VAT Ruling No. 019-01

May 7, 2001 VAT RULING NO. 019-01 Sec. 110 (B) VAT Ruling No. 104-99 Chato Eleazar & Liboro Law Office 8th Floor Strata 2000, Emerald Avenue Ortigas Center, Pasig City Attention: Atty . Wilfredo M . Chato Gentlemen : This refers to your letter dated 13 December 2000 requesting for a confirmation of your opinion that the input taxes of your above mentioned client, which it erroneously apportioned and allocated to its VAT-exempt sales during the period from 1995 to 1998, may still be restored as input tax credit. IcaHCS It is represented that your client, GENERAL MILLING CORPORATION, is engaged principally in the manufacture of "soybean oil" which is extracted from soybeans and processed into refined, bleached and deodorized soybean oil (RBDSO); that the extraction process likewise yields waste materials and by-products called "soybean meal" and "crude soybean oil" which are sold and disposed as animal feed ingredient; that, its sale of RBDSO is subject to 10% VAT; that upon your client's inquiry in its covering letter dated 29 September 1999, it has been ruled in VAT RULING No. 104-99, dated 06 October 1999, that (a) "soybean meal" and "crude soybean oil" are merely the wastes or by-products in the manufacture of its principal product (i.e., RBDSO), which are disposed as livestock and poultry feeds, hence, the sale thereof is VAT-exempt; and (b) being merely such wastes or by-products, that no input tax may be attributed and apportioned thereto, pursuant to the provision of Section 110 (A) (3), NIRC of 1997, considering that all your client's input taxes can be directly attributed to the manufacture of its principal product; that during the years from 1995 to 1998, your client erroneously apportioned its input taxes on its VAT-exempt sales of the aforesaid wastes/by-products, hence, your herein request for a confirmation that your client is authorized, under the law, to rectify the said error so that the said input taxes which were erroneously apportioned to its VAT-exempt sales of wastes/by-products may be restored as input taxes, pursuant to the provisions of Section 110(B) of the said Code. In reply, please be informed that Section 110 (B) of the said Code provides: "(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 . . . . " The said law is implemented by Sec. 4.104-4, Revenue Regulations No. 7-95, as follows: " 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 . This is termed as the VAT payable . If however, the input tax exceeds the output tax, the excess shall be carried over to the succeeding months or quarters . " However, Section 12 of Revenue Regulations No. 5-87 provides that whenever input taxes have been apportioned and allocated to VAT-exempt sales, such input taxes shall be removed from the taxpayer's book of accounts ( i.e. , under input tax account) and, instead, that the same should be charged to operations ( i.e. , debited to expense or cost and deducted from gross income, as follows: "The input taxes allocated to non-VAT taxable operations should be charged to operations under the following entry: "Dr. Repairs P2,000 Supplies 400 "Cr. Input Taxes P2,400 "The above adjustment is necessary if the total input taxes of . . . were previously debited to input taxes. " It follows, your client had over claimed its deductions from gross income during the years from 1995 to 1998 when it erroneously apportioned and allocated some of its input taxes to its aforementioned VAT-exempt sales, thereby also possibly resulting to understatement of its yearly net taxable income to the extent of the aforesaid input taxes. In view of the foregoing, please be informed, as follows: 1. Your opinion that your aforesaid client is authorized by law to carry over to the succeeding taxable quarter or quarters the aforementioned input taxes which were erroneously apportioned and allocated to its VAT-exempt sales, is hereby confirmed in the light of the provisions of Section 110(B), NIRC of 1997, as implemented by Section 4.104-4 of Revenue Regulations No. 7-95. It may be stated that this has been the rule since the inception of the old VAT law, as amended by E.O. No. 273 (See also VAT RULING No. 066-89, March 17, 1989). Accordingly, your client is hereby authorized to make the corresponding correcting entry in its book of accounts in order to restore in its input tax account the aforementioned input taxes which were erroneously removed from its input tax account and, instead, have been erroneously charged to operations, hence, had also been erroneously deducted from gross income. 2. However, since the same amount/s have been erroneously deducted from your client's gross income in the taxable years 1995 to 1998, any amount of input tax so determined and to be restored or debited to your client's input tax account should also be recognized as taxable income in the year such correcting entry is done. This is in accordance with the doctrine of "Tax Benefit Rule" which is now institutionalized in the NIRC of 1997, as follows: " Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction ." (Sec. 34 (C)(1), NIRC of 1997). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it is disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue