New rules in claiming input VAT refund

New rules in claiming input VAT refund by: Atty. Roy N. Relato

Every time we buy something -- whether it is from our favorite fast food chain, mall, gasoline station, coffee shop, drugstore, or convenience store -- or every time we avail the services of our trusted contractor, broker, agent, or practitioner, it is most likely that we pay an additional amount called value-added tax (VAT). Indeed, almost every sale of goods and services here in the Philippines is subject to VAT.

VAT is an indirect tax which may be passed on by the seller to the buyer. The idea is that the seller has the responsibility to remit the VAT to the government but the buyer ultimate bears the tax burden. However, a buyer whose transactions are subject to VAT may likewise shift the tax to another buyer. This shifting mechanism continues until the VAT ultimately reaches the consumer who does not have anybody to pass on the tax.

Under our present output-input VAT system, a VAT-registered taxpayer is allowed to offset his input VAT against his output VAT. If the output VAT is higher than the input VAT, the difference shall be remitted by the taxpayer to the government. On the other hand, if the input VAT is higher than the output VAT, the difference may be carried over to the succeeding quarter/s as input tax credit. But what if the sales transactions of a VAT-registered taxpayer are subject or effectively subject to 0% VAT and he has no output VAT against which the input VAT may be credited? 

Section 112(A) of the Tax Code allows a VAT-registered taxpayer whose sales are subject to zero-rated or effectively zero-rated to file a claim for refund or issuance of a tax credit certificate (TCC) of the unutilized input VAT within two years after the close of the taxable quarter when the sales were made with the Bureau of Internal Revenue (BIR). Under Section 112(C) of the Tax Code, the BIR is given a period of 120 days from the complete submission of documents by the taxpayer within which to grant or deny the claim for refund.

What would be the remedy of the taxpayer if the BIR does not act on the claim within the 120-day period or worse, denies the claim of the taxpayer during that period?

Section 112(C) of the Tax Code further provides that the affected taxpayer may, within 30 days after the expiration of the 120-day period, or within 30 days from the receipt of the decision denying the claim, appeal the unacted claim or decision with the Court of Tax Appeals (CTA). However, in previous decisions by the Supreme Court (SC), it was pronounced that in addition to the requirements under Sections 112 (A) and (C) of the Tax Code, a taxpayer must also comply with Section 229, which requires the prior filing of the claim with the BIR as well as the filing of the judicial claim within two years from the date of payment of tax or penalty, regardless of any supervening cause that may arise after payment. Correlating these provisions of Tax Code would however reveal that there are two different dates from which the two-year prescriptive period shall be counted. Section 112(A) of the Tax Code provides that the two-year period shall be counted from the close of the taxable quarter when the sales were made while Section 229 prescribes the date of payment as the reckoning date. So when should the two-year prescriptive period be reckoned?

This issue was first addressed in the case of Atlas Consolidated Mining and Development Corp. vs. CIR, (G.R. Nos. 141104 & 148763 dated June 8, 2007), where the SC pronounced that both the administrative and judicial claims for refund/credit of input VAT on zero-rated sales must be filed within rwo years from the date of filing of the return and payment of the tax due. However, in the case of Commissioner of Internal Revenue vs. Mirant Pagbilao Corporation (G.R. No. 172129 dated September 12, 2008), the SC declared that the reckoning date of the two-year prescriptive period should be from the close of the taxable quarter when the sales were made. Thus, the prevailing rule before was both the administrative and judicial claims for refund or credit of input VAT must be filed with the BIR and the CTA within two years from the close of the taxable quarter when the sales were made. Under this rule, taxpayers need not wait for the BIR to act on the claim within the 120-day period before filing the judicial claim with the CTA. What is important is that the taxpayer was able to file both the administrative and judicial claims within two years from the close of the taxable quarter when the sales were made.

However, just a few days ago, the SC issued its decision in the case of Commissioner of Internal Revenue vs. Aichi Forging Company of Asia, Inc., G.R. No. 184823 dated October 6, 2010 where it was ruled that the two-year prescriptive period only applies to the filing of the administrative claim and not to the judicial claim. According to the SC, the two-year prescriptive period under Section 229 of the Tax Code is not applicable for claiming a refund or credit of unutilized input VAT because the said provision applies only to erroneous payment or illegal collection of taxes.  The SC explained that applying Section 229 of the Tax Code would render nugatory Section 112(D) (now Section 112(C)) of the Tax Code which already provides for a specific period within which a taxpayer should appeal the decision or inaction of the BIR on the administrative claim to the CTA. In the decision, the SC enumerated the two situations when a judicial claim for refund or credit of unutilized input VAT may be filed with the CTA, to wit: (1) when a decision is issued by the BIR before the lapse of the 120-day period; and (2) when no decision is made by the BIR after the 120-day period. In the first scenario, a taxpayer has 30 days from receipt of the decision of the BIR within which to file an appeal with the CTA while in the second, the taxpayer has 30 days from the lapse of the 120-day period within which to file a judicial claim with the CTA. In this particular case, both the administrative and judicial claims were simultaneously filed by the petitioner. Thus, the judicial claim was prematurely filed by the petitioner. Consequently, the case was dismissed by the SC for lack of jurisdiction.

With this recent decision of the SC, the counting of the 120-day period is very crucial in making a decision when to file a judicial claim with the CTA; otherwise the taxpayer runs the risk of having the judicial claim dismissed by the CTA for being prematurely filed or filed late. The dismissal of the case due to premature filing would mean losing the CTA filing fee which basically depends on the amount of the claim. On the other hand, failure to file on time would mean that the taxpayer has lost its right to appeal the case to the CTA.

It bears stressing that Section 112(D) of the Tax Code states that the BIR must act on the claim within 120 days from the complete submission of the documents. Thus, the important question now is when can it be said that the taxpayer has made a complete submission of the documents supporting his claim for refund or issuance of a TCC?

In Revenue Memorandum Circular (RMC) No. 029-09, the BIR clarified that in case the taxpayer fails to present the accounting books and records for audit, or submit additional documents to explain discrepancies or findings or refuses to concur to the outcome of the audit, or where a question of law arises during the conduct of the audit, the running of the 120-day shall stop from the date of notification to the taxpayer. However, the RMC failed to discuss when the 120-day will commence to run again once the taxpayer has submitted the documents or when the question of law has been resolved. To avoid any dispute between the BIR and the taxpayer, it is suggested that the BIR issue clear and specific guidelines on the counting of the 120-day period.

Also, the case envisions two scenarios: (1) when a decision is issued by the BIR before the lapse of the 120-day period; and (2) when no decision is made after the 120-day period. Does this now mean that the BIR can no longer decide the case after the 120-day period? Assuming that the BIR can still render a decision after the 120 days, does this mean that the taxpayer no longer has the right to appeal the case to the CTA?

It must be noted, however, that this recent decision has not yet attained its finality since a party adversely affected by a decision by a division of the SC is entitled to file a motion for reconsideration within 15 days from notice. Hence, prior to the expiration of the 15-day period, the decision of the SC is not yet final and executory.