When Zero-rated Seller of Goods or Services is Entitled to a Refund or Tax Credit of the Input Taxes on Purchases of Goods and Services

November 16, 1994 BIR RULING NO. 155-94 100 (a) (1) 000-00 155-94 Sycip Gorres Velayo & Co. 6760 Ayala Avenue, Makati Metro Manila Attention: Atty . M . F . A . Balili Tax Division Gentlemen : This refers to your letters dated February 2 and March 21, 1994 stating that your client, NEC TECHNOLOGIES PHILIPPINES, INC. (NTPI) was registered with the Export Processing Zone Authority (EPZA) on August 15, 1989 and is engaged in the manufacture and sale of transmission and telecommunications equipment, exporting 100% of its total production; that as an EPZA-registered enterprise, it is entitled to the income tax holiday incentive; that NTPI was also registered with the BIR for value-added tax (VAT) as exporter, and is therefore entitled to the 0% output VAT rate on its sales and is under the law entitled to file a claim for refund or credit for the 10% input VAT paid on its purchases of goods and services from VAT-registered suppliers; that after having been registered for the VAT and during the construction of its manufacturing plant, it paid a 10% passed-on VAT on its purchases of goods and services from VAT-registered suppliers, duly supported with VAT invoices and receipts of these suppliers; that for financial accounting purposes, it capitalized the 10% passed-on VAT on these purchases of goods and services and depreciated the same as part of the "Property, Plant and Equipment" account; that in your letter dated March 21, 1994, you informed this Office that NTPI has already changed its method of recording and accounting for its VAT input taxes; that it has already removed the VAT input taxes from its property, plant and equipment account and is already reflecting the VAT input taxes as a separate asset item on its books of accounts as reflected in NTPI's audited financial statements for the years ended March 31, 1993 and 1992; that likewise in your letter dated April 13, 1994 you alleged that even if NTPI, previously capitalized and depreciated its VAT input taxes as part of its "Property, Plant and Equipment Account" it did not claim any depreciation expense or deduction for the capitalized VAT input taxes for income tax purposes because it is enjoying an income tax holiday incentive; and that since NTPI has already stopped capitalizing and depreciating its VAT input taxes for financial accounting purposes, no double tax benefit will result even if its income tax holiday will already expire in 1994 and the claim for refund is granted. cdtech Based on the foregoing representations, you now request for confirmation of your opinion that 1. NTPI is entitled to the refund or credit of its VAT input taxes, even if it capitalized and depreciated the same as part of its "Property, Plant and Equipment" account for financial accounting purposes, because being exempt from income tax under its income tax holiday incentive as an EPZA-registered enterprise, it did not derive any tax benefit from such depreciation charges; 2. Assuming for the sake of argument that NTPI did not comply with the accounting procedures prescribed in Revenue Regulations No. 5-87 in recording the purchases and the VAT input taxes thereon, said non-compliance is not fatal to its right to claim a refund or credit for its VAT input taxes, because the accounting procedures prescribed in the Regulations are merely directory, and not mandatory; 3. Since NTPI has no output VAT liabilities, it follows that it is entitled by law to claim a refund or credit for its VAT input taxes. In reply thereto, please be informed as follows: (1) Pursuant to Section 100(a)(1) of the Tax Code, as amended, export sales by VAT registered persons shall be subject to 0%. Thus, the zero-rated seller of goods or services is entitled to a refund or tax credit of the input taxes on its purchases of goods and services to the extent that such taxes have not been applied against output taxes. Your opinion that NTPI is entitled to the refund or credit of its VAT input taxes, even if it capitalized and depreciated the same as part of the "Property, Plant and Equipment" account for financial accounting purposes is hereby confirmed. NTPI is exempt from income tax under its income tax holiday incentive as an EPZA-registered enterprise. It did not derive any tax benefit from such depreciation charges. Actually, while it previously capitalized and depreciated its VAT input taxes as part of its "Property, Plant and Equipment" account it did not claim any depreciation expense or deduction for the capitalized VAT input taxes for income tax purposes because it is enjoying an income tax holiday incentive. Moreover, NTPI has already changed its method of recording and accounting for its VAT input taxes. It has already removed that VAT input taxes from its property, plant and equipment account and is already reflecting the VAT input taxes as a separate asset item on its books of account as reflected in NTPI's audited financial statements for the years ended March 31, 1993 and 1992. NTPI has already stopped capitalizing and depreciating its VAT input taxes for financial accounting purposes, thus no double tax benefit will result even if its income tax holiday will already expire in 1994 and the claim for refund is granted. (2) That even if NTPI did not comply with the accounting procedures prescribed by then Revenue Regulations No. 5-87 in recording its purchases and VAT input taxes thereon, nevertheless the same will not affect its right to claim a refund or credit for its VAT input taxes because the accounting procedures prescribed in the said Regulations are merely directory intended for the immediate identification of the VAT element from sales or receipts for each transaction. (VAT Ruling No. 116-92 dated December 18, 1992) (3) Your opinion that since NTPI has no output VAT liabilities, it follows that it is entitled by law to claim a refund or credit for its VAT input taxes is hereby confirmed. (VAT Ruling No. 116-92 dated December 18, 1992) cdti Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue