Input Value Added Tax expense in the Philippines

By: Tax and Accounting Center Philippines

As a rule, a 12% value added tax is imposed on every sale of goods or services by business establishments and every importation whether for business or for personal use. However, for some transactions subject to value added tax in the Philippines, the rate is zero percent (0%) and not 12% referred to as zero-rated sale in the Philippines such as the following:

• Export sales of goods
• Foreign currency denominate sales of goods
• Sale of goods to persons with indirect tax exemptions such as to ecozones or PEZA
• Sales of services under Section 108(B) of the Tax Code, as amended

For a zero-rate sale of goods and services, they do not impose 12% value added tax to their buyers so their sale produces not output VAT but are being passed on 12% value added tax in the Philippines from their suppliers of good or services or on importation in certain instances. As such, input VAT from suppliers accumulates in their respective books of account, financial statements, and value added tax returns in the Philippines and continue to build-up with the time.

Under Section 114 of the Tax Code, as amended, input VAT from zero-rated sales of goods and services in the Philippines are allowed the following options:

• Creditable input VAT against output VAT;
• Carry-over of input VAT;
• Applied tax refund in the Philippines
• Applied tax credit certificate in the Philippines

Considering that zero-rated sellers seldom transactions subject to 12% value added tax in the Philippines, input tax credit does not work resulting to carry-over option, year-in, year-out where the input VAT from zero-rated transaction accumulates to the maximum level. Thus, this account always appears on the audited financial statements on an increasing amount from year to year.

Alternatively, some would prefer for an application for input VAT refund or tax credit certificate within two (2) years from the quarter of sale. Upon approval of the successful application for refund, the government will issue a refund check that may be cashed out within five (5) years or a tax credit certificate (TCC) that could be applied against direct internal revenue tax liabilities. However, with the pre-requisite tax examination in the Philippines to determine the taxpayer applicant has no other internal revenue tax liabilities, the verification of supporting official receipts and invoices from suppliers of goods and services supporting the input VAT, and the entire tedious process of application for refund and tax credit certificate, some would prefer to carry-over.

On business standpoint, such accumulated input VAT could mean a stagnant asset on financial statements and generates a negative impact on the analysis of the financial statements. To remedy the negative situation, most taxpayers wished that instead of a stagnant asset, they be allowed to write-off the accumulated input VAT and claim input VAT expense for income tax purposes.

Input VAT expense allowed in 2010 Ruling

In VAT Ruling No. 059-1992, it provides that taxpayers with zero-rated sales shall be construed as the final consumer which the cost of the tax passed shall legally stop and rest. Further, in BIR Ruling No. DA(VAT-021)121-2010 dated July 9, 2010, a regional operating headquarter (ROHQ) in the Philippines with most zero-rated sales is allowed to claim input VAT expense input VAT passed on to them, and allowed to claim the same as deduction for income tax purposes based on the following conditions:

• That input VAT passed on to ROHQ were not booked as input VAT,
• That input VAT were not claimed as input VAT in the VAT returns, and
• The input VAT were not claimed for input VAT refund or tax credit certificate

Based on the above, input VAT is allowed as an expense and likewise made to apply to the following instances:

• Expiry of the 2-year period for refund/tax credit certificate without applying
• Denial of application for refund/tax credit certificate for being filed out of time and failure to comply with documentary requirements
• The claim for refund/tax credit certificate pending with the BIR is voluntary withheld.

This input VAT expense rule had been alive for quite some time and gave taxpayers a tax benefit to the extent of reduction from income tax brought about by the input VAT expense. This should have been better and more investor friendly with the rise of economic zone export oriented enterprise, the service exporter business process outsourcing and all others in zero-rating.

Input VAT expense no legal basis under 2013 ruling

In BIR Ruling No. 123-2013 dated March 25, 2013 and circularized by Revenue Memorandum Circular No. 57-2013 dated August 23, 2013, the above rule on input VAT has been put to an end. It provides that Section 110, in relation to Section 112(A) of the Tax Code, as amended, the remedy for unutilized creditable input taxes from zero-rated sales is a claim for refund or tax credit certificates within two years and does not include input VAT expense. Accordingly, input VAT expense is no longer supported and could no longer be availed by the taxpayer without being penalized.

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. For comments, you may please send mail at in**@ta************.org, or you may post a question at Tax and Accounting Center Forum and participate therein.