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Input VAT Attributable to Zero-Rated Sales: Gross Income Deductible?

Input VAT Attributable to Zero-Rated Sales

By: Moses Daniel D. Lim


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What comes to mind when we talk about excess, unutilized input value-added tax (VAT) that can be allowed as deduction to gross income for tax purposes are the following: input VAT from VAT exempt transactions, input VAT of non-VAT registered persons, and the excess of the actual input VAT from government sales to the seven percent (7%) standard input VAT prescribed under Section 4.114(2)(a) of Revenue Regulations (RR) No. 16-05, as amended.

input vat attributable to zero-rated sales

In Court of Tax Appeals (CTA) En Banc (EB) Case No. 1786 promulgated last June 13, 2019, the CTA denied the petition for review filed by the Commissioner of Internal Revenue (CIR). The petition seeks to reverse the October 11, 2017 decision made regarding an assessment on deficiency income taxes in favor of a taxpayer. To give a brief background, the taxpayer has excess, unutilized input VAT attributable to zero-rated sales of services which was applied for issuance of tax credit certificate or refund with the Department of Finance (DOF) in 2006. However, the taxpayer received on March 11, 2010 the DOF’s denial of the refund claim on the sole ground that it did not strictly comply with the invoicing requirements. In view of the denial, the taxpayer wrote off the same in its books and claimed it as a deduction from gross income for taxable year 2010. Afterwards, the CIR assessed the taxpayer for deficiency income tax as a result of disallowing the deduction of the denied input VAT refund claim.

In determining whether the denied input VAT refund claim may be deducted from gross income or not, the Court concluded that the same met the requisites for deductibility of losses pursuant to Section 34(D)(1)(a) of the Tax Code, as amended. It added that the taxpayer’s treatment of recording followed RR No. 09-89 wherein the journal entry for the denied input VAT refund claim is charged to expense. Also, a separate and concurring opinion made by one of the associate justices cited Revenue Memorandum Circular (RMC) No. 42-2003 which states that the denial of refund caused by failure to comply with invoicing requirements is without prejudice to the right of the taxpayer to charge input taxes to the appropriate expense or asset account subject to depreciation, whichever is applicable.

To counter the above arguments, the CIR then subscribes to the dissenting opinion made by one of the associate justices that the unutilized input taxes attributable to zero-rated sales can only be recovered through an application for refund or tax credit, and there is no specific provision under the law which allows another modality to recover unapplied input taxes arising from zero-rated or effectively zero-rated sales. Also, there is another dissenting opinion which argues that RR No. 09-89 was already superseded by RR No. 14-05 issued on July 1, 2005. Hence, the former may no longer be used as legal basis.

The Court replied that while it recognized that the Tax Code, as amended, specifically mentions refund or tax credit as modes to recover unutilized input taxes attributable to zero-rated sales, it does not categorically prohibit the use of any other mode for its recovery.

In fact, a reading of Section 112(A) of the Tax Code, as amended, suggests that an alternative mode may be resorted to by a taxpayer for the recovery of excess input taxes other than by tax refund or tax credit. Thus:

"SEC. 112. Refunds or Tax Credits of Input Tax. - (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:” (Emphasis supplied)

Thus, the Court mentioned that if the taxpayer desires to fully recover its excess input VAT, i.e., to the extent that such input tax has not been applied against output tax, the law provides only for two (2) modes: either by filing a claim for tax refund or tax credit. However, if the taxpayer decides not to fully recover the same, it may resort to other modes which are not categorically prohibited by any law or rule, and which are based on sound accounting principles and procedure.

Will the above then suggest that the CTA not only allows denied input vat refund claims as deduction, but also interprets the law in such a way that it gives taxpayers liberty on how to treat their unutilized input vat attributable to zero-rated sales?

This further leads to two (2) other possible scenarios of applying excess, unutilized input VAT attributable to zero-rated sales as deduction from gross income. Will the deduction be allowed if the same resulted from the expiration of the two-year period for application for refund? Or what if by virtue of cost-benefit analysis or an impending financial crisis, the taxpayer chooses to immediately apply the same as deduction from gross income within the two-year period?

Under the first scenario, the Bureau of Internal Revenue issued a directly related circular, RMC No. 57-2013, on August 23, 2013, preventing the deduction of expired, unutilized input VAT after the lapse of the two-year prescriptive period. However, it is to be noted that the ground of the denial is the same with the dissenting opinion above. According to the issuance, the Tax Code does not expressly provide for another mode of recovering the excess unutilized input VAT attributable to zero-rated sales.

Under the second scenario, however, we are uncertain if it is permissible. We do not have any issuances directly related to taxpayers, driven by different kinds of situations, who opt to immediately deduct excess, unutilized input VAT without applying for the refund.

It is important to note that the case has been appealed by the CIR to the Supreme Court (SC). Whatever decision the SC will give shall be the final interpretation of the law. We must wait for it and for the guidelines that will be issued in case the deduction will be permitted.

In the meantime, let’s hope that the reduction of the VAT refund process to 90-days will enable timely refund. Finally, as taxpayers, we must do our part to fully comply with the requirements established by law and BIR issuances so that our claims will not be denied.

Moses Daniel D. Lim 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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