Understanding VAT refunds

SUITS THE C-SUITE By Cecille Santillan-Visto

Business World (01/09/2017 – p.S1/4)

(First of three parts)

Companies that have filed applications for refunds with the Bureau of Internal Revenue (BIR) can attest that securing an approval of a refund claim for unutilized input Value-Added Tax (VAT) attributable to zero-rated sales is always a challenge. There is a perception that tax refunds, compared to tax assessments, are not prioritized by BIR examiners. It is easy to see why.

First, the BIR has a mandate to increase tax collection. With a P3.3-trillion government budget to help fund in 2017, the BIR needs every peso it can collect from, and not refund to, taxpayers. Second, the sheer volume of records requiring careful review can discourage some examiners from processing applications, especially as their priority may be to timely complete their regular tax audit assignments. Third, while the timely completion of a VAT refund case is also considered a performance indicator for an examiner, more weight is given to actual cash collection in terms of assessing accomplishments under BIR internal rules.

With the issuance of Revenue Memorandum Circular (RMC) 54-2014, which clarified the issues on the application for VAT refund under Section 112 of the Tax Code, the BIR has significantly changed the procedure for processing refund applications, particularly in light of recent Supreme Court decisions.

Under Section 112 (A), as amended, any VAT-registered person with zero-rated or effectively zero-rated sales may (within two years after the close of the taxable quarter when sales were made) apply for the issuance of a tax credit certificate or refund of input tax paid or attributable to such sales to the extent that such input tax has not been applied against output tax. The taxpayer also has the option to carry forward the unutilized input VAT to the succeeding quarter(s) and credit against any output tax due. It is important to note that the BIR already clarified in RMC 57-2013 that unused input VAT cannot be claimed as an expense for income tax purposes.

With RMC 54-2014, the procedure for VAT refunds is now more stringent.

• Strict deadlines — The letter authorizing examiners to audit is accompanied by a checklist of documents and schedules required for submission by the applicant-taxpayer. Previously, both taxpayers and examiners did not have a specific deadline when it comes to compliance with the documentary requirements for a VAT refund. Under the current rules, the 120-day period for the BIR to process the refund is mandatory. Standard timelines have been set. For instance, a refund claim of more than P10 million must be reviewed by examiners and the Revenue District Office, and the memorandum report recommending the same must be endorsed to the Revenue Region within 60 days from filing. Thereafter, the Regional Director has 30 days to approve and transmit the same to the Assessment Service at the BIR National Office, particularly the Tax Audit Review Division. Normally, the Assessment Service will not accept a docket for review if the claim has been filed more than 90 days prior. In turn, the Office of the Deputy Commissioner for Operations will require at least 20 days to review the documents before deciding on the refund claim. Claims less than P1 million are approved by the Regional Director while claims less than P10 million are signed by the Assistant Commissioner for Assessment Service. If the claim is more than P10 million, the Deputy Commissioner for Operations is the final signatory. Claims of large taxpayers also have to be reviewed and approved by the Commissioner.

The 120 days is counted from the filing of the refund application to the date of approval of the refund. Even if the report is submitted prior to the deadline, if not duly approved on or before the lapse of the 120-day period, it is deemed denied.

• Partial submission of documents is no longer allowed — Before 2014, a taxpayer may claim a refund by simply filing BIR Form 1914 or the Application for Tax Credit or Refund and the supporting documents can be submitted subsequently. Under the current rules, the application must be accompanied by complete supporting documents as enumerated under Annex “A” of RMC 54-2014. In fact, the claimant is required to issue a sworn statement that the documents accompanying the application are the only documents which the taxpayer will present to support the claim. No other documents will be accepted in the course of the evaluation. The incomplete submission of requirements will result in the denial of the refund.

• The administrative and judicial claims cannot proceed independently — In the past, the taxpayer had the option to simultaneously pursue both the administrative claim at the BIR and the judicial claim at the Court of Tax Appeals (CTA). Pursuant to RMC 49-2003, the simultaneous process could continue until a final decision is reached by either institution. In contrast, the BIR now automatically loses its jurisdiction over the administrative claim. However, processing offices, such as the Regular Large Taxpayers Audit Division, can still evaluate the case “for purposes of intelligently opposing the taxpayer’s judicial claim.”

When RMC 54-2014 was issued in June 2014, all pending cases which failed to comply with the 120-day processing period were deemed denied. Taxpayers who opted to pursue their administrative claim with the BIR and did not file judicial claims with the CTA within 30 days from the lapse of the 120 days for the BIR to process the refund claims were left without recourse.

Even amid strong calls from various groups for the repeal, or at least a prospective application, of RMC 54-2014, the issuance remains in force. The dockets of unresolved cases have since been returned to their originating offices either for issuance of denial letters or archiving. With RMC 54-2014 as the prevailing rule, a company which has unutilized input VAT on account of zero-rated or effectively zero-rated sales must be able to thoroughly prepare in case it decides to file a claim for refund with the BIR.

In the second part of this article, we will discuss the common issues raised by the BIR during a VAT refund audit and some matters that taxpayers may consider to increase their chances of getting a BIR approval of their refund claims.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of EY or SGV & Co.

Cecille Santillan-Visto is a Tax Senior Director of SGV & Co.