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January 27, 2026 | 12:00am
In Philippine tax law, rules on refunds and exemptions are notoriously strict, rooted in the long-standing principle that taxes are the lifeblood of the nation and that any claim diminishing government revenue must be narrowly construed.
As the calendar year closes, taxpayers enter the most demanding compliance period. Annual income tax returns must reflect the financial results for the year ended 2025, while the Bureau of Internal Revenue (BIR) correspondingly intensifies its scrutiny of taxpayers’ tax positions in preparation for revenue collection.
Beyond meeting filing deadlines, this season requires careful judgment in identifying which expenses may be validly claimed as deductions. Taxpayers must ensure that all deductions are both ordinary and necessary and fully compliant with existing tax laws, regulations and administrative issuances.
This is particularly important for business costs not expressly addressed in the Tax Code, such as unrecoverable input VAT, where improper treatment may lead to disallowances, tax assessments and penalties during future BIR audits.
This principle is underscored in BIR Ruling OT-016-2024, issued on Feb. 28, 2024, which denied a local shipping company’s request to treat a denied VAT refund claim as a miscellaneous expense deductible from gross income.
The request was prompted by a June 2019 CTA En Banc decision, which suggested that, under limited circumstances, a denied VAT refund claim could be treated as a deductible expense after all administrative and judicial remedies had been exhausted. This decision was viewed as potentially providing a “third route,” alongside the two recognized recovery methods under the Tax Code — a refund or issuance of a tax credit certificate (TCC).
Relying on this CTA En Banc decision, the shipping company filed a request for a BIR ruling, seeking to treat its denied VAT refund claim as a miscellaneous expense deductible from gross income, instead of pursuing a costly judicial appeal. The BIR, however, denied the request. In BIR Ruling OT-016-2024, it maintained that unutilized input VAT attributable to zero-rated sales may be recovered only through a refund or the issuance of a TCC, consistent with Revenue Memorandum Circular (RMC) 57-2013, which circularized BIR Ruling 123-2013 dated March 25, 2013.
Invoking the doctrine of stare decisis, the BIR further emphasized that CTA decisions, even those issued by the CTA En Banc, do not constitute binding precedent absent a ruling from the Supreme Court. While persuasive, CTA decisions do not carry the force of authority that would compel the BIR to depart from its established position.
The doctrine of stare decisis et non quieta movere, meaning “to adhere to precedents and not to unsettle established matters,” is embodied in Article 8 of the Civil Code, which states that “judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal system of the Philippines.” Crucially, only decisions of the Supreme Court form part of binding jurisprudence. Decisions of the CTA, even those issued by the CTA En Banc, do not have the same authoritative weight and are binding only on the parties to the case.
Until the Supreme Court affirms the CTA En Banc ruling or RMC 57-2013 is amended, taxpayers cannot expect the BIR to recognize denied VAT refund claims as deductible expenses. For now, refund or TCC remain the only formally sanctioned avenues for recovering unutilized input VAT, and with the ‘third route’ still uncertain, strict adherence to established procedures is essential.
The takeaway is clear: while unrecoverable input VAT may constitute a real business cost, its treatment as a deductible expense requires careful evaluation. Every deadline, every document and every procedural requirement matters. Until the Supreme Court provides definitive guidance, taxpayers must adhere to the law’s prescribed paths — no shortcuts are allowed.
Joycee Martin is an associate from the Tax Group of R.G. Manabat & Co. (KPMG in the Philippines), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Joycee Martin or Maria Myla Maralit through [email protected], social media or visit www.home.kpmg/ph.
