Monday, October 13, 2014

Authority to print and the value-added tax refund

FAILURE to secure an Authority to Print (ATP) prior to the zero-rated transaction is fatal to the taxpayer’s claim for tax refund of input tax attributable to such zero-rated sales.


In the recent case of Emerson Electric (Asia) Limited-ROHQ vs. Commissioner of Internal Revenue (CIR), the Court of Tax Appeals (CTA) ruled that to prove that a taxpayer is engaged in zero-rated sales, the duly registered invoices or receipts must be presented. This assumes that the proper ATP was secured prior to the transaction. If the ATP is not indicated in the invoices or receipts, the only way to verify whether the said invoices or receipts are duly registered is for the taxpayer to present its ATP issued by the Bureau of Internal Revenue (BIR). Without this proof, the invoices or receipts would have no probative value for the purpose of refund.

The CTA emphasized that invoices or receipts must be duly registered. Absence of an ATP is fatal to the taxpayer’s claim for refund/tax credit of input tax attributable to zero-rated sales. Also, securing the required ATP after the subject transactions have taken place is fatal to the taxpayer’s refund claim.

Zero-rated sales of goods and services by a value-added tax (VAT)-registered taxpayer are taxable transactions for VAT purposes. However, they do not result in any output VAT. Thus, the taxpayer is in a situation where there is accumulated input VAT on purchases of goods, properties or services related to such zero-rated sale but there is no output VAT to credit against. Consequently, the law allows the taxpayer to file a claim for refund to enable it to recover the accumulated unutilized input VAT.

According to Section 112 (A) of the Tax Code, a taxpayer is entitled to the tax refund provided that the following requirements are present:

1. There must be zero-rated or effectively zero-rated sales;

2. Input taxes were incurred or paid;

3. Such input taxes are attributable to zero-rated or effectively zero-rated sales;

4. The input taxes were not applied against any output VAT liability; and

5. The claim for refund was filed within the two-year prescriptive period.

In this case, the taxpayer was held to be compliant with all the requirements under the Tax Code -- except that it failed to substantiate its alleged zero-rated sales. The taxpayer claimed that the services it rendered to its non-resident affiliates qualify for VAT-zero rating. To support its claim, the taxpayer presented its schedule of zero-rated sales and related sales invoices, various service agreements with the non-resident clients, incorporation documents in their respective foreign countries, Certifications of Non-registration, Certificate of inward remittances, and credit advices.

In the case of CIR vs. Burmeister (GR No. 153205), the Supreme Court held that for the supply of services to be zero-rated under Section 108 (B)(2) of the Tax Code, the following requisites must be satisfied:

1. The services must be other than processing, manufacturing or repacking of goods;

2. The payment for such services must be in acceptable foreign currency accounted for in accordance with the Bangko Sentral ng Pilipinas (BSP) rules and regulations; and

3. The recipient of such services is doing business outside the Philippines.

In determining whether the transaction qualifies as zero-rated sales, the CTA did not confine itself to the requirements stated in the Tax Code. The CTA, in this case, explained that corollary to the requirement that the payments be in acceptable foreign currency, the taxpayer must also comply with the invoicing requirements under Section 113 (A)(2) of the Tax Code. The Court said that said Section states in no uncertain terms that the foreign currency remittances must likewise be supported by a VAT zero-rated official receipt.

While the taxpayer presented the related sales invoices, the Court stressed that the taxpayer failed to prove that it issued an official receipt. More glaringly, the CTA noted that the taxpayer was only able to secure its ATP in July 22, 2008. However, the transactions covered by the refund were for the fourth quarter of 2007 and the first quarter of 2008. Thus, the Court held that securing the required ATP after the transaction took place is fatal to the petitioner’s claim for refund.

For the claim of VAT refund to be successful, the taxpayer should comply with every requisite. In this case, the Court held that all requirements of the Tax Code, no matter how seemingly inconsequential can be fatal to the request for refund. More importantly, the Court did not limit itself to the requirements under Section 112 (A) of the Tax Code on VAT refund but widened the requirements to include Section 113 of the Tax Code.

Taxpayers with foreign clients must be mindful of the invoicing regulations even if their clients do not require them to issue VAT official receipts or invoices. They should remember that failure to comply with the requirements of the law can have fatal effects on their claims for input VAT refund, as evidenced by this case.

It bears stressing that a claim for tax refund is in the nature of a tax exemption. Laws granting tax exemptions are construed against the taxpayer and are liberally in favor of the taxing authority. As mentioned by the law authorities, taxation is the rule and exemption is the exception.

As such, the taxpayer should comply with every requisite required by law for it to be entitled to the claim for tax refund.

Ed Warren L. Balauag is an associate with the Tax Advisory and Compliance Division of Punongbayan & Araullo.

source:  Businessworld

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