Philippines: Reduction in accounts receivable did not result in VAT deficiency (Court of Tax Appeals decision)

The Court of Tax Appeals (CTA) recently held in an en banc decision that the taxpayer’s reduction in accounts receivable (AR) did not result in a value added tax (VAT) deficiency.

The taxpayer, a general professional partnership, was assessed a VAT deficiency for reductions in AR that were treated by the Bureau of Internal Revenue (BIR) as collections. The taxpayer argued that it was not liable for a VAT deficiency because the reduction in AR was attributable to the write-off of uncollectible accounts, which should not be considered as receipts subject to VAT and provided proof of the write-off.

The tax authority contended that tax assessments must be presumed correct and made in good faith, and it is the taxpayer's responsibility to prove otherwise. The tax authority also claimed that the write-off did not comply with the mandatory requirements set forth under Revenue Regulations (RR) No. 05-99, as amended by RR No. 25-02, stipulating the conditions for bad debts to be allowed as deductions from gross income.

The CTA held that the prima facie correctness of a tax assessment does not apply if the assessment is arbitrary and capricious, and assessments must be based on facts and not mere presumption. The court explained that a change in the AR balance does not necessarily pertain to collections that are subject to VAT. In this case, the taxpayer was able to explain the decrease in the AR with supporting documents (e.g., minutes of the partner’s meeting, journal vouchers, and collection letters). The court further held that the requirements of RR No. 05-99 pertain to deductibility for income tax, and not to deficiencies in VAT. Thus, assuming the write-off did not comply with the requirements of the RR, an income tax deficiency would result, not a VAT deficiency.

Read a January 2024 report prepared by the KPMG member firm in the Philippines