to retirement from or cessation of business. Based on the foregoing provisions, it appears that, in case of denial of claim for refund of excess input VAT, the taxpayer has no other option to recover input taxes since the Tax Code has no express provision for expensing the unutilized input VAT attributed to zero-rate sales.
However, a review of the various rulings and RMCs of the BIR issued pursuant to its rule making power negates such a conclusion.
In BIR Ruling No. DA 591-2004 dated November 24, 2004 the BIR confirmed that a taxpayer- claimant of a denied claim for refund/tax credit of unutilized input taxes relating to VAT zero-rated sales may claim the same as deduction for income tax purposes if the denial was due to: (a) failure to comply with certain sales invoicing requirements, such as failure to issue VAT invoice/receipt with the word “zero-rated” printed thereon, or issuance of invoices/ receipts that had not been registered with the BIR; or ( b) failure to show evidence that the input taxes sought to be refunded were not carried over and applied against any output VAT in the succeeding periods. In the said ruling, the BIR held that input taxes are assets which are expected to benefit the taxpayer. Denial by the BIR or the Court of the refund application means that the asset has lost its useful value. Thus, the denied claim should be treated as a deductible loss of property sustained during the taxable year.
On the other hand, if the denial is due to the failure of the taxpayer to submit supporting VAT invoices/ receipts for the purchases giving rise to the input taxes being refunded, the denied claim cannot qualify as a loss deduction in the year denied. In this ruling, the BIR held that purchases not covered by proper VAT invoices/receipts shall not give rise to any input tax as the VAT passed on by the supplier should have formed part of the expense or cost of the items purchased. Accordingly, the BIR held that the remedy available to the taxpayer is to amend its income tax return if the three-year period for such relief has not yet prescribed and no letter of investigation covering its income tax liabilities has been issued to the company.
In RMC 42-2003, the BIR held that, in case the zero-rated sales fail to comply with the invoicing requirements, input VAT claimed for refund or tax credit may be charged to the appropriate expense account or asset account subject to depreciation, whichever is applicable. In other words, the denied claim for refund/tax credit of input VAT attributable to zero-rated sales may be charged to expense or cost of goods or services for purposes of computing taxable income subject to income tax.
Based on the cited RMC and BIR Ruling, expensing of unutilized input VAT may be allowed depending on the grounds for denial.
How about if the denial was on the ground of “deemed-denial rule” under RMC 54-2015, will the taxpayer be allowed to expense the denied input VAT? Most of the recent denials of VAT refund were due to this reason. BIR examiners, due to heavy workloads, failed to examine and process the application within the 120-day period. Given the present situation, would it be fair for taxpayer-claimant to bear the burden?
On the other hand, if the denial is due to failure to submit the complete documents (e.g., taxpayer failed to submit verification of delinquent accounts by the Regional District Office and other documents certified by the BIR), will this hinder also the taxpayer-claimant from expensing the denied input VAT?
If expensing is not an option, can the taxpayer return it to the input VAT account in the quarter denied and carry it over to the succeeding quarters?
Apparently, the BIR has yet to issue clear and definitive rules to answer the questions above. However, one thing is for sure, taxpayers should be able to recover input VAT attributable to zero- rated sales. Otherwise, the taxpayer will be disadvantaged relative to a taxpayer with VATable sales. This is because zero-rated taxpayers will now shoulder the cost of input VAT even without the benefit of shifting the burden of output tax which is a clear departure from the general principles of the VAT system.
The Philippine VAT system adopts the destination principle which requires that the VAT be imposed where the goods or services are destined to be consumed. Hence, the law is structured such that exports of goods and services should not have a VAT component.
Exports are imposed zero percent VAT and the input VAT paid by the exporters is allowed to be recovered as credit against other output VAT or as refund in the form of cash or tax credit. Thus, if the taxpayer is not be allowed to expense input VAT attributable to zero-rated/export sales when its claim for refund is denied, then the principle of VAT system on export sales will be a fallacy.
The BIR, in issuing the rules and guidelines on the treatment of denied input VAT, should not blatantly disregard this long- standing principle. The BIR should also be cognizant of what RMC 57- 2013 prohibits — the outright expensing of input VAT upon expiration of the two-year period to refund and not the expensing of input VAT when claim for refund is denied. While the BIR is duty bound to raise revenues for the government, it must bear in mind that it also has an obligation to return to the taxpayer what is his by right.
While the BIR is duty bound to raise revenues for the government, it must bear in mind that it also has an obligation to return to the taxpayer what is his by right.