Tax Articles

VAT Ang Hirap Mong Mahalin

By Atty. Irwin C. Nidea Jr.

Jurisprudence on VAT has evolved over the years. The continues change in interpretation by the courts on the same section of the Tax Code (Section 112) has inflicted wounds that never healed, especially on claims for refund where wounds are always fresh.

First, it was well-settled in the case of Atlas that the 2-year period to file a claim for refund is reckoned from the filing of the quarterly VAT return. The deadline for filing is every 25th day following the end of every quarter. But this was reversed by the Supreme Court in the case of Mirant, where it ruled that the reckoning point in counting the deadline in filing a claim for VAT refund is not from the filing of the quarterly VAT return but from the end of every quarter. When Mirant was promulgated, many VAT refund claims that relied on Atlas were denied because according to the court, claims for refund that were filed 2 years from the filing of the quarterly VAT return is considered late. This is because a vat return is usually filed 25 days after the end of the quarter.

Taxpayers bit the bullet and lost a lot of refundable amount that was actually due. For many years, it has been settled in Mirant that the unutilized input VAT payments not otherwise used for any internal revenue tax due the taxpayer must be claimed within two years reckoned from the close of the taxable quarter when the relevant sales were made pertaining to the input VAT regardless of whether said tax was paid or not.

Second, in the case of Aichi, the 120-day period for the Commissioner to decide a claim for VAT refund was found to be mandatory and not just an option. So, if the Commissioner fails to decide within 120 days, the claim for refund is considered as deemed denied. Taxpayers who relied on previous jurisprudence where waiting for the decision of the Commissioner before elevating to the Court of Tax Appeals (CTA), even after 120 days is an option, have also lost their claims on the ground of late filing.

Third, the term “attributable” to zero-rated sales remains a blur. Some court decisions require taxpayers to prove that an input VAT that is subject of a claim for refund is attributable to zero-rated sales. The BIR argues that taxpayers must prove direct attribution and that only materials that are directly involved in production must be considered attributable to zero-rated sales. There are contradicting interpretations and decisions on this which have left taxpayers in quandary.

But there may no longer be a need to belabor on the definition of “attributable” because CREATE happened. The taxpayer must now contend with a new monster - proving that its purchase is directly and exclusively used for its zero-rated sale.

Cross-border doctrine is dead, automatic zero-rating too. The BIR now requires prior approval for effective zero-rating which leaves some industries in limbo on what to do if they fail to secure prior approval from the BIR. Many are left with no choice but to pass on the VAT to their customers. How can customers recover the VAT that was passed on to them? Can they file a claim for refund? They might face a steep legal battle since the SC in Coral Bay has already ruled that if you are entitled to zero-rating but you still allowed your supplier to pass on VAT, you cannot file a claim for refund from the government. Your remedy is to ask your supplier to return the VAT that you must not have allowed to be passed on to you in the first place.

Lastly, the SC in Luzon Hydro has ruled that a taxpayer cannot claim for VAT refund if it has no zero-rated sales.

But in a very recent case, the SC went a step further and ruled that the two-year period to file a claim for refund must be reckoned from the time when the zero-rated sale was made. The SC has effectively superseded its ruling in Mirant, which as discussed above, reckoned the two-year period to file a claim for VAT refund from the close of the taxable quarter when the relevant sales were made pertaining to the input VAT regardless of whether said tax was paid or not.

This new ruling is effectively saying that the reference point of the two-year period to file a claim for refund is the end of the quarter when the zero-rated sale was made and not when the input VAT was incurred. It must be noted that currently, the reference point by the courts and even by the BIR in granting or denying claims for VAT refund is not when the sale was recorded but when the input VAT was incurred. A claim for VAT refund will be denied for being out of period if the input VAT was recorded beyond the taxable quarter. But if it is true that Mirant has been superseded, how will taxpayers now proceed? How can it reconcile the zero-rated sale during the quarter vis a vis the input that is being claimed during the same quarter? It must be noted that it is probable that the input VAT that was incurred during the quarter of claim is not the one that is attributable to the zero-rated sale during the same quarter. For example, the fuel that were purchased by an export enterprise from which it recorded input VAT during the first quarter of 2023 may not be the same fuel that it used during its production and sale for the first quarter of 2023, as it may still have inventory of fuel that it purchased in 2022.

The evolution of VAT continues. A looming new jurisprudence is scary as it will redefine claims for VAT refund as we know it. Old wounds will again be reopened.