BIR Ruling [DA-571-04]

November 10, 2004 BIR RULING [DA-571-04] 106; RR 5-87; #155-94; VAT Ruling 116-92 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Joel L. Tan-Torres Partner, Tax Division Gentlemen : This refers to your letter dated August 31, 2004 requesting, on behalf of your clients Analog Devices Philippines, Inc. (ADPI) and Analog Devices Gen. Trias, Inc. (ADGTI) , for confirmation of your opinion regarding ADPI's and ADGTI's financial accounting and tax treatment of its unutilized input value-added tax (VAT) attributable to VAT zero-rated sales in relation to their claims for refund or tax credit of said input VAT. The facts, as represented, are as follows: ADPI and ADGTI are domestic corporations duly registered with the Bureau of Internal Revenue (BIR) as income tax and VAT taxpayers, and are likewise registered with the Board of Investments. ADPI and ADGTI are engaged in the manufacture, test and assembly of semiconductor products, and export the same abroad. In the course of their trade or business, ADPI and ADGTI import or purchase raw materials and pay the 10% input VAT on such importations or purchases. The imported or purchased raw materials are directly used by ADPI and ADGTI in the manufacture of semiconductor products that are subsequently exported abroad. These export sales are paid for in acceptable foreign currency, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP), and, therefore, subject to VAT at zero percent, pursuant to Section 106(A)(2)(a) of the National Internal Revenue Code of 1997 (Tax Code). As said export sales are VAT zero-rated, no output VAT resulted therefrom. ADPI's and ADGTI's accumulated input VAT on their importations or purchases of raw materials are not credited against any output VAT and, therefore, remain unutilized. For financial accounting purposes, ADPI and ADGTI record the 10% input VAT on their importation or purchase of raw materials as a separate input VAT asset account, consistent with the provisions of Revenue Regulations No. 5-87, as amended. Subsequently, ADPI and ADGTI set-up a provision or reserve for the input VAT by charging to expense an amount equivalent to the input VAT amount, and recording a separate contra-asset account against the Input VAT asset account at the same amount. However, said amount charged to expense is not claimed by ADPI and ADGTI as a deductible expense for taxation purposes in their income tax returns (ITR) and is declared as a reconciling item in the Reconciliation of Net Income per Books Against Taxable Income in the ITR of ADPI and ADGTI. CDaTAI Based on the foregoing, you now request for confirmation of your opinion that the setting-up by ADPI and ADGTI of a provision or reserve for its unutilized input VAT for financial accounting purposes by charging to expense an amount equivalent to said input VAT, and recording a separate contra-asset account against the input VAT asset account at the same amount, shall not preclude ADPI and ADGTI from claiming as a refund or tax credit said input VAT because such input VAT amount is not claimed as a deductible expense in the ITR of ADPI and ADGTI for taxation purposes and, hence, would not result in any double tax benefit in favor of ADPI and ADGTI if their VAT claims are granted. In reply, please be informed that the setting-up by ADPI and ADGTI, for financial accounting purposes only, of a provision or reserve for their unutilized input VAT by charging to expense an amount equivalent to such input VAT shall not preclude ADPI and ADGTI from claiming as a refund or tax credit said unutilized input VAT. Said financial accounting treatment by ADPI and ADGTI of their unutilized input VAT shall not affect the merits of the claims for said input VAT because said treatment is not applied by ADPI and ADGTI in its ITR for taxation purposes. The amount of input VAT that is charged to expense for financial accounting purposes is not charged to expense or claimed as a deduction in the ITR for taxation purposes, and, is, in fact, declared as a reconciling item in the Reconciliation of Net Income per Books Against Taxable Income in ADPI's and ADGTI's ITR. Hence, no tax benefit would be derived by ADPI and ADGTI from the above financial accounting treatment of input VAT and, therefore, no double tax benefit would result if ADPI's and ADGTI's claims for refund or tax credit for said input VAT are granted. [ BIR Ruling No. 155-94 dated November 16, 1994 ] Moreover, existing BIR rules, regulations and rulings, which prohibit taxpayers from charging their unutilized input VAT to an expense account, does not apply to ADPI's and ADGTI's above charging to expense of input VAT for financial accounting purposes. Under existing BIR rules, regulations and rulings, the prohibition is directed to the charging to expense of the claimed input VAT in the ITR for taxation purposes as this will result to double tax benefit to the taxpayer if the VAT claim is likewise granted by the BIR. Accordingly, there is no charging to expense to speak in the instant case of ADPI and ADGTI because the input VAT being claimed are not charged to expense or claimed as a deductible expense in the ITR of ADPI and ADGTI for taxation purposes. ( VAT Ruling No. 116-92 dated December 18, 1992 ) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. AECacS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group