Headline

This decision of the Court of Tax Appeals (CTA) En Banc reverses previous CTA rulings that a taxpayer must have zero-rated sales in the same quarter when the unutilized input VAT was incurred. In its earlier decisions, the CTA interpreted the phrase attributable to zero-rated sales to mean that there should be zero-rated sales in the same quarter when the input VAT subject of the claim was incurred.

Recent Developments

On 18 August 2017, the CTA En Banc affirmed the decision of the CTA Second Division, which granted the claim for refund of KEP (Philippines) Realty Corporation (KPRC) of its excess input value-added tax. KPRC incurred the unused input VAT subject of the claim for refund, on the 3rd quarter of 2012. It began to generate zero-rated sales only in the first quarter of the following year.

Change in the Position of the CTA

One of the requirements for the refund of excess input VAT is that the input VAT must be attributable to zero-rated sales. On appeal to the CTA En Banc, the Commissioner of Internal Revenue (CIR) argued that the Company did not present evidence which would show that it had zero-rated sales during the quarter when it purchased the five (5) parcels of land and incurred its input VAT.

Quisumbing Torres, counsel for the Company, counter-argued that based on the rule on apportionment provided for by Revenue Regulations No. 16-2005, as amended, the "attribution to zero-rated sales" rule applies when a taxpayer has both zero-rated sales and sales subject to 12% VAT or sales exempt from VAT during the same period. In such a case, the input VAT must be apportioned between these types of sales transactions and only the input VAT attributable to zero-rated sales may be the subject of a claim for refund. The rule does not mean that that there should be zero-rated sales in the same quarter when the input VAT subject of the claim was incurred.

Past Decisions

In San Roque Power Corporation v. CIR (CTA Case No. 7173, dated 23 April 2009), the claim for unutilized input taxes of P3,126,582.54 and P1,077,448.86 for the first quarter of 2003 and for the month of April 2003, respectively, totaling P4,204,031.40 was denied. The reason for the denial was that petitioner started operations only in May 2003 and had no zero-rated sales/receipts for the first quarter of 2003 and for the month of April 2003 to which the said input taxes could be attributed. The CTA further stated that it is clear from Section 112 (A) of the National Internal Revenue Code (Tax Code) that the refund/tax credit of input tax is premised on the existence of zero-rated or effectively zero-rated sales.

In Harte-Hanks Philippines, Inc. v. CIR (CTA EB No. 949, dated 28 April 2014), the CTA denied petitioner's claim for refund of excess input VAT for the 3rd and 4th quarters of 2007, even if petitioner had zero-rated sales in the succeeding quarters. The CTA found that petitioner did not submit any VAT official receipt proving the zero-rated sales for the 3rd and 4th quarters of 2007. The CTA concluded that consequently, there were no zero-rated sales to speak of and petitioner was not entitled to a refund or issuance of tax credit certificate of its input tax allegedly attributable thereto since it is a basic requirement under Section 112 (A) of the Tax Code that there should exist a zero-rated sales in order to be entitled to a refund or unutilized input tax.

In the recent decision of the CTA En Banc in CIR v. KEP (Philippines) Realty Corporation (CTA EB Case No. 1504, dated 18 August 2017), the CTA En Banc affirmed the decision of the CTA Second Division, which granted the claim for refund even if the Company started generating zero-rated sales only during the first quarter of 2013 (Note that the input VAT was incurred in the 3rd quarter of 2012). The CTA En Banc ruled that:

"Neither the law nor the implementing regulations provide that in a claim for refund of input VAT that there be zero-rated or effectively zero-rated transactions at the time the claimed input VAT was incurred or paid. Neither does it provide that the input tax in the purchase of land be refunded only when it was sold or input tax thereon be apportioned to the period of lease. Neither does the law nor the implementing regulations provide that the option to carry over to the succeeding quarters any unutilized input tax or to file a claim for refund and availing of an option precludes choosing that of the other.

What the law and the implementing regulations provide is that a taxpayer who has zero-rated or effectively zero-rated transactions were allowed to apply for the issuance of a tax credit certificate or a tax refund for input taxes paid, in addition to the option to carry forward the input taxes against future output tax liabilities. To be entitled to the issuance of tax credit certificate or tax refund, the input taxes should not have been applied against output taxes, the input tax is attributable to zero-rated or effectively zero-rated sales and the claim should be made within 2 years from the close of the taxable quarter when the zero-rated or effectively zero-rated sales were made. (Emphasis supplied)"

Based on this recent decision of the CTA En Banc, claims for refund of excess input VAT should not be denied merely on the basis that the zero-rated sales came after the quarter when the excess input VAT subject of the claim was incurred.

Actions to Consider and Conclusion

Given this development, taxpayers with pending cases before the Supreme Court and the CTA, involving similar issues, may cite this case to support its position that the existence of zero-rated sales in the same quarter when the input VAT was incurred is not necessary in order to be entitled to a claim for refund. As stated in the decision, there is no requirement in the law, nor in the existing regulations, that that there be zero-rated or effectively zero-rated transactions at the time the claimed input VAT was incurred or paid. What the law and the implementing regulations provide is that a taxpayer who has zero-rated or effectively zero-rated transactions is allowed to apply for the issuance of a tax credit certificate or a tax refund for input taxes paid, or the option to carry forward the input taxes against future output tax liabilities. To be entitled to the issuance of tax credit certificate or tax refund, the input taxes should not have been applied against output taxes, the input tax is attributable to zero-rated or effectively zero-rated sales, and the claim should be made within two (2) years from the close of the taxable quarter when the zero-rated or effectively zero-rated sales were made.