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Input VAT refund for capital goods still possible

Input VAT refund for capital goods still possible

by:  ROMEO H. DURAN

Prior to the effectivity of the R-VAT, taxpayers were allowed to apply for a tax credit certificate or refund for input taxes paid on their importation or local purchases of capital goods, in addition to the option to carry forward the input taxes against future output tax liabilities..  To exercise the refund or TCC option, the input taxes should not have been applied against output taxes and the claim should be made within 2 years from the close of the taxable quarter when the purchases or importations were made.

This has changed with the effectivity of the R-VAT.

Under the R-VAT, the input tax paid on purchases or importations of capital goods should only be claimed as input tax credit, which would either be in full during the month of acquisition, or spread over a period of time, depending on the aggregate acquisition cost of the capital goods in the calendar month.

If the aggregate acquisition cost exceeds P1 Million, the claim for input tax should be spread over 60 months or  the estimated useful life of the capital good, whichever is shorter.  On the other hand, if aggregate acquisition cost does not exceed P1 Million, the total input taxes shall be allowed as  credit against output tax in the month of acquisition This, however, is still subject to the 70% input tax limit if total input tax should exceed the output tax.

The prohibition to refund input taxes on capital goods is not absolute.  Despite the deletion of the general option for the issuance of a tax credit certificate or refund, this option remains for taxpayers engaged in zero-rated or effectively zero-rated activities.

Although the existing regulations and circulars do not expressly provide for this remedy this is implicity affirmed in the existing regulations by way of an example concerning the apportionment of input tax on mixed transactions.

In discussing the apportionment rules, the regulations used as an example “input tax on depreciable capital goods not attributable to any specific activity.” After discussing the allocation formula, the regulations indicated in the summary table that both the input VAT directly attributable to the zero-rated sales and input VAT not directly attributable to any activity are entitled to input VAT refund. Notably, the “input VAT not directly attributable to any activity” pertains to the portion on the input tax on capital goods not attributable to any specific activity.

This, although not expressly stated, is an affirmation that taxpayers subject to 0% output VAT still retain the right to claim a tax credit certificate or refund, provided these are attributable to their zero-rated or effectively zero-rated sales.

Applying the input tax paid on acquisitions of capital goods assumes that the taxpayer is liable for output tax in the first place. This assumes there is a mechanism for recovery of the input tax, which is by way of credit against output tax liability. It is only the manner of recovering the input tax that is regulated, i.e., either credited in full or amortized over a period of time. Clearly,  for taxpayers engaged in zero-rated or effectively zero-rated sales, as in the case of exporters since they are not subject to output tax, claiming the input tax as either a tax credit in the month of acquisition or amortizing over a given period will only be an academic and totally pointless exercise.

Hence, zero-rated taxpayers continue to be entitled to issuance of a tax credit certificate or refund of input taxes paid on capital goods, provided they can prove their entitlement thereto under a separate provision of the R-VAT (no longer on the basis of “capital goods”). That is,  input taxes: (i) are attributable to such zero-rated or effectively zero-rated sales; (ii) these have not been applied against output tax; (iii) in certain instances, the payments are made in acceptable foreign currency duly accounted for in accordance with BSP rules and regul ations; and (iv) the applicatio n is filed within 2 years from the close of the taxable quarter when the sales were made.

Obviously, this is the only way, under the existing VAT system, that such taxpayers could recover the input taxes paid on their acquisitions of capital goods.

(The author is a tax principal at Punongbayan & Araullo, member of Grant Thornton International.  For comments and inquiries, please e-mail the author or call 886-5511.)