Fritzie Presley, Inc. (FPI) is a domestic corporation engaged in Value Added Tax (VAT) zero-rated transactions. In the second quarter of 2022, the input taxes of FPI from zero-rated sales amounted to PHP 9,811,152.02. The accountant of FPI advised to refund the input taxes and not to offset it with output taxes. On July 10, 2023, FPI filed a claim to refund the input taxes before the Bureau of Internal Revenue (BIR) but was denied. FPI elevated the case to the Court of Tax Appeals (CTA). Meantime, the BIR’s assessment against FPI for deficiency output VAT for the second quarter of 2022 in the amount of PHP 8,501,355.53 became final and executory. After trial, the CTA granted FPI’s claim for refund but only for PHP 1,309,796.49 representing the difference between the excess input taxes and deficiency output taxes. The CTA held that since FPI has deficiency output taxes for 2022, the input taxes must first be applied against the deficiency taxes, and only the balance should be allowed for refund. On the other hand, FPI argued that the taxpayer- claimant has the option to charge the input taxes from zero-rated sales against the output taxes. May the CTA offset the input taxes against deficiency output taxes even without the taxpayer-claimant choosing this option? Explain.
Suggested answer only. Not an official answer and not legal advice.
No, the CTA may not offset the input taxes against the deficiency output taxes without the taxpayer choosing this option. Under Section 112(A) of the NIRC and Chevron Holdings, Inc. v. CIR, the law does not require a taxpayer to first offset input
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Quick check
Under Section 112(A) of the NIRC, who holds the option to offset input taxes against output taxes or seek a refund?
Under Section 112(A) of the NIRC, the option to apply input taxes against output taxes or seek a refund belongs exclusively to the taxpayer.
In Chevron Holdings, Inc. versus CIR, what did the Supreme Court hold regarding the offsetting of zero-rated input taxes?
The law does not require a taxpayer to first offset input taxes from zero-rated sales against output taxes before a refund claim may prosper.
What is the primary statutory requirement under Section 112(A) of the NIRC regarding the input tax sought to be refunded?
Section 112(A) requires that the input tax attributable to zero-rated sales has not been previously applied against any output tax.
May the Court of Tax Appeals offset input taxes against deficiency output taxes without the taxpayer's election?
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Which statute governs the refund or tax credit of creditable input tax attributable to zero-rated VAT sales?
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Learn more about these topics
1. Taxpayer Offsetting Option
Under Section 112(A) of the National Internal Revenue Code, a VAT-registered person whose sales are zero-rated or effectively zero-rated may apply for the issuance of a tax credit certificate or refund of creditable input tax attributable to such sales. In Chevron Holdings, Inc. versus Commissioner of Internal Revenue, the Supreme Court ruled that the choice to offset input tax against output tax or to claim a direct cash refund belongs exclusively to the taxpayer. Neither the Bureau of Internal Revenue nor the Court of Tax Appeals may compel an offset without the taxpayer's consent.
2. Zero Rated Input
Under Section 112(A) of the National Internal Revenue Code, input taxes paid on purchases of goods, supplies, and services attributable to VAT zero-rated transactions are creditable against output taxes or refundable. The statutory prerequisite for claiming a refund of input tax under Section 112(A) is simply that the input tax has not been applied against any output tax of the taxpayer. The law does not mandate that the taxpayer must first exhaust or offset input tax against existing output tax liability or deficiency assessments prior to qualifying for a tax credit certificate or monetary refund.
3. Mandatory Offsetting Absence
Judicial or administrative offsetting of taxes is not automatically permitted in Philippine taxation without statutory authorization or taxpayer election. While the government may assess deficiency output VAT, the Court of Tax Appeals cannot unilaterally deduct deficiency taxes from valid refundable input taxes in a refund proceeding when the taxpayer elected to claim a full refund. Forcing an unchosen offset deprives the taxpayer-claimant of its statutory prerogative under Section 112(A) and undermines the distinct procedural mechanisms governing tax assessment disputes versus tax refund claims.