Tax Articles

Successful Implementation of an Enhanced VAT Refund System

Atty. Rodel C. Unciano

As most of us are now aware, Revenue Regulations (RR) 9-2021 implements the imposition of 12% VAT on certain transactions previously taxed at zero percent rate under Sections 106 and 108 of the Tax Code of 1997, as amended, allegedly after full satisfaction of the conditions set forth in the TRAIN Law. This has caused confusion on the VAT zero-rating of covered transactions.
Following RR 9-2021, the following transactions which were previously considered zero-rated sales under Sections 106 and 108 of the Tax Code, shall now be subjected to 12% VAT:

1. Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

2. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production;

3. Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws;

4. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

5. Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production;

As provided under the TRAIN Law, the primary conditions for the imposition of 12% VAT on the foregoing transactions are as follows: 1) The successful establishment and implementation of an enhanced VAT refund system, and 2) All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019.

Other conditions include the automatic appropriation of an amount equivalent to five percent (5%) of the total VAT collection of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) as a special account in the General Fund or as trust receipts for the purpose of funding claims for VAT refund, and submission by the BIR and the BOC to the Congressional Oversight Committee on the Comprehensive Tax Reform Program (COCCTRP) a quarterly report of all pending claims for refund and any unused fund.

Proof of full satisfaction of these requisites remains to be seen. Has there really been a successful establishment and implementation of an enhanced VAT refund system as contemplated in TRAIN Law?

To determine the effectivity of the successful establishment and implementation of an enhanced VAT refund system, TRAIN Law does require that all applications for VAT refund filed from January 1, 2018 shall be processed and must be decided within ninety (90) days from the filing of the VAT refund application.

While there are rules set in place to ensure the processing of claims and issuance of a decision within the 90-day period, there remains a question whether the decision is fair enough. Is the issuance of the decision alone within the 90-day period an indicator that we now have a successful VAT refund system? Does the BIR now have the capability to faithfully examine the correctness of taxpayers’ claims within the prescribed period? I am aware that the BIR has indeed processed and issued decisions observing the 90-day period but I am also aware that some of these decisions are denial decisions, forcing taxpayers to resort to judicial remedies, thinking that the decision is not reasonable.

Revenue Memorandum Order (RMO) 47-2020 was issued to expedite the processing of VAT refund claims. While the objective of the RMO is laudable, the documentary requirements needed and procedures laid down there are still cumbersome and challenging for both taxpayers and BIR reviewers to comply. Thus, there is a need to revisit and further simplify the checklist of requirements, guidelines and procedures as set forth under RMO 47-2020.

In his Veto message on some provisions of the CREATE Law, the President himself acknowledged that it is administratively difficult for the BIR to implement the processing of refund claims within the 90-day period. Thus, the President is suggesting the legislature, the Department of Finance, and the BIR to come up with mechanisms to streamline the process of tax refunds in a separate tax administration bill. I note though that the Veto message pertains to the proposed 90-day period of processing refund claims of erroneous payment of taxes under Section 204 of the Tax Code, not on VAT refund claims.

As it stands now, the BIR is required to process and issue decision on VAT refund claims within the 90-day period. Given this short period of time, there should be a mechanism to streamline processing of VAT refund claims, a mechanism that will ensure that taxpayer’s claims are granted, if warranted. It is not enough that a decision be issued within the 90-day period. The decision must have a semblance of correctness, not a decision that is hastily issued just for the sake of being able to meet the 90-day deadline. It is only then that we can declare that we now have a successful enhanced VAT refund system.