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As featured on PhilStar:  Overcoming noncompliance

If given the opportunity to overcome setbacks, would you seize it? The decision to embrace a second chance varies among individuals. It is influenced by factors such as the nature and severity of the mistakes, their impact on others and the individual’s readiness and willingness to address and rectify the errors. This concept extends beyond personal circumstances and can also manifest in legal proceedings, as demonstrated in a Court of Tax Appeals (CTA) case involving a deficiency value-added tax (VAT) assessment in 2017 (the 2017 CTA Case).

In the case, the petitioner sought judicial recourse from the CTA concerning the Commissioner of Internal Revenue’s (CIR) disallowance of its creditable input taxes against its output taxes. This disallowance resulted from noncompliance with the invoicing requirements under the Tax Code, as amended, specifically, the absence of separate billing for VAT and incomplete information of the petitioner-taxpayer, such as taxpayer identification number (TIN) and/or address, in the VAT official receipts (ORs) and/or sales invoices (SIs).

The petitioner-taxpayer asserted that it was not liable for the deficiency VAT assessment, emphasizing that its claimed input VAT was duly substantiated and established. To support these claims, the petitioner took the following initiatives while the BIR’s tax audit was ongoing:

  1. Requested for rectified VAT ORs and SIs with countersignatures matching those of the authorized signatories’ signature appearing on the documents; and
  2. For the rectified VAT ORs and SIs with countersignatures different from the original authorized representatives' signatures, the petitioner-taxpayer sought a notarized certification confirming the following:

a.     Specific OR and/or SI number issued by the supplier to the petitioner-taxpayer, with the amount declared therein and VAT amount separately shown;

b.     Name of the authorized representative who countersigned the corrections; and

c.      Attestation that the VAT arising from the listed transactions was paid and declared in the VAT returns and are reflected in the Summary List of Sales attached to the supplier’s VAT returns.

Despite these efforts, the CIR deemed the supporting certifications invalid citing their belated execution by the supplier and tardy procurement by the petitioner-taxpayer. While the CIR sustained its stance, the Court, upon meticulous examination, ruled in favor of the petitioner-taxpayer. The Court acknowledged the rectified ORs and SIs with countersignatures and notarized certifications issued by suppliers, leading to a reduction in the deficiency VAT assessment.

In view of the above decision, a crucial question comes to mind on what led the Court to decide that these documents are valid supports for the petitioner-taxpayer’s claim for input VAT. Does this imply that the rectification process and supporting certifications negate the noncompliance and, consequently, decrease deficiency VAT assessment?

To answer these questions, two cases below were considered:

Taxpayers have the right to request for compliant ORs and SIs

In CTA En Banc cases, the Court affirmed the taxpayer's entitlement to request its supplier to issue a compliant receipt or invoice, incorporating the necessary information as mandated by the Tax Code, as amended. However, along with this right, the taxpayer bears the responsibility to verify whether the insertions or alterations have been duly validated or countersigned by the authorized signatory.

Revisiting the 2017 CTA Case, the corrections and additions made by the petitioner’-taxpayer’s suppliers to rectify noncompliant ORs and SIs were supported by countersignatures, similar to those of the authorized signatories appearing on the said documents. This persuaded the Court to allow the related input VAT, emphasizing the importance of proper documentation.

No contradictory evidence or proof on the disputable presumptions

Notably, the ORs and SIs issued by the petitioner'-taxpayer’s suppliers serve as tangible evidence of business transactions. Under Section 3(p) and (q) of Rule 131 of the Rules of Court, as amended, these documents trigger presumptions that private transactions were fair and regular, and the ordinary course of business was followed.

The legal principle, as explained in a Supreme Court case, clarifies the consequences of such presumptions, wherein if an adversary neglects to furnish evidence to challenge a presumption, the presumption may operate unfavorably against them. Essentially, the party carrying the burden of proof is obliged to provide evidence substantiating their stance, or else the presumption may be deemed valid and accepted as true.

In the 2017 CTA Case, the CIR did not furnish any contradictory evidence to suggest that the issuance of ORs, SIs, and notarized certifications by the petitioner’-taxpayer's suppliers was stained by irregularities or done in bad faith. Consistent with the discussions in the immediately preceding paragraphs, the Court upheld the information in the ORs and SIs, asserting that input taxes corresponding to these documents, supported by certifications, must also be deemed allowable.

In the wake of the decisions upheld by the Court in the 2017 CTA Case, taxpayers are afforded a chance to reclaim their entitlement to input VAT. They can mitigate their deficiency VAT assessment by actively seeking compliant ORs and SIs from their suppliers, supported by countersignatures and certifications for affirmation. Despite this avenue for correction, it remains prudent to proactively ensure that VAT ORs and SIs, at the outset, align with the invoicing requirements enumerated in the Tax Code, as amended, to avoid the effort, time, and cost associated with requesting rectified documents and supporting certifications from suppliers. 

Erika Jane F. Manguin
Assistant Manager
KPMG in the Philippines

Erika Jane F. Manguin is an Assistant Manager from the Tax Compliance Group under the Tax Group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Assistant Manager Erika Jane F. Manguin or Tax Partner Maria Myla S. Maralit through ph-kpmgmla@kpmg.com, social media or visit www.home.kpmg/ph.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.