VAT Ruling No. 022-04

September 13, 2004 VAT RULING NO. 022-04 Sections 57, 58, 75, 76; 110, 114; 204 000-00 Philippine Long Distance Telephone Company 15/F Ramon Cojuangco Building 1226 Makati Avenue, Makati City 1200 Metro Manila Gentlemen : This refers to your letter to the VAT Review Committee dated March 5, 2003 that was filed with the Law Division on March 14, 2003, requesting confirmation of your opinion that your creditable withholding value-added tax (VAT) and expanded withholding tax (EWT), represented by Certificates of Creditable Tax Withheld at Source (BIR Form No. 2307) that are issued by withholding agents only after the filing of the respective VAT and EWT Returns, may be applied as credits, nonetheless, in subsequent returns that your company may file. It is represented that the Philippine Long Distance Telephone Company (PLDT for brevity) fails to receive, at the required time, the Certificates of Creditable Tax Withheld at Source (BIR Form No. 2307) from its withholding agents, including more than 800 government agencies nationwide. According to you, "[u]sually PLDT receives such Certificates only when said withholding agents receives ( sic ) a notice of disconnection for failure to pay the remaining balance which actually represents the amount of VAT or EWT previously withheld." Thus, for the year 2002, PLDT failed to utilize at the appropriate time such withheld taxes, either as input taxes or withholding tax credits, because the issuance of the BIR Form No. 2307 were made by the withholding agents only after or subsequent to the filing dates of the required returns. In support of your opinion, you have submitted the following arguments: 1. The Tax Code does not provide a prescriptive period within which excess input VAT can be carried-over to the succeeding quarter or quarters, and therefore, the same may be carried-forward continuously. Section 110(B) of the Tax Code enables VAT-registered sellers to carry-over to the succeeding quarter or quarters the excess input VAT over the output VAT of the present quarters. THCASc 2. The excess income tax paid by the taxpayer prospectively may be carried forward indefinitely, pursuant to Section 76 of the Tax Code. Excess income taxes paid as shown in the taxpayers' final adjustment returns can be credited against the income tax liabilities of the succeeding taxable years. 3. Consistent with the tenets of justice and fairness, sellers-payees should be allowed to apply as tax credits, the taxes withheld and remitted to the BIR by the customers-payors, and should not be prejudiced, therefore, by the tardiness of the payors in submitting the BIR Forms No. 2317. 4. It is not administratively feasible for PLDT to amend previously filed returns to include creditable taxes covered by belatedly issued certificates of withheld taxes. We reply. The request of the taxpayer is denied according to the following discussion. The withholding of taxes at source is a collection system that has been adopted in this jurisdiction in order to ensure that income and transactions during a taxable period or year are properly subjected to taxes. Hence, persons, whether juridical or natural, are mandated by law to act as withholding agents in the collection and remittance of said taxes to government at the designated time and place. Similarly, taxpayers have the legal obligation to pay the correct amount of taxes on their income and transactions during a taxable period or year, according to the provisions of law, rules and regulations. The withholding tax system was devised for two main reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; and second, to ensure the collection of the income tax which could otherwise be lost or substantially reduced through failure to file the corresponding returns. To these, a third reason may be added: to improve the government's cash flow. ( Citibank vs. CA, et al ., GR 107434, October 10, 1997) Under this system, income is viewed as a flow and is measured over a period of time known as an "accounting period." An accounting period covers twelve months, subdivided into four equal segments known as "quarters." Income realized within the taxpayer's annual accounting period (fiscal or calendar year) becomes the basis for the computation of the gross income and the tax liability. ( ibid .) In the case of income taxes, Section 57(B) of the Tax Code legally authorizes the BIR to require the withholding of a tax on the items of income payable to persons residing in the Philippines by payor-persons, which shall be credited against the income tax liability of the taxpayer for the taxable year . Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to designated authorized persons. The return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made. In this regard, the Commissioner, with the approval of the Secretary of Finance, may even require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government. (Section 58(A), Tax Code) During any taxable year, a corporation shall file a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three quarters of the taxable year, whether calendar or fiscal year. (Section 75, Tax Code) Such corporation that is liable to pay income tax under Section 27 of the Code shall then file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. Section 76 of the Tax Code further provides that, and we quote " If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either : (A) Pay the balance of tax still due ; or (B) Carry-over the excess credit ; or (C) Be credited or refunded with the excess amount paid, as the case may be . In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years . Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor ." (italics supplied) The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three quarters of the taxable year, and the final adjustment return shall be filed on or before the fifteenth day of April, or on or before the fifteenth day of the fourth month following the close of the fiscal year, as the case may be. The income tax due on the corporate quarterly returns and the final adjustment income tax returns shall be paid at the time the declaration or return is filed in a manner prescribed by the Commissioner. (Section 77, Tax Code) The same principle for the withholding system on income taxes must be applied for VAT purposes. An accounting period covers twelve months, subdivided into four equal segments known as "quarters." The gross receipts realized within the taxpayer's annual accounting period (fiscal or calendar year) becomes the basis for the computation of the net output tax liability of the taxpayer. For VAT in particular, every person liable to pay the value-added tax imposed shall generally file a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable quarter prescribed for each taxpayer; however, the VAT-registered person shall pay the value-added tax on a monthly basis. Only one consolidated return shall be filed by the taxpayer for his principal place of business or head office and all branches. (Section 114, Tax Code) In the case of the Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled-corporations (GOCCs), they are, before making payment on account of each purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, required to deduct and withhold the value-added tax due at the general rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by contractors on every sale or installment payment which shall be creditable against the value-added tax liability of the seller or contractor, or eight-and-a-half percent (8.5%) in the case of public works contractors although this latter case will not apply to PLDT since it is not a public works contractor. For this purpose, the payor or person in control of the payment shall be considered as the withholding agent, and the value-added tax withheld shall be remitted within ten (10) days following the end of the month the withholding was made. (Section 114(C), Tax Code) In relation to Section 114 of the Tax Code, the VAT-registered taxpayer shall determine and pay, at the end of each taxable quarter, the excess output taxes that it may have according to Section 110(B) of the Tax Code. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters. The relevant portions of Section 114 are quoted below: "(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. (C) Determination of Creditable Input Tax . The sum of the excess input tax carried over from the preceding month or quarter and the input tax creditable to a VAT-registered person during the taxable month or quarter shall be reduced by the amount of claim for refund or tax credit for value-added tax and other adjustments, such as purchase returns or allowances and input tax attributable to exempt sale. The claim for tax credit referred to in the foregoing paragraph shall include not only those filed with the Bureau of Internal Revenue but also those filed with other government agencies, such as the Board of Investments and the Bureau of Customs." TDAHCS The Tax Code provides for a two-year prescriptive period for the claim of refunds or credits of taxes. In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes for zero-rated or effectively zero-rated transactions, as well as capital goods, within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) of Section 112 of the Tax Code. In this regard, the Tax Code provides a two-year prescription period within which such applications shall be made. (Section 112, Tax Code) Outside of these transactions, the Tax Code provides a general two-year prescriptive period for the taxpayer to file a written claim for the refund or credit of taxes erroneously or illegally received, as well as penalties imposed by the BIR without authority. A return that shows an overpayment shall be considered as a written claim for credit or refund. (Section 204, Tax Code) As a means to ensure that taxpayers are correctly filing the amount of taxes due from them, the Bureau of Internal Revenue is authorized to assess a taxpayer for deficiency taxes, within three (3) years, in general, from the last day for the filing of or from the date of the filing of the return according to the provisions of Section 203 of the Tax Code. Within this period of time, also, the taxpayer is required to preserve its books of accounts and other accounting records, the efficient management of which is best left for the taxpayer and its accounting, credit or finance department, at the very least, to undertake. To guide the taxpayers, however, the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, has issued and duly promulgated Revenue Regulations pursuant to Section 244 and 245 of the Tax Code, including Section 245(i) thereof, in order to implement the above-stated and cited tax provisions. Good faith on the part of the taxpayer, in respect of its failure to timely receive its certificates of creditable withholding taxes from its income-payors and customers or clients who are designated withholding agents of government, is not an acceptable argument and is definitely not sufficient to justify its request. Taxes are paramount, and their efficient and timely collection, as much as their proper monitoring, are overriding considerations in the present case. The law, rules and regulations on the matter of withholding taxes and the obligations of the withholding agents are clearly set out and are already beyond quibbling at this time. Based on the foregoing, therefore, this Office rules as follows: 1. There cannot be a carry-over of withheld taxes that have not obviously been credited as yet in any given taxable year. 2. Withheld taxes, whether these are VAT or income taxes, can only be deducted from items of income or credited against output taxes, for the given and corresponding taxable period or year. 3. The taxpayer must file a written claim for refund or credit of taxes remitted by its withholding tax agents within the two-year prescription period provided in Section 204 of the Tax Code if it does not, in the alternative, amend its returns to reflect belatedly received certificates of creditable withheld taxes on unreported items of income, or of creditable input taxes that have not been deducted from output taxes in the case of VAT, during the taxable period or year involved, whichever case may be applicable. Please be guided accordingly. DaAIHC Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue