Refund of input VAT prior to VAT registration

A VAT-registered taxpayer that incurred input VAT on its VAT-zero rated sales prior to its VAT registration is not entitled to claim refund for such unutilized input VAT.

Under Section 112(A) of the Tax Code, in order to be entitled to refund/tax credit of unutilized input VAT, the following requisites must be satisfied: (1) the taxpayer must be

VAT-registered; (2) the taxpayer must be engaged in sales that are zero-rated or effectively zero-rated; (3) the claim must be filed within the two years after the close of the taxable quarter when such sales were made; and (4) the input taxes were not applied against any output VAT liability during and in the succeeding quarters.

In the instant case, the input VAT that was the subject of refund refers to the VAT paid by the taxpayer on its purchase of land, while its alleged zero-rated sale of service occurred when it entered into a lease agreement with its affiliate PEZA-registered IT enterprise. The taxpayer incurred the VAT and the alleged zero-rated transaction took place when the taxpayer was not yet VAT-registered.

Considering that the unutilized input VAT on the purchase of land was incurred by the taxpayer at a time when it was not yet registered as a VAT taxpayer, there is no input VAT that can be a subject of refund.

Moreover, the Court of Tax Appeals (CTA) held that since the land lease agreement was executed before the taxpayer’s VAT registration, its sale of service is not yet considered a VAT zero-rated sale. Hence, for failure to establish that it incurred input taxes and rendered zero-rated sale of service, the taxpayer’s claim for refund was denied by the CTA.

(Crescent Park 14-678 Property Holdings, Inc. v. Commissioner of Internal Revenue, CTA Case No. 8326, June 13, 2013)

Tax Brief – July 2013

Punongbayan and Araullo