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Refunding input VAT upon dissolution or change of VAT status

The legal provisions on refunding input value-added tax (VAT) upon dissolution of the company or upon the change of VAT status was unaffected by the TRAIN law.

However, the TRAIN implementing regulations on the VAT provided a significant clarification relating to the timing of application for VAT refund for dissolving companies and those shifting from a VAT to non-VAT business.

Section 112 of the National Internal Revenue Code (NIRC), as amended, allows for the refund or issuance of tax credit certificates for unutilized excess input VAT upon cancellation of VAT registration due to the retirement of business since the taxpayer can no longer use such excess input tax. Input VAT is an asset which, upon dissolution, may be returned to the shareholders as capital or as part of liquidating dividends. However, such input VAT of the dissolving company cannot be utilized and will have no value to the shareholder receiving the assets. Hence, it is usually just written off as a loss. But if a refund is applied for, the unutilized input VAT can be converted to cash and become an asset of value for distribution to shareholders.

In the case of a company shifting from a VAT to a non-VAT business, the unutilized input VAT may also be refunded. The taxpayer, though, still has the option to retain such input VAT in its books in case it decides to engage again in a VATable business.

Section 12 specifically mentions that the taxpayer may, within two years from the date of cancellation of VAT registration, apply for the issuance of a tax credit certificate for any unused input tax which may be used in payment of other internal revenue taxes. However, a dissolving company shall be entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized.

In order to implement the said Section, the BIR issued Revenue Regulations (RR) No. 16-2005, the Consolidated Value-Added Tax Regulations of 2005, wherein Sec. 4.112-1 (b) reiterated the requirement that such applicant is only entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized. Based on the said RR, the requirements that the applicant should observe are (1) the application should be filed within two years from the date of cancellation; and, (2) he has no internal revenue tax liabilities against which the tax credit certificate may be utilized.

The date of cancellation of VAT registration is generally understood to take effect on the first day of the following month. The law and the regulations may appear to be clear on the prescription period to file the application, but subsequent court decisions prove otherwise. Other interpretations emerged. The two-year period was reckoned from either the date of cancellation, the filing of the short period return which confirms the amount of excess input VAT available, the issuance of the tax clearance, or the cancellation of the SEC registration. With the differing interpretations, the dissolving company runs the risk of having the application denied for being filed either prematurely or beyond the prescription period.

In the recently issued RR No. 13-2018, to implement the VAT provisions of the TRAIN law, the Commissioner interpreted the “date of cancellation” under Section 112 of the NIRC as the date of issuance of tax clearance by the BIR, after full settlement of all tax liabilities relative to the cessation of business or change of VAT status of the taxpayer.

The said issuance of the tax clearance also supports the additional amendment of Sec. 4.112-1 (b), where filing of the claim shall be made only after completion of the mandatory audit of all internal revenue tax liabilities covering the immediate preceding year and the short period return and the issuance of the applicable tax clearance by the appropriate BIR Office. The issuance of the tax clearance presupposes that the mandatory audit as provided has been completed by the BIR.

This interpretation is harmonized with the requirement that the taxpayer has no internal revenue tax liabilities against which the tax credit certificate may be utilized.

The amendment in the regulations also supports the decisions of the Court of Tax Appeals (SMI-ED Philippines Landholdings, Inc. vs. CIR, CTA EB No. 208; Dumex Philippines, Inc. vs. CIR, C.T.A. CASE No. 7790), where the Court ruled that certificate of tax clearance (CTC) is an essential requirement for a claim of refund of unutilized/excess input VAT on importation of goods and domestic purchases of goods and services from commencement of its operations until the cancellation of its VAT registration.

In the regulations, the above rules would also apply if the taxpayer claims a refund upon cancellation of VAT registration as a result of the change in status as a VAT-registered person such as when the taxpayer shifts to a non-VAT activity. The rules suggest that the taxpayer changing VAT registration shall wait for the completion of the audit of the year immediately preceding the change in VAT status and the issuance of the corresponding tax clearance before the VAT refund claim is filed.

With the clarifications and amendments made by the BIR, the taxpayer should be more comfortable knowing that the application for refund cannot be denied on the basis of the previously unclear rules on the prescription period for a refund. Furthermore, the taxpayer should feel at ease that the full amount of input VAT remaining in the books can be claimed for a refund since all of the requirements have been complied with as evidenced by the issuance of the tax clearance. A separate audit for the refundable amount should no longer be required.

Unutilized input VAT is clearly an asset of the company which was generated or acquired with the use of its capital. Justice dictates that these should be properly returned and refunded to the taxpayer when these can no longer be utilized by the business. It is appreciated that this aspect of the refund process has been cleared up so that mere technicalities will not deprive the taxpayers of their right to the refund.


Ed Warren L. Balauag is a senior associate with the Tax Advisory and Compliance division of P&A Grant Thornton. P&A Grant Thornton is one the leading audit, tax, advisory and outsourcing services firm in the Philippines.


As published in BusinessWorld, dated 15 May 2018