BIR Ruling [DA-636-06]

October 27, 2006 BIR RULING [DA-636-06] VAT Ruling 059-92 dtd 4-28-92 Azura Quiroz & Campos Attorneys at Law 5th Floor Pacific Star Bldg., Sen. Gil J. Puyat Ave. cor. Makati Ave. Makati City Attention: Atty. Rolando G. Campos Gentlemen : This refers to your letter dated February 2, 2004 in behalf of your client, SIMEAN CONSERVATION BREEDING and RESEARCH CENTER (SICONBREC, for short) requesting confirmation of your opinion that creditable input taxes whose periods for refund have already prescribed may be deductible for income tax purposes. It is represented that SICONBREC is a corporation formed and organized under the laws of the Philippines; that it was formed principally for the purpose of engaging in the business of breeding and exporting all bred monkeys to its various customers abroad, for the benefit of the international biochemical research community; that the company is VAT-registered whose sales is zero rated, as most, if not all of its revenues come from export sales; that incidentally, the company as of December 31, 2003, has accumulated creditable input taxes amounting to P5,058,619.12 lodged under the "Other Asset Account" in the balance sheet; that the said amount can no longer be refunded to the company by the BIR as its availment has already prescribed, pursuant to Section 112 (A) of the Tax Reform Act of 1997; that your are of the opinion that the input taxes may be claimed as deductions for income tax purposes, for the following reason, hereunder quoted as follows: "1) The company has no other sales transactions big enough which is subject to 10% VAT against which their input taxes may be used in payment, then it follows that they are constituted as the final persons against which the costs of the tax passed on shall legally be converted as cost, available as deduction for income tax purposes. "2) In Revenue RegulationsNo.9-89(GuidelinesinDeterminingrefundable/creditable InputTaxes Attributable to Zero-rated Transactions), the BIR has illustrated in the sample journal entry to record if there is disallowance in a company's claim for refund. The pro-forma entry includes a debit to Purchases or Cost of Sales for an amount equivalent to the disallowed input tax and a credit to Receivables . On the basis of the foregoing by debiting Purchases or Cost of Sales , which are expense accounts, it can be implied that the BIR may allow the claiming of disallowed input tax credits as deductions for the purpose of computing the taxable income." In reply, please be informed that in VAT Ruling No. 059-92 dated April 28, 1992, the BIR elucidated that if the Mining Company have no other sales transactions subject to 10% VAT against which their input taxes may be used in payment, then, it follows, they are constituted as the final persons against which the costs of the tax passed on shall legally stop and rest, hence, in this connection, the said input taxes may already be legally converted as cost available as deduction for income tax purposes. Moreover, in several CTA cases ( Atlas Consolidated Mining & Development Corp. vs. CIR (CTA Case No. 4749 dated April 5, 1994), Benguet Corporation vs. CIR (CTA Case No. 4686 and 4829 dated Sept. 27, 1995, the CTA has impliedly agreed with the treatment of input taxes in VAT Ruling No. 59-92 as cost which may be deducted from income for income tax purposes. In Court of Appeals (CA) Case CA-G.R. S.P. Nos. 37205, 38958 and 39435 dated July 10, 1998, involving Benguet Corporation vs. CIR , though the CA opined that the remedy suggested by the CTA in the CTA cases mentioned above would not result in the full recovery of the cost of input taxes, it did not disagree on the treatment of input taxes as deduction for income tax purposes. A perusal of Revenue Regulations No. 9-89 (Guidelines in Determining Refundable/Creditable Input Taxes Attributable to Zero-Rated Transactions), the BIR illustrated the sample journal entry to record disallowance of input taxes attributed to zero-rated sales in a company's claim for refund. The pro-forma journal entry includes a Debit to Purchase or Cost of Sales for an amount equivalent to the disallowed input tax and a credit to Receivables. The foregoing entry, a debit to Purchases or Cost of Sales of the amount of the disallowed input tax is a cost recovery method whereby the amount of tax/cost (i.e., input tax) duly identifiable with the particular asset sold but cannot be passed on as part thereof may be claimed as expense deductible from the taxpayer as gross income. ATDHSC Based on the foregoing, this Office is of the Opinion and hereby affirms your opinion that creditable input taxes whose periods for refund have already prescribed, may be deductible as expense for income tax purposes. This ruling is 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service