(Third of three parts)
In the second part of this series, we discussed some pointers that companies may wish to consider before filing an application for value-added tax (VAT) refund. In particular, we discussed the need to prepare for a BIR audit, to secure in advance the required certifications from government agencies and to ensure that non-resident corporations who are service recipients are not doing business in the Philippines.
We continue the discussion of the issues to guide taxpayers who are either planning on filing refund claims or in the midst of processing their applications.
4. Compliance with the invoicing requirements
In reviewing the refund claims, one of the more tedious tasks of BIR examiners is the review of the schedule of purchases and the corresponding supporting sales invoices and official receipts (OR) to ensure that these comply with the invoicing requirements.
The claimant is required to submit a schedule of purchases for the period of the claim with the following details: registered name of supplier, Tax Identification Number (TIN) of supplier, invoice or OR number, date and number of invoice or OR, purchase amount, input tax, and total invoice or OR amount.
Invoices or receipts must have all the information required under Revenue Regulations No. 16-2005, as amended, including the complete name, TIN, and address of the purchaser, otherwise these will be disallowed for non-compliance with the invoicing rules.
However, taxpayers who have non-compliant invoices or receipts can still request their suppliers to indicate the required information.
In a recent case, the CTA ruled that any alteration to the invoices or receipts must be counter-signed or the countersignature must be verified to be considered compliant with the invoicing requirements for VAT refund purposes. (Coral Bay Nickel Corporation vs. CIR, CTA En Banc Case No. 1269 promulgated June 29, 2016)
In this case, the CTA ruled that for failure of the taxpayer to have the insertions countersigned or to have the counter-signature verified, the claimant did not comply with the invoicing requirements under the Tax Code and related BIR issuances.
The CTA explained that taxpayers have the right to request its BIR-registered suppliers to issue compliant receipts or invoices, but they also have the corresponding obligation to check whether the insertions or alterations were properly validated or countersigned by the authorized signatory. The claim for refund was denied due to the taxpayer’s failure to comply with the rules.
5. Big-ticket items
For purchases that are considered “big-ticket” items, the BIR will require proof of payment other than the invoices and receipts. “Big-ticket” items of purchases refer to purchases from suppliers whose gross annual cumulative sales to the particular taxpayer-purchaser account for more than 5% of said taxpayer-purchaser’s annual gross purchases covering the period under audit.
Under Revenue Memorandum Order (RMO) 16-2007, revenue officers are required to verify the authenticity and validity of the input taxes claimed by the taxpayer in its VAT returns. Pursuant to the RMO, it is not enough that the taxpayer is able to present invoices or receipts to evidence these purchases but there is a further need to ascertain the legitimacy and factual existence of “big-ticket” items. Examiners have to validate that these have been appropriately recorded in the books of accounts and reflected in the filed tax returns.
To validate, the BIR will require the submission of checks, vouchers, and other similar documents to prove that suppliers of “big-ticket items” were duly paid.
Unfortunately, some examiners are not aware of this requirement even as these are usually raised upon review of the dockets. Considering that submission of additional documents is not allowed after filing of the application, it is crucial for taxpayers to be mindful of this and include the required support, if the provision is applicable to them. “Big ticket” items support may be classified under “other requirements” for submission to the BIR.
6. Amortization of input VAT for depreciable goods
Section 110(A) of the National Internal Revenue Code (NIRC), as amended, enumerates the transactions upon which the related input tax may be claimed as tax credits. This includes depreciable assets or capital goods. The section provides that if the aggregate acquisition cost of the capital goods, excluding the VAT component thereof, exceeds P1 Million in a calendar month, the input tax should be spread over 60 months or the estimated useful life of the capital goods, whichever is shorter.
In a claim for refund, the BIR carefully reviews transactions booked as depreciable capital assets and confirms if the corresponding attributable input tax is subject to deferment pursuant to Section 4.110-3(a) of RR No. 16-2005.
In most instances, outright claiming of the input tax is denied if the input tax pertaining to the taxable period in audit cannot be readily determined.
7. Foreign currency payments and reconciliation of bank remittances
For zero-rated sales under Sections 106(A)(2)(a)(1) and (2) and 108(B)(1) and (2) of the Tax Code, the acceptable foreign currency exchange proceeds must have been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas to be eligible for refund.
For purposes of the refund audit, the BIR will ensure that the payments are in acceptable foreign currency and if these are remitted through banks, a reconciliation of the summary list of sales (SLS) and the bank remittances will be required. Discrepancies may be disallowed.
If the Audited Financial Statements are in foreign currency, peso translation of the accounts is required for purposes of verifying the payments made in the tax returns. If certifications are required from foreign banks, particularly in cases where there are discrepancies between the SLS and bank remittances, then taxpayers should also secure these in advance for submission to the BIR.
8. Dealings with the BIR
It is basic for taxpayers to know the rules in filing and processing a refund claim but in most instances, it all boils down to how well the claimant can engage the BIR examiner to follow through on the application.
As discussed in the first part of this article, adherence to the strict timelines is essential in winning or losing your tax refund case.
Regular discussions with the examiners and reviewers to ensure all issues are resolved at the Revenue District Office level, or at the Large Taxpayers Audit Division, whichever is the case, are necessary
While all preparations are made in the hope of obtaining a tax refund, all the hard work will be for naught if the case is not attended to in a timely manner.
As if to underscore the importance of affording fair relief to taxpayers, just last week, the BIR issued Revenue Regulations 1-2017, which sets aside the retroactive application of the “deemed denied” provision of Revenue Memorandum Circular 54-2014 and allows for the continuation of the administrative processing of claims filed before effectivity of RMC 54-2014. RMC 54-2014 provides that the Commissioner has 120 days from the submission of the complete documents to decide on a claim for refund. Inaction on the part of the Commissioner is deemed a denial of the tax credit or refund application. This provision was applied to pending claims at the time of the issuance of the circular.
Quoting the Supreme Court’s decision in Pilipinas Total Gas, Inc. vs. Commissioner of Internal Revenue (GR 2017112, promulgated on Dec. 8, 2016), the BIR said RMC 54-2014 cannot be retroactively applied as it prejudices taxpayers whose VAT claims were filed before the circular took effect on June 11, 2014.
However, the BIR clarified that the cases affected by the retroactive application will be processed based on available documents submitted by the claimant-taxpayer within the statutory two-year period.
Claims filed beyond the two-year period and denied in writing by the approving authority are not covered by RR 1-2017. Moreover, approved applications — whether partially or fully — may no longer be reviewed or revived. Claims already appealed and pending with the Court of Tax Appeals are likewise excluded unless there is proof of withdrawal of the case filed with the CTA.
It should also be noted that even with the issuance of RR 1-2017, the BIR still needs to clarify other issues relating to the treatment of the input VAT, such as in cases where the claim was deemed denied but subsequently approved.
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.