BIR Ruling No. 123-13

March 25, 2013 BIR RULING NO. 123-13 City of Iloilo, et al. vs. Smart Communications, Inc., G.R. No. 167260; CIR vs. Isabela Cultural Corporation, G.R. No. 172231 Cekas Development Corporation Elipe Building, Kauswagan Cagayan de Oro City Attention: Rafael R. Magsaysay Chief Executive Officer Gentlemen : This refers to your letter dated 15 October 2012 requesting on behalf of Cekas Development Corporation ("Cekas") confirmation of your opinion that the accumulated and unapplied input value-added tax (VAT) arising from its purchase of goods and services after the expiration of the two (2) year prescriptive period may be expensed outright, and that the basis of computing the expanded withholding tax (EWT) on such purchase of goods and services is the total amount appearing in the invoice/official receipt net of VAT. CDAcIT It is represented that Cekas , with Taxpayer's Identification No. 006-873-841-000, is registered with the Securities and Exchange Commission under Registration No. CS200714268 on 10 September 2007; that its primary purpose is to carry on the business of exploration, development, utilization, exploration, quarrying and processing of any and all mineral resources as well as of operating mines, and of prospecting, milling, concentrating, converting, melting, treating, refining, preparing for market manufacturing, buying, selling, exchanging and otherwise producing and dealing in all kinds of ores, metals and minerals, hydrocarbons, acids and chemicals, and in the products and by-products of every kind and description; that considering the nature of its business, Cekas often enters into VAT zero-rated transactions in the ordinary course of its business that Cekas obtained passed-on input VAT from its purchases that can be used to offset against its output VAT liabilities; that Cekas is a VAT-registered taxpayer and because its transactions do not result to any output VAT liability, its input VAT from its purchases has remained unapplied on its books and has accumulated over the years; that as of 31 December 2011, the unapplied input tax (asset account) has already amounted to P1,961,767.00; that Cekas intended to avail of the refund for the said amount but was not able to do so due to the prescription of the period to file the same. In reply, please be informed that Section 110 (B), in relation to Section 112 (A) of the 1997 Tax Code, as amended, provides for the remedy of a taxpayer to recover the unapplied accumulated input VAT arising from zero-rated transactions, viz. : "110. Tax Credits. 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. Any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112 ." (underscoring supplied) xxx xxx xxx In addition thereto, Section 112 (A) of the same Code states: "(A) Zero-rated or Effectively Zero-rated Sales. Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may , within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax : . . ." (Underscoring supplied) It is noted, based on the above-cited provisions, that unutilized creditable input taxes attributable to zero-rated sales can only be recovered through the application for refund or tax credit. Nowhere in the Tax Code can we find a specific provision expressly providing for another mode of recovering unapplied input taxes, particularly your proposition that unapplied input taxes may be treated outright as deductible expense for income tax purposes. Thus, your proposition, that accumulated and unapplied input value-added tax (VAT) arising from Cekas' purchase of goods and services after the expiration of the two (2) year prescriptive period may be expensed outright, is hereby denied for lack of legal basis. It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. The basic principle in the construction of laws granting tax exemptions has been very stable. He who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be beyond doubt or mistake ( City of Iloilo, et al. vs. Smart Communications, Inc., G.R. No. 167260 , dated February 27, 2009). And since a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be strictly construed ( CIR vs. Isabela Cultural Corporation, G.R. No. 172231 dated February 12, 2007). aIAHcE As regards the request that, in the purchase of goods and services, the amount to be used as basis for expanded withholding tax shall be the purchase amount net of VAT, the same is hereby granted. Revenue Memorandum Circular No. 72-04 clarifies that the basis of CWT to a VAT registered supplier of goods and services shall be the gross amount paid exclusive or net of VAT. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue