In the first part of this series, we discussed the difference in the procedures for processing refund claims for unutilized input Value-Added Tax (VAT) on account of zero- or effectively zero-rated sales prior to and after the issuance of Revenue Memorandum Circular (RMC) 54-2014; given the Bureau of Internal Revenue’s (BIR) mandate to increase tax collection, it needs every peso it can collect from, and not refund to, taxpayers; and the maintenance of the status quo under the current administration insofar as the application of the circular. RELATED STORIES
This week, we look at some of the common issues that have been raised in the evaluation of refund claims of input VAT attributable to zero-rated sales. This includes the usual factual and legal matters noted by the Bureau of Internal Revenue (BIR) and to some extent, the Court of Tax Appeals (CTA), in its recent decisions on refund claims.
At the outset, it should be noted that refund claims are construed strictly against the claimant as these take on the nature of a tax exemption. While companies may argue that they are entitled to a refund on their unutilized input VAT attributable to zero-rated sales, claims are generally not favored.
The claim of refund on account of export sale of goods requires taxpayers to prove that there was sale and actual shipment of goods from the Philippines to another country and these goods so exported are paid for in acceptable foreign currency and accounted for in accordance with the rules of the Bangko Sentral ng Pilipinas (BSP). From taxpayers’ experience, complying with the requirements for refund claims on account of zero-rated sale of goods is generally straightforward compared to zero-rated sale of services.
Based on jurisprudence and refund claims processed by the BIR, we discuss the usual issues raised in the processing of refunds on account of zero-rated sales of services and some pointers to consider before filing their application and in the course of its processing.
1. Prepare for a BIR audit Filing for a claim for refund will trigger a BIR audit of the company’s records for the taxable period covered by the application.
As such, companies will have to evaluate at the outset whether they is prepared for a rigorous tax audit that will not only be limited to issues of unutilized input VAT but will likely extend to issues such as possible deficiency income and other taxes. As the BIR will have ready access to the company’s records such as audited financial statements, income tax returns, and importation documents, examiners are not prohibited from ranging beyond VAT-related items.
There have been cases, as previously mentioned, where taxpayers filing claims for refund have been assessed by the BIR for deficiency taxes much higher than the amount of the claim. In these instances, the taxpayer cannot use as a defense that the audit should have been restricted to reviewing its unutilized input VAT for purposes of refund.
Thus, in case of a full-blown audit and to minimize the risk of a tax deficiency assessment, a taxpayer-claimant must be ready to defend other audit issues that may be raised by the BIR.
2. Secure in advance the required certifications from government agencies Annex “A” of RMC 54-2014 provides for a long list of certifications and certified documents that must be submitted to the BIR. While it is relatively easy to secure certified copies of registrations from the Bureau of Internal Revenue (BIR), Philippine Economic Zone Authority (PEZA) and the Board of Investments (BOI), the taxpayer should make allowances for securing other requirements, such as certifications that it has no similar refund claims pending with the BOI, Bureau of Customs and even the Department of Finance One Stop Shop. For companies rendering services to non-resident foreign corporations, SEC certification that the recipients of services are not doing business in the Philippines is mandatory. Thus, if the taxpayer serves 50 customers, a negative certification for each entity must be secured. Notably, the SEC can only process a certain number of certifications at any one time.
3. Non-resident foreign corporation not doing business in the Philippines An essential condition for entitlement to zero-percent VAT is that the buyer of the services is a person doing business outside the Philippines (CIR vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G.R. No. 153205, January 22, 2007).
Aside from the SEC certificate of non-registration, the CTA reiterated in En Banc Case 1313 promulgated on Sept. 22, 2016 that the claimant is also required to present proof of incorporation in a foreign country (e.g., Certificate of Incorporation, Memorandum and Articles of Association, and Certificate of Registration) or any other equivalent document to prove that the non-resident foreign corporation is not doing business in the Philippines. Supporting documents that it is listed in a foreign stock exchange, such as a screenshot of the website of the exchange with participating companies, may also suffice.
In numerous cases, the Supreme Court and the CTA ruled that it is not enough to prove that the recipient of a service is a non-resident foreign corporation but also that it is not engaged in trade or doing business in the Philippines.
In a landmark SC case docketed GR 190102 promulgated on July 11, 2012, A Co. filed a claim for refund for unutilized input VAT attributable to zero-rated sales of services to foreign clients outside the Philippines.
Due to the Department of Finance’s inaction and to toll the running of the two-year prescriptive period for refund claims, A Co. filed a Petition for Review with the CTA.
At the CTA, the BIR argued, among others, that A Co. did not sufficiently prove that its sale of services to alleged foreign clients were engaged in business outside the Philippines and qualified to zero percent VAT. The CTA Division subsequently denied the refund claim, which the CTA En Banc upheld.
The Supreme Court, finding in favor of the BIR, held that A Co.’s foreign clients must be doing business outside the Philippines for the transaction to qualify for zero-rating under Section 108(B) of the Tax Code. While A Co. presented evidence presented to establish that its clients were foreign, this did not mean that these clients were doing business outside the Philippines.
In next week’s column, we discuss the other issues that taxpayers have to consider in the filing and processing of their VAT refund claims.