A More Prudent Approach in Apportioning Input VAT Attributable to Zero-rated Sales

 As featured on PhilStar:  A More Prudent Approach in Apportioning Input VAT Attributable to Zero-rated Sales

When have you made the right choice by deviating from a longstanding practice? This may be challenging but rewarding if guided by the right principles. Undeniably, this holds true in tax cases decided by our High Court, such as those involving the use of "Substantiated or Valid Input VAT" in evaluating refund claims attributable to zero-rated sales.

Excess and unutilized input VAT attributed to zero-rated sales arises when taxpayers engaged in zero-rated activities pay VAT on their purchases but do not charge VAT on their sales. In such cases, they may apply for a refund or the issuance of a tax credit certificate (TCC) for the portion of input VAT attributable to their zero-rated sales.

In a landmark ruling (G.R. No. 215159), the Supreme Court (SC) laid out pivotal guidelines for computing refundable excess and unutilized input VAT attributable to zero-rated sales when the taxpayer-claimant is engaged in mixed transactions. The ruling, highlighted by a separate opinion, examined two approaches under the ‘no judicial assessment’ rule: whether the declared input VAT or the substantiated input VAT after adjustments should be used as the allocation basis.

Under the first approach, which applies to both refund and TCC options, the Court held that apportionment should be based on the “Declared Input VAT”, rather than substantiating the total available input VAT for the period of claim. Following this would avoid a double tax benefit to the taxpayer-claimant, as a portion thereof may be charged against the "Output VAT Still Due” and the excess claimed as an expense. Accordingly, the refundable amount is the lower of the “Excess and Unutilized Input VAT attributable to Declared Zero-Rated Sales" and the "Substantiated or Valid Input VAT” (after deducting disallowances), pursuant to Section 112(A) of the NIRC of 1997, as amended.

In contrast, the second approach applies when the taxpayer opts to claim a refund or issuance of a TCC in its entirety. It may be argued, however, that the Court of Tax Appeals (CTA) erred in delving into input tax substantiation, as this creates the potential risk of judicially sanctioning an indirect deficiency output VAT assessment.

The SC also clarified that neither the CTA nor even the High Court has the authority to determine the sufficiency or substantiation of input VAT in refund claims. This responsibility lies with the BIR through administrative proceedings for the assessment of deficiency taxes. Further, under the second approach, a refund shall be granted only if there is an excess of “Substantiated or Valid Input VAT allocated to Valid Zero-Rated Sales" after applying the "Output VAT Still Due."

With this interpretation, the SC adhered to the more prudent ‘Declared Input VAT’ approach, which provides an alternative for taxpayers in apportioning input VAT attributable to zero-rated sales. Moreover, the SC was compelled to choose the first approach, as it settled the petition without distinguishing between the taxpayer-claimant’s two options, and such judicial ruling forms part of the Philippine legal system under Article 8 of the Civil Code.

Once the ratable portion allocable to zero-rated sales is determined, the essence of the taxpayer’s option arises. At this stage, the Courts do not possess assessment powers to validate refund or tax credit claims, a principle further supported by Section 112(C) of the Tax Code, as amended, which requires compliance with other refund rules.

CTA Case No. 10201 further reinforces that proportional allocation of input VAT is only permitted when substantiated by credible documentation. Without such evidence, courts cannot reconstruct, estimate, or infer VAT amounts, as doing so would cross into assessment-type functions. Exporters and businesses engaged in mixed transactions are thus urged to enhance their compliance systems, particularly in monitoring adherence to VAT rules.

The CTA case likewise emphasizes that the computation of refundable input VAT must be anchored on what the taxpayer-claimant has actually reported, supported by a clear legal basis and credible evidence. And while a refund claim is akin to a tax exemption and therefore strictly construed against the claimant, the Court does not hesitate to grant the refund when all requirements are fully met. By grounding the process in the claimant’s own declarations, the first approach preserves the taxpayer’s right to choose the mode of refund while upholding due process and promoting fairness in VAT refund adjudication.

Taken together, these perspectives remind us that we must conscientiously shift from conventional practices to what is more legally appropriate. More than merely securing tax benefits, choosing the right approach ensures that we avoid unnecessary risks, align with evolving legal standards, and position ourselves for long-term compliance. In tax compliance, as in life, the prudent choice is often the one that balances both fairness and protection.