The unsettled rule on attribution to zero-rated sales in VAT refund claims

The unsettled rule on attribution to zero-rated sales

By: Anthea Marie L. Cortez


Tax refund has never been an easy process, especially in the Philippines.  Some say that getting a tax refund in the Philippines is almost next to impossible, a tedious and a time-consuming process that can trigger a mandatory tax audit on the taxpayer.

the unsettled rule on attribution to zero-rated sales in VAT refund claims

For companies, however, who are engaged in zero-rated sales but have accumulated input VAT on their purchases of goods and services, the option to file a claim for VAT refund cannot be quickly brushed aside no matter the difficulties involved, especially if the claim is substantial or significant.

Under Section 112(A) of the Tax Code, a VAT-registered person whose sales are zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for a refund of creditable input tax due or paid attributable to such zero-rated sales.  

Based on this Tax Code provision, in order to be entitled to a refund of input tax due or paid attributable to zero-rated sales, the following requirements must be met: (1) the taxpayer is VAT-registered; (2) there are zero-rated sales; (3) input taxes were incurred or paid; (4) input taxes claimed are attributable to zero-rated sales; (5) input taxes have not been applied against any output VAT liability; and (6) the claim was filed within the prescribed periods both in the administrative and judicial levels.

With regard the fourth (4th) requirement, i.e. that input taxes claimed are attributable to zero-rated sales, there is a recent Court of Tax Appeals case wherein the tax court sitting En Banc held that a PEZA-registered entity’s claim for VAT refund should be denied because the input VAT claimed were not proven to be attributable to zero-rated sales.   The case involves a PEZA-registered enterprise who enjoyed VAT zero-rating on its export sales.  The PEZA-registered enterprise incurred input taxes in the construction of laborers row houses, foreman’s duplex, dormitory, bus terminals and airport runway.  According to the tax court, these purchases are not related to the export sales and hence, should not be refunded.

Interestingly, in the Dissenting Opinion of the same case the Presiding Justice opined that the input taxes claimed are attributable to zero-rated sales. The Dissenting Opinion noted that the construction of the abovementioned facilities were necessary in the pursuit of the PEZA-registered activity – taking into consideration that the PEZA-registered entity’s plant is located in a remote area where public transport is lacking.  

In an action for tax refund, it is a settled rule that the burden of proof is on the taxpayer. Considering that taxpayers have a daunting task to prove their entitlement to VAT refunds, it would be a welcome development if guidelines can be set on how taxpayers can establish the attributability of input taxes to zero-rated sales. These guidelines could also help taxpayers in assessing whether they have basis to resort to a VAT refund claim under Section 112(A), and whether they can readily comply with the parameters set to support their claim for refund.

Anthea Marie L. Cortez  is an Associate from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email or

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