Matching input VAT with zero-rated sales

Matching input VAT with zero-rated sales by Charity P. Mandap

Section 112 (A) of the National Internal Revenue Code (NIRC) of 1997, as amended, states that any value-added tax (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 a tax credit certificate or refund of creditable input tax due or paid attributable to such sales to the extent that such input tax has not been applied against output tax.

As an essential requirement under the abovementioned rule of the NIRC, the input VAT sought to be refunded must be attributable to and dependent on the presence of zero-rated or effectively zero-rated sales.   

In view of this requirement, is there a need to match the input VAT against the concurring zero-rated or effectively zero-rated sales?

The answer is: No, there isn’t a need for such. This requirement does not necessarily mean that the presence of zero-rated or effectively zero-rated sales must be made during the same quarter when the input taxes sought to be refunded were incurred or paid. 

This was the doctrine enunciated in the case of GST Philippines, Inc. vs. CIR, CTA Case No. 6522, June 23, 2010. The taxpayer claimed a refund of its unutilized input VAT incurred during the fourth quarter of 2006 and first and second quarters of 2007.  In the said quarters, however, no amount of zero-rated sales/receipts was yet reported in the taxpayer’s VAT returns. The taxpayer was able to generate zero-rated sales only in the third quarter of 2007.  This is because the goods were not immediately sold in the period when the inputs were procured and the goods were manufactured.  The input taxes, however, have to be reported in the VAT returns in the period the inputs were purchased. 

The Court of Tax Appeals (CTA) initially denied the refund of input VAT claim on the ground that no amount of zero-rated sales/receipts was reported in the taxpayer’s VAT returns.

However, the CTA amended its decision and held that the input taxes that are subject of the refund need not be incurred or paid during the same quarter when the zero-rated or effectively zero-rated sales were made.  In its decision, the CTA explained that as long as there were zero-rated sales to which the inputs are attributable, although at a later date, the input taxes incurred relating to the goods sold should be refunded.  Hence, the taxpayer should be entitled to a refund of its unutilized input VAT incurred during the fourth quarter of 2006 and the first and second quarters of 2007 which are attributable to its zero-rated sales for the third quarter of 2007.

Based on the cited case, it is not essential that the zero-rated or effectively zero-rated sales attributable to the input taxes sought to be refunded, be incurred during the same period for which the refund is being claimed.  As long as the zero-rated sales occur, although at a later date, the input taxes incurred relating to the goods sold should be refunded.

On the condition that the requisites to be entitled to the tax refund of unapplied or unutilized input VAT are complied with, the request for tax refund should be allowed.  Consequently, the requisites to be entitled to the tax refund of unapplied or unutilized input VAT are as follows:

1.       There must be zero-rated or effectively zero-rated sales;

2.       That input taxes were incurred or paid;

3.       That the input taxes are attributable to such zero-rated or effectively zero-rated sales;

4.       That the input taxes were not applied against any output VAT liability; and

5.       The claim for refund was filed within the two-year prescriptive period

(American Express International, Inc. — Philippine Branch vs. Commissioner of Internal Revenue, CTA Case No. 6294, December 28, 2004).

In disallowing the petitioner’s refund solely on the ground that there were no zero-rated sales during the said quarters, the CTA in its earlier decision, in effect, imposed an additional requirement not prescribed under Section 112(A) of the NIRC of 1997, as amended.

In fact, Section 112 (A) of the NIRC further provides that the amount of creditable input tax due or paid, which cannot be directly and entirely attributed to any one of the transactions, shall be allocated proportionately on the basis of the volume of sales.  This implies that the input taxes need not be directly matched with a particular sale or transaction made within the same period, to give due course to the refund.   The only essential requisite is the existence of the zero-rated or effectively zero-rated sales giving rise to the output tax substantial enough to absorb the attributable input taxes.

Moreover, in case the input taxes attributable to zero-rated or effectively zero-rated sales are not fully utilized, the excess may be carried over to the succeeding quarter or quarters.  These rules reinforce the conclusion that matching of input taxes against zero-rated sales in the same period is not required.

It shall also be considered that in any industry, it is a common occurrence that companies make purchases in bulk not necessarily utilizing all materials purchased in production during the current period.  Furthermore, there is no guarantee that all goods produced and available for sale will be sold instantly to be able to match the sales with the input taxes. To impose same-period matching as an additional requirement for claiming input tax refund or credit will serve as an unnecessary burden to the taxpayer. 

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at Charity.Mandap@ph.gt.com.  For other tax concerns, please check out our other tax services.