One of the challenges that companies face is how to properly apply for tax refund or credit. Similar to tax exemptions, claims for tax refund or credit may be perceived as pro-government rather than working to the advantage of taxpayers, as the burden of proof rests with the taxpayer having the responsibility to provide evidence that supports its entitlement to such refund or credit.
In a recent en banc case, the ruling of the Court of Tax Appeals (CTA) discussed areas relevant to value-added tax (VAT) refunds. This included the requisites for a valid claim for refund or tax credit of input VAT attributable to zero-rated sales and the essential elements of valid VAT zero-rated sales of services.
Based on the particular case, there are nine requisites for claiming a refund or tax credit of unutilized or excess input VAT, as taken from Section 112 of the National Internal Revenue Code (NIRC) of 1997, as amended. With respect to timeliness, the first requisite is to ensure that the claim for refund is filed with the Bureau of Internal Revenue (BIR) within two years after the close of the taxable quarter when the sales were made.
Further, the second requisite is the filing of a judicial claim with the CTA within 30 days from receipt of the decision or after the expiration of the 120-day period within which the commissioner shall grant a refund in case of full or partial denial of the said claim, or failure on the part of the commissioner to act on the application within 120 days. We understand that under current rules, the BIR would now have 90 days to act on the application. Thirdly, the claimant must be a VAT-registered taxpayer.
The fourth and fifth requisites establish the notion that the taxpayer is engaged in zero-rated or effectively zero-rated sales wherein the acceptable foreign currency exchange proceeds for those under Sections 106 (A) (2) (1) and (2); 106 (B); and 108 (B) (1) and (2) of the NIRC, have been duly accounted for in accordance with Bangko Sentral ng Pilipinas (BSP) rules and regulations.
As to the input VAT being refunded, the remaining four requisites provide that such input taxes must not be transitional; are due or paid; are attributable to zero-rated or effectively zero-rated sales; and have not been applied against output taxes during and in the succeeding quarters. In addition to these, tax applicants claiming VAT refund or credit must comply with the substantiation and invoicing requirements under the NIRC and other implementing rules and regulations.
The ruling further discusses the essential elements of valid VAT zero-rated sales of services under Section 108 (B) (2) of the NIRC, as the petitioner failed to establish the same. As enumerated, (a) the recipient of the services is a foreign corporation, and the said corporation is doing business outside the Philippines, or is a non-resident person not engaged in business who is outside the Philippines when the services were performed; (b) the services rendered should be other than “processing, manufacturing or repacking goods”; (c) the services must be performed in the Philippines by a VAT-registered person; and (d) the payment for such services was made in acceptable foreign currency accounted for in accordance with the BSP rules.
For establishing that the recipient of services are nonresident foreign corporations (NRFC) doing business outside the Philippines, there should be both the Securities and Exchange Commission (SEC) Certificate of Non-registration of Corporation/Partnership and proof of registration/incorporation in a foreign country (i.e., Articles of Foreign Incorporation). In the CTA en banc case, the petitioner taxpayer failed to provide either one or both documents for some of its customers. The court also mentioned that service agreement containing the address of NRFC clients and affidavit from responsible officer of foreign affiliate were either incomplete, self-serving or unauthenticated following the rules on evidence.
Considering the foregoing, the petitioner taxpayer in the CTA en banc case requested a Motion to Reopen to be able to submit consularized foreign registration documents and SEC Certificate of Registration, among others. In response, the Court in Division discussed that a motion to reopen may properly be presented only after either or both petitioner and respondent have formally offered, and closed their evidence, but before judgment. The petitioner argues on the ground that reopening the case will allow them to present additional evidence that will serve as proof of its claim. However, in reference to another case, the court clarified that the evidence must be newly discovered and are not readily available and not already in existence even before or during the trial. Otherwise, there is no compelling reason to justify the motion to reopen the case. As such, it is important for claimants to abide by the procedures, in this case, to exercise prudence and diligence to present all available evidence before judgement.
Businesses, especially large companies, could have transactions that are subject to VAT in their course of trade or business. It is undeniably possible that these entities may also have transactions that are subject to VAT zero-rating, which eventually give them the right to file a claim for a tax refund or tax credit. Knowledge about the processes, requisites, and documentary requirements related to its application will surely help the taxpayer in their efforts to claim tax refund or tax credit. In conclusion, it is essential that taxpayers know their taxes. No more ‘VAT ganito?’! It is high time to know more about VAT.
Angellica L. Velasquez is an associate from the tax group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in transfer pricing practice and in general corporate tax practice by the International Tax Review. For more information, you may reach out to tax associate Angellica L. Velasquez or tax partner Leandro Ben M. Robediso through ph-kpmgmla@kpmg.com, social media or visit www.home.kpmg/ph.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in thePhilippines.