No more “VAT nga ba ang hirap?” with refined VAT refund guidelines

As featured on PhilStar: No more ‘VAT nga ba ang hirap?’

In an article published by the International Monetary Fund (IMF) in 2021 entitled How To Manage Value-Added Tax Refunds, value-added tax (VAT) is described as “one of the most important taxes in the world, both in terms of its global adoption and revenue-generating potential” and that it is an “attractive tax” because of its potential for generating significant government revenue and intrinsic self-enforcement capacity. Nevertheless, the article highlighted that refunding excess input credits is challenging for many tax administrations and can easily undermine VAT operations.

The same article explained that while recovery of excess input VAT credits is critical to a well-functioning VAT system, the reality is that access to VAT refunds is often limited. Meeting the refund requirements to claim VAT refunds is considered an uphill climb, and the associated tax administration procedures are complex and burdensome, discouraging taxpayers from claiming legitimate VAT refunds. And when taxpayers claim such refunds, payments are either delayed or not received. These problems, according to the article, are not the result of the VAT’s design but stem from inadequate legal and institutional frameworks and weak administrative capacity to identify VAT refund fraud and implement preventive measures.

In the Philippines, VAT refund provisions under the Tax Code provide that VAT-registered entities whose sales are zero-rated or effectively zero-rated may apply for the refund of creditable input tax due or paid attributable to such zero-rated sales. For instance, if a taxpayer is engaged in sale transactions subject to 0% VAT but is paying the 12% VAT on its production inputs, the taxpayer will have excess input VAT credit that may be the subject of a claim for refund.

However, as pointed out by the IMF article, Philippine taxpayers often feel discouraged in filing refund claims as they expect stringent application procedures.

In response, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 71-2023 and Revenue Memorandum Order (RMO) No. 23-2023, which introduced significant changes in the documentary requirements and procedures for VAT refund claim applications laid down in RMO No. 47-2020. The refined VAT refund guidelines apply to claims filed starting 01 July 2023.

The new checklist contains a maximum of twenty-two (22) documentary requirements compared to thirty (30) from the previous checklist. Note that some of the requirements in the checklist might not be applicable depending, among others, on the nature of the applicant’s business.

Under the new checklist, the BIR has dispensed with submitting the Annual Income Tax Return, VAT Returns, Withholding VAT Returns, etc. Aside from that, there is no longer a need to submit a USB flash drive or CD containing the scanned copies of the taxpayer-claimant’s sales and purchase documents. The original copies would already suffice for the application.

Claims for a VAT refund of direct exporters, regardless of the percentage of export sales to total sales and whose claims are anchored under Section 112 (A) of the Tax Code, except for claims with a mix of VAT zero-rated sales emanating from sales of power or fuel from renewable energy sources, shall still be filed with the VAT Credit Audit Division (VCAD) of the BIR National Office.

However, claims of other taxpayers like indirect exporters or those engaged in other VAT zero-rated activities, other than direct exports, shall now be filed with the Large Taxpayers VAT Audit Unit (LTVAU) of the Large Taxpayers Service (LTS) for large taxpayers or the VAT Audit Section (VATAS) in the Regional Assessment Division or respective Revenue District Office (RDO) where the taxpayer is registered, if without VATAS, for non-large taxpayers.

For VAT refund applications filed beyond the two-year prescriptive period, the claim shall still be accepted. However, the processing office shall recommend outright denial of the claim for the claimant to avail of judicial remedy.

Further, the BIR will now accept VAT refund applications of taxpayer-claimants with existing tax delinquencies reflected in the Delinquency Verification Certificate (DVC). However, the amount of liabilities will be offset against the amount of refund approved, either fully or partially.

The efforts of the BIR in adhering to the Ease of Doing Business Law through these refined guidelines for VAT refund applications are indeed commendable. Taxpayers should keep in mind that these requirements and procedures are but a means for the tax authorities to safeguard public funds by ensuring that claims filed are legitimate.