What happens to a VAT refund claim after it has been finally denied by the BIR or the courts?
The usual reaction is to consider the matter closed. The taxpayer claimed a refund, the claim was denied, and the amount is lost.
But is that necessarily the correct result?
A related question is whether a taxpayer should be allowed to return the denied amount to its VAT return as unutilized input VAT or, if that is no longer possible, recognize the amount as a loss for income tax purposes.
This issue deserves attention because not all denied VAT refund claims are denied for the same reason.
When a taxpayer files a VAT refund claim, the amount being claimed is effectively removed from the unutilized input VAT portion of the VAT return and transferred to the portion relating to the amount being claimed for refund. The taxpayer is no longer intending to carry the amount over as input VAT; it is seeking to recover it through a refund.
But what if the refund is later denied?
One case that provides guidance is a decision of the Court of Tax Appeals (CTA) in CTA EB No. 1786. The taxpayer had applied for a refund of input VAT. The claim was eventually denied by the Department of Finance. The taxpayer then wrote off the denied amount and claimed it as a deduction from gross income.
The CTA En Banc allowed the deduction. It found that while the Tax Code specifically provides refund or tax credit as a means of recovering unutilized input taxes attributable to zero-rated sales, it did not categorically prohibit another mode of recovery.
The court therefore allowed the taxpayer to recognize the amount as a loss. It is worth noting that the denial was mainly due to non-compliance with invoicing requirements.
The decision, however, did not settle the issue.
The BIR subsequently took a different position.
In BIR Ruling No. 16-2024, a taxpayer cited the decision in CTA EB No. 1786 in asking whether an unclaimed or denied VAT refund could be recorded as a miscellaneous expense for income tax purposes.
The BIR said no.
Among the reasons given was that the Tax Code provides refund or tax credit as the means of recovering unutilized input VAT attributable to zero-rated sales. The BIR also took the position that the rule of following prior court rulings applies only to decisions of the Supreme Court and that a CTA decision does not have the same binding effect.
The BIR consequently relied on RMC No. 57-2013, which provides that unutilized creditable input taxes attributable to zero-rated sales may only be recovered through a refund or tax credit.
Thus, the BIR’s present administrative position is that a denied VAT refund cannot simply be converted into an income tax deduction.
The CTA En Banc decision mentioned above remains relevant. It provides judicial support for treating a finally denied claim as a loss, although taxpayers adopting this position should recognize the possibility of a BIR challenge during an audit.
There is another issue, perhaps more important: What happens to the input VAT itself?
In BIR Ruling No. 45-2023, the BIR denied a taxpayer’s request to reverse or return a denied refund claim as excess input VAT in a subsequent VAT return. According to the BIR, the Tax Code does not provide that a denied refund claim may be recovered through a reversal or return to the VAT return.
I believe a distinction should be made here.
A refund claim can be denied for different reasons. A taxpayer may fail to provide sufficient documentary support or may submit defective documents. In such a case, there may be a legitimate question as to whether the taxpayer has sufficiently established its entitlement to the input VAT.
That is different from a refund claim being denied because it was filed prematurely or beyond the prescribed period.
Take a taxpayer with legitimate input VAT arising from actual purchases and attributable to zero-rated sales. The taxpayer files a refund claim, but the claim is denied because it was filed prematurely.
The denial does not necessarily mean that the taxpayer did not have the input VAT. The problem was with the timing of the refund claim.
The same issue arises when a refund claim is filed out of time. The taxpayer may have lost the right to recover the amount through a refund, but that does not necessarily mean that the underlying input VAT was never valid.
This distinction is important. When the taxpayer filed the refund claim, the input VAT was removed from the unutilized input VAT balance precisely because the taxpayer was pursuing a refund. If the refund is later denied for a reason that does not invalidate the underlying input VAT, why should the amount permanently disappear from the VAT system?
The present BIR rules do not provide an answer favorable to the taxpayer.
Perhaps the rules should be changed.
There should be a mechanism allowing a taxpayer, subject to appropriate safeguards, to return a denied refund claim to its unutilized input VAT when the denial is based solely on timing or another procedural ground and does not establish that the underlying input VAT is invalid.
The taxpayer should prove that the input VAT actually exists, is properly supported, has not previously been utilized or recovered, and that reinstating it will not result in double recovery.
The situation should be different when the refund is denied because the taxpayer failed to establish the underlying input VAT. A taxpayer should not be allowed to use reinstatement as a second opportunity to claim an input tax that it could not substantiate.
This approach would strike a better balance. It would protect the government from unsupported claims while preventing legitimate input VAT from simply disappearing because a taxpayer pursued a refund that was later denied on procedural grounds.
The income tax treatment presents a separate issue.
While the BIR currently does not recognize the denied refund as a deductible expense, the CTA En Banc decision mentioned above provides a reasonable basis for treating the amount as a loss where the taxpayer has suffered an actual and final economic loss.
Whether a taxpayer should take this position will depend on the legal authorities, the circumstances of the denial and its tolerance for an audit challenge.
Ultimately, this is not simply a question of whether a taxpayer should be given another tax benefit.
It is a question of what should happen to legitimate input VAT after the refund mechanism fails.
If the underlying input VAT was never valid, there is no reason to return it to the taxpayer’s VAT return. But if the input VAT was valid and the refund was denied only because the claim was filed prematurely or beyond the prescribed period, permanently eliminating the input VAT may be difficult to justify.
The BIR circulars do not presently provide a mechanism for this.
To be fair to taxpayers, the law, or even a revenue issuance, should consider providing one.
A refund claim may be denied. But that should not automatically mean that the underlying input VAT disappears with it.
The author is a senior partner of Du-Baladad and Associates Law Offices (BDB Law) (www.bdblaw.com.ph).
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal, or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported, therefore, by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at irwin.c.nideajr@bdblaw.com.ph or call 8403-2001 local 330.