Non-VAT Taxpayers Receiving VAT-Inclusive Invoices: Compliance and Remedies

Introduction

In the Philippine tax system, the Value-Added Tax (VAT) is a consumption tax imposed on the sale of goods and services, as governed by Title IV of the National Internal Revenue Code (NIRC) of 1997, as amended by various laws including Republic Act (RA) No. 10963 (TRAIN Law), RA No. 11534 (CREATE Law), and subsequent issuances from the Bureau of Internal Revenue (BIR). VAT-registered persons are required to issue VAT invoices and charge 12% VAT on taxable transactions, while non-VAT taxpayers—such as those with annual gross sales or receipts below the VAT threshold (currently PHP 3,000,000) or those exempt under Section 109 of the NIRC—are not subject to VAT registration and output tax obligations.

A common issue arises when non-VAT taxpayers receive invoices that include VAT charges from VAT-registered suppliers. This scenario can lead to overpayment, compliance challenges, and potential disputes. This article comprehensively explores the legal framework, implications for compliance, and available remedies for non-VAT taxpayers in such situations, drawing from statutory provisions, BIR rulings, and judicial precedents.

Legal Framework Governing VAT Invoicing

VAT Registration and Threshold

Under Section 236 of the NIRC, sellers of goods or services must register for VAT if their annual gross sales or receipts exceed PHP 3,000,000, unless they qualify for exemption. Non-VAT taxpayers include:

• Marginal income earners (e.g., small sari-sari stores or street vendors).
• Exempt entities under Section 109, such as agricultural cooperatives, educational institutions, or sales of basic necessities like rice and fresh produce.
• Businesses opting for the 8% tax on gross sales/receipts in lieu of itemized deductions and VAT, as introduced by the TRAIN Law.

VAT-registered sellers must issue official receipts or invoices that separately indicate the VAT amount, as per Revenue Regulations (RR) No. 16-2005 and RR No. 18-2011. Failure to do so can result in penalties, but the reverse—charging VAT to non-VAT buyers—creates issues for the recipient.

Erroneous Charging of VAT

When a VAT-registered supplier issues a VAT-inclusive invoice to a non-VAT taxpayer, it may stem from:

• Misclassification of the transaction (e.g., assuming the buyer is VAT-registered).
• Oversight in invoicing practices.
• Intentional practices to shift tax burdens.

Section 113 of the NIRC mandates that invoices reflect the true nature of the transaction. If the buyer is non-VAT, the invoice should not include VAT, as the buyer cannot pass it on or claim it as input tax. However, if VAT is charged, it becomes part of the gross payment, effectively increasing the cost to the non-VAT buyer without corresponding benefits.

Compliance Obligations for Non-VAT Taxpayers

Input Tax Treatment

Non-VAT taxpayers are not entitled to claim input VAT credits under Section 110 of the NIRC, which is reserved for VAT-registered entities. Thus, any VAT paid on purchases is treated as part of the cost of goods or services, akin to an expense. This is confirmed in BIR Ruling No. 123-2012, where the BIR clarified that non-VAT entities absorb the VAT as a business cost.

For compliance:

• Record-Keeping: Non-VAT taxpayers must maintain books of accounts and retain invoices for at least three years (extendable to ten years in fraud cases) under Section 235 of the NIRC. Even if VAT is erroneously charged, the invoice serves as proof of expense for income tax purposes.
• Tax Reporting: If the non-VAT taxpayer is subject to percentage tax (e.g., 3% under Section 116), the gross receipts exclude the VAT component, as per RR No. 7-2014. However, if VAT is embedded, it must be segregated to avoid over-reporting gross income.
• Withholding Taxes: If the transaction involves withholding (e.g., expanded withholding tax on services), the non-VAT buyer must withhold and remit the appropriate tax based on the VAT-exclusive amount, per RR No. 2-98.

Non-compliance, such as failing to segregate VAT in records, can lead to assessments during BIR audits, with penalties including 25% surcharge, 12% interest per annum, and compromise penalties under Section 255.

Special Considerations for Exempt Transactions

If the non-VAT taxpayer is VAT-exempt (e.g., a hospital or non-profit), receiving a VAT-inclusive invoice violates Section 109, which prohibits VAT on exempt sales. The buyer should not pay the VAT portion, and the supplier may face penalties for improper invoicing.

Implications and Challenges

Economic Impact

For non-VAT taxpayers, absorbing erroneous VAT increases operational costs, potentially eroding profit margins. Small businesses, already operating on thin margins, may face cash flow issues. In competitive markets, this can disadvantage them against VAT-registered peers who can credit input VAT.

Audit and Assessment Risks

During BIR examinations, mismatched invoices can trigger discrepancies. For instance, if a non-VAT buyer's books show VAT payments but no credits claimed, it may invite scrutiny. Judicial cases like Commissioner of Internal Revenue v. Sony Philippines, Inc. (G.R. No. 178697, November 17, 2010) emphasize the importance of proper invoicing to substantiate claims, though primarily for VAT-registered entities.

Supplier Liability

The VAT-registered supplier bears primary responsibility. Under Section 237, issuing incorrect invoices can result in fines of PHP 1,000 per invoice, up to PHP 50,000, plus criminal penalties if willful. BIR Ruling DA-489-03 highlights that suppliers must refund erroneous VAT collections.

Remedies Available to Non-VAT Taxpayers

Informal Remedies

• Request for Adjustment: The non-VAT taxpayer should immediately notify the supplier in writing, requesting a credit memo or adjusted invoice excluding VAT. This is supported by RR No. 18-2011, which allows issuance of credit memos for returns or allowances.
• Negotiation: If the supplier refuses, escalate to a formal demand letter citing NIRC provisions.

Administrative Remedies

• BIR Assistance: File a complaint with the BIR via the Revenue District Office (RDO) or use the eComplaint system. The BIR can investigate under its audit powers (Section 5) and compel the supplier to refund the VAT, treating it as erroneously collected tax under Section 229.
• Refund Claim: Although non-VAT taxpayers cannot claim VAT refunds directly (as they are not output tax payers), they can seek recovery through the supplier. If the supplier remits the erroneous VAT to the BIR, the buyer may file a claim for refund or tax credit certificate (TCC) under Section 229, provided it is within two years from payment. However, jurisprudence like Commissioner v. Mirant Pagbilao Corp. (G.R. No. 172129, September 12, 2008) requires proof of erroneous payment and non-shifting of the burden.
• Protest Assessments: If the BIR assesses the buyer for underreported income due to unsegregated VAT, file a protest within 30 days under RR No. 12-99.

Judicial Remedies

• Civil Action: Sue the supplier for reimbursement in civil court under Article 22 of the Civil Code (unjust enrichment). The claim must be filed within six years (contractual) or four years (quasi-delict) from payment.
• Criminal Complaint: If fraud is involved, file for estafa under the Revised Penal Code or tax evasion under Section 255 of the NIRC.
• Court of Tax Appeals (CTA): Appeal adverse BIR decisions to the CTA within 30 days, as in Section 11 of RA No. 1125. Cases like Pilipinas Shell Petroleum Corp. v. Commissioner (G.R. No. 172598, December 21, 2007) illustrate successful refunds for erroneous VAT.

Preventive Measures

To avoid issues:

• Inform suppliers of non-VAT status upfront.
• Review invoices before payment.
• Maintain a VAT-exempt certificate if applicable.
• Consult tax professionals for complex transactions.

Conclusion

Navigating VAT-inclusive invoices as a non-VAT taxpayer requires vigilance in compliance and proactive pursuit of remedies. The Philippine tax framework prioritizes accurate invoicing to prevent undue burdens, with multiple avenues for redress from informal adjustments to judicial recourse. By understanding these mechanisms, non-VAT taxpayers can safeguard their financial interests and ensure adherence to the NIRC.