Covered period vs validity period in VAT refunds

Over the past few years, policymakers have taken measures to streamline the filing process of VAT refund applications with the Bureau of Internal Revenue (BIR) to ease the burden on taxpayers. For instance, perhaps one of the more significant amendments to the Tax Code introduced by the TRAIN Law is the 90-day period within which the BIR should act on such applications. Another example is the BIR’s issuance of Revenue Memorandum Order No. 47-2020, which significantly reduced the required supporting documents for VAT refund or tax credit applications.

Previously, the requirement to provide voluminous documents and the protracted period for resolution of refund claims have led many taxpayers to veer away from even attempting to pursue this course of action, lest they endure incurring considerable time, administrative costs, and continuously testing the limits of their patience, only to be faced by a grim outcome: the denial by the BIR of their claims. With the 90-day limit and streamlined documentary requirements, taxpayers will arguably feel more confident in filing claims with the BIR.

But one might wonder: are these measures enough? Granting tax refunds or issuing tax credit certificates will result in reduced revenue. Thus, while the resolution period of the claim has become considerably shorter, the BIR is still more inclined to deny applications of this nature, considering that taxes are the lifeblood of the government. The denial will then prompt the aggrieved taxpayers to seek recourse from the Court of Tax Appeals. What follows next is an entirely different battle altogether — one that is fraught with providing not just copious legal bases but sufficient supporting documents and evidence to prove the taxpayer’s entitlement to the refund claim. But while this process may understandably be tiring for taxpayers, perhaps they can find comfort in the fact that court decisions, more often than not, serve as a guide on how they can be more vigilant in their compliance. One such case is the Supreme Court (SC) case involving a tax refund that was penned in September 2020 (G.R. No. 236325).

In that case, the taxpayer classified its sales to a buyer during the third and fourth quarters of the fiscal year (FY) 2010 as zero-rated sales and applied for a tax refund of the related input taxes that it was not able to utilize. To support the VAT zero-rated sales, the taxpayer submitted a Certification from the Board of Investments (BoI) dated Jan. 27, 2010, which states that the buyer is a BoI-registered entity that exported 100% of its total sales volume from Jan. 1 to Dec. 31, 2009. The Certification indicates that it is valid from Jan. 1, 2010 to Dec. 31, 2010, unless sooner revoked by the BoI.

Denying the refund claim, the SC held that the BoI Certification merely showed that the BoI-registered entity exported 100% of its total sales in 2009. However, nothing in the Certification showed that the buyer exported its products for the third and fourth quarters of 2010, or from Jan. 1, 2010 to June 30, 2010, which is the period subject of the refund claim.

The decision’s rationale is that it is not enough that zero-rated invoices or official receipts are issued. The taxpayer must prove that such issuances are valid based on the existence and validity of the underlying zerorated sales to be entitled to a refund or tax credit. Hence, the BoI-registered buyer must furnish its suppliers with a copy of the BoI Certification attesting that it exported 100% of its products to enable the supplier to confirm the zero-rated sales treatment.

While the BoI Certification issued to the BoI-registered entity allowed the seller to accord VAT zerorating status to its sales during the validity period of the certification or until Dec. 31, 2010, this is pre-empted by the condition that the BoI-registered entity must actually and eventually export such products. Notably, the BoI Certification was issued on Jan. 27, 2010. Since the BoI can only attest to actual exports after the end of the taxable year, at that point in time, it could only certify the export sales for the calendar year 2009. Thus, the Certification failed to prove that the BoI-registered entity exported all its in 2010. For the taxpayer’s 2010 sales to qualify as zero-rated sales, the BoI must certify that the buyer actually exported all its products from Jan. 1, 2010 to Dec. 31, 2010.

From the ruling, what is controlling to qualify as zero-rated sales is the confirmation of the period of actual export sales in the BoI Certification and not its validity period. As the Court explained, the certification’s validity period is only meant to accord zero-rating status to sales made during the extended period to avail of this benefit. It is not proof that the relevant sales were, in fact, entirely exported during the same period.

While appeal to courts may give taxpayers another window of opportunity to prove their claims, the ruling nevertheless highlights how important it is for taxpayers to be more prudent in demonstrating their entitlement not just in their legal defenses, but in their supporting documents as well.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.