Intercompany offsetting agreement in VAT refund cases
By: Atty. Keshia Daniell L. Valencia on September 10, 2026
IT is common for multinational companies to enter into intercompany offsetting agreements to streamline transaction with affiliates, particularly for service payments.
Intercompany offsetting agreements are often employed when an affiliate holds a liability toward another company and, at the same time, renders services to that same company. The service income is then debited against the outstanding liability. This type of agreement is relevant to input value-added tax (VAT) attributable to zero-rated sales in the Philippines, which are refundable under Section 112 of the National Internal Revenue Code, as amended (Tax Code).
Export sales of goods or services are zero-rated under Section 106(A)(2)(a) (for sale of goods), or Sections 108(B)(1) and Section 108(B)(2) (for sale of services) if they are paid for in acceptable foreign currency exchange proceeds duly accounted for in accordance with Bangko Sentral ng Pilipinas (BSP) rules and regulations. Thus, an essential requisite for claiming an input VAT refund is to prove that their corresponding export transactions were paid for in foreign currency.
However, if the Philippine exporter has a payable to the foreign buyer or customer, the parties may just offset their respective receivables and payables, and in such instance, no foreign currency may actually be inwardly remitted to pay for the transaction.
Under BSP Circular 1353, Series of 1992, it is established that payments for exports may be made through various modes. Such modes include intercompany open account offset arrangements. Thus, even if the export transaction or sales were settled through intercompany offset arrangements, they may still qualify as zero-rated export sales for VAT purposes.
In this regard, Revenue Memorandum Circular 42-2003 clarifies that the BIR requirement of full documentation of proofs of inward remittances of export proceeds is no longer enforced. Accordingly, in the case of offsetting arrangements, the following documents should be required:
a) Import documents which created liability accounts in favor of the foreign parent or affiliated company;
b) Other contracts with the foreign or affiliated company that brought about the liabilities that were offset against receivables from export sales;
c) Evidence of proceeds of loans, in case the claimant has received loans or advances from the foreign company;
d) Documents or correspondence regarding offsetting arrangements;
e) Confirmation of the offsetting arrangements by the heads of the business organizations involved;
f) Documents to prove actual export of goods; and
g) Documents to prove that the sales are zero-rated sales.
Further, Revenue Memorandum Order 27-2020, which consolidates and updates the guidelines and procedures on the processing of claims for VAT refund/credit, provides that, in case of constructive remittance, such as an offsetting arrangement, there is a need to submit: (1) a Board resolution authorizing the offsetting arrangement; (2) Intercompany debit or credit memos detailing the amount of constructive remittance under the offsetting arrangement; and (3) Loan documents or proofs of intercompany advances.
The Court of Tax Appeals (CTA) has recently rendered decisions that consider the above BIR issuances recognizing offsetting arrangements as acceptable proof that zero-rated sales are paid for in acceptable foreign currency accounted for in accordance with BSP rules. The CTA has rendered decisions granting input VAT refunds in favor of taxpayers that have strictly complied with all the above requirements. However, in some cases, the CTA has ruled otherwise.
In one case, a witness explained the process by which the offsetting arrangement was implemented. The witness testified that the taxpayer-petitioner received collections from its affiliates through an affiliated clearing house. Each affiliated entity can transact with the clearinghouse through an account opened in its own name at Bank of America. These collections are reflected in the clearing account as a credit transaction (deposit). The taxpayer-petitioner remitted funds from the clearing house to its local bank in the Philippines to finance its operations, and the same were reflected in the clearing account as a debit transaction (withdrawal) against any balance amount. Any withdrawals (debit) made by the taxpayer-petitioner were offset against the collections (credit) it received via intercompany netting. The taxpayer-petitioner further presented its In House Cash Account Statements for the offsetting arrangement.
However, the CTA ruled that while these documents confirm the existence of an intercompany offsetting agreement between the taxpayer-petitioner and an affiliated clearing house, it failed to prove that said netting agreement existed between the taxpayer-petitioner and its other affiliates apart from the clearing house.
According to the court, in the absence of such proof, taxpayer-petitioner failed to show that a valid offsetting agreement existed which may serve as an alternative to the actual inward remittance of foreign currency in consideration for the services it rendered to its other affiliates.
Similarly, in another case, the CTA En Banc denied the claim for VAT refund due to lack of proof of payment in acceptable foreign currency. The CTA ruled that the agreements submitted to court only authorized a set-off of credits between the head office and a borrowing affiliate, rather than among the affiliates themselves. Accordingly, taxpayer-petitioner in this case failed to establish any authority permitting the offsetting of credits between taxpayer-petitioner itself and another affiliate of the head office company.
Based on these rulings, multinationals must ensure that offsetting agreements bind all transacting affiliates. Ultimately, the court will decide on whether the intercompany offsetting agreement will be sufficient to serve as alternative proof that zero-rated sales are paid for in acceptable foreign currency accounted for in accordance with BSP rules.
Keshia Daniell L. Valencia is an Associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com.
The article was published at the More to Follow Column at The Manila Times on September 10, 2026. Please see this link.