Many of us kick off our day with a cup of coffee. Coffee has become my staple beverage to boost my energy before starting my day. Yesterday, while I was having my favorite black roast coffee, I received an overseas call from my childhood friend, who told me in a low voice that she had won a lottery prize. I was curious why she was not excited when she said she had won. Later, she told me that she was disqualified from claiming the prize due to discrepancies in the documents produced for verification.
This is likewise true when dealing with the Bureau of Internal Revenue (BIR). During tax assessments and even in applications for tax refunds or credits, taxpayers are normally required to present documents to substantiate claims for expenses, exemptions, input taxes, and income tax credits. If the taxpayer fails to submit proper documents supporting the claim, the BIR will impose deficiency taxes, or even subject the taxpayer’s claim to disallowance due to discrepancies. But the question now is, should there be a discrepancy in the amount being claimed vis-à-vis the evidence presented, will that always amount to disallowance?
This was answered in the recently promulgated decision of the Court of Tax Appeals En Banc (CTA EB) on the consolidated petitions for review filed by Maersk Global Services Centres (Philippines) Ltd. vs. Commissioner of Internal Revenue (CTA EB No. 2541) and Commissioner of Internal Revenue vs. Maersk Global Services Centres (Philippines) Ltd. (CTA EB No. 2547).
In the case, the petitioner-taxpayer made a purchase from a service provider, which issued a corresponding VAT official receipt (OR) showing the VAT amount on the purchase. Later, the input VAT on this purchase was included in petitioner-taxpayer’s application for refund of its unutilized excess input VAT. It turned out that the input VAT being claimed by the petitioner-taxpayer is lower than the amount of VAT indicated in the OR; thus, the discrepancy. This resulted in disallowance by the BIR due to petitioner-taxpayer’s violation of the substantiation requirements.
Upon reaching the CTA En Banc, the latter ruled in favor of the petitioner-taxpayer and allowed the input VAT being claimed by it on its purchase. The CTA En Banc applied the well-settled rule for income tax, that is, taxpayers are free to deduct from their gross income a reduced amount, or not to claim any deduction at all. What is prohibited by the income tax law is claiming a deduction beyond the amount authorized. The rule, although pertaining to income tax, can be logically applied to input VAT refund or credit, according to the CTA En Banc. Clearly, the CTA En Banc applied by analogy this rule, and thus reasoned that a taxpayer should likewise be free to deduct from output VAT an input VAT which is lower than the actual amount of input VAT stated in the VAT invoice or VAT official receipt.
In ruling for the allowance of the input VAT being claimed despite the discrepancy in the actual amount of input VAT as appearing on the face of the VAT official receipt, one might think that the CTA En Banc has deviated from the time-honored principle that since a tax refund partakes the nature of an exemption, it must be strictly construed against the claimant who must discharge such burden convincingly, especially that in VAT cases, the main evidence that a taxpayer holds would be the VAT ORs and/or invoices. Thus, a taxpayer must clearly and properly substantiate its claim by following the rules on substantiation and invoicing requirements by the letter.
In the above-mentioned case, however, the CTA En Banc noted that although there was a discrepancy as to the amount of input VAT being claimed which is lower than the amount of input VAT amount appearing on the face of the receipt, the amount being claimed is still well within the input VAT that the petitioner-taxpayer is allowed to claim. Thus, it is but proper to allow the input VAT, according to the Court.
It is worth noting that in applications for refund of unutilized excess input VAT, it is incumbent on the part of the taxpayer to comply with the substantiation and invoicing requirements of the tax bureau. It is likewise the duty of every taxpayer to explain the differences and present related documents to support the same. Nevertheless, it can still be inferred, based on this persuasive decision of the CTA sitting En Banc, that not all differences or even discrepancies in the input VAT as stated in the VAT OR vis-à-vis the actual amount of input VAT being claimed, would be considered grounds for the automatic disallowance by the BIR.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Ma. Jessica A. Guevarra is a manager from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.