By Euney Marie Mata-Perez on March 24, 2022

In last week’s article, we discussed Revenue Memorandum Circular (RMC) 24-2022, which interpreted the rules on value-added tax (VAT) zero rating under the National Internal Revenue Code as amended by the Create Act (Republic Act 11534). Specifically, RMC 24-2002 interpreted the provisions of Sections 294(E) and 295(D) of the Tax Code, which provide that VAT zero-rating on local purchases only applies to goods and services directly and exclusively used in the registered project or activity by a registered business enterprise (RBE).

So, what happens if a supplier erroneously passes on VAT to an RBE or it is later discovered that such input VAT was not directly and exclusively used in the registered project or activity of an RBE? Can the RBE validly apply for a refund from the Bureau of Internal Revenue (BIR)?

There are two tax refund provisions in the Tax Code: Section 229, on the recovery of erroneously or illegally collected tax payments; and Section 112(A) on the refund of unutilized input VAT attributable to zero-rated sales. Section 112(A) prescribes that “any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two 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.”

Also, Article 2154 of the New Civil Code states that “if something is received when there is no right to demand it and it was unduly delivered through mistake, the obligation to return it arises.” This doctrine is also known as “solutio indebiti,” wherein no person shall be unjustly enriched at the expense of another.

No one is exempt from the principle of solutio indebiti, not even the government. Therefore, in cases of erroneous payment of taxes to the government, the latter has the obligation to refund the erroneous payment to the taxpayer. Any tax that is not due but otherwise paid to the government is not a property of the government but a property right that is protected by the Constitution. (Commissioner of Internal Revenue vs Estate of Cabrera, CTA EB Case 1503, July 25, 2017; Winebrenner and Iñigo Insurance Brokers Inc. vs CIR, GR 206526, Jan. 28, 2015).

However, it is noteworthy that the principle of solutio indebiti has been applied by our courts only to tax refunds under Section 229 of the Tax Code but not to the refund of input VAT under Section 112(A).

The Court of Tax Appeals has opined that erroneously passed on input VAT by a supplier is not considered to be a tax “excessively” collected by the government. Stated differently, the unutilized input VAT that may be erroneously passed on to the buyer/taxpayer is not deemed paid by such buyer or taxpayer to the BIR “erroneously” or “by mistake.” Therefore, the doctrine of solutio indebiti cannot apply (Coca-Cola Bottlers Philippines Inc. vs CIR, CTA Case 8218, April 29, 2014).

In the landmark case of Coral Bay Nickel Corp. vs CIR (GR 190506, June 13, 2016), the Supreme Court held that the reporting and remittance of VAT paid to the BIR is the obligation of the seller or supplier. Hence, the proper party to seek the tax refund or credit should be the suppliers, not the taxpayer to whom the VAT was erroneously passed on and the taxpayer’s recourse is to seek refund from its suppliers, not from the BIR.

Adopting the same position, the BIR stated in RMC 24-2022 that should a local supplier inadvertently pass on VAT to an RBE, the supplier may seek reimbursement of the VAT paid, if any, from the BIR. Its claim will be pursuant to Section 229 of the Tax Code. However, the RBE itself cannot seek the refund of such input VAT, whether under Section 112(A) or under Section 229 of the Tax Code.

RMC 24-2022 expressly states that “reconciling both provisions (introduced by Create and Section 112[A]), VAT paid or incurred for purchases not directly and exclusively used in the registered project or activity of the registered export enterprise are not allowed for VAT refund under Section 112(A) of the Tax Code, as amended.”

However, RMC 24-2022 provides that the RBE has the following options:

– If VAT-registered and enjoying income tax holiday, claim the passed-on VAT as input tax credit under Section 110 of the Tax Code and apply against future output VAT liabilities;

– If there are no sales subject to VAT, accumulate the input tax credits and claim as VAT refund upon expiration of VAT registration; or

– If non-VAT registered, charge to cost or expense account.

It is important to note that RMC 24-2022 mandates that suppliers must seek prior BIR approval for sales to RBEs to qualify for zero rating. Absence of such may result in the disallowance of the VAT zero-rated sale.

#vat #philippineVAT #VATphilippines #tax #taxation #taxphilippines #philippinetaxVAT #create #registeredbusinessenterprise 

Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo and Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by the Asia Business Law Journal.

https://www.manilatimes.net/2022/03/24/business/top-business/erroneously-passed-on-input-vat/1837362