BIR Ruling [DA-614-04]

December 6, 2004 BIR RULING [DA-614-04] 113; 237 VAT Ruling No. 046-03 SGV & Co 6760 Ayala Avenue Makati City Attention: J.A. OSANA Tax Division Gentlemen : This refers to your letter dated October 12, 2004 stating that your client, JDH (Philippines),Inc. (JDH) is a domestic corporation engaged in the business of marketing, selling on wholesale, distribution, export, import, purchase, barter or otherwise disposition of consumer products, with principal office address at 29 Industria Street, Bagumbayan, Quezon City; that on the other hand, Kraft Foods Philippines, Inc. (Kraft) is a domestic corporation engaged in the business of manufacturing food, beverage, confectionery and other products, with principal office address at 8378 Dr. A. Santos Avenue, Paraaque City; that from 1999 to July 31, 2004, JDH was appointed as the exclusive distributor of Kraft products in the Philippines; that under the Distribution Agreement, JDH purchases the products from Kraft and pays the selling price thereof to Kraft, including the 10% VAT due thereon; that JDH then sells the products to customers (at a certain margin of profit),records all sales, and issues its own VAT invoice to the customers; that as part of its advertising campaign, Kraft would, in certain cases, instruct JDH to give discounts to the customers and has agreed to reimburse JDH for the said discount; that in seeking reimbursement for the discount as per agreement with Kraft, JDH billed Kraft the amount of the discount plus 10% VAT using a Debit Note which indicated on its face the VAT Registration number of JDH and the name of Kraft, among other information; that JDH treated the billed amount to Kraft as part of sales and paid 10% VAT thereon on the theory that since the discount was reimbursed to JDH, it is as if JDH did not give any discount and therefore, subject to VAT on the full amount of selling price; that Kraft, on the other hand, refused to pay the VAT component of the bill on the ground that the reimbursement for the discount billed by JDH may not be subject to VAT and thus, Kraft may not be entitled to claim the VAT component of the bill as its own input VAT credit; that therefore, Kraft paid only the amount of the basic discount and did not claim any input Vat in relation thereto; and that the VAT component of the bills have remained unpaid to date. Based on the foregoing representations, you now request confirmation of your opinion that if the accumulated VAT component of JDH's billings will be paid to date by Kraft, the latter would be entitled to claim the same as input VAT credit, as a consequence, JDH will issue a VAT invoice or Official Receipt upon receipt of Kraft's payment. In reply thereto, please be informed that your opinion is hereby confirmed that Kraft is entitled to claim as input VAT the 10% VAT component of JDH's past billings for the discount, upon payment thereof to JDH. This is so because our VAT system is based on a system of offsetting between the output tax and the input tax. Thus, under the discount agreement between Kraft and JDH, Kraft undertook to reimburse JDH for the discount given to its customers and the former effectively paid part of the selling price of its products to the extent of the discount it asked JDH to give to its preferred customers which is evidenced by the Debit Notes issued by JDH. In other words, JDH should have been able to collect fully the selling price of the products as though no discount was in fact given. Under the circumstances, the serially numbered Debit Notes qualify as VAT sales invoice because they reflect on their face, the VAT registration number of JDH and the amount billed by JDH with an indication that such amount includes VAT as required under Sections 113 and 237 of the Tax Code of 1997. Accordingly, the Debit Notes may be allowed as basis to claim input taxes on the part of Kraft as prescribed in Section 110 of the said Code. DACTSa The principle that the VAT system works through the input tax mechanism is explained in BIR VAT Ruling No. 046-03 dated November 17, 2003, where it was ruled that "...,the billing of the VAT and the subsequent remittance thereof by MAK was erroneous. But the VAT system cures this basic defect through the input tax credit mechanism as regards transactions between two VAT registered persons wherein the seller is required to remit the VAT and the buyer is allowed to claim the input tax credit. However, in a situation where the purchaser of services upon whom the VAT was shifted refuses, as in fact it did not pay the tax shifted, the seller has no recourse to recover the tax which under the law, may be shifted or passed on to the buyer, it being in the nature of an indirect tax. If the credit system is in place, the Government should have not collected any VAT because the remittance of the seller should be offset by an input tax credit of the buyer. But the system was distorted because the buyer did not pay the tax and accordingly did not claim an input tax credit making the government unjustly enriched by such VAT remittance. Accordingly, MAK should be entitled to claim for refund based on the principle that nobody, not even the government, shall enrich himself at the expense of another. ( Philex Mining Corporation, vs. CIR et al. ,G.R. No. 125704, 1998)" WHEREFORE, in view of the foregoing ,this Office holds that Kraft is entitled to claim as input VAT the 10% VAT component of JDH's past billings for the discount upon payment thereof to JDH. 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 null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group