Written by Sylvia R. Salvador, 18 May 2007
With the passage of Republic Act (RA) No. 9337, known as the Reformed Value-Added Tax Law (RVAT Law) in 2005, the VAT on capital goods has been one of the more contentious issues.
Under the RVAT law, if the total acquisition cost of the depreciable capital goods in a calendar month exceeds Php 1 Million, exclusive of VAT, the availment of input tax credits arising from the purchase of capital goods is subject to an amortisation of 5-years or such life span of the capital goods if it is less than five years.
In view of this limitation, one of the major concerns is whether the taxpayer can claim the total input taxes relative to the purchased capital goods which were paid during the period of construction of said assets or should the taxpayer wait until completion of the construction of the capital assets and thereafter claim input taxes relative thereto subject to the applicable amortised period.
Under the initial VAT implementing related regulations, Revenue Regulations (RR) No.14-05, taxpayers cannot claim the input taxes paid during the construction stage of the capital assets. It provides that depreciable capital assets, which take more than one month to complete, shall be deemed to have been acquired on the month of its completion.
Thus, it appears that the input tax related to such capital assets can either be credited all at once or be subjected to the aforesaid amortisation, if applicable, beginning on the month when the construction of said depreciable capital goods was completed.
Subsequently, however, the BIR amended this provision when it issued RR 16-2005, which repealed RR 14-05. Under RR 16-2005, the phrase, “depreciable capital goods” was changed to ”existing or finished depreciable capital goods” for the purpose of the input tax limitation.
This amendment seems to infer that the input taxes paid during the construction of the capital assets may be claimed entirely even before the completion of the construction since they are not deemed included in the term “existing or finished depreciable capital goods.”
However, in the absence of a specific provision in RR 16-2005 clarifying this issue , taxpayers were still at a loss on the proper tax treatment of input taxes related to constructed capital assets. The BIR recently issued RR 4-2007 dated 07 February 2007, which now included a provision specifically addressing this particular issue.
RR 4-2007 defines “capital goods” as those goods or properties with estimated useful life greater than one year and which are treated as depreciable assets under Section 34 (F) of the Tax Code, used directly or indirectly in the production or sale of taxable goods or services. It now explicitly allows the taxpayers to claim entirely the total input taxes paid during the stage that the construction of a capital asset is still in progress.
The cost of construction work not yet completed (Construction in Progress [CIP]) is not a depreciable asset until the asset is placed in the service. For claiming input taxes, CIP is considered as a purchase of services, the value of which shall be determined based on progress billings.
Accordingly, input tax credit related to CIP can be recognised in the month payment was made based on progress billing provided an official receipt has been duly issued. It is only upon completion of construction and it is placed into service that it can be reclassified as depreciable capital goods.
RR 4-2007 also provides that in transactions where only the labor is supplied by the contractor and the materials are purchased by the contractee, the input tax on the labor contracted shall be recognised in the month of payment based on the progress billings while input tax on purchase of materials shall be recognised at time of purchase of materials.
Furthermore, to ensure that the taxpayer will not be able to claim the input tax twice, RR 4-2007 clearly provides that no additional input tax can be claimed upon completion of the asset, which has been reclassified as a depreciable capital asset and subsequently depreciated, once the input taxes have already been claimed while the construction is in progress.
These recent amendments in the VAT regulations effectively lifted the amortisation-of- input-tax-rule on constructed capital assets. Generally, taxpayers would prefer to claim outrightly the total input taxes paid during the construction of the capital goods instead of waiting for the completion of the construction to avoid the input tax limitation.
Although, it may result to excess input tax credits, these credits, however, can be totally carried-over in the succeeding quarter/quarters without any restriction since the 70% cap on input taxes has already been removed by RA 9361 dated November 21, 2006.
The recent VAT amendment and the earlier removal of 70% cap on input taxes are laudable reforms which demonstrate the government’s genuine support to the business sector. The reforms are expected to reduce the transaction costs of business and eventually the prices of commodities, thereby ultimately benefiting the final consumers.
Given these developments, it is also hoped that the government would consider the complete removal of the 5-year amortisation rule on capital goods as this limitation still causes a heavy toll in the country’s business environment.
