Tax Articles

VAT Refund Under CREATE

By Atty Rodel C. Unciano

One question that remains unanswered even with the deferral of the implementation of Revenue Regulations (“RR”) No. 9-2021 is the viability of claiming tax credit or refund of input taxes attributable to zero-rated sales under Section 112 of the Tax Code, in relation to the amendments introduced by the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE).

In relation to this, CREATE neither repealed nor amended the VAT refund provisions under Section 112 of the Tax Code. As it stands now, any VAT-registered person, whose sales are zero-rated or effectively zero-rated, may still apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid that is attributable to such zero-rated sales.

The Implementing Rules and Regulations (“IRR”) of the tax incentives provisions of CREATE in fact recognized this taxpayer’s right. It provides that excess input taxes attributable to zero-rated sales by VAT-registered business enterprises may be refunded or applied for a tax credit, subject to the guidelines provided under existing regulations, specifically under RR 13-2018, as amended.

The conditions, however, on the VAT exemption and VAT zero-rating of local purchases as laid down under the tax incentives provisions of the CREATE and its IRR gave birth to the issue on the viability of claiming tax credits or refunds of input VAT attributable to zero-rated sales.

As introduced by CREATE, the VAT exemption on importation and VAT zero-rating on local purchases shall only apply to goods and services that are directly and exclusively used in the registered project or activity by a registered business enterprise (RBE). Ergo, importations and local purchases that do not qualify for VAT exemption or VAT zero-rating for reasons that such importations or local purchases by the RBE are not directly and exclusively used in the registered project or activity, are subject to the 12% VAT.

The IRR of the tax incentives provisions of CREATE defines “direct and exclusive use” as referring to raw materials, inventories, supplies, equipment, goods, services and other expenditures necessary for the registered project or activity without which the registered project or activity cannot be carried out. If the importations or local purchases of a registered enterprise do not fall under this definition of direct and exclusive use, then, said importation and local purchases shall therefore be subjected to the 12% VAT.

The question to ask now is, whether or not the RBE may claim a tax credit or refund for the input taxes passed on to it by its suppliers for reasons that these importations or purchases are not directly and exclusively used in the enterprise’s registered project or activity. Again, following Section 112 of the Tax Code, the registered business enterprise may apply for tax credit certificate or refund of the input VAT passed on to it by its suppliers, provided that the input tax paid on such importations or purchases are attributable to the enterprise’s zero-rated sales.

The other question then is, whether an input VAT on importations and purchases that are not directly and exclusively used in the enterprise’s registered project or activity be nevertheless considered attributable to the enterprise’s zero-rated sales?

If the importations or local purchases are not directly and exclusively used in the enterprise’s registered project or activity, arguably, such importations or local purchases are not indispensable in the operations of the enterprise’s registered project or activity. In other words, such importations or local purchases are not indispensable in generating the RBE’s sales or revenue. Following this view, it appears that a tax credit or refund is not feasible. Apparently, there is no way by which input tax on such importations or local purchases be considered attributable to the RBE’s zero-rated sales.

It must be noted though that very often, an enterprise would need allied services or supplies from or related to legal, consultancy, marketing, accounting finance and other support activities. It may be argued that these purchases, albeit not exclusively and directly used in the enterprise’s registered project or activity, are nevertheless needed in the enterprise’s business operations. Will the input VAT passed on by the suppliers be considered attributable to the RBE’s zero-rated sales and therefore, qualify for tax credit or refund under Section 112 of the Tax Code?

I believe the term “attributable” is more inclusive than the phrase “direct and exclusive use” as defined in the IRR. As such, purchases made by RBEs, although not directly and exclusively used in the RBE’s registered project or activity, if purchased by reason of the entity’s business operations, should still be considered attributable to the entity’s zero-rated sales. As such, the enterprise should be entitled to reclaim the same through refund or tax credit. Otherwise, the enterprise will be left without any use for the passed-on/paid input taxes.

These are questions which need further clarifications from our legislators or regulators for guidance of taxpayers. Absent any clear direction on these policies will further cast doubt on the successful implementation of our enhanced VAT refund system and on the refund system in general.