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July 9, 2010

BIR RULING [DA-(VAT-021) 121-10]

RR 9-89; RMC 42-2003; 110; 112; VAT


Ruling No. 059-92;
BIR Ruling Nos. DA-636-2006; DA-(VAT-
086)539-09

JGC Corporation Manila-ROHQ


7th Floor, JGC Phil. Building, 2109 Prime St.
Madrigal Business Park, Ayala Alabang
Muntinlupa City
Attention: Mr. Hiroki Kitajima
Authorized Representative

Gentlemen :

This refers to your letter dated January 19, 2009 requesting for con rmation that
the input taxes shifted or passed-on to JGC Manila ROHQ by its local value-added tax
(VAT) registered suppliers of goods, properties and services may be recognized
outright as an expense for income tax purposes, or be added to the acquisition cost
upon purchase of the capital asset subject to depreciation, as the case may be.
It is represented that JGC Corporation Manila-ROHQ ("JGC Manila ROHQ") is a
multi-national company organized and existing under the laws of Japan and engaged in
the business of IT-enabled engineering, procurement and construction services.
On December 11, 2000, JGC Manila ROHQ registered with the Securities and
Exchange Commission (SEC) as a regional operating headquarters in the Philippines for
which it was issued a license to engage certain qualifying services, to wit:
• general administration and planning;
• business planning and coordination;
• sourcing/procurement of raw materials and components;
• corporate finance advisory services;
• marketing control and sales promotion;
• training and personnel management;
• logistics services; DHETIS

• research and development services and product development;


• technical support and maintenance;
• data processing and communications; and
• business development.
JGC Manila ROHQ renders such qualifying services mostly to its head o ce in
Japan and other related companies abroad, for which it bills the latter in foreign
currency on the basis of man-hours incurred by its expatriate employees. JGC-ROHQ is
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VAT-registered, and since most, if not all of its revenues are derived from its services
rendered to its head o ce and other a liates abroad, its sales are mostly subject to
VAT at 0%.
Since JGC Manila ROHQ makes local purchases of various supplies and services,
consisting primarily of fuel, hotel accommodation, subcontractor services, utilities, etc.,
for which it is subjected to the value-added tax of 12% shifted or passed-on to it by its
local sellers or suppliers of such goods or services, it constantly accumulates
creditable input taxes in its balance sheet. Since the services of JGC Manila ROHQ are
mostly VAT zero-rated, it has no other sales transactions subject to twelve percent
(12%) VAT which may be applied or used as payment for the input tax shifted or
passed-on to it.
In reply, please be informed that in VAT Ruling No. 059-92 dated April 28, 1992,
this O ce elucidated that if the Mining Company have no other sales transactions
subject to VAT against which their input taxes may be used in payment, then, it follows,
that they are constituted as the nal persons against which the costs of the tax passed
on shall legally stop and rest, hence, in this connection, the said input taxes may already
be legally converted as cost available as deduction for income tax purposes.
Moreover, in several CTA cases (Atlas Consolidated Mining & Development Corp.
vs. CIR (CTA Case No. 4749 dated April 5, 1994), Benguet Corporation vs. CIR (CTA
Case Nos. 4686 and 4829 dated Sept. 27, 1995), the CTA has impliedly agreed with the
treatment of input taxes in VAT Ruling No. 059-92 as cost which may be deducted from
income for income tax purposes. TcCSIa

In Court of Appeals (CA) Case CA-G.R. S.P. Nos. 37205, 38958 and 39435 dated
July 10, 1998, involving Benguet Corporation vs. CIR, though the CA opined that the
remedy suggested by the CTA in the CTA cases mentioned above would not result in
the full recovery of the cost of input taxes, it did not disagree on the treatment of input
taxes as deduction for income tax purposes. A perusal of Revenue Regulations No. 9-89
(Guidelines in Determining Refundable/Creditable Input Taxes Attributable to Zero-
Rated Transactions), this O ce illustrated the sample journal entry to record
disallowance of input taxes attributed to zero-rated sales in a company's claim for
refund. The pro-forma journal entry includes a Debit to Purchase or Cost of Sales for an
amount equivalent to the disallowed input tax and a credit to Receivables. The
foregoing entry, a debit to Purchases or Cost of Sales of the amount of the disallowed
input tax is a cost recovery method whereby the amount of tax/cost (i.e., input tax) duly
identi able with the particular asset sold but cannot be passed on as part thereof may
be claimed as expense deductible from the taxpayer as gross income.
In BIR Ruling Nos. DA-636-06 dated October 27, 2006 and DA-(VAT-086)539-09
dated September 15, 2009, this O ce had already made con rmation that creditable
input taxes whose periods for refund have already prescribed may be deducted from
gross income for income tax purposes.
Finally, Revenue Memorandum Circular (RMC) No. 42-2003 dated July 15, 2003,
provides that the input VAT claimed for refund or tax credit may be charged to
appropriate expense account or asset account subject to depreciation, whichever is
applicable, in case the zero-rated sales fail to comply with the invoicing requirement,
e.g., including the TIN of the VAT registered seller-claimant in the VAT invoice or VAT
receipt it issued to its customers. Thus:
A-13: Failure by the supplier to comply with the invoicing requirements on
the documents supporting the sale of goods and services will result to the
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disallowance of the claim for input tax by the purchaser-claimant. AEcIaH

If the claim for refund/TCC is based on the existence of zero-rated sales


by the taxpayer but it fails to comply with the invoicing requirements in the
issuance of sales invoices (e.g., failure to indicate the TIN), its claim for tax
credit/refund of VAT on its purchases shall be denied considering that the
invoice it is issuing to its customers does not depict its being a VAT-registered
taxpayer whose sales are classified as zero-rated sales. Nonetheless, this
treatment is without prejudice to the right of the taxpayer to charge the input
taxes to the appropriate expense account or asset account subject to
depreciation, whichever is applicable. Moreover, the case shall be referred by the
processing office to the concerned BIR office for verification of other tax
liabilities of the taxpayer. (Emphasis supplied)
Based on the foregoing, it is clear that a disallowed claim of a VAT-registered
taxpayer for a tax credit for the issuance of tax credit certi cate on the input taxes
attributable to its zero-rated sales of goods or services may, in lieu of being subject to
a claim for tax credit or refund, be charged to expense or cost of the goods or services
sold for the corresponding period in computing for its net taxable income subject to
the corporate income tax, which in this case, is the 10% income tax on ROHQs.
Accordingly, this O ce con rms your opinion that the input taxes shifted or
passed-on to JGC Manila ROHQ by its local VAT-registered suppliers of goods,
properties and services may be recognized outright as an expense for income tax
purposes, or be added to the acquisition cost upon purchase of the capital asset
subject to depreciation, as the case may be. This treatment shall likewise apply to
situations involving input taxes sales already recognized in the books of JGC Manila
ROHQ where: (1) the two (2) year prescriptive period had already lapsed without any
claim for refund or credit having been led; (2) the claim for refund or credit was denied
or rejected by the BIR for having been led beyond the 2-year prescriptive period or for
non-compliance with invoicing/substantiation requirements; or (3) a claim for refund or
credit is still pending with the BIR but is voluntarily withdrawn by JGC Manila ROHQ.
Provided, that in regard to input taxes attributable to the latter's zero-rated sales which
it recognizes outright as an expense or charges to asset account subject to
depreciation, as the case may be, (i) the input taxes shifted or passed-on to JGC Manila
ROHQ shall not be recorded as input tax in its books; (ii) the input taxes shifted or
passed-on to JGC Manila ROHQ shall not be re ected/reported as input tax in its VAT
returns; and (iii) the input taxes shifted or passed-on to JGC Manila ROHQ shall not be
claimed by the latter as tax refund or tax credit. cAEaSC

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation it will be disclosed that the facts are different, then this
ruling shall be considered null and void.

Very truly yours,

Commissioner of Internal Revenue


By:
(SGD.) GREGORIO V. CABANTAC
Deputy Commissioner
Legal and Inspection Group

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