AT A GLANCE:

Tax credits may be claimed in instances involving creditable input tax, excess output or input tax, and output VAT credit on uncollected receivables. Meanwhile, tax refunds may be claimed for zero-rated or effectively zero-rated sales and the cancellation of VAT registration. The NIRC further provides the period in which these credits or refunds may be claimed.

When May a Taxpayer Claim a Tax Credit?

Section 110 of the National Internal Revenue Code (NIRC), as amended by Republic Act No. 10963, otherwise known as the TRAIN Law, and Republic Act No. 11976, otherwise known as the Ease of Paying Taxes Act, enumerates the instances when a taxpayer may claim a tax credit. These include creditable input tax, excess input tax, and output VAT attributable to uncollected receivables.

What is Input Tax?

The term ‘input tax’ means the value-added tax due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT-registered person. It shall also include the transitional input tax determined in accordance with Section 111 of this Code. (Section 110 of the NIRC)

What is Output Tax?

The term ‘output tax’ means the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under Section 236 of this Code.  (Section 110 of the NIRC)

Creditable Input Tax

One instance where a taxpayer may claim a tax credit is through creditable input tax. Under Section 110 of the NIRC, input tax evidenced by a VAT invoice may be credited against output tax on the following transactions:

(1) Any input tax evidenced by a VAT invoice issued in accordance with Section 113 hereof on the following transaction shall be credible against the output tax:

 

(a) Purchase or importation of goods;

 

(i) For sale; or

(ii) For conversion into or intended to form part of a finished product for sale including packaging materials; or

(iii) For use as supplies in the course of business; or

(iv) For use as materials supplied in the sale of service; or

(v) For use in trade or business.

 

(b) Purchase of services on which a value-added tax has accrued.

(2) The input tax on domestic purchase of goods or properties shall be creditable:

 

(a) To the purchaser upon consummation of sale and on importation of goods or properties; and

(b) To the importer upon payment of the value-added tax prior to the release of the goods from the custody of the Bureau of Customs.

 

However, in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee.

 

(3) A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax credit as follows:

 

(a) Total input tax which can be directly attributed to transactions subject to value-added tax; and

(b) A ratable portion of any input tax which cannot be directly attributed to either activity.

Excess Output or Input Tax

If at the end of any taxable quarter the output tax exceeds the input tax, Section 110 (B) of the NIRC,as amended, provides that the excess shall be paid by the Vat-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.

Are VAT-registered persons eligible for tax refunds?

Any VAT-registered person, whose sales are zero-rated or effectively zero-rated, may within 2 years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax. (Section 112 of the NIRC, as amended)

It further provides that a person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Section 106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate or cash fund for any unused input tax which may be used in payment of his other internal revenue taxes or apply for refund for any unused input tax. (Section 112(B) of the NIRC, as amended)

Period within which the Refund of Input Taxes shall be Made

Under Section 112(C) of the NIRC, as amended, in proper cases, the Commissioner shall grant a refund for creditable input taxes within ninety (90) days from the date of submission of invoices and other documents in support of the application filed in accordance with Subsections (A) and (B) hereof: Provided, That for this purpose, the VAT refund claims shall be classified into law, medium , and high-risk claims with the risk classification based on amount of VAT refund claim, tax compliance history, frequency of filing VAT refund claims, among others: Provided, further, That medium and high risk claims shall be subject to audit or other verification processes in accordance with the Bureau of Internal Revenue’s national audit program for the relevant year: Provided, finally, That should the Commissioner find that the grant of refund is not proper, the Commissioner must state in writing the legal and factual basis for the denial within the ninety (90)-day period.

In case of full or partial denial of the claim for tax refund, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the ninety (90)-day period, appeal the decision with the Court of Tax Appeals: Provided, however, That failure on the part of any official, agent, or employee of the Bureau of Internal Revenue to act on the application within the ninety (90)-day period shall be punishable under Section 269 of this Code. Section 112(C) of the NIRC, as amended)

Tax Refunds Made Upon Warrants drawn by the Commissioner

Under Section 112(D) of the NIRC, as amended, refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized countersigned by the Chairperson, Commission on Audit, the provisions of the Administrative Code of 1987 to the contrary notwithstanding. Furthermore, refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on audit, the provisions of the Administrative Code of 1987 to the contrary notwithstanding: Provided, That refunds under this paragraph shall be subject to post audit by the Commission on Audit.

May a taxpayer claim his or her overpayment of income taxes?

Under Section 204(C) of the NIRC, as amended, credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund.

When should the claim for tax credit or tax refund be filed?

For a better understanding, let us take the case of Commissioner of Internal Revenue vs. Univation Motor Philippines, Inc., G.R. No. 231581, April 10, 2019:

Jurisprudence laid down the basic requirements in order for a taxpayer to claim tax credit or refund of creditable withholding tax, thus: (1) The claim must be filed with the CIR within the two-year period from the date of payment of the tax, as prescribed under Section 229 of the NIRC of 1997; (2) The fact of withholding is established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld; and (3) It must be shown on the return of the recipient that the income received was declared as part of the gross income.31 The second and third requirements are found under Section 2.58.3(B) of Revenue Regulation No. 2-98,32 as amended, which reads:

 

Section 2.58.3. Claim for tax credit or refund. — (B) Claims for tax credit or refund of any creditable income tax which was deducted and withheld on income payment shall be given due course only when it is shown that the income payments has been declared as part of the gross income and the fact of withholding is established by a copy of the withholding tax statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld therefrom.

The Court also clarifies the prescriptive period to file a claim for refund as follows:

In the instant case, the two-year period to file a claim for refund is reckoned from April 15, 2011, the date respondent filed its Final Adjustment Return. Since respondent filed its administrative claim on March 12, 2012 and its judicial claim on April 12, 2013, therefore, both of respondent’s administrative and judicial claim for refund were filed on time or within the two-year prescriptive period provided by law. Under the circumstances, if respondent awaited for the commissioner to act on its administrative claim (before resort to the Court), chances are, the two-year prescriptive period will lapse effectively resulting to the loss of respondent’s right to seek judicial recourse and worse, its right to recover the taxes it erroneously paid to the government.

Read also: Documents to Process Claims for Tax Credit Certificates or Cash Refund (RMC No. 74-2024)

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 09175772207/ 09778050020.

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