A taxpayer’s last resort
TOP OF MIND - John Martin Mendoza (The Philippine Star) - November 19, 2019 - 12:00am

In the course of doing business, you will always encounter taxes. Taxation is necessary to the existence of government and is considered as the lifeblood of the state.

One of many taxes imposed by our government is the value-added Tax (VAT). The VAT is a consumption tax imposed at every stage of the distribution process on sale, barter, exchange, lease of goods or property, and the rendition of services in the course of trade or business, or the importation of goods.

A taxpayer shall incur input vat in the purchase of goods and services and the vat payable from the taxpayer shall be the excess of the output tax over input tax. Our VAT system allows the taxpayer to subtract from the VAT charged on its sales or output the VAT it paid on its purchases, input, and imports. Consequently, a taxpayer may incur more input VAT than output VAT. In a situation where the latter exists, the taxpayer may avail of a refund or tax credit of excess input taxes. However, a refund or tax credit shall be available only to a VAT-registered taxpayer for transactions involving zero-rated sales and effectively zero-rated sales of goods, properties, or services; or when the taxpayer closes his business.

A VAT refund or tax credit shall be granted when the application for the refund or tax credit is filed within two years after the close of the taxable year and strict compliance with the invoicing requirements as mandated by our Tax Code.

While our laws allow a system of refund and tax credit as an avenue for taxpayers to claim their excess input VAT, what happens then, when, through non-compliance, a taxpayer was not able to fully observe the invoicing requirements. Considering that a claim for refund is aptly treated as the same as a tax exemption, and hence, construed strictissimi juris, the subsequent claim for refund shall be denied by the Bureau of Internal Revenue (BIR) for noncompliance. Will the taxpayer suffer the burden of payment and be left with no recourse?

A recent decision by the Court of Tax Appeals (CTA) in June this year involved a taxpayer who had excess input VAT arising from various purchase of goods and services. Its claim for refund was subsequently denied due to noncompliance with the invoicing requirements for zero-rated sales, and upon receipt of the denial of its claim for refund, the taxpayer wrote off the excess input VAT in its books and claimed it as a deduction from its gross income. Consequently, the BIR, through a Letter of Authority, conducted an investigation of the books of accounts and accounting records of the taxpayer, ultimately disallowing the claim of the taxpayer that the denied VAT refund was an allowable expense considered as a valid loss which can be properly deducted from its gross income.

The CTA, however, allowed the denied VAT refund as an expense deductible on the gross income, reasoning that there is no explicit rule as to the treatment of disallowed/denied application for refund or issuance of tax credit certificate on input VAT attributable to zero-rated sales, citing Section 110(B) of the Tax Code. The CTA further explained that any input tax attributable to zero-rated sales by a VAT-registered person may, at his option, be refunded or credited against other internal revenue taxes.

The CTA categorized the denied VAT refund as a loss for the taxpayer and that it created an undesirable outcome of a risk; the disappearance or diminution of value. Our Tax Code allows a loss to be deductible when such loss is actually sustained by the taxpayer during the taxable year it is to be claimed; the loss is not compensated by insurance or other forms of indemnity; and, the loss is incurred in the taxpayer’s trade, profession, or business evidenced by a closed and completed transaction.

The CTA further explained that while the Tax Code specifically mentions refund or tax credit as modalities to recover unutilized input taxes attributable to zero-rated sales, it does not categorically prohibit the use of any other mode for its recovery. And, in interpreting the provisions of Section 112(A) of the Tax Code, the latter suggests that an alternative mode may be resorted to by a taxpayer for the recovery of excess input taxes other than by tax refund or tax credit. In other words, our laws allow a taxpayer to fully recover the excess input tax, to the extent that such input tax has not been applied against any output tax, and that no law prohibits a taxpayer from resorting to any other mode for the recovery of excess input tax.

Succinctly, the CTA decision provides that if the taxpayer desires to fully recover its excess input VAT (to the extent that such input tax has not been applied against the output tax), the law provides only for two modes: a) filing a claim for tax refund or b) tax credit. However, if the taxpayer decides not to fully recover the same, the latter may resort to other modes which are not categorically prohibited by law and are based on sound accounting principles and procedures, as in this case, claim as deductible expense.

John Martin M. Mendoza is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.

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