VAT Ruling No. 040-99

April 8, 1999 VAT RULING NO. 040-99 104 000-00 040-99 Richards Hogg International (Phils . ), Inc . Average Adjusters & Marine Claims Consultants Suite 303 Marbella II Bldg. 2071 Roxas Boulevard, Malate, Manila Attention: Mr . Henson S . Lim Director Gentlemen : This refers to your letter dated March 21, 1996 and a follow-up letter dated January 2, 1997 stating that you are a firm of licensed Average Adjusters whose main occupation is to determine the claim payable to a shipowner under his insurance policy for physical loss or damage to his vessel; that prior to January 1996, inter-island shipping companies, which are considered "common carriers" are VAT exempt; that whenever the insured vessel sustained damage, the shipowner would normally have his vessel repaired by a reputable contractor who would then bill the shipowner for the repair with the value-added tax included thereon; that once the shipowner has paid the bill, he would seek reimbursement from the insurance company according to the Statement of Claims that your company prepares; that prior to the effectivity of Expanded Value-Added Tax Law, it is your firm's practice to allow recovery of the cost of repair with VAT included since the shipowner did not recover the VAT from his clients; that the common carrier is for the carriage of goods only; and that you now request for a ruling on the following, viz: "1. Is the shipowner allowed to credit the VAT included in his damage repair bill from his output VAT although he may seek reimbursement from the insurance company for the repair cost itself? LibLex "For example in a damage repair of P100,000 00 the shipowner is billed and pays P110,000.00. The shipowner could use the VAT of P10,000.00 to set-off his greater output VAT of say P50,000.00. In this case, the shipowner only remits to the government P40,000.00. "2. If a shipowner only owns one (1) vessel, it can be anticipated that should the vessel require extensive damage repair, during which time the vessel is unable to trade, it is possible that the shipowner has no VAT output for that month/quarter. Can the shipowner in this situation seek recovery of VAT from the government and if so, what is the procedure in obtaining the refund?" In reply, please be informed as follows: 1. Pursuant to Sections 4.104-2 and 4.104-5 of Revenue Regulations No. 7-95, also known as the Consolidated Value-Added Tax Regulations dated December 9, 1995, which implemented the provisions of E.O. No. 273, as amended by R.A. No. 7716 (now Section 110 of the Tax Code of 1997), viz: "SEC. 4.104-2. Persons who can avail of the input tax credit . The input tax credit on purchase of goods or properties or services shall be creditable: xxx xxx xxx (c) To the purchaser of services or the lessee or licensee upon payment of the compensation, rental, royalty or fee. "SEC. 4.104-4. Substantiation of claims for input tax credit . (a) Input taxes shall be allowed only if a domestic purchase of goods, properties or services is made in the course of trade or business. The input tax should be supported by an invoice or receipt showing the information as required under Section 108(a) and 238 of the Tax Code, as amended. . . ." From the aforequoted provisions, the value-added tax imposed on the repair of the vessel as charged by the contractor, and paid by the shipowner in the first instance, but subsequently billed to the insurance company for reimbursement is not an expense per se by the shipowner in the course of his trade or business since the same is duly recoverable under the policy. The shipowner, in this instance, merely advanced the cost of repair which is duly attributable to the insurance company. Thus, the cost of repair with the value-added tax included thereon cannot be attributed to the shipowner as expense made in the course of his trade or business if the same is covered by an insurance. But rather, if he had advanced the payment, as in this case, the subsequent reimbursement is deemed to be a payment of claims he has against the insurance company. Therefore, no VAT input can be claimed by the shipowner as tax credit for the advance payment he made for the repair of the vessel covered by an insurance and recoverable thereon. However, since in reality, it is the insurance company who actually paid for the expense including the VAT, the input tax may be recognized by the insurance company upon showing that the same was paid for by it, irrespective of the fact that the invoice or receipt may be in the name of the insured. It bears stressing that insurance business, other than life insurance, is now subject to VAT pursuant to Section 108 as amended by RA 7716 and as renumbered by RA 8424. 2. The shipowner who owns only one (1) ship which had undergone extensive repair for a given period has no VAT output during such period since it does not have income which can be attributed to its operations. Thus, if the VAT input exceeds that of the VAT output thereby resulting in a VAT credit, such creditable input VAT excess shall be carried over to the succeeding months/quarters until the same has been fully utilized. However, the law provides for cases wherein refund may be an option, as follows: a) Input tax attributable to zero-rated or effectively zero-rated sales except transitional input tax, to the extent that such input tax has not been applied against output tax; LexLib b) Input tax paid on capital goods imported or locally purchased, to the extent that such input tax has not been applied against output tax. (Section 112, Tax Code of 1997); and c) Erroneous payment. (Section 204, ibid.) Since the transaction does not fall under any of the above circumstance, it follows that the refund of the input tax cannot be had in the situation contemplated above. cdll Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue