Excess Advance VAT Payments Applicable as Payment for Current Advance VAT through Tax Debit Memo System

December 22, 2005 BIR RULING NO. 022-05 R.A. 9337; RR 14-2005 000-00 All Asian Countertrade, Inc . Rm. 504, National Life Insurance Bldg. 6762 Ayala Avenue, Makati City Attention: Mr. Michael L. Escaler President Gentlemen : This refers to your letter dated August 1, 2005, requesting confirmation that your excess Advance VAT payment on refined sugar may be applied as payment for your current Advance VAT on your purchases of refined sugar and/or Advance VAT on the raw sugar milled into refined sugar, in compliance with BIR Revenue Regulations (Rev. Regs.) No. 7-89, as amended. Background ALL ASIAN COUNTERTRADE, INC. (AACI) is a trading company and a large taxpayer, principally dealing with raw and refined sugar, in the domestic and export market. In the course of its business, AACI has been critically accumulating advance VAT payments as follows: 1. Advance VAT on refined sugar purchased from sugar refineries; and 2. Advance VAT paid before the withdrawal of refined sugar milled from AACI's own raw sugar. Under the present regulations, AACI carries over these accumulated Advance VAT payments together with its excess Input VAT of previous quarters to arrive at and pay its current quarter's output VAT liabilities. However, due to the large volumes of both Advance VAT payments and excess input VAT, this procedure of carrying-over in its Quarterly VAT returns both payments to offset its current VAT output has hardly helped diminish the company's accumulating excess Advance VAT payments on refined sugar, mainly because the Advance VAT on refined sugar has been raised by more than one-half, or 54.54% i.e., from P55.00 per 50-kg (LKG) bag under Rev. Regs. No. 7-89 to P85.00 per LKG bag under Rev. Regs. No. 29-2002. CTIEac AACI has further represented that this new advance VAT rate is based on an assumed market price level of P850/LKG bag which, ironically , has become often times, higher than actual market prices particularly in recent years of declining prices due to smuggling. Further, the AACI alleged that while it supports the new Expanded VAT Law for the sake of our economy and our country, the 70% cap on the amount of Input VAT that can be credited against the Output VAT imposed under RA No. 9337, as implemented by Rev. Regs. No. 14-2005, would further aggravate the accumulation of its Advance VAT payments. Pertinent portion of Section 8 of RA No. 9337, thus reads as follows: "Sec. 8. Section 110 of the same Code, as amended, is hereby further amended to read as follows: "Sec. 110. Tax Credits . "(A) Creditable Input Tax . xxx xxx xxx "(B) Excess Output or Input Tax . If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: Provided, that the input tax inclusive of input VAT carried over from the previous quarter that may be credited in every quarters shall not exceed seventy percent (70%) of the output VAT . . ." [Emphasis supplied] Effectively, AACI's excess Advance VAT will further accumulate with no end in sight of being diminished, much less, depleted. AACI also alleged that with the 70% cap imposed under RA No. 9337, the continuous practice of tacking the excess Advance VAT with the Input VAT in offsetting its Output VAT to arrive at its VAT liability will surely cause it an unbearable burden on its operations in terms of availability of funds or liquidity, not to stress anymore the high cost of money. The taxpayer so believes that it is within the power of the Commissioner of Internal Revenue (CIR) to help solve its big problem as he has the power to prescribe the manner of payment of taxes as in Rev. Regs. No. 7-89 when he prescribed the payment of Advance VAT on refined sugar. Thus, the Commissioner of Internal Revenue has likewise the same power to reform the mode of payment of Advance VAT particularly when deliberated and passed upon by the VAT Committee. As further invoked by AACI, the power of the Commissioner to grant a particular mode of payment was seen in the BIR Ruling No. UN-228-95 dated June 22, 1995 granting the request of Social Security System to pay capital gains tax and other taxes, in the form of checks, as an exception to RR No. 14-93 which required payment of taxes through Manager's checks, Cashier's checks and other certified checks. IDCcEa Premised on the foregoing, AACI is therefore requesting that it be allowed to temporarily use its Excess Advance VAT payments on refined sugar as the effective mode of payment by which it may pay its current Advance VAT liabilities as it purchase refined sugar or cause their raw sugar to be milled into refined sugar, instead of the usual Manager's checks, Cashier's checks, and other certified checks and other acceptable modes of payment, until such time that its excess Advance VAT payment shall have been depleted. BIR Reply We reply as follows: Section 4.114-1 (B) (I) (1) (d) of Rev. Regs. No. 16-2005 re: Consolidated Value-Added Tax Regulations of 2005 implementing RA No. 9337, provides as follows: "SEC. 4.114-1. Filing of Return and Payment of VAT. (A) Filing of Return (B) Payment of VAT (1) Advance payment. The following are subject to advance payment of VAT: xxx xxx xxx (d) Proof of Advance Payment . The RDO concerned or the duly constituted unit in its place such as the Regional Task Force on Sugar, as the Regional Director may decide, shall issue a Certificate of Advance Payment of VAT. This certificate shall serve as the authority of the sugar mill/refinery to release the refined sugar described therein, and together with the payment form (BIR Form No. 0605 or its equivalent) and the BIR-prescribed deposit slip validated by the AAB, or the Revenue Official Receipt (ROR) issued by the RCO or the duly authorized City or Municipal Treasurer, as the case may be, shall serve as a proof of the payment for the advance VAT which can be credited against VAT liability/payable in VAT return/s to be filed." Impliedly, such Advance VAT payments are in the nature of credit account of the taxpayer. Procedurally, and for monitoring purposes, Advance VAT payments are being posted/recorded in the taxpayer's ledger maintained by the BIR (LTS, if the taxpayer is a large taxpayer). Thus, given the fact that AACI's excess Advance VAT payments were already collected by the government prior to the determination of taxpayer's current Advance VAT liability, AACI may be allowed to avail of the Tax Debit Memo (TDM) system by applying for a TDM with the Large Taxpayer Service (LTS), subject to the approval of the Commissioner of Internal Revenue. ASICDH Under the TDM system, herein taxpayer may charge the Advance VAT due on its purchases of refined sugar and/or the Advance VAT on the refined sugar milled from raw sugar against its unused or excess Advance VAT payments. The TDM when issued by the LTS is presumably a better and more reliable instrument compared to any Manager's check, Cashier's check, or Bank Debit Memo since the BIR can actively keep track of it. In view of the foregoing, this Office hereby sustains the propriety of AACI's request as being consistent with the present BIR TDM system. This serves as an authority for ALL ASIAN COUNTERTRADE, INC. to settle its Advance VAT liabilities on its purchases of refined sugar and/or Advance VAT liabilities on refined sugar milled from its own raw sugar, subject to the following procedures: 1) The issuance of a TDM to the taxpayer shall not be construed as a permission for the taxpayer to cause the release of its purchased refined sugar or own refined sugar milled from its own raw sugar, unless the TDM shall have been properly utilized together with BIR Form 0605 and electronically filed with the LTS, in accordance with the existing LTS and EFPS regulations, in compliance with RR No. 7-89; and 2) This Ruling shall immediately cease to be effective when the accumulated excess advance VAT of the taxpayer, as managed, recorded and kept track by the LTS as of the date of the release of this ruling, shall have been fully depleted. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue