Dear Atty. Gab,

Musta Atty! I hope this message finds you well.

My name is Gregorio Panganiban, and I run a small construction company, “Panganiban Builders,” here in Quezon City. We recently finished a major project building a small commercial complex. Over the past year, we purchased a significant amount of materials like cement, steel bars, and electrical components, plus some new equipment like a cement mixer and scaffolding, which I believe are capital goods. Naturally, we paid input VAT on all these purchases, amounting to roughly PHP 550,000.

We also incurred substantial costs for architectural design services, project management consultancy, and rental fees for our temporary site office during the construction period. The input VAT on these services totals around PHP 150,000.

Now that the project is done and we haven’t had enough output VAT to offset all this input VAT, I was hoping to claim a refund from the BIR. However, I encountered a potential issue. For about three months last year, some of our suppliers issued official receipts under “Panganiban Construction Works,” a trade name we used briefly before formally registering “Panganiban Builders” with the DTI and BIR. The TIN is correct on these receipts, but the business name isn’t exactly our currently registered one. Also, I’m unsure if the VAT paid on the design, management, and rental services can be included in the capital goods refund claim.

Can I still claim the input VAT refund, especially for the purchases with the slightly different business name on the receipts? Do the service costs qualify as part of capital goods for refund purposes? I’m quite confused about the rules and worried these issues might cause my claim to be denied. Any guidance you can offer would be greatly appreciated.

Salamat po,

Gregorio Panganiban

Dear Gregorio,

Thank you for reaching out. It’s completely understandable why you’re seeking clarity on VAT refunds, especially given the complexities involved in construction projects and the specific issues you’ve encountered with invoicing and service costs.

Claiming a refund for unutilized input VAT, particularly on capital goods, requires careful adherence to the rules set by the Bureau of Internal Revenue (BIR). The core principle revolves around proper substantiation – proving that the input VAT was indeed paid on legitimate business purchases and that all documentary requirements, especially those concerning official receipts and the nature of the goods or services purchased, are met. Let’s break down the relevant legal considerations for your situation.

Navigating VAT Refunds and Substantiation Rules for Your Business

The Value-Added Tax (VAT) system allows businesses like yours to credit the input VAT paid on purchases against the output VAT collected from sales. When your input VAT exceeds your output VAT, particularly due to significant investments like acquiring capital goods, the Tax Code provides a mechanism to recover the excess, either through a refund or a tax credit certificate. However, obtaining this refund isn’t automatic; it requires strict compliance with legal and regulatory requirements.

One of the most critical aspects is the substantiation requirement. The law mandates specific information to be present on VAT invoices and official receipts to support claims for input tax credits or refunds. This is not merely a technicality but a fundamental requirement for the BIR to verify the legitimacy of the claimed input VAT. The regulations emphasize the need for accuracy in the details reflected on these documents.

“The requisite that the receipt be issued showing the name, business style, if any, and address of the purchaser, customer or client is precise so that when the books of accounts are subjected to a tax audit examination, all entries therein could be shown as adequately supported and proven as legitimate business transactions. The absence of official receipts issued in the taxpayer’s name is tantamount to non-compliance with the substantiation requirements provided by law.”

This principle underscores the importance of having receipts issued under your correctly registered business name, “Panganiban Builders.” While the TIN might be correct, the discrepancy in the business name on some receipts (issued under “Panganiban Construction Works”) could pose a significant challenge. The tax authorities adhere strictly to these invoicing requirements as outlined in the Tax Code and relevant Revenue Regulations (like Sections 113 and 237 of the National Internal Revenue Code, as amended, and implemented by Revenue Regulations No. 7-95).

Regarding the nature of the purchases, the possibility of refunding input VAT on capital goods is specifically provided for. However, what constitutes ‘capital goods’ for VAT refund purposes has a specific definition under tax regulations.

“‘Capital goods or properties’ refer to goods or properties with estimated useful life greater than one year and which are treated as depreciable assets under Section 29(f) [now Section 34(F) of the NIRC], used directly or indirectly in the production or sale of taxable goods or services.”

Based on this definition (found in Section 4.106-1(b) of Revenue Regulations No. 7-95), the equipment you purchased (cement mixer, scaffolding) likely qualifies, provided they meet the useful life and depreciable asset criteria and are recorded as such in your company’s books (e.g., under Property, Plant & Equipment). Materials like cement and steel bars, while used in construction, are generally considered inventory or form part of the cost of the construction project, not capital goods themselves unless capitalized as part of a larger depreciable asset under specific accounting treatments.

Services such as architectural design, project management, and site rentals generally do not fall under the definition of capital goods. These are typically treated as operating expenses. While essential to your project, the input VAT paid on these services is normally credited against output VAT in the period incurred. Unless these specific service costs were capitalized and recorded as part of the cost of a specific depreciable asset account (like ‘Construction in Progress’ which eventually becomes part of a building or structure account), the input VAT related to them is generally not refundable under the rules for capital goods. How you recorded these expenses in your accounting books is crucial.

It is also vital to remember the nature of tax refund claims. They are treated similarly to tax exemptions and are interpreted strictly against the claimant.

“Taxpayers claiming for a refund or tax credit certificate must comply with the strict and mandatory invoicing and accounting requirements provided under the 1997 NIRC, as amended, and its implementing rules and regulations… Rules and regulations with regard to procedures are implemented not to be ignored or to be taken for granted, but are strictly adhered to for they are developed from the law itself.”

This means the burden is squarely on you, the taxpayer, to prove your entitlement to the refund by presenting complete and compliant documentation. Any deviation, such as the name discrepancy on invoices, can be grounds for the denial of that portion of your claim. Arguments based on substantial compliance often face difficulty in refund cases due to the strict interpretation applied.

Practical Advice for Your Situation

• Review All Invoices Carefully: Segregate the invoices issued under “Panganiban Builders” from those under “Panganiban Construction Works.” The claim related to the correctly named invoices has a much higher chance of success.
• Assess the Invoices with Name Discrepancy: While challenging, you could attempt to supplement these receipts with other proofs (like contracts, delivery receipts mentioning the correct name/TIN, proof of payment from your registered company account) to argue that the transaction was legitimately yours. However, be prepared for the possibility of disallowance based on strict invoicing rules.
• Verify Capital Goods Classification: Ensure the equipment (cement mixer, scaffolding) is recorded as depreciable assets (Property, Plant & Equipment) in your accounting records with a useful life exceeding one year. Input VAT on these has a basis for a capital goods refund claim.
• Separate Service Costs: Understand that input VAT on services (design, management, rental) is generally not refundable as part of a capital goods claim unless specifically capitalized into a depreciable asset account. Check your accounting records to see how these were treated. The related input VAT should typically be claimed as a regular input tax credit against output tax.
• Consult a Tax Professional/Accountant: Given the amounts involved and the complexities, it is highly advisable to work with a tax practitioner or accountant experienced in BIR refund claims. They can help prepare the claim meticulously, assess the risks associated with the improperly named receipts, and ensure proper accounting treatment.
• Maintain Proper Documentation Moving Forward: Ensure all suppliers consistently use your correct, registered business name (“Panganiban Builders”) and TIN on all official receipts and invoices.
• File Within the Prescriptive Period: Remember that administrative and judicial claims for VAT refund have strict deadlines (generally within two years from the close of the taxable quarter when the relevant sales were made, or in the case of input VAT, from the close of the quarter when the purchase was made). Act promptly.

Navigating tax refunds requires careful planning and strict adherence to regulations. The issues you’ve raised, particularly regarding the invoicing name and the classification of service costs, highlight common pitfalls that businesses face. Addressing these proactively with professional help is key.

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.