Value added tax (VAT) refund administration presents challenges for tax authorities in countries employing a VAT system. 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 outputs 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 will become a tax paid on the production and investments, which can be discouraging for taxpayers and investors. Hence, there should be efficient VAT refund policies and processes in place.
Fortunately, conscious efforts are being made by the Bureau of Internal Revenue (BIR) to simplify the requirements and procedures for VAT refund applications. Recently, the BIR issued Revenue Memorandum Circular (RMC) No. 71-2023 and Revenue Memorandum Order (RMO) No. 23-2023 which provided streamlined guidelines, policies and mandatory requirements for VAT refund claims. The simplified guidelines and documentary requirements are applicable for VAT refund applications that will be filed starting July 01, 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, shall still be filed with the VAT Credit Audit Division (VCAD) in the BIR National Office.
However, claims of other taxpayer claimants like indirect exporters or those engaged in other VAT zero-rated activities, other than direct exports, shall 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 are being filed with the LT Audit Division under the LTS or RDO where the taxpayer is registered, for large taxpayers and non-large taxpayers, respectively.
REDUCTION OF THE NUMBER OF MANDATORY REQUIREMENTS
One of the most welcome changes is the significant reduction of the number of documentary requirements needed to be submitted by taxpayers in applying for VAT refund. The previous checklist of documentary requirements provides for thirty (30) documents while the revised checklist contains only a maximum of twenty-two (22) documentary requirements. 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 excluded some of the requirements 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 in the eAFS facility of BIR. However, taxpayers can still submit copies of these documents to help the BIR officers to timely process 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 to be submitted. 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 importations, a certification from DOF-OSS Center that the claimant has not filed a similar claim/s covering the same period is deleted from the checklist due to the abolishment of the DOF-OSS Center. Moreover, proof of payment of input VAT on importations 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) will already suffice as proof of payment of the input VAT on importations.
SUBMISSION OF ORIGINAL COPIES OF DOCUMENTS TO THE BIR
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 on 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 if there will be enough storage spaces in processing BIR offices in consideration of the expected volume of documents to be stored. It should also be ensured that the original documents will remain intact and complete while in BIR’s 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 necessitate submission of proof of sales and expense transactions to refute BIR’s 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 will be elevated to the judicial level.
OTHER POLICIES IN THE ACCEPTANCE OF VAT REFUND APPLICATIONS
The old policy of the BIR that only applications with complete documentary requirements shall be accepted remains under the new RMC and RMO. Hence, taxpayers should plan their applications accordingly and ensure that all the applicable documents in the checklist of requirements are secured and available for submission to the BIR.
The new RMO provides that in cases where a taxpayer file VAT refund claims beyond the 2-year prescriptive period, the said 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 are not accepted by the BIR.
However, I think that even with the above latest policy by the BIR, it is prudent for taxpayers to still strictly observe the 2-year prescriptive period to apply for the administrative claim for VAT refund. It is worth noting that the 2-year prescriptive period is expressly provided 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 refund of unutilized input VAT.
Regarding taxpayers with existing tax delinquencies, the previous policy of the BIR is 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 concerned DVC-issuing office.
In the latest RMO, the BIR provided that similar claims above will now be accepted by the BIR. However, the amount of tax liabilities will be offset against any approved amount of VAT refund to collect either fully or partially, the outstanding delinquent tax liability of the taxpayer-claimant, 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 on the simplified guidelines for VAT refund applications. 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 being granted but at the same time, these strategies and processes should not cause the decline of the taxpayer’s confidence in the country’s VAT refund system. But 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.
As published in BusinessWorld, dated 04 July 2023