JGC Corporation Manila-ROHQ

July 9, 2010 BIR RULING [DA-(VAT-021) 121-10] RR 9-89; RMC 42-2003; 110; 112; VAT Ruling No. 059-92; BIR Ruling Nos. DA-636-2006; DA-(VAT-086)539-09 JGC Corporation Manila-ROHQ 7th Floor, JGC Phil. Building, 2109 Prime St. Madrigal Business Park, Ayala Alabang Muntinlupa City Attention: Mr. Hiroki Kitajima Authorized Representative Gentlemen : This refers to your letter dated January 19, 2009 requesting for confirmation that the input taxes shifted or passed-on to JGC Manila ROHQ by its local value-added tax (VAT) registered suppliers of goods, properties and services may be recognized outright as an expense for income tax purposes, or be added to the acquisition cost upon purchase of the capital asset subject to depreciation, as the case may be. It is represented that JGC Corporation Manila-ROHQ ("JGC Manila ROHQ") is a multi-national company organized and existing under the laws of Japan and engaged in the business of IT-enabled engineering, procurement and construction services. On December 11, 2000, JGC Manila ROHQ registered with the Securities and Exchange Commission (SEC) as a regional operating headquarters in the Philippines for which it was issued a license to engage certain qualifying services, to wit: general administration and planning; business planning and coordination; sourcing/procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistics services; DHETIS research and development services and product development; technical support and maintenance; data processing and communications; and business development. JGC Manila ROHQ renders such qualifying services mostly to its head office in Japan and other related companies abroad, for which it bills the latter in foreign currency on the basis of man-hours incurred by its expatriate employees. JGC-ROHQ is VAT-registered, and since most, if not all of its revenues are derived from its services rendered to its head office and other affiliates abroad, its sales are mostly subject to VAT at 0%. Since JGC Manila ROHQ makes local purchases of various supplies and services, consisting primarily of fuel, hotel accommodation, subcontractor services, utilities, etc., for which it is subjected to the value-added tax of 12% shifted or passed-on to it by its local sellers or suppliers of such goods or services, it constantly accumulates creditable input taxes in its balance sheet. Since the services of JGC Manila ROHQ are mostly VAT zero-rated, it has no other sales transactions subject to twelve percent (12%) VAT which may be applied or used as payment for the input tax shifted or passed-on to it. In reply, please be informed that in VAT Ruling No. 059-92 dated April 28, 1992, this Office elucidated that if the Mining Company have no other sales transactions subject to 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 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 Nos. 4686 and 4829 dated Sept. 27, 1995), the CTA has impliedly agreed with the treatment of input taxes in VAT Ruling No. 059-92 as cost which may be deducted from income for income tax purposes. TcCSIa 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), this Office 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. In BIR Ruling Nos. DA-636-06 dated October 27, 2006 and DA-(VAT-086)539-09 dated September 15, 2009, this Office had already made confirmation that creditable input taxes whose periods for refund have already prescribed may be deducted from gross income for income tax purposes. Finally, Revenue Memorandum Circular (RMC) No. 42-2003 dated July 15, 2003, provides that the input VAT claimed for refund or tax credit may be charged to appropriate expense account or asset account subject to depreciation, whichever is applicable, in case the zero-rated sales fail to comply with the invoicing requirement, e.g., including the TIN of the VAT registered seller-claimant in the VAT invoice or VAT receipt it issued to its customers. Thus: A-13: Failure by the supplier to comply with the invoicing requirements on the documents supporting the sale of goods and services will result to the disallowance of the claim for input tax by the purchaser-claimant. AEcIaH If the claim for refund/TCC is based on the existence of zero-rated sales by the taxpayer but it fails to comply with the invoicing requirements in the issuance of sales invoices ( e.g., failure to indicate the TIN), its claim for tax credit/refund of VAT on its purchases shall be denied considering that the invoice it is issuing to its customers does not depict its being a VAT-registered taxpayer whose sales are classified as zero-rated sales. Nonetheless, this treatment is without prejudice to the right of the taxpayer to charge the input taxes to the appropriate expense account or asset account subject to depreciation, whichever is applicable. Moreover, the case shall be referred by the processing office to the concerned BIR office for verification of other tax liabilities of the taxpayer. (Emphasis supplied) Based on the foregoing, it is clear that a disallowed claim of a VAT-registered taxpayer for a tax credit for the issuance of tax credit certificate on the input taxes attributable to its zero-rated sales of goods or services may, in lieu of being subject to a claim for tax credit or refund, be charged to expense or cost of the goods or services sold for the corresponding period in computing for its net taxable income subject to the corporate income tax, which in this case, is the 10% income tax on ROHQs. Accordingly, this Office confirms your opinion that the input taxes shifted or passed-on to JGC Manila ROHQ by its local VAT-registered suppliers of goods, properties and services may be recognized outright as an expense for income tax purposes, or be added to the acquisition cost upon purchase of the capital asset subject to depreciation, as the case may be. This treatment shall likewise apply to situations involving input taxes sales already recognized in the books of JGC Manila ROHQ where: (1) the two (2) year prescriptive period had already lapsed without any claim for refund or credit having been filed; (2) the claim for refund or credit was denied or rejected by the BIR for having been filed beyond the 2-year prescriptive period or for non-compliance with invoicing/substantiation requirements; or (3) a claim for refund or credit is still pending with the BIR but is voluntarily withdrawn by JGC Manila ROHQ. Provided, that in regard to input taxes attributable to the latter's zero-rated sales which it recognizes outright as an expense or charges to asset account subject to depreciation, as the case may be, (i) the input taxes shifted or passed-on to JGC Manila ROHQ shall not be recorded as input tax in its books; (ii) the input taxes shifted or passed-on to JGC Manila ROHQ shall not be reflected/reported as input tax in its VAT returns; and (iii) the input taxes shifted or passed-on to JGC Manila ROHQ shall not be claimed by the latter as tax refund or tax credit. cAEaSC 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, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group