Monetization Program of Outstanding VAT Tax Credit Certificate

By Harold S. Ocampo, 7 June 2012

Taxpayers may settle their tax liabilities either in cash or through Tax Credit Certificates (TCCs).

The most commonly known TCCs are those issued by the Bureau of Internal Revenue (BIR). In certain instances, TCCs are also issued by the Bureau of Customs (BoC), Board of Investments (BoI) and Department of Finance (DoF).

This article will primarily discuss BIR issued TCCs and the impact of the recent Monetization Program of the Government as laid down under Executive Order (EO) No. 68 on said TCCs.

A TCC is a certificate duly issued by the BIR Commissioner or his/her duly authorized representative in favor of the taxpayer named therein, reduced in a BIR Accountable Form, acknowledging that the grantee is legally entitled to a tax credit, the money value of which may be used in payment of other internal revenue tax liability (except withholding taxes) or may be converted to a cash refund or may otherwise be disposed of in the manner and in accordance with the limitations as prescribed by the revenue regulations.

TCCs are issued by the BIR for tax credits resulting from various transactions, e.g., a) over withheld income taxes at source not applied against income tax due, b) input taxes attributed to zero-rated sales by VAT-registered taxpayer including export sales, c) input taxes attributed to effectively zero-rated sales by VAT-registered taxpayer, d) unused input taxes resulting from cancellation of VAT registration, e) excise taxes on petroleum products sold to tax-exempt entities or international carriers, f) excise taxes on locally produced or manufactured goods and actually exported without returning to the Philippines and g) taxes erroneously or illegally paid or penalties imposed without authority.

BIR issued TCCs are valid for a period of five years from date of issue and may be used by the grantee to pay his/her internal revenue tax liabilities. Unused TCCs may be re-validated before the end of the fifth year. Once re-validated, the TCCs shall be valid for another period of five years from date of re-validation. TCCs which still remain unused within the extended five-year period shall become invalid and the amounts thereof shall revert to the General Fund of the National Government.

On the other hand, BoC TCCs are issued for duty drawbacks or erroneously paid duties and taxes and can only be used in payment of import duties, charges and taxes on importations directly payable to the BoC. BoC issued TCCs may be transferred or assigned to another party only once. Similarly, they also have a validity period of five years and can be re-validated before the end of the fifth year. For taxpayers who have no immediate use of the TCCs (e.g., taxpayers incurring continuous business losses), they may request for the cash conversion of the TCCs during the validity period of the TCC by surrendering the original TCC to the BIR. The refund check or treasury warrant issued as a result of the conversion must be encashed or claimed within five years from date of issue, otherwise, this will be forfeited and the amount reverted to the General Fund. While a cash conversion is allowed, it requires a very strict and tedious process, i.e., requires the approval of the Department of Budget and Management (DBM) and appropriation by Congress, making it an impractical, if not an impossible option.

Moreover, under Revenue Regulation (RR) No. 5-2000, taxpayers were allowed to make a one-time transfer (usually through discounted sale) of their BIR issued TCCs subject to prior approval of the BIR. The transferred TCC had a validity period of five years but were not eligible for conversion to cash in the hands of the transferee.

The sale or transfer of BIR TCCs to another party was, however, recently disallowed by virtue of RR No. 14-2011 which was issued last year, The prohibition of this option has therefore left the holders of unused TCCs with no other choice but to apply said TCCs against their own tax liabilities, or in the absence thereof, to request for their cash conversion, which is almost uncertain to materialize.

An important breakthrough on the issue of tax refund came recently with the issuance by the Office of the President of the Philippines (OPP) of EO No. 68 which has for its principal objectives, the promotion of the Philippines as a conducive business environment and raising of the business credibility of our government both locally and globally.EO No. 68 which provides for a Monetization Program of Outstanding VAT TCCs ("Monetization Program"), essentially favors VAT-registered taxpayers who have no immediate use or benefit of their outstanding VAT TCCs. Specifically, the Monetization Program covers outstanding VAT TCCs for unused input tax pertaining to zero-rated or effectively zero-rated sales issued pursuant to Section 112 (A) of the Tax Code, and outstanding VAT component of duty drawback TCCs issued pursuant to Section 106 (e) of the Tariff and Customs Code of the Philippines (TCCP), as amended.

Under the Monetization Program, qualified VAT- registered taxpayers with outstanding VAT TCCs may obtain the cash equivalent of their outstanding TCCs under any of the following options: Collect in advance from a trustee bank a discounted cash value of their TCCs; or Collect the full cash value of the TCCs upon a certain maturity date, to be determined by the BIR or the BoC, as the case may be, pursuant to the implementing rules and regulations that will be issued to implement EO 86.The Monetization Program will be implemented over a period of five years, i.e., from 2012 to 2016. To guarantee the success of the Monetization Program, the EO has mandated the DBM based on the recommendation and request of the DoF, to ensure the inclusion of the funding requirement of said Program in the National Expenditure Program of the Government for the years covered and to the release of the amounts appropriated for this purposes in the General Appropriations Act.

EO No. 68 further provides for the administrative procedures in the processing of the cash conversion of the outstanding VAT TCCs. The process will require the participation of the various concerned agencies, such as the BIR, BoC, DoF, Commission on Audit and Government Financial Institutions, which shall serve as trustee banks for purposes of monetizing the outstanding VAT TCCs.One last important feature of EO No. 68 is found in Section 6 thereof which addresses the refund of unused VAT beginning 2012 onwards. Under this provision, both the BIR and the BoC as a general rule will no longer issue TCCs for VAT refund, unless this is requested or applied for by the VAT-registered taxpayer.

EO No. 68 became effective in March 2012. However, much work is still to be done before the Monetization Program can be implemented, foremost is the preparation and issuance of the implementing rules and regulations of EO No. 68 (IRRs). Under the EO, the IRRs shall be jointly issued by the DBM, DoF, BIR and BoC.I personally commend the Monetization Program since it has effectively resolved the apparent inequitable treatment of refunds of unused taxes which taxpayers have long been clamoring. With this development, taxpayers may now be refunded their unused VAT either in the form of cash or TCC, at their option depending on their individual needs.Notwithstanding the limited coverage of the Monetization Program (i.e., covers only VAT TCCs issued or VAT refunds arising under Section 112 (a) of the Tax Code and BoC TCCs on duty drawback issued under Section 106 (e) of the TCCP), I still consider this as a positive development. My only hope is that the President would also expand the coverage of the Monetization Program to include all other TCCs or refunds of unused, excess or erroneous taxes paid (including income tax, withholding tax and other internal revenue taxes), if only to give more teeth to the very purpose for which EO No. 68 was issued, i.e., to promote our country as a conducive and credible investment destination, both locally and globally.

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.