Conditions for availment of transitional input tax

Under Section 105 [now 111(A)] of the Tax Code, a person who becomes liable to VAT or who elects to be a VAT-registered person is entitled to transitional input tax credits, which shall be creditable against the output tax. The transitional input tax is equivalent to 8% of the value of the taxpayer’s beginning inventory of goods, materials and supplies or the actual VAT paid on such goods, materials and supplies, whichever is higher. The taxpayer shall file an inventory of such goods as prescribed by regulations.

According to the Supreme Court (SC), prior payment of taxes is not required to avail of the 8% transitional input tax. The SC said that there is nothing in the provisions of Section 105 of the Tax Code which indicate that prior payment of taxes is necessary for the availment of the 8% transitional input tax. All that is required under Section 105 of the Tax Code is for the taxpayer to file a beginning inventory with the BIR.

The SC pointed out that the requirement for prior payment is not only tantamount to judicial legislation but would also render nugatory the provision in Section 105 of the Tax Code that the transitional input tax credit shall be “8% of the value of the beginning inventory or the actual VAT paid on such goods, materials and supplies, whichever is higher,” because the actual VAT (now 12%) paid on the goods, materials, and supplies would always be higher than 8% (now 2%) of the beginning inventory. According to the SC, limiting the value of the beginning inventory only to goods, materials, and supplies where taxes were paid is not the intention of the law. Otherwise, the SC held that the law would have specifically stated that the beginning inventory excludes goods, materials and supplies where no taxes were paid.

Further, the SC maintained that prior payment of taxes is not required to avail of the transitional input tax because it is not a tax refund per se but a tax credit.  The SC distinguished between a tax credit and tax refund, and held that unlike a tax refund, prior payment of taxes is not a prerequisite to avail of a tax credit.

As regards Section 4.105-1 of Revenue Regulations No. (RR) 7-95, which limited the 8% transitional input tax credit to the value of the improvements on the land, the SC further held that RR 7-95 contravenes the provision of Section 105 of the Tax Code, in relation to Section 100 of the Tax Code, which defines the term “good or properties” to include, among others, real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business.

Accordingly, the SC held that transitional input tax should not be limited to the value of improvements on the real properties but should include the value of real properties. Hence, the SC ruled that Section 4.105-1 of RR 7-95, in so far as it limits the transitional input tax to the value of improvements of the real properties, is a nullity.

(Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue, et. al., GR 173425, September 4, 2012)

Tax Brief – October 2012

Punongbayan and Araullo