AS BENJAMIN Franklin wrote in his 1789 letter, “In this world, nothing is certain except death and taxes.” Obviously, death is an undeniable truth and an inescapable fate for all of us. As regards taxes, these are the State’s lifeblood, allowing it to discharge its functions for the welfare of its constituents from people’s money. Such is the power of Taxation – one of the inherent powers of the State. As an inherent power of the State, it can step upon the rights of the people. To protect this right, as a rule, in cases of ambiguity in taxation laws, it will be strictly construed against the State.
However, when we talk about tax exemptions, we often hear the phrase, strictissimi juris – a phrase that was mentioned in one of our previous articles. Strictissimi juris means “of the strictest right or law.” Since taxation is the rule, exemption becomes the exception. Hence, exemption from tax is construed in stictissimi juris against the taxpayer and liberally in favor of the taxing authority. This means that tax exemption cannot be presumed but must be proven by the taxpayer based on factual and legal evidence. Tax exemptions are frowned upon by the State because they deprive the State of its collecting power from the people – a principle that negates the lifeblood doctrine.
So, how are the above principles applied in the Philippines? Let’s discuss in this article the refund of input value added tax (VAT) – a remedy of the taxpayer that is in the nature of tax exemption.
VAT Refund Process in a Nutshell
As laid down in Section 112(A) of the 1997 National Internal Revenue Code (Tax Code), as amended, a VAT-registered person may apply for a refund of excess input VAT within two (2) years after the close of the taxable quarter if such transaction arises from the taxpayer’s zero-rated or effectively zero-rated sale. The Bureau of Internal Revenue (BIR) is given a 90-day period from the date of submission of the VAT refund application to review and process the documents submitted by the taxpayer. In case the application is approved, the BIR will issue a refund check or tax credit certificate (TCC) to the taxpayer. However, in case it is denied or there is inaction, i.e., lapse of the 90-day period, the taxpayer may further elevate the case to the Court of Tax Appeals (CTA) within thirty (30) days from the receipt of the denial. For most taxpayers whose application was denied, the dilemma arises whether to appeal the case or not.
Relevant Court Decision and Rulings
In CTA En Banc No. 1786, dated June 13, 2019, the BIR disallowed the bad debts claimed as a deduction from the gross income of the taxpayer. Apparently, the bad debts refer to the excess input VAT applied for a refund by the taxpayer, which was denied by the Department of Finance (DOF). Because of the denial, the taxpayer wrote off the same in its books and claimed it as a deduction from gross income. On appeal, the appellate court explained that, while the Tax Code specifically mentioned refund or tax credit as modes to recover unutilized input taxes attributable to zero-rated sales, it does not categorically prohibit the use of any other mode for its recovery. Thus, the partial recovery of the input VAT by claiming it as a deduction from gross income is not prohibited, if it is based on sound accounting principles and procedure.
However, in a recent 2023 ruling, the BIR ruled that the recovery of a denied application or unacted application of input VAT credit or refund through a reversal or return to the VAT return is not allowed. The BIR emphasized that there is no specific provision in the Tax Code that expressly allows it. Further, in a 2024 ruling, the BIR rejected the taxpayer’s request to claim its denied input VAT refund as a deduction from gross income. In said ruling, the taxpayer relied on the decision in the above-quoted CTA En Banc case. However, the BIR posts that the decision of the CTA En Banc is not a binding precedent, considering that judicial precedents are only set by the pronouncement of the Supreme Court.
The Taxpayer’s Dilemma
Based on the above discussion, apparently, the only recourse of the taxpayer is to appeal to the higher court in case of a denied VAT refund application. This is a dilemma for the taxpayer in consideration of many factors. For some taxpayers, it would be impractical to appeal the case if the cost of litigation outweighs the benefit of a refund. Since the judicial appeal could take years, the purchasing power of the money sought to be refunded differs by the time the refund is granted by the higher court.
It is worth noting that the recognition of the input VAT against a zero-rated output VAT is a privilege given to qualified sellers of goods and services. Apparently, it is intended to entice investors to locate in the Philippines and not worry about the additional cost of VAT. Corollary thereto, if an actual exporter is not VAT registered, its sale would be VAT exempt, and the VAT from its purchased goods or services forms part of its deductible cost.
Hence, disallowing the recovery of denied input VAT as a deduction would disadvantage a VAT-registered actual exporter vis-a-vis a non-VAT registered exporter. Simply put, a non-VAT registered exporter can readily claim the passed-on VAT as part of his cost without the hassle of going through an administrative claim for a refund and, if denied, a judicial appeal.
Moreover, during closure or cessation of business, can the taxpayer include the previously denied input VAT in its application for issuance of TCC, notwithstanding that it is no longer included in the VAT return? If the BIR will only base the amount on the unused input tax in the last return filed by the BIR, this may be prejudicial for the taxpayers because such an unused portion does not include the amount to which it was prohibited to return in the VAT return, unless the BIR will consider.
With the foregoing, all that taxpayers can do now is hope that future jurisprudence settles the issue. Or, at the very least, a statutory or administrative issuance will consider the plight of VAT-registered taxpayers seeking a refund of excess input VAT.
Taxes are what keep the State going. However, it is also the duty of the State to balance its inherent powers and the rights of the people. The BIR’s action of streamlining and simplifying the existing rules and procedures is a testimony to its goal to ease the doing of business. If gray areas of taxation, especially the aforementioned discussions, will be resolved, this will provide more ease in the VAT refund system. After all, it is a give-and-take situation. If a taxpayer’s claim for a refund is granted, then it could spur reinvestments in the Philippines. Ultimately, it boosts the production of goods and services, thereby creating employment among others, all of which is a source of wealth from which the State may impose tax.
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Lorenzo Miguel A. Soriano is a manager from the Tax Advisory & Compliance at P&A Grant Thornton. One of the leading audit, tax, advisory, and outsourcing firms in the Philippines, P&A Grant Thornton is composed of 29 Partners and 1,500 staff members. We’d like to hear from you! Connect with us on LinkedIn and like us on Facebook: P&A Grant Thornton and email your comments to pagrantthornton@ph.gt.com. For more information, visit our website: www.grantthornton.com.ph.
