Deductible VAT attributable to zero-rated sales: gross income deductible?



What comes to mind when we talk about an unused input value added tax (VAT) excess that can be deducted from gross income for tax purposes are: Input VAT on transactions exempt from VAT, input VAT of persons not registered for VAT, and the excess of actual input VAT of government sales over the standard seven percent input VAT prescribed under Section 4.114 (2) (a ) of Tax Regulation (RR) No. 16-05, as amended.

In the case n ° 1786 of the Court of Appeal of Taxes (CTA) En Banc (EB) promulgated on June 13, the CTA rejected the request for revision filed by the Commissioner of Taxes (CIR). The petition seeks to overturn the decision taken on October 11, 2017 regarding a deficit income tax assessment in favor of a taxpayer.

To give a brief overview, the taxpayer has excess and unused input VAT attributable to zero-rate sales of services that was claimed for the issuance of a tax credit or refund certificate with the Ministry of Finance ( DOF) in 2006.

However, on March 11, 2010, the taxpayer received the DOF’s refusal of the refund request on the sole ground that he did not strictly comply with the billing requirements. In view of the refusal, the taxpayer wrote it off in its books and claimed it as a deduction from gross income for the 2010 tax year. Subsequently, the CIR imposed on the taxpayer an income tax in deficit in reason for denial of denial deduction. request for reimbursement of input VAT.

To determine whether the refused input VAT refund claim can be deducted from gross income or not, the court found that it met the conditions for loss deductibility under Section 34 (D) (1) (a ) of the Tax Code, as amended. He added that the taxpayer’s registration processing followed RR # 09-89 in which the journal entry for the denied input VAT refund claim is charged to expenditure. In addition, a separate and concurring opinion issued by one of the associate judges cited Tax Circular No.42-2003 which states that the refusal of reimbursement caused by failure to comply with the billing requirements is without prejudice to the taxpayer’s right. charge input taxes to the appropriate expense or asset account subject to depreciation, as applicable.

To counter the above arguments, the CIR then subscribes to the dissenting opinion issued by one of the associate judges according to which the taxes on unused inputs attributable to zero-rated sales can only be recovered by a request for reimbursement or credit. tax, and there is no provision under the law that allows another modality to recover unapplied input taxes resulting from zero-rated or effectively zero-rated sales. In addition, there is another dissenting opinion which maintains that RR n ° 09-89 has already been replaced by RR n ° 14-05 published on July 1, 2005. Therefore, the former can no longer be used as a legal basis. .

The court replied that while it recognized that the Tax Code, as amended, specifically mentioned the refund or tax credit as a means of recovering unused input taxes attributable to zero-rated sales, it was not categorically prohibiting the recourse to another mode for its recovery.

Indeed, a reading of Article 112 (A) of the Tax Code, as amended, suggests that an alternative method can be used by a taxpayer for the recovery of excess input taxes other than by reimbursement or credit. ‘tax. Thereby:

“SECOND. 112. Refunds or tax credits of input tax. – (A) Zero-rated or effectively zero-rated sales. – Any person registered for VAT, whose sales are zero-rated or effectively zero-rated” may “, in the two years following the end of the taxable quarter during which the sales were made, request the issuance of a tax credit certificate or the reimbursement of the input tax due or paid attributable to these sales, with the exception of transitional input tax, insofar as this input tax has not been applied to the output tax: ”(emphasis provided)

Thus, the court indicated that if the taxpayer wishes to fully recover his excess input VAT, that is to say insofar as this input tax has not been charged against the input tax, the law does not provides for two modes: either by filing a refund request or tax credit. However, if the taxpayer decides not to collect the same thing in full, he can resort to other methods which are not categorically prohibited by any law or rule and which are based on sound accounting principles and procedures.

Will the above then suggest that the LTC not only allows input VAT refund claims that are refused as a deduction, but also interprets the law in such a way that it gives taxpayers the freedom to process their own VAT. unused entry attributable to zero-rated sales?

This further leads to two other possible scenarios of applying excess and unused input VAT attributable to zero-rated sales as a deduction from gross income. Will the deduction be allowed if it resulted from the expiration of the two-year time limit for the refund request? Or what if, due to a cost-benefit analysis or an impending financial crisis, the taxpayer chooses to immediately apply the same deduction from gross income within the two-year period?

In the first scenario, the Bureau of Internal Revenue issued a directly related circular, RMC No. 57-2013, on August 23, 2013, preventing the deduction of expired and unused input VAT after the expiration of the limitation period. two years. However, it should be noted that the ground for refusal is the same as for the dissenting opinion above. According to the program, the Tax Code does not expressly provide for another method of recovering the excess input VAT unused attributable to zero-rated sales.

In the second scenario, however, we don’t know if this qualifies. We do not have emissions directly related to taxpayers, motivated by different types of situations, who choose to immediately deduct the excess input VAT unused without requesting the refund.

It is important to note that the case was appealed by the CIR to the Supreme Court (SC). Whatever decision the SC will render, will be the final interpretation of the law. You have to wait for it and the instructions that will be issued in the event that the deduction is allowed.

In the meantime, let’s hope that reducing the VAT refund process to 90 days will allow for a quick refund. Finally, as taxpayers, we must do our part to fully comply with the requirements established by law and BIR broadcasts so that our claims are not denied.

Moses Daniel D. Lim is a partner in the tax group of KPMG RG Manabat & Co. (KPMG RGM & Co.), The Philippine member firm of KPMG International. KPMG RGM & Co. has been recognized as a Level 1 Tax Practice and Level 1 Transfer Pricing Practice by the International Tax Review.

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

The views and opinions expressed here 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 or



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