April 4, 2013

BIR RULING NO. 133-13

City of Iloilo, et al. vs. Smart Communications, Inc., G.R. No. 167260; CIR vs. Isabela Cultural
Corporation, G.R. No. 172231

Diaz Murillo Dalupan and Company

This refers to your letter dated June 19, 2010 requesting on behalf of Takasago Import-Export
Philippines, Inc. ("Takasago") confirmation of your opinion that the accumulated and unapplied input
value-added tax (VAT) arising from its purchase of goods and services may be expensed outright, and that
the basis of computing the expanded withholding tax (EWT) on such purchase of goods and services is the
total amount appearing in the invoice/official receipt net of VAT. dctai

The attendant facts, as represented, are as follows:

Takasago was incorporated and registered with the Securities and Exchange Commission (SEC) on
February 9, 1990 bearing SEC Certificate of Registration No. 173471. It was formed primarily for the
purpose of engaging in the business of import and export, buy, sell, assemble, repack or otherwise deal in
wholesale of goods such as food ingredients, flavours and fragrances of all kinds and aromatic chemicals,
components and substances and perform marketing research and promotional sales work for its principal
which are classified as VAT zero-rated. The company often enters into VAT zero-rated transactions in the
ordinary course of its business and had obtained passed-on VAT from its purchases of goods and services.
As of December 31, 2009, Takasago's input VAT representing present and prior year's unapplied input
VAT amounted to Php5,032,917.00. Per company's projection, said input taxes can no longer be credited
from its output tax because majority of its transactions are zero-rated. In order to benefit the company
from this input VAT, it was decided by the company to write it off from the books and, instead, charge it
as operation expense which shall be claimed as deductible expense. EaCDAT

It is your contention that the company may be allowed to treat its unutilized input VAT as deductible
expense pursuant to BIR Ruling No. DA-636-2006 dated October 27, 2006, and under the provisions of
Revenue Memorandum Circular (RMC) No. 42-2003, Answer to Question 13 thereof, which provides, to
wit:

"A-13: Failure by the supplier to comply with the invoicing requirements on the documents supporting
the sale of goods and services will result to the disallowance of the claim for input tax by the purchaser-
claimant.

If the claim for refund/TCC is based on the existence of zero-rated sales by the taxpayer but it fails to
comply with the invoicing requirements in the issuance of sales invoices (e.g., failure to indicate the TIN),
its claim for tax credit/refund of VAT on its purchases shall be denied considering that the invoice it is
issuing to its customers does not depict its being a VAT-registered taxpayer whose sales are classified as
zero-rated sales. Nonetheless, this treatment is without prejudice to the right of the taxpayer to charge the
input taxes to the appropriate expense account or asset account subject to depreciation, whichever is
applicable. Moreover, the case shall be referred by the processing office to the concerned BIR office for
verification of other tax liabilities of the taxpayer." CDTHSI
In reply, please be informed that Section 110 (B), in relation to Section 112 (A) of the 1997 Tax Code, as
amended, provides for the remedy of a taxpayer to recover the unapplied accumulated input VAT arising
from zero-rated transactions, viz.:

"110. Tax Credits. —

xxx xxx xxx

"B) Excess Output or Input Tax. — If at the end of any taxable quarter the output tax exceeds the
input tax, 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." (underscoring
supplied)

xxx xxx xxx

In addition thereto, Section 112 (A) of the same Code states: DIETcC

"(A) Zero-rated or Effectively Zero-rated Sales. — Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may, within two (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:" . . . (Underscoring supplied)

It is noted, based on the above-cited provisions, that unutilized creditable input taxes attributable to zero-
rated sales can only be recovered through the application for refund or tax credit. Nowhere in the Tax
Code can we find a specific provision expressly providing for another mode of recovering unapplied input
taxes, particularly your proposition that unapplied input taxes may be treated outright as deductible
expense for income tax purposes. Furthermore, the discussions provided under RMC 42-2003 apply only
in cases of denied claim for refund or tax credit on input VAT attributable to zero-rated sales. The case at
hand does not fall within the operation of the above-cited RMC. As regards the request that, in the
purchase of goods and services, the amount to be used as basis for expanded withholding tax shall be the
purchase amount net of VAT, the same is hereby granted. Revenue Memorandum Circular No. 72-04
clarifies that the basis of CWT to a VAT registered supplier of goods and services shall be the gross
amount paid exclusive or net of VAT. cAIDEa

It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against
the taxpayer and liberally in favor of the taxing authority. The basic principle in the construction of laws
granting tax exemptions has been very stable. He who claims an exemption from his share of the common
burden of taxation must justify his claim by showing that the Legislature intended to exempt him by
words too plain to be beyond doubt or mistake (City of Iloilo, et al. vs. Smart Communications, Inc., G.R.
No. 167260, dated February 27, 2009). And since a deduction for income tax purposes partakes of the
nature of a tax exemption, then it must also be strictly construed (CIR vs. Isabela Cultural Corporation,
G.R. No. 172231 dated February 12, 2007).

This ruling revokes all other rulings which are inconsistent herewith.

Please be guided accordingly. CTHDcS

Very truly yours,

(SGD.) KIM S. JACINTO-HENARES

Commissioner

Bureau of Internal Revenue