Tax lawyers are accustomed to counting days.
In VAT refund cases, however, the more important question is not how many days have passed, but which clock is running.
Recent Supreme Court decisions provide an opportunity to revisit an issue that has long surfaced in VAT refund practice. While the Tax Code has always been clear on the applicable prescriptive period, discussions in practice have often centered on a different point in time. Read together, these decisions demonstrate that VAT refunds are governed not by one clock, but by two. The first determines when the taxpayer’s right to seek a refund arises. The second determines when the Commissioner’s period to act begins. Appreciating the distinction between these two clocks brings greater coherence to a refund mechanism that has too often been viewed simply as an exercise in counting days.
Section 112 of the Tax Code expressly provides that a claim for the refund or tax credit of unutilized input VAT attributable to zero-rated sales must be filed within two years after the close of the taxable quarter when the zero-rated sales were made.
Despite the clarity of this provision, discussions in practice often begin with a different question: When was the input VAT incurred?
That is hardly surprising. Businesses engaged in capital-intensive industries such as power generation, manufacturing, infrastructure, and renewable energy typically incur substantial input VAT during construction, often years before commercial operations begin. From a business perspective, the economic burden arises when VAT is paid on equipment, construction contracts, engineering services, and other project costs.
This commercial reality has naturally shaped the way refund claims are described. They are commonly referred to as involving ‘input VAT incurred during taxable year 2025’ or ‘input VAT incurred during the first quarter of 2026.’ Over time, however, this convenient shorthand may have inadvertently suggested that the two-year prescriptive period likewise begins when the input VAT is incurred.
The Tax Code, however, measures the period differently.
Consider the construction phase of a renewable energy project. At that stage, there are naturally no commercial sales. Purchases giving rise to input VAT necessarily precede the zero-rated sales to which they will eventually be attributed. Construction comes first. Commercial operations follow. The accumulated input VAT is therefore carried forward until qualifying zero-rated sales are made. Otherwise, input VAT incurred during the investment stage would effectively be lost before the taxpayer even begins generating revenue.
The question, then, is this: When does the taxpayer’s right to seek a refund legally arise?
The Supreme Court recently clarified that the right matures only when there are actual zero-rated sales to which the accumulated input VAT may be attributed. It is the occurrence of those sales, not the earlier payment of input VAT, that triggers the statutory two-year period.
This framework is relatively straightforward where the claim involves input VAT accumulated before commercial operations begin. Once the taxpayer starts generating zero-rated sales, it can establish that the previously accumulated input VAT has become attributable to those qualifying transactions.
The more difficult question arises after the business has been operating for several years.
Suppose a refund claim covers input VAT incurred during a particular taxable quarter. Must the taxpayer prove that the zero-rated sales during that same quarter are specifically attributable to each item of input VAT incurred during the period? Must every purchase be traced to a particular zero-rated sale?
These questions illustrate why attribution should not be confused with contemporaneity. Section 112 requires that input VAT be attributable to zero-rated sales. It does not necessarily require that every purchase and every qualifying sale occur within the same taxable period.
The second clock: When does the government’s time to process begin?
Once the taxpayer has properly filed an administrative claim, an entirely different timing question emerges.
When does the Commissioner’s period to act begin?
This issue was comprehensively addressed by the Supreme Court in Commissioner of Internal Revenue v. Team Sual Corporation.
Rather than prescribing a single reckoning point for all administrative claims, the Court harmonized the various legislative amendments and administrative issuances governing VAT refund claims over the years. It explained that the commencement of the Commissioner’s processing period depends on the legal regime in force when the administrative claim was filed.
Claims filed before June 11, 2014 follow one framework. Claims governed by Revenue Memorandum Circular No. 54-2014 follow another. The rules were subsequently refined by the TRAIN Law, the CREATE Act, and most recently, the Ease of Paying Taxes Act.
If the first line of cases explains when the taxpayer’s clock begins to run, Team Sual explains when the government’s clock starts ticking.
Taken together, these decisions offer a more coherent understanding of Section 112. The first clock determines when the taxpayer’s right to seek a refund matures. The second determines when the Commissioner must act on a properly filed administrative claim.
For years, discussions on VAT refunds have understandably focused on counting the two-year prescriptive period. Recent jurisprudence reminds us that the more fundamental inquiry is identifying which clock the law is measuring.
That distinction does more than resolve questions of prescription. It aligns the statutory framework with the commercial realities of long-term investments while ensuring that refund claims rest on a complete factual record. Ultimately, understanding the two clocks of VAT refunds provides greater certainty not only for taxpayers pursuing legitimate refund claims, but also for the administration of the VAT system itself.
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.