Refund of excess input VAT clarified

It is a well-settled doctrine that tax refunds are in the nature of tax exemptions and, hence, are construed strictissimi juris against the taxpayer. A claim for a tax refund is a statutory privilege; thus, the rules and procedures for claiming a tax refund should be faithfully complied with by the taxpayer. However, due to the reforms of the tax system (TRAIN Law, CREATE Law, EoPT Act), changes in the processes and rules for the application for tax credits and refunds caused confusion as to the proper procedure and timelines in the value-added tax (VAT)-refund process.

Thankfully, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 5-2024 clarifying the rules on tax refunds, which covers claims that are filed starting July 1, 2024 onwards, to give ample time for the tax-payers and the BIR to adjust to the new requirements and procedures prescribed.

RISK-BASED VERIFICATION OF VAT REFUND CLAIMS
The EoPT Act introduced the risk-based approach to verifying and processing VAT refund claims under Section 112(C) of the Tax Code. VAT refund claims filed pursuant to Section 112(A) of the Tax Code are to be classified into low, medium, and high-risk claims. For a low-risk claim, the scope of verification requires the submission of complete documentary requirements prescribed by the BIR, with no verification required for sales and purchases. On the other hand, a claim classified as medium or high risk is required to submit complete documentary requirements and be subjected to 50% and 100% verification of sales and purchases, respectively.

In establishing the risk level of each claim, the BIR will be considering risk factors such as, but not limited to, the size of the VAT refund claim, the frequency of filing VAT refund claims, tax compliance history, and other risk fac-tors that may be identified.

Note, however, that the classification and scope of verification may change, such as when the prior claim was denied in full. The succeeding claim will then be classified as high-risk. Also, claims filed by a first-time claimant are automatically considered high-risk and will remain as such for the succeeding three VAT refund claims. Further, for medium-risk claims, if the assigned revenue examiner finds at least 30% disallowance of the amount of the VAT refund claim, verification is to be adjusted to 100%, and finally, claims classified as low-risk for three consecutive filings of VAT refund claims are to be subject to mandatory full verification on the fourth VAT refund claim, regardless of risk classification.

SEPARATE REGULAR AUDIT, VERIFICATION AND PROCESSING OF VAT REFUND CLAIMS
What is the effect of the verification and processing of VAT refund claims on a regular audit that may be conducted by the BIR? The regulations state that the verification and processing of VAT refund claims are to be separate from the regular audit, if any, of internal revenue taxes, particularly VAT, conducted by the appropriate BIR office that has jurisdiction over the taxpayer-claimant. Any findings during the verification of the VAT refund claim that have no effect on the amount to be refunded are to be incorporated into the existing audit for the taxable year covered by the claim if processed within the same BIR office that has jurisdiction over the claimant, or endorsed for further verification and/or consolidation with the existing audit if the processing is conducted by an office other than the BIR office that has jurisdiction over the claimant.

90 DAYS TO PROCESS AND DECIDE VAT REFUND APPLICATIONS
The BIR is given 90 days to process and decide on VAT refund applications, starting from the filing of the claim with complete documentary requirements. This is a very welcome development for the taxpayers to ensure that their application is acted upon, since failure on the part of any official, agent, or employee of the BIR to act on the application within the 90-day period may subject the concerned party to administrative liability.

PERIOD AND VENUE OF APPEAL
Just like any other application, approval for a claim for a refund is not always guaranteed. The claim may be fully or partially denied, or worse, unacted upon. In the case of full or partial denial of the claim for VAT refund, the tax-payer affected may, within 30 days from receiving the decision denying the claim, appeal the decision to the Court of Tax Appeals (CTA).

In case the VAT refund is not acted upon by the Commissioner within the 90-day period, the taxpayer-claimant has two options: (i) appeal to the CTA within the 30-day period after the expiration of the 90 days required by law to process the claim; or (ii) forego the judicial remedy and await the final decision of the Commissioner of Internal Revenue on the application of the VAT refund claim.

When the BIR fails to render a decision within the 90-day period and the taxpayer-claimant opts to seek a judicial remedy within 30 days of such a period, the administrative claim for refund will be considered moot and no long-er be processed.

This provision in RR No. 5-2024 sheds light on the varying opinions in the interpretation of RR No. 13-2018 implementing VAT provisions in the TRAIN Law, which is silent as to the option of the taxpayer to file an appeal with the CTA within 30 days after the expiration of the 90-day period.

PRESCRIPTIVE PERIOD OF CLAIM FOR VAT REFUND
It is already settled that only the administrative claim (with the CIR) must be filed within the two-year prescriptive period. This is the ruling in the case of CIR vs. Aichi Forging Company of Asia, G.R. No. 183421, Oct. 22. 2024, which ruled that Section 112(A) of the Tax Code provides for a two-year prescriptive period after the close of the taxable quarter when the sales were made, within which a VAT-registered person whose sales are zero-rated or effectively zero-rated may apply for the issuance of a tax credit or refund of creditable input tax. The Court clarified that the two-year period refers to the filing of an administrative claim with the BIR and does not cover the judicial claim with the Court of Tax Appeals (CTA).

Further, CIR vs. San Roque Power Corp.(G.R. No. 187485, 196113, and 197156) and the recent case of Energy Development Corp. (G.R. No. 203367, March 17, 2021) clarified and reiterated the jurisdictional doctrines in Aichi. As held in these cases, failure to comply with the 120-day (now 90-day) waiting period violates a mandatory provision of law. It violates the doctrine of exhaustion of administrative remedies and renders the petition premature and thus without a cause of action, with the effect that the CTA does not acquire jurisdiction over the taxpayer’s petition. The phrase “within two years… apply for the issuance of a tax credit certificate or refund” in Section 112(A) of the NIRC, as amended, refers to applications for refund or credit filed with the CIR and not to appeals made to the CTA. This is apparent in the first paragraph of subsection (C) of the same provision, which states that the CIR has “120 days (now 90 days) from the submission of complete documents in support of the application filed in accordance with Subsections (A) and (B)” within which to decide on the claim. Thus, a taxpayer must wait for the expiration of the 90-day period before it may appeal to the CTA.

This should not be confused with the rule of prescription on refund of taxes erroneously or illegally collected under Section 204(C) and Section 229 of the Tax Code, which follows the Doctrine on Twin Prescription, meaning both the administrative (CIR) and judicial (CTA) appeals must be made within the two-year prescriptive period.

TAXPAYER-CLAIMANT, BIR LIABILITY IN CASE OF COA DISALLOWANCE
As provided in Section 112(D) of the Tax Code as amended, VAT refunds are subject to post audit by the Commission on Audit. RR No. 5-2024 mandates that in case of disallowance by the Commission on Audit (CoA), only the tax-payer is liable for the disallowed amount, without prejudice to the administrative liability on the part of any employee of the BIR who may be found to be grossly negligent in the grant of the refund.

Thus, as the rules are now clear, it is imperative for taxpayers to keep abreast of these changes. The success in the implementation of the recent legislation aimed at improving the tax system requires the support not only of the government agencies concerned but, more importantly, the cooperation of the taxpayers to fully attain the goal of ease of doing business in the Philippines. The improvements and clarity in the tax refund process could make our country a leading choice for investment by entrepreneurs and foreign investors, which would ultimately result in economic growth and development.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

FELIPE L. JUBAN, JR. is an associate from the Tax Advisory & Compliance division of P&A Grant Thornton Cebu Branch, the Philippine member firm of Grant Thornton International Ltd.

pagrantthornton@ph.gt.com