TRAIN: Enhancing the VATmobile for refunds

Just like Batman’s famous Batmobile, our government too has its own special and rather complicated vehicle to help collect its “lifeblood” revenues. Of course, through the years, there have been plenty of versions of the high-tech and dependable Batmobile. In comparison, taxes too have changed in shape, size, rates and amounts. For this article, I want to highlight one of the most crucial type of taxes, the Value-added Tax (VAT) or in my own special term, the VATmobile and its corresponding refund system. 

Believe it or not, our Tax Code, as amended, allows recovery of VAT for certain transactions: (1) excess and unutilized input VAT attributable to VAT zero-rated sales, (2) excess input VAT upon dissolution; and (3) erroneous VAT payments.

Taxpayers, especially corporations, generally do not want to have unutilized assets floating around their accounting systems. ‘Unutilized assets’ could have been invested somewhere else to generate something beneficial for the company. Having said that, taxpayers previously had two options to recover excess and unutilized VAT attributable to VAT zero-rated sales under the Tax Code, as amended. Taxpayers could apply for either the issuance of a tax credit certificate or an input VAT refund. An application should be filed within two years after the close of the taxable quarter when such sales were made.

But alas, just like a hero aiming to save the day, Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) attempts to do the same using the enhanced VAT refund system. The much celebrated law made significant revisions in the Tax Code, as follows:

First, the period given to the commissioner of internal revenue (CIR) to decide whether to grant or deny the VAT refund claim has been reduced from 120 days to 90 days. Supposing the CIR deems the application as improper, the denial of claim shall be stated with the corresponding factual and legal basis. The taxpayer may then file an appeal with the Court of Tax Appeals (CTA) within 30 days after the BIR’s denial.

Second, prior to TRAIN, the CIR was authorized to either grant a cash refund or issue a tax credit certificate. With the new law, however, a cash refund is the only option granted for meritorious claims. As such, it appears the law assumes that VAT refund claims will be acted upon within the 90-day period.

Third, and personally the most interesting, the amended Tax Code, now includes a provision stating that failure of any official, agent or employee of the Bureau of Internal Revenue (BIR) to act on the claim within the 90-day period could result in administrative and criminal liability for the said government employee. Pursuant to Section 269 of the Tax Code, as amended, this administrative liability involves heavy sanctions and even perpetual disqualification to hold public office, to vote, and to participate in any public election.

Reasonable as it may seem, this poses an issue as to whether the BIR can actually review and decide on the VAT refund claims of taxpayers efficiently within the 90-day period. In the past, the agency had an infamous status of not following timelines for VAT refunds. Having said that, there could be an issue in which affected officials may simply deny VAT refund claims just because of the fear of criminal sanctions due to the inability to process the claim on time.

Finally, under Section 31 of TRAIN, there would be an automatic annual appropriation under the Enhanced VAT Refund System. Five percent of the total VAT collection of the BIR and the BOC from the immediately preceding year shall be treated as a special account in the General Fund or as trust receipts for the purpose of funding claims for VAT refunds.  The previous modifications might be worrisome for others.

However, this final significant amendment is a positive welcome for taxpayers. With the automatic appropriation, we hope that the usual years for the delay of the actual cash refund would be significantly reduced. The said amendment is further strengthened by the additional provision stating that a quarterly report of all pending claims for refund and unused funds will be submitted by the BIR to the Congressional Oversight Committee on the Comprehensive Tax Reform Program (COCCTRP). The report will serve as a reminder and an action point by which concerned employees should exercise its mandate to decide on the appropriate claim for refunds within the stated timeline.

Furthermore, the Department of Finance shall also establish a VAT refund center in the BIR and in the Bureau of Customs (BOC) to handle the processing and granting of cash refunds of creditable input tax. The new law also states that all pending VAT refund claims as of Dec. 31, 2017 shall be fully paid in cash by Dec. 31, 2019. These particular provisions in the TRAIN are an overdue relief for taxpayers who have lost confidence in the VAT refund process.

To sum it all up, one of the intentions of the much celebrated law is to uplift and simplify the VAT process. While the Enhanced VAT Refund System is a praiseworthy effort on the part of our lawmakers, effective implementation of the law is necessary to make it a success. For years, taxpayers have lost confidence in the VAT refund process which takes several years to be resolved. What’s in store for the future will lie on how it is implemented. Who knows, perhaps by the time that actual VAT refunds are  given, they will not be so special anymore that the government can even successfully make foreign tourists enjoy the same privilege for tax refunds. As practiced internationally, dedicated VAT refund stations in international airports will then become a common thing where foreigners can present receipts and get a refund for purchased items.

To close, I would like to quote Harvey Dent’s famous quote from The Dark Knight trilogy: “The night is darkest just before the dawn. And I promise you, that the dawn is coming.” Surely, the transition will be wobbly, but we all hope for the best with the “change” that this new law promises.

Arsean Kerk H. Lopez is an associate 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, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines 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 [email protected] or [email protected].