Dear Atty. Gab,

Musta Atty! I hope this email finds you well.

My name is Felipe Castillo, and I run a small furniture manufacturing business here in Pampanga called “Kahoy Kreations.” We specialize in custom pieces made from quality wood. Recently, we’ve started exporting some of our dining sets and cabinets to clients in Singapore and Australia, which has been exciting but also brings new challenges, especially with taxes.

My main concern involves the imported hardwood we use. Our supplier in Manila handles the importation and pays the necessary duties and, importantly, the excise taxes on the wood before selling it to us. Naturally, they factor these taxes into the price we pay for the raw materials. I was recently reading online about potential tax refunds or credits for goods that are exported. Since a significant portion of the value of my exported furniture comes from this taxed wood, I started wondering if Kahoy Kreations could claim a refund for the excise taxes initially paid by my supplier.

I’m quite confused because while my supplier technically paid the tax to the BIR, I’m the one who ultimately shouldered that cost as part of my purchase price, and I’m the one actually exporting the finished product. Does the fact that I exported the goods entitle me to claim the refund, even though I wasn’t the one who directly paid the BIR? Or is my supplier the only one who can apply for this? This could make a difference to our small business’s bottom line.

Any clarification you could provide on who is the proper party to claim such refunds under our tax laws would be greatly appreciated.

Salamat po,

Felipe Castillo

Dear Felipe,

Thank you for reaching out. It’s great to hear about Kahoy Kreations expanding into exports! Your question about claiming refunds for excise taxes paid on materials used in exported goods is a common and important one for businesses like yours.

In essence, Philippine tax law distinguishes between the person legally liable to pay a tax (the statutory taxpayer) and the person who ultimately bears the economic burden. For indirect taxes like excise tax, the law generally grants the right to claim a refund only to the statutory taxpayer – the entity that directly paid the tax to the government. Even if this cost was passed on to you in the purchase price of the wood, the right to the refund typically remains with your supplier, who was legally obligated to pay the excise tax upon importation.

Understanding Excise Tax Refunds for Exported Goods

Let’s delve deeper into the principles governing excise tax refunds in the context of exportation. Excise taxes in the Philippines are generally considered indirect taxes. This means that while the tax is imposed on the manufacturer, producer, or importer of certain goods (like your supplier for the imported wood), the economic burden of the tax is often shifted or passed on to the buyer (you, in this case) as part of the selling price.

It’s crucial to understand the difference between bearing the economic burden and having the legal liability to pay the tax. When your supplier included the excise tax cost in the price of the wood they sold you, they effectively shifted the economic burden. However, the legal liability to remit that tax to the Bureau of Internal Revenue (BIR) remained with them. They are considered the statutory taxpayer concerning the excise tax on the imported wood.

The National Internal Revenue Code of 1997 (Tax Code) specifies who is liable for excise taxes. For imported goods, the liability generally falls on the importer before the goods are released from customs. For domestic goods, it’s the manufacturer or producer before removal from the place of production.

Section 130(A)(1) of the Tax Code identifies the persons liable: “Every person liable to pay excise tax imposed under this Title shall file a separate return… Should domestic products be removed from the place of production without the payment of the tax, the owner or person having possession thereof shall be liable for the tax due thereon.” (While this part focuses on domestic production removal, the principle links liability to the entity obligated to pay before removal/release).

This establishes that the legal obligation rests with the entity designated by law, which, in the case of your imported wood, is your supplier.

Now, regarding refunds for exported goods, the relevant provision is Section 130(D) of the Tax Code:

Section 130(D) states: “Credit for Excise tax on Goods Actually Exported. – When goods locally produced or manufactured are removed and actually exported without returning to the Philippines, whether so exported in their original state or as ingredients or parts of any manufactured goods or products, any excise tax paid thereon shall be credited or refunded upon submission of the proof of actual exportation and upon receipt of the corresponding foreign exchange payment…” (Emphasis added)

While this section allows for a refund or credit when goods (or their ingredients) are exported, the critical phrase “any excise tax paid thereon shall be credited or refunded” is generally interpreted in conjunction with who is considered the taxpayer. The Supreme Court has consistently held that the right to claim a refund for indirect taxes belongs to the statutory taxpayer – the person on whom the law imposes the direct liability for payment.

Furthermore, the general provision on tax refunds reinforces this:

Section 204(C) of the Tax Code provides: “No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty…” (Emphasis added)

The term “taxpayer” is defined under Section 22(N) of the Tax Code as “any person subject to tax.” In the context of excise tax on imported goods, this refers to the importer – your supplier. Therefore, combining these provisions, the legal framework points towards the supplier, as the statutory taxpayer who actually paid the tax, being the proper party to file the claim for refund under Section 130(D).

Unlike the Value-Added Tax (VAT) system, where the law explicitly allows subsequent purchasers in the chain to claim input VAT credits, the Tax Code does not have a similar provision for excise taxes that automatically transfers the right to claim a refund to the purchaser who bears the passed-on cost. When the excise tax was incorporated into the cost of the wood you purchased, it ceased to be a ‘tax’ from your perspective and became part of the cost of your raw materials.

Lastly, it’s a well-settled rule in taxation that claims for tax refunds or exemptions are construed strictissimi juris – meaning strictly against the claimant and liberally in favor of the taxing authority. The claimant must unequivocally prove they fall under the provision allowing the refund. In your situation, since you are not the statutory taxpayer who paid the excise tax, establishing a clear legal right to the refund under current interpretations might be difficult.

Practical Advice for Your Situation

• Confirm the Proper Claimant: Based on prevailing jurisprudence and the Tax Code, your supplier, as the importer and statutory taxpayer who paid the excise tax, is generally considered the proper party to claim the refund or tax credit under Section 130(D).
• Review Supplier Agreements: Check your purchase agreements or contracts with your supplier. See if there are any clauses regarding the treatment of passed-on taxes, particularly in the event of refunds related to exportation.
• Discuss with Your Supplier: Have an open conversation with your supplier. Since they are the likely entity entitled to claim the refund, explore if they are willing to file the claim. You might negotiate an arrangement where the benefit of the refund, if granted, could be shared, potentially through future pricing adjustments.
• Maintain Documentation: Regardless of who files, ensure you meticulously keep all proofs of exportation (e.g., export declarations, bills of lading, invoices) and proof of receipt of foreign currency payments, as these are requirements under Section 130(D). Also, keep records showing the excise tax component passed on by your supplier.
• Note the Prescriptive Period: Tax refund claims must generally be filed within two (2) years from the date the tax was paid. Since your supplier paid the tax, the two-year period runs from their date of payment to the BIR.
• Supplier’s Cooperation is Key: If your supplier files the claim, they will need documentation tracing the taxed raw materials to your exported finished products, which would require your cooperation.
• Consult a Tax Professional: For navigating the specifics, including documentation and potential negotiations with your supplier, consulting with a tax advisor experienced in excise tax refunds is highly recommended. They can provide tailored guidance based on your exact circumstances and supplier relationship.

Navigating tax refunds can be complex, Felipe. While you bore the economic cost, the legal right to claim the excise tax refund generally stays with the entity legally liable for its payment – your supplier. Exploring cooperative solutions with them might be your most viable path forward.

Hope this helps!

Sincerely,
Atty. Gabriel Ablola

For more specific legal assistance related to your situation, please contact me through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This correspondence is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please schedule a formal consultation.