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Input taxes on zero-rated sales to be treated as outright expense?

Input taxes on zero-rated sales to be treated as outright expense?

Taxpayers, whose sales are mostly zero-rated, are always faced with the burden of claiming for refund the input taxes shifted or passed-on to them by their local suppliers of goods, properties, or services.

Although existing regulations mandates the Bureau of Internal Revenue (BIR) to issue a refund to the taxpayer within 120 days from the filing of his application together with the complete documents, the tedious process of completing the documentary requirements, especially that of the supporting invoices for the input taxes and their zero-rated sales, requires so much time and money.  

Are there alternative options available to taxpayers who accumulated huge amounts of input taxes but do not have any output tax from which these can be deducted?

Can the unused input taxes be claimed as outright expense or capitalized as part of cost of depreciable asset?

According to one of the most recent rulings issued by the BIR to a regional operating headquarter (ROHQ), the answer to this question is, yes.

Under BIR Ruling No. DA(VAT-021)121-2010, July 09, 2010 secured by an ROHQ, with sales mostly zero-rated, the input taxes passed on to them may be recognized as an expense for income tax purposes, or added to the acquisition cost upon purchase of the capital asset subject to depreciation also deductible for income tax purposes.

The BIR, as it clarified in VAT Ruling No. 059-92, held that since taxpayers with sales mostly zero-rated, have no output tax against which the passed-on input tax can be credited, shall be construed as the final persons against which the cost of the tax passed on shall legally stop and rest.

Following this, the BIR then ruled that the said input taxes, instead of being subject to a claim for tax credit or refund, may be charged to expense or cost of the goods or services sold for the corresponding period in computing for its net taxable income, provided the following are met:

     a.  The input taxes shifted or passed on to the ROHQ should not be recorded as input tax in its books;

     b. The input taxes should not be reflected/reported as input tax in its VAT returns; and

     c. The input taxes should not be claimed by the ROHQ as tax refund or tax credit. 

Based also on its discussion of various court decisions and BIR rulings and issuances, the BIR further held that the expensing of input VAT shall also apply to situations involving input taxes already recognized in the books of the ROHQ where:

      a.  the two-year prescriptive period has already lapsed without any filed claim for refund or credit;

      b. the claim for refund or credit was denied or rejected by the BIR for having been filed beyond the two-year prescriptive period or for non-compliance with invoicing/substantiation requirements; and

      c. the claim for refund or credit is pending with the BIR but is voluntarily withdrawn. 

It should be noted, however, that treating input taxes on purchases of goods, properties or services, related to zero-rated sale as outright expense is not specifically provided in the Tax Code, as amended. Thus, should a taxpayer wish to apply this treatment, the most prudent action remains to secure first a ruling from the BIR in relation to the application of the remedy on the basis of facts peculiar to the taxpayer.  

Furthermore, consideration must be given to the fact that treating such input taxes as expense instead of as subject of a claim for refund will not result to the full recovery of the cost - i.e. the benefit is only 30 percent of the total input tax instead of 100 percent if the same were refunded.  Generally, expensing is a more efficient option if the amount of input VAT is insignificant as compared to the cost that may be incurred in processing the refund.  It is also wise to consider expensing your accumulated input VAT if you find difficulty in substantiating your claim for refund which likely lead to the denial of your claim for VAT would refund.  

Taxpayers are thus advised to carefully weigh their options and consider that would provide the most benefit to them considering their circumstances.