What input VAT is allowed for VAT refund or tax credit in Philippines?

By: Garry S. Pagaspas

Under Section 1, Article III – Bill of Rights of the Philippine Constitution and hereunder quoted:

“No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied equal protection of the laws”

The above provision could have been the source of input value added tax (VAT) rules under the National Internal Revenue Code or Republic Act No. 8424, as amended. Input VAT in the Philippines is passed on by value added tax suppliers to its buyers and in the books of accounts of VAT registered buyer, the same is normally accounted for as an “asset “or simply a “property” in the context of the above provision in the Constitution. In effect, input VAT as a property could not simply be forfeited by the government through the Bureau of Internal Revenue (BIR) without the requisite due process.

Input VAT allowed for tax refund or tax credit certificate in Philippines

Under the VAT rules in the Philippines, only selected sources or transactions are allowed for VAT refund or tax credit certificates.  Here are those allowed for tax refund or tax credit application:

1. Excess input VAT on zero-rated transactions under Section 112 (A) of the Tax Code

“Section 112(A) Zero-rate or effectively Zero-rated Sales. Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1,(2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.”

In zero-rated sales, the VAT –registered seller does not impose VAT on its sales so it generates no output VAT. However, suppliers still pass them VAT on their purchases of goods or services. Thus, input VAT from suppliers normally accumulates and they could apply for VAT refund or tax credit certificate within the two (2) year period.

2. Excess input VAT upon dissolution under Section 112 (B) of the Tax Code

Another area for refund is upon retirement or cessation and quoted below:

“Section 112 (B) Cancellation of VAT Registration. – Any person whose registration has been cancelled due to retirement or cessation of business, or due to changes or in cessation of status under Section 106(c) of this Code may, within two (2) years from the date of cancellation, apply for issuance of a tax credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes”

The VAT rules provide the taxpayers for the last opportunity to recover funds paid on VAT passed on to them to the extent of any unused input VAT. This could mean input VAT carried over from the very first period of the taxpayer’s existence and does not necessarily came from zero-rated sales.

3. Excessive or erroneous VAT payments under Section 229 of the Tax Code

Finally, taxpayers are allowed to recover tax erroneously or illegally collected VAT and quoted hereunder:

 “Section 229. Recovery of Tax Erroneously or Illegally Collected. – no suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without the authority, of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.”

“In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid”

This area of refund is basically a prohibition on the government enriching itself from the expense of the taxpayer. However, the two (2) year period is a straight period reckoned from the date of payment regardless of any supervening cause that may arise after payment.

 Input VAT not allowed for tax refund or tax credit in Philippines

As we are all aware, there are other classifications of input VAT under the VAT rules. With the above list of refundable, we could generate the list below as those input VAT you could not refund:

1. Input VAT attributable to regular sales;
2. Input VAT on sales to Philippines government;
3. Input VAT on capital goods for allocation;
4. Input VAT on VAT-exempt sales
5. Standard input VAT
6. Transitional input VAT
7. Input VAT of non-VAT registered taxpayer

Applying for VAT refund or tax credit for input VAT on the above would just be a waste of your effort and resources. Before deciding on whether or not to apply for VAT refund or tax credit certificate, it is suggested that you consult a professional to verify documents and come up with the recommendation on the timing and amount to be applied for.

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for about fifteen (15) years now helping out taxpayers on tax compliance, tax savings, tax assessments, tax refunds, and other related professional tax services. He has been helping out some clients in their BIR Input VAT refund applications and at times acts as independent certified public accountant (ICPA) with the Court of Tax Appeals in relation to input VAT refunds. 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.