Substantiation of input tax credits

Substantiation of input tax credits by: Mark Julius C. Estur

Taxes are the lifeblood of the nation.  In fact, under Philippine laws, statutes that grant tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority.

Tax refunds in relation to the value added tax are in the nature of such exemptions.

Thus, cliché as it may sound the taxpayer has the burden of proving the factual bases for the grant of tax credits/refunds and that the necessary supporting documents thereto should be clearly scrutinized by the taxing authorities.

The recent pronouncement of the Supreme Court (SC) penned by Justice Carpio-Morales, AT&T Communications Services Philippines Inc. vs. Commissioner of Internal Revenue, G.R. No. 182364 dated August 3, 2010, stating that Section 113 of the Tax Code does not create a distinction between a sales invoice and an official receipt. 

Parenthetically, the SC ruled that to determine the validity of petitioner’s claim as to unutilized input VAT; an invoice would suffice to prove its zero-rated sales provided the requirements under Section 113 and 237 of the Tax Code are met. 

It is worthy to mention, however, that this is based on the provision of the VAT Law effective at the time of the transaction covered by said case.    

In the foregoing case, petitioner filed the application for tax refund and/or tax credit of its excess/unutilized input VAT from zero-rated sales with the Commissioner of Internal Revenue and subsequently to the Court of Tax Appeals last March 26, 2004. 

This was prior to the Republic Act (RA) No. 9337, which took effect on November 1, 2005.  RA No. 9337 specifically provides that input tax credits for domestic purchase of goods and properties must be substantiated and supported by an invoice and an official receipt for services.

Even if the transaction occurred prior to the issuance of RA No. 9337, however, the CTA First Division in February 23, 2007 ruled in a manner which is consistent with the 2005 Revenue Regulation (i.e., Revenue Regulations (RR) No. 16-05) and relied on the provisions of the Tax Code, to wit: “The CTA First Division, relying on Sections 106 and 108 of the Tax Code, held that since petitioner is engaged in sale of services, VAT Official Receipts should have been presented in order to substantiate its claim of zero-rated sales, not VAT invoices which pertain to sale of goods or properties.”

This is notwithstanding that in the old VAT regulations; there were no specific distinction between an invoice and an official receipt in the claim for tax credit/refunds. 

In RR No. 3-88 amending RR No. 5-87, it may be implied that an invoice may suffice for claiming tax credit on services, by stating only that:  “a photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be submitted together with the application.

The same holds true with RR 6-97 amending RR 7-95, otherwise known as the consolidated value-added tax regulations, which made no mention that the provision relative to the substantiation of input tax credit has been revised or amended.

There are varied opinions regarding the matter, as some practitioners point out that even prior to the issuance of the RR 16-05, there is already a distinction between an invoice and an official receipt for purposes of substantiation in rendition of service, and that it was only strictly implemented and made clear by the issuance of the said regulation. 

This is also supported by Revenue Memorandum Circular No. 42-2003 issued last July 15, 2003, which provides that invoice is the supporting document for the claim of input tax on purchase of goods whereas official receipt is the supporting document for the claim of input tax on purchase of services. 

A 2008 CTA Decision (Teekay Shipping Philippines Inc. vs. Commissioner of Internal Revenue, C.T.A. Case No. 7533, October 15, 2008), stated that our laws and regulations require that the sale of goods or properties must be supported by sales invoices; while the sale of services must be supported by official receipts. This requirement is mandatory in nature and consequently, non-compliance therewith is fatal to one's claim for credit or refund of its input taxes.  With the recent decision of the SC, however, it appears that there is no more distinction between an official receipt and an invoice in the substantiation of input tax credit for services relying on the provisions of the Tax Code prior to the issuance of RR 16-2005.

While this may appear favorable to the taxpayer, we should be wary of the implications of this recent pronouncement by the Supreme Court for purposes of invoking the issue on substantiation of input VAT claims for credit/refund on services.  It should be noted that Section 113 of the Tax Code, as amended, already made a distinction between an invoice and an official receipt for purposes of invoicing requirements.  Thus, it may appear that the case in point may be applicable only to those filed prior to the issuance of RR No. 9337.