Diaz Murillo Dagupan and Company

September 9, 2009 BIR RULING [DA-(VAT-082) 520-09] VAT Ruling No. 053-94; 089-02; BIR Ruling Nos. 088-99; DA636-06 Diaz Murillo Dagupan and Company 5th Floor, Don Jacinto Building Dela Rosa corner Salcedo Streets Legaspi Village, Makati City Attention: Mr. Alverto V. Igrubay Manager, Tax and Corporate Services Gentlemen : This refers to your letter dated February 25, 2009 stating that your client, K Line Maritime Academy Philippines, Inc. (KLMAPI), was incorporated and registered with the Securities and Exchange Commission (SEC) on April 26, 1993; that its income comes from rendition of services which are vatable at zero rate; that KLMAPI has input tax (asset account) representing present and prior years unapplied/un-utilized input tax; that KLMAPI has projected that this input value-added tax (VAT) cannot, in any way now and in the future, be used as a charge to output VAT considering that all its income from services are VAT zero-rated; that in order that the company can at least benefit from this input VAT, it decided that all this input VAT be written off from the books and charged to operations; and that it is also the intention of KLMAPI to charge to the corresponding expense account, a deductible expense, rather than as an asset account, the input VAT that were passed to it by its suppliers of goods and services. Based on the foregoing representations, you now request for confirmation of your opinion that the accumulated unapplied input VAT arising from the purchase of goods and services of a zero-rated VAT taxpayer may be treated as outright expense; and that the basis of computing the expanded withholding tax on such purchase of goods and services is the total amount appearing in the invoice/official receipt net of VAT. In reply thereto, please be informed that this Office had already occasion to rule on the matter when it said in BIR VAT Ruling No. 059-92 dated April 28, 1992, as follows: CaATDE ". . . if the Mining Company has 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." Corollarily, in BIR Ruling No. DA-636-06 dated October 27, 2006, this Office likewise confirmed the opinion that Simean Conservation Breeding and Research Center creditable input taxes whose periods for refund have already prescribed, may be deductible as expense for income tax purposes. The above-cited rulings are justified in Revenue Memorandum Circular (RMC) No. 42-2003 dated July 15, 2003 which 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. 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) cHDaEI The position of this Office is not without authority, 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. 059-92 as cost which may be deducted from income for income tax purposes. In the same vein, the 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. SUCH BEING THE CASE, this Office holds that KLMAPI may claim as deduction its excess input VAT related to its zero-rated sales against its gross income for income tax purposes. The said deduction may only be availed of after the lapse of the period for which it is entitled to apply for a refund. 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. ICcDaA Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service