How to apply Excess Input VAT Refund or Credits in Philippines?

By: Garry S. Pagaspas, CPA

Value added tax (VAT) rules in the Philippines allows recovery of excess input VAT of taxpayers engaged on certain transactions specified in the National Internal Revenue Code (NIRC or Tax Code), as amended. In this article, let us take up the process of application for excess input VAT refund or tax credit certificate in the Philippines and the related considerations.

What are input VAT allowed for VAT refund or tax credit Philippines?

Under the National Internal Revenue Code o 1997 or Republic Act No. 8424 (NIRC or RA 8424 or Tax Code), as amended, the following could be applied for input VAT refund or tax credit certificate:

1. Excess input VAT on zero-rated transactions under Section 112 (A) of the Tax Code
2. Excess input VAT upon dissolution under Section 112 (B) of the Tax Code
3. Excessive or erroneous VAT payments under Section 229 of the Tax Code

The rules provide for specific input VAT allowed for refund in the Philippines and not all of those input VAT in your books of accounts are qualified for input VAT refund. Thus, it could be a good approach to identify input VAT qualified and not allowed to be refunded.

When to file input VAT refund or tax credit in Philippines?

Input VAT refund or tax credit applications in the Philippines are required to be filed within two (2) years pursuant to Section 112 (C) of the Tax Code as follows:

• Excess input VAT on zero-rated transactions under Section 112 (A) of the Tax Code within two (2) years from the taxable quarter of zero-rating sale (CIR vs. Mirant Pagbilao.GR No.172129)
• Excess input VAT upon dissolution under Section 112 (B) of the Tax Code two (2) years from date of dissolution.
• Excessive or erroneous VAT payments in Philippines two (2) years from date of erroneous or excessive payment of value added tax (VAT).

Filing an application for VAT refund or tax credit beyond those periods could be aground for an outright denial.

Where to file input VAT refund or tax credit application?

There are two (2) stages of VAT refund – Administrative Level (Bureau of Internal Revenue (BIR) or Department of Finance (DOF)) level, and, Courts Level (Court of Tax Appeals and Supreme Court of the Philippines). In the case of Aichi Forging of Co. of Asia vs. CIR (GR No.184823. Oct.6,2010) it was in effect held that an application for VAT refund should first be resolved by the BIR before filing an appeal with the CTA. Accordingly, applications for VAT refund shall be filed with the VAT Credit Audit Division (VCAD) for direct importers, otherwise, with BIR Office of registration (Revenue District Office (RDO) or Large Taxpayers Service (LTS) or Large Taxpayer District Office (LTDO). Upon complete submission of necessary documentary requirements, the BIR should resolve the same within 90 days (formerly 120 days) and within thirty (30) days from BIR denial, the taxpayer should file an appeal with the CTA.

What are the documentary requirements for input VAT refund in Philippines?

Input VAT refund or tax credit application in the Philippines is a matter of documentary requirements. No sufficient and appropriate documents could lead to denial of input VAT refund application. Said documentary requirements would prove the basis (zero-rated or erroneous or dissolution, etc.) and the factual circumstances to convince the BIR or the Courts that you are entitled to be issued a refund check or tax credit certificates. Here are some basic documentary requirements:

1. Application for VAT Refund or Credit – BIR Form No. 1914 for ITS RDOs and BIR Form No. 2552 for non-ITS RDOs;
2. Copy of approved application for Zero-rate, when applicable;
3. Summary list of purchases in prescribed BIR format and copies of VAT purchase invoice and official receipts
4. Summary of importations in prescribed format and copies of importation documents;
5. Vat returns filed – BIR Form Nos. 2550M and 2550Q;
6. Certification of taxpayer showing breakdown of sales, where applicable: zero-rated, exempt, regular sales;
7. Articles of Incorporation (for first time filers)
8. Certificate of Registration with PEZA, BOI, where applicable
9. BIR Certificate of Registration (BIR Form No. 2303)
10. Sales contract or agreement

There could be a lot more documentary requirements the BIR would require depending on the nature of the application, e.g. zero-rating, dissolution, etc.

How will BIR process the input VAT refund in Philippines?

Upon filing of the application and related documentary requirements for VAT application for VAT refund or credit, the BIR will do the following:

• Verify the completeness of the documentary requirements;
• Examine each sales invoice for goods or properties or official receipts for services and determine compliance with invoicing requirements (name of company, tax identification number, address, VAT;
• Examine sales invoices or official receipts issued by applicant to determine compliance with stamping or imprinting “zero-rated” under the rules;
• Verification of the BIR System for validity of taxpayer registration and authority to print of applicant and suppliers;
• Conduct of tax assessment for the covered quarters or years applied for VAT refund or tax credit certificates;

Those are general procedures and BIR could further enhance and apply such other necessary procedures to determine validity of the claim and proper substantiation.

How is input VAT refund with the tax Court in Philippines?

Upon denial or inaction of the BIR on the VAT refund or tax credit application BIR, the taxpayer may file an appeal with the Court of Tax Appeals within thirty (30) days from receipt of the resolution on denial or from the lapse of the 90 days (formerly 120 days) after submission of complete documentary requirements. The following events with the CTA are relevant:

1. Payment of filing fees upon filing of the application;
2. Submission of necessary documents along with the application;
3. Attendance in hearings of the case and related court processes;
4. Commissioning of Independent Certified Public Accountant (ICPA), if applicable;

Process with the CTA may take for quite some time depending on the workload of the court, complexity of the case, and other related matters. Some would count for months from filing, or even years.

What are costs and expenses related to input VAT refund or tax credit?

In application for VAT refund, the taxpayer is in effect getting back the money it paid on VAT passed on by the suppliers. Simply stated, taxpayer is getting back his money. However, to get it back, the following costs and expenses will have to be incurred:

1. While to filing fee with BIR, cost of reproduction of documentary requirements;
2. Transportation costs to BIR and back;
3. Filing fees with the CTA;
4. Professional fees of CPA or lawyer or Firm to assist in the pre-filing evaluation and handling the case with BIR or CTA;
5. Professional fees of independent CPA under CTA case, if necessary

Applying for VAT refund to get back your money paid on VAT passed on to you by your suppliers could be costly. In some cases, the applicant would have to pay more amounts for the deficiency taxes on tax assessment related to the application than the amount applied for refund. Accordingly, it is suggested that you make cost-benefit considerations in applying for Vat refunds or tax credit in the Philippines.

Summary

The concept of VAT refund or tax credit in the Philippines could be easy to learn but the technicalities of actually filing could be frightening. One false move could be an end to it so you may consider securing professional assistance of professionals equipped with technical knowledge on VAT refunds, and experience in dealing with tax authorities. Planning and careful evaluation before filing of the application to VAT refund are best recommended to generate better results and avoid the negative and costly implications on the application.

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for more than ten (10) years now helping out taxpayers on tax compliance, tax savings, tax assessments, tax refunds, and other related professional tax services. He is presently a frequent speaker of Tax and Accounting Center, Inc. and you may send him mail at garry.pagaspas(@)taxacctgcenter.ph.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.