Input taxes treated as deductible

costs/expenses
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Input taxes treated as deductible costs/expenses

Input taxes treated as deductible costs/expenses

By Fulvio D. Dawilan

The value-added tax (VAT), as a form of sales tax, was designed to be borne by the end-user.

As each good or service is sold or transferred from one person to another, a tax is imposed on the
value added by the transferor.

The cumulative effect of the VAT imposed for every value added by the seller on each stage in
the distribution chain is shifted to the next buyer until it reaches the end-user.

But this system of shifting the cumulative cost of the VAT to the end user applies in a scenario
where there is uniform VAT rate. Under the present law, that VAT rate is 12%. The VAT law
recognizes other VAT regimes, namely: VAT exemption and the VAT zero-rating.

In a VAT-exempt transaction, the seller is not allowed to charge VAT to his customer. Since no
output tax is shifted by the seller, there is no output tax against which the related input taxes may
be credited. Neither can he credit this input tax against the VAT due on other sales. In this case,
he is treated as the end user who will shoulder the cost of the input VAT.

A different rule applies to VAT zero-rated sale of goods or services. As in the case of VAT-
exempt sales, no VAT is charged by the seller on its VAT zero-rated sales. What happens then to
the input taxes generated from related purchases?

Unlike the input taxes related to exempt sales, input taxes related to zero-rated sales may be
credited against output taxes on other sales. In case it is not fully utilized, the excess may be
carried over to the succeeding quarter or quarters. There is no prescription period for the carry-
over.

The law gives the taxpayer another option for the recovery of used input taxes: application for
refund or tax credit certificate. Incidentally, the Supreme Court ruled in a recent decision that the
input taxes paid on purchases related to VAT zero-rated sales are not considered erroneously or
illegally paid.

Hence, the provisions of the Tax Code requiring the filing of a claim for refund within two years
from the payment of the tax does not apply. The two-year period should be reckoned from the
close of the taxable quarter when the sale or transaction was made, not from the payment of the
tax (which in this case was paid after the payment of the service fee).

While the option to apply for refund is available for input taxes related to zero-rated sales, some
taxpayers are reluctant to avail of such option. The filing of an application for refund would
normally follow the issuance of a letter of authority for the examination of the taxpayer, not only
on the subject of the refund but also for all other taxes. The taxpayer could end up being assessed
for a higher amount than the subject of the refund. This, and the costly and long process of
pursuing a refund, are among the factors considered by the taxpayers.

Instead of these options, may a taxpayer claim the used input taxes related to zero-rated sales as
expense/cost?

This remedy is not provided in the Tax Code. Hence, it would seem that a taxpayer can not claim
input taxes as expenses/costs. In fact, in an old ruling, the Bureau of Internal Revenue ruled that
VAT paid by a VAT-registered person on his purchases is an asset account in the balance sheet
and should not be treated as an expense.

However, in a more recent ruling, BIR confirmed that creditable input taxes whose periods for
refund have already prescribed may be deductible as expense for income tax purposes. This
ruling allows the deduction of input taxes for income tax purposes, after the lapse of the period
allowed by law within which a taxpayer may apply for refund.

The existing regulations do not specifically provide that input taxes related to zero-rated sales
may be claimed as costs/expenses.

Thus, for taxpayers who want to avail of this alternative, it is recommended that a ruling be
secured from the BIR. On the part of the tax authority, there seems to be no prohibition for
treating input taxes as part of the costs or exp enses. There should be no reason for not allowing
taxpayers to claim input taxes as part of costs or expenses, if the taxpayer so desires. Indeed, this
is more beneficial to the government since the effect of such cost or expense is limited to the
income tax benefit and not to the full amount.

(The author is a tax partner at Punongbayan & Araullo, a member firm within Grant Thornton
International Ltd. For comments and inquiries, please e-mail Fulvio.Dawilan@pna.ph or call
886-5511.)