For a long time now, recovering from a loss as massive as being denied of their right to claim a refund for the creditable input value-added tax (VAT) they paid has been a key issue for diligent taxpayers. This issue remains a conundrum that is worthy of review and clarification every now and then. With the rise of VAT refunds denied because of technicalities, taxpayers are now keen on seeking justice with their own hands. Thus, a loss of a loss — i.e., when denied a claim, which is a significant loss on their part, taxpayers are convinced they can deduct the same as a loss.

Since the rules have yet to be set in stone, taxpayers are deeply concerned about an accepted solution if their claim for a VAT refund is denied. Our Tax Code, as amended, has not clearly expressed the remedies to which our taxpayers can avail in this event. The denial becomes an extensive loss, which the taxpayers can only hope to recover by treating it as an expense deductible against gross income. Is this too much to ask from the government?

The current rules of the Bureau of Internal Revenue (BIR) result in at least millions of pesos’ worth of losses caused by denied claims for VAT refunds. Unavoidably then, the BIR should have cautioned taxpayers and issued conclusive guidelines on how to treat the unutilized input VAT. The long-standing issues on what taxpayers can do with their idle asset accounts and whether the loss will remain a burden on them should have been settled in clear terms by now.

In light of recent events, however, there seems to be hope amidst the ominous negativity of results in claiming tax refunds, when the Court of Tax Appeals (CTA) issued a decision saying that a denied claim for VAT refund is a deductible loss.

The taxpayer initially availed of a tax refund, but was denied. The taxpayer wrote off the amount in its books and claimed it as a deduction from gross income. The BIR, however, prohibited the same and assessed the former for deficiency income tax.

Under Section 34(D)(1)(a) of the Tax Code, as amended, it provides that a loss actually sustained during the taxable year that is not compensated by insurance or otherwise shall be deductible from gross income, if the same is incurred in trade or business. This means that a claim for a refund eventually denied on a certain year becomes a loss sustained during the same taxable year and, as such, must be deductible from the taxpayer’s gross income, if it is incurred due to the zero-rated sales of the latter.

In addition, the use of an account name “bad debts” does not necessarily equate to bad debt expense, as identified in the Tax Code. The account referring to a deductible loss can be understood as a loss defined under the Black’s Law Dictionary. The loss should encompass an undesirable outcome of a risk, the disappearance or diminution of value, usually in an unexpected or relatively unpredictable way, as applied herein. This confirms how a reasonable expectation of entitlement to a tax credit certificate for unutilized input VAT could encourage a taxpayer to file for a tax refund. Upon denial thereof, a taxpayer is bereft of this opportunity. Consequently, it bears without stressing that it is proper to consider an amount pertaining to the denied VAT refund claim as a loss and deduct it from the gross income in the year the refund is denied. The taxpayer is left without any reasonable expectation to classify the same as an asset. 

With this, I would like to emphasize BIR Ruling No. DA 591-2004 dated Nov. 24, 2004, wherein the BIR also held that input taxes are assets which are expected to benefit the taxpayer. Denial by the BIR or the CTA of the refund application means that the asset has lost its useful value. Thus, the denied claim should be treated as a deductible loss of property sustained during the taxable year.

This case has undoubtedly shed new light on the arduous dispute over the treatment of a denied claim for VAT refund. What remains to be seen now is if the CTA’s position will soon be affirmed by the CTA En Banc and, ultimately, by the Supreme Court to ensure a binding legal precedent on the matter and put an end to this predicament wherein the taxpayers have to carry all the burden.

Even if the decisions continue to flip-flop with regard to this pressing issue, it would be unfair to hold this uncertainty solely against hardworking taxpayers who can only rely on the law and rulings to guide them. The taxpayers must be accordingly given sufficient remedies to aid them with their investments, transactions, and their accurate tax treatment.

The BIR remains mum on the definitive rules on the proper treatment of these denied claims. However, it is commendable that the CTA continues to advocate the taxpayers’ privilege to recover input VAT. Without this support, VAT-registered persons are definitely at a disadvantage for not being able to avail of the benefit of the VAT system, despite efforts of compliance with rules and regulations to be entitled to the same. The law extends to all VAT-registered persons, even those engaged in export sales. Otherwise, the purpose for which the system was developed would deliberately be bashed and, thus, futile to say the least.

Steffanieh Gail M. Tan is an associate of the Tax Advisory and Compliance of P&A Grant Thornton.