CTA ruling eases documentation burden

By: Glenn Del Rosario

DEALING with tax compliance, especially when it comes to value-added tax (VAT) refunds, remains a complex challenge for businesses. In the case of zero-rated sales to persons not doing business in the Philippines, a taxpayer-claimant needs to submit the original sales documents to the Bureau of Internal Revenue (BIR) along with the contracts of customers, certificate of inward remittance and negative certification of the nonresident foreign clients from the Securities and Exchange Commission (SEC). This is in compliance with Section 108 (B) (2) of the National Internal Revenue Code of 1997 (Tax Code), as amended.

To validate input tax from purchases, the taxpayer-claimant should submit original sales invoices, official receipts from vendors and proof of payment for big-ticket items — purchases that account for more than 5 percent of the taxpayer's annual gross purchases — even though the Tax Code does not explicitly require proof of payment to substantiate big-ticket transactions.

A recent decision on the VAT refund case (CTA EB 2654) by the Court of Tax Appeals (CTA) en banc sheds light on these issues, offering valuable insights for businesses. In this case, the BIR opposed the domestic corporation's refund on two grounds: first, by arguing that the taxpayer, being 99.4 percent-owned by its parent company and also its sole client, should be treated as an extension of the parent company, and second, by claiming that the taxpayer failed to substantiate its VAT claims, particularly for big-ticket purchases.

Section 108(B)(2) of the Tax Code provides the following requisites to avail of VAT zero-rating on sale of services:

– The service should be other than processing, manufacturing or repacking goods.
– The service is rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed.
– The service is performed in the Philippines by a VAT-registered seller.
– The consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas.

The CTA ruled in the taxpayer's favor, rejecting the BIR's argument that ownership alone justifies treating the taxpayer and its parent company as one entity. The court reaffirmed the separate juridical personality of the domestic corporation, stating that it should not be treated as an extension of its parent company. Furthermore, the court found no proof that the parent company conducted business in the Philippines. It is also important to emphasize that a subsidiary is an entity established and registered with the SEC as a domestic corporation, and it has a personality separate and distinct from that of its shareholders.

Regarding the VAT refund substantiation, the Commissioner of Internal Revenue argued that the taxpayer's claim was deficient due to the additional documentation requirements outlined in Revenue Memorandum Order 16-2007, which requires taxpayers to present proof of payment other than invoices and receipts. However, the CTA affirmed that nothing in the Tax Code supports the BIR's assertion that invoices and receipts are insufficient to validate big-ticket purchases. Section 110 (A) (1) of the Tax Code clearly states that any input tax evidenced by a VAT invoice or official receipt shall be creditable against output tax.

This CTA ruling introduces a more balanced approach to VAT refund compliance, relieving businesses of the unnecessary burden of excessive documentation for big-ticket purchases. This allows businesses to streamline their processes and focus on more strategic priorities, all while maintaining confidence in the sufficiency of standard invoicing and official receipts for substantiation. While this decision simplifies the path to VAT refunds, businesses must continue to uphold strong compliance practices, ensuring that they remain prepared for BIR scrutiny.

As published in The Manila Times on 30 September 2024. The author is a Senior Manager at the Tax & Legal practice of Deloitte Philippines.