Value-added tax (VAT) refund administration presents many challenges. Taxpayers often face frustration due to inefficient procedures and strict requirements even for legitimate refund claims.
In the Philippines, VAT is imposed on the value added at each production stage using an invoice-based method, i.e., VAT on output or sales less the VAT paid on goods and services consumed during production. If a taxpayer, for instance, is engaged in sales transactions subject to VAT at 0% (like export transactions and sales to entities enjoying fiscal incentives) but is paying the 12% on its production inputs, the taxpayer will normally be in excess input VAT credit position. The excess input VAT credits should be refunded to the taxpayer lest the VAT become a tax paid on production and investment, which can be discouraging for taxpayers and investors. Hence, VAT refund policies and processes should be efficient.
Fortunately, conscious efforts are being undertaken by the Bureau of Internal Revenue (BIR) to simplify the requirements and procedures for VAT refunds. Recently, the BIR issued Revenue Memorandum Circular (RMC) No. 71-2023 and Revenue Memorandum Order (RMO) No. 23-2023 which streamline the rules and requirements for VAT refund claims. The simpler procedures apply to VAT refund applications filed starting July 1, 2023.
Here are the updates introduced by the BIR in the new RMC and RMO, specifically for VAT refund applications of excess input taxes attributable to zero-rated sales.
VENUE FOR FILING VAT REFUND CLAIMS
Claims for VAT refund of direct exporters, regardless of the percentage of export sales to total sales and whose claims are anchored under Section 112 (A) of the Tax Code of 1997, may still be filed with the VAT Credit Audit Division (VCAD) at the BIR National Office.
However, claims of other taxpayers like indirect exporters or those engaged in other VAT zero-rated activities, other than direct exports, may now be filed with the Large Taxpayers VAT Audit Unit (LTVAU) of the Large Taxpayers Service (LTS) for large taxpayers or the VAT Audit Section (VATAS) in the Regional Assessment Division or respective Revenue District Office (RDO) where the taxpayer is registered, if without VATAS, for non-large taxpayers.
Previously, these VAT refund applications had been filed with the LT Audit Division in the LTS or RDO where the taxpayer is registered, for large taxpayers and non-large taxpayers, respectively.
One of the most welcome changes is the significant reduction of the number of documentary requirements needed tfor submission in a VAT refund application. The previous checklist of documentary requirements had 30 documents, which have been reduced to 22 under the new rules. Some of the requirements included in the checklist may not be applicable depending on the types of transactions the claimant is engaged in.
The revised checklist notably excludes some documents already available in the BIR’s records and database. For example, Quarterly VAT returns and Annual Income Tax Returns covering the period of the claim are no longer part of the checklist, as well as a copy of Audited Financial Statements (AFS), together with the complete notes to AFS, if the AFS was already submitted by the taxpayer via the BIR’s eAFS facility. However, taxpayers can still submit copies of these documents to help the BIR officers in the timely processing of the claim.
The Delinquency Verification Certificate (DVC) issued by Collection Division of the BIR’s Regional Office for non-large taxpayers or by the Large Taxpayers (LT) Collection Enforcement Division/LT Division Cebu/Davao for large taxpayers are no longer required for submission. Only the DVC issued by the Accounts Receivable Monitoring Division (ARMD) of the BIR National Office must be secured by the taxpayer and submitted during the application for VAT refund.
For claims with input VAT on imports, a certification from DoF-OSS Center that the claimant has not filed a similar claim/s covering the same period has been deleted from the checklist due to the abolition of the DoF-OSS Center. Moreover, proof of payment of input VAT on imports, like the Statement of Settlement of Duties and Taxes (SSDT) is no longer required as the VAT Payment Certification to be issued by the BoC Revenue Accounting Division (RAD) is deemed sufficient.
ORIGINAL COPIES OF DOCUMENTS
In the latest RMC and RMO, the BIR now requires only the original of the duplicate copies of sales invoices or official receipts issued for sales transactions, and the original copies of suppliers’ sales invoices or official receipts and other supporting documents for the input VAT from purchases. Under the previous policy of the BIR, soft copies of the documents stored in a separate memory device should also be submitted, in addition to the original copies.
However, would it have been more practical for taxpayers to submit soft copies only or at least give the taxpayers a choice whether they would like to submit either the original copies or the soft copies of the documents?
One concern on the submission of original copies of the documents is the adequacy of storage space in the BIR offices in anticipation of the volume of documents to be stored. It should also be ensured that the original documents remain intact and complete while in BIR custody, since taxpayers will still most likely be requiring the documents in the future. For instance, the taxpayer may be subjected to a BIR audit which will require the submission of proof of sales and expense transactions to refute any BIR findings, or, in case of denial of the VAT refund claim by the BIR, the taxpayer will also have to present the same documents to the courts if the claim is elevated to the judiciary.
The old policy of the BIR that only applications with complete documentary requirements are to be accepted remains has been retained in the new RMC and RMO. Thus, taxpayers should plan their applications accordingly and ensure that all applicable documents on the checklist are secured and available for submission to the BIR.
The new RMO provides that in cases where a taxpayer files VAT refund claims beyond the two-year prescriptive period, the application will be accepted but will be for outright denial, for the claimant to avail of judicial remedy. Previously, claims that are not filed within the prescriptive period were not accepted by the BIR.
However, I think that it is prudent for taxpayers to still strictly observe the two-year prescriptive period to apply for the administrative claim for VAT refund. It is worth noting that the two-year prescriptive period is expressly provided for in our Tax Code. Moreover, the Court of Tax Appeals and Supreme Court have consistently ruled that the filing of the VAT refund claim within two years after the close of the taxable quarter when the sales were made is one of the requisites in order to validly claim a refund of unutilized input VAT.
Regarding taxpayers with tax delinquencies, the previous policy of the BIR was to not receive VAT refund applications where the Delinquency Verification Certificate (DVC) submitted shows delinquent accounts other than VAT. The claimant must first settle the tax liabilities so that a DVC with no tax liabilities can be issued by the DVC-issuing office.
In the latest RMO, the BIR allows such claims to be accepted. However, the tax liability will be offset against any approved VAT refund, to allow the collection, either fully or partially, of the outstanding delinquent tax liability, subject to existing tax laws and issuances on the enforcement and settlement of delinquent accounts.
I laud our tax authorities for taking another step towards ease of doing business through these new issuances. Admittedly, VAT refund administration can be a tricky exercise. Strategies and processes must be in place to ensure that only legitimate VAT refund claims are granted. At the same time, these strategies and processes should not erode taxpayer confidence in the VAT refund system. When the right balance is struck, it’s a win for both the government and the taxpayers.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
John Paulo D. Garcia is a senior manager from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.