BIR Ruling [UN-268-95]

July 24, 1995 BIR RULING [UN-268-95] 1st Indorsement Returned to the Assistant Commissioner, Performance and Monitoring Service, Attn.: Chief, Regulations, Operations and Monitoring Division, the entire docket of Lepanto Consolidated Mining Company, BA-Lepanto Building, 8747 Paseo de Roxas, Makati, Metro Manila, involving tax-credit/refund claim in the amount of P42,740,589.45 covering unused input tax credits from February 1990 to January 1991. It appears that Lepanto Consolidated Mining Company (Lepanto) is a domestic corporation duly registered with the Board of Investments as a producer of mineral products; that it is engaged in mining production, sale and/or exportation of copper concentrates, including gold and silver as by-products; that for the period from February 1990 to January 1991, its total zero-rated sales representing its export sales is P1,445,136,438.00, while its taxable sales representing its domestic sales is P26,970,402.00 plus miscellaneous taxable sales of P926,556.66; that for the same period, it has generated input taxes from its local purchases and importations of parts and supplies aggregating P53,170,614.56 which amount, after audit, verification and disallowance made by the investigating internal revenue officers was reduced to P42,740,589.45; that the issuance of tax credit certificate/refund of said amount was recommended by then Value-Added Tax Division; that in the course of review by the Office of Deputy Commissioner Beethoven L. Rualo, the amount was reduced to P4,359,990.29 on the grounds that 1) the deferred input tax on the ending inventory for parts and supplies as of January, 1991 in the amount of P21,189,711.00 was disallowed; and 2) the deferred input tax in the ending inventory of parts and supplies in the preceding quarters in the amount of P17,190,888.16 was also disallowed for alleged lack of approval by the Commissioner of Internal Revenue. In view thereof, the entire docket was forwarded to this Office for resolution of the following questions: 1. In mixed transactions where a taxpayer is engaged in zero-rated, effectively zero-rated, exempt or taxable transaction, does the law allow deferment of input taxes allowable to ending inventories of parts and supplies and excluding it from the taxpayer's subsequent claim for tax credit/refund? 2. If it had indeed deferred the input tax in the above situation, does the law allow the taxpayer to add back the deferred input tax to its subsequent claim for tax credit/refund? 3. Given the situation wherein the taxpayer was allowed to defer its input tax in a given quarter, is he required by law to file in the subsequent quarters a separate claim for tax credit/refund for deferred input tax? Pursuant to Section 104(b) of the Tax Code, as amended, 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 sale by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes. Under this provision, input taxes generated in the purchase of supplies are creditable or refundable. Revenue Regulations No. 9-89 dated December 4, 1989 further amending Section 16(c) (5) of Revenue Regulations No. 5-87, clarified that if there are inventories on hand at the end of the quarter covered by the claim, the allocation of input tax shall be determined using the attribution formula in determining the input tax on taxable domestic sales, exempt sales, or zero-rated sales pursuant to Section 16(C) of said Regulations. Items included in the ending inventory of materials and supplies which are zero-rated under Revenue Regulations No. 2-88 or exempt under Section 103 of the Tax Code, as amended, or other special laws should be excluded from the inventory in computing the attributable input tax credits. This provision prescribes the deferment of input tax on ending inventories of supplies; thus, to answer question No. 1, in a mixed transaction where a taxpayer is engaged in zero-rated, effectively zero-rated, exempt or taxable sales, the law requires the deferment of the input tax; thus excluding it from the taxpayer's claim for tax credit/refund. To answer questions Nos. 2 & 3, since the regulations require that the input tax on the ending inventory of the spare parts and supplies shall be deferred until use thereof, the deferred input tax credits shall be automatically added back to the rest of the creditable input taxes in the succeeding quarters without need of securing prior approval from the Commissioner, or filing a separate application for tax credit/refund because the deferred input tax is already included in the original claim filed by the taxpayer pursuant to Section 106(c) of the Tax Code, as amended. It would be an undue diminution of the taxpayer's right to claim tax credit or refund of the input taxes earned from legitimate purchases to defer the grant until use of the spare parts or supplies while allowing the two-year statutes of limitations to run against the taxpayer. Moreover, the allegation that the deferment was not approved by the Commissioner is contradicted by the findings that indeed "the deferment of the input tax on ending inventory of parts and supplies amounting to P17,190,888.16 was done by Revenue Examiner Efren Borleo and Virginia Bancay and duly approved by then Commissioner Jose U. Ong. Based on the foregoing, the original recommendation to approve Lepanto's claim for tax credit in the amount of P42,740,589.45 covering the period from February, 1990 to January, 1991 may be given due course. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue