Managing output VAT credit

By: Audrey Kaye Marquez

REPUBLIC Act 11976, also known as the Ease of Paying Taxes (EoPT) Act, provides relief to cash flow issues that may arise from output value-added tax (VAT) on uncollected receivables. Revenue Regulation (RR) 3-2024, issued by the Bureau of Internal Revenue (BIR) on April 11, 2024 to implement the EoPT law, provides guidance on how sellers can claim output VAT credit on their uncollected receivables.

A seller who has passed on the VAT to the buyer has no problem collecting the corresponding VAT in cash sales, since it has already been collected in the agreed selling price. However, in credit sales, the seller pays the VAT upfront and may not be able to collect the receivables on time, or at all, while the buyer is free to deduct the related input VAT at the time of payment. Previously, the seller's only recourse was to recognize the uncollected receivables, including VAT, as bad debts and claim it as a deduction under Section 34(E) of the Tax Code.

RR 3-2024 now allows VAT-registered sellers of goods and services to reclaim VAT paid in advance if the receivable remains uncollected after the agreed period with the buyer. Starting from the effectivity of the regulation, sellers may deduct the output VAT related to uncollected receivables against their output VAT in the subsequent quarter, following the lapse of the agreed-upon payment period if the seller has already paid the VAT on the transaction and the VAT associated with these uncollected receivables have not been claimed previously as an allowable deduction under Section 34(E) of the Tax Code.

To qualify for claiming the entitlement to the VAT credit, certain requisites must be met:

• The sale or exchange occurred after the effective date of RR 3-2024.
• The sale was made on credit or on account.
• There exists a written agreement specifying the period to pay the receivable, indicated in the invoice or any document showing the credit term.
• The VAT is separately shown on the invoice.
• The sale is specifically reported in the summary list of sales covering the period when the sale was made and not reported as part of various sales.
• The seller declared the corresponding output VAT in the quarterly VAT return.
• The agreed-upon payment period, whether extended or not, has already elapsed.
• The VAT component of the uncollected receivable was not claimed as a deduction from gross income under bad debts.

Failure to satisfy all these conditions will result in disallowance of these tax credits related to output VAT on uncollected receivables by the BIR in the event of a VAT audit.

This regulation was further clarified by the BIR on June 13, 2024, through Revenue Memorandum Circular 65-2024, which addresses specific issues and provides guidelines on the implementation of the regulation. This clarification is just in time for the filing deadline of the quarterly VAT return for the second quarter of 2024 on July 25, 2024.

When the seller claims an output VAT credit on uncollected receivables, the corresponding input VAT cannot be claimed by the delinquent buyer. The seller must stamp "Claimed Output VAT Credit" on the duplicate or triplicate copies of the invoice and furnish the same to the buyer. If the seller fails to provide this document, the buyer may voluntarily reverse its claimed input VAT credit in its quarterly VAT return. If the buyer claims the input VAT in relation thereto, they may face liability for deficiency VAT and may face penalties in the event of a tax audit by the BIR. This consequence arises because the buyer did not adhere to the agreed payment terms between the parties.

When receivables, for which the output VAT was previously claimed as VAT credit, are collected, the seller must report the corresponding output VAT in the taxable quarter when the recovery or collection occurs. Failure to declare these transactions may result in penalties under the Tax Code. Subsequently, the buyer can claim the input tax. The seller should stamp "Recovered" on the original invoice that was previously declared as uncollected and include "Recovery of Previously Reported Uncollected Receivable" if a supplementary document is issued. Afterward, the seller must provide copies of these documents to the buyer. Once the buyer settles the previously uncollected receivable, they can enjoy the benefit of reclaiming the initial input VAT that was originally entitled to them had they made the payment on time.

However, claiming output VAT credit on uncollected receivables is completely optional. Sellers are not required to automatically claim the output VAT credit whenever there is an uncollected receivable due to the lapse of the agreed-upon period, especially if it is highly likely that these receivables will eventually be collected.

This remedy necessitates a meticulous and thorough monitoring process for businesses, requiring both sellers and buyers to focus on the due dates and recovery dates to maintain accuracy and timeliness in their records. It also entails strict documentation procedures to avail of this remedy.

While the newly implemented output VAT credit provides an additional form of relief, it is advisable for taxpayers to exercise caution and weigh the costs and benefits associated with this provision. It is also worth noting that keeping track of the claim for the output VAT credit on uncollected receivables can be particularly challenging, especially for taxpayers with a large number of receivables, varied payment terms, and numerous transactions.

As published in The Manila Times on 15 July 2024. The author is a Senior at the Tax & Corporate Services practice of Deloitte Philippines.