BIR Ruling [UN-369-95]

October 11, 1995 BIR RULING [UN-369-95] MEMORANDUM FOR The Commissioner This refers to the claim of CHUNJI INTERNATIONAL PHILS., INC. with principal office at the Export Processing Zone in Rosario, Cavite, for refund P1,501,202.51 as alleged VAT input taxes generated from its purchases of goods and services from VAT-registered persons and attributable to its export sales from 1990 to 1992. The claim for refund was denied per letter dated August 3, 1993 by then Special Operations Service Chief Bernardo A. Frianeza on the ground that the input tax arising from the said taxpayer's purchases of goods and services were charged or debited to accounts under Costs of Goods Sold, Operating Expenses or Property and Equipment, as the case may be, instead of the Input Tax Credit Asset Account, or other accounts with similar import, as prescribed by regulations. The effect of this departure was laid down in VAT Ruling No. 43-92 wherein it was held that "A taxpayer who adopts the accounting procedure wherein input taxes are considered expenses can no longer claim for a refund." The basis of the denial lies therefore in the failure of the taxpayer to strictly adhere to the VAT bookkeeping regulations by charging such generated input taxes to accounts (costs/expenses) which operates as a matter of course in the reduction of its net income for income tax purposes, instead of setting up a separate input tax asset account as required. This mode of recording was precisely designed not only to ensure effective monitoring and verification of such input taxes but also and more importantly to prevent the grant of refunds on top of reduced income tax collection, in cases apparently exemplified by this instant claim for tax credit/refund. In its request for reconsideration of the decision denying its claim for refund, the subject taxpayer, when required to submit proof that it is a registered EPZA enterprise, submitted a certification dated July 5, 1995 from the Cavite Export Processing Zone that it is a zone registered export enterprise which started its commercial operations on August 1, 1991 at the Philippine Economic Zone Authority, and as such is entitled to a 4-year income tax holiday under the incentives granted to export enterprises by Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987. It is the subject taxpayer's contention that the manner of entering the input taxes on its purchases of goods and services attributable to its export sales of manufactured products as part of operating expenses in its books of account did not have any effect on income tax, since it was enjoying income tax holiday as an exporter under EO 226. After a careful review of the facts of the case, we find the taxpayer's request for reconsideration PARTIALLY meritorious. Considering that the subject taxpayer started enjoying income tax holiday on August 1, 1991 as a registered export enterprise, the VAT input taxes paid on its purchases recorded in its books of account as operating expenses beginning that date should be considered as validly generated VAT input taxes. Accordingly, if as represented and on the basis of supporting documents the amount sought to be credited can be proven as validly generated VAT input taxes, such claim should be processed, BUT ONLY FOR SUCH PURCHASES MADE BEGINNING August 1, 1991. However, for deviating from the prescribed procedures in recording VAT input taxes paid, the taxpayer should be held liable for such violation of existing VAT regulations under the provision of Section 274 of the Tax Code, as amended. It is therefore respectfully recommended that the docket bearing on the claim for refund/tax credit of the subject taxpayer be remanded to Revenue District Office No. 54, Trece Martirez, Cavite for processing of the claim for tax credit but ONLY on all its purchases with validly generated VAT input taxes made BEGINNING August 1, 1991. Respectfully submitted: MILAGROS V. REGALADO Chief, Law Division I CONCUR: ALICIA P. CLEMENO Assistant Commissioner Legal Service RECOMMENDATION APPROVED: LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue