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Amortization of input tax on capital goods

When it comes to capital goods, depreciation and amortization are as relevant to value-
added tax (VAT) as they are to income tax. As in income tax, goods are classified as
either ordinary (or simply goods) or capital goods for VAT purposes.

Amending the provisions on VAT of the National Internal Revenue Code of 1997 (NIRC),
Republic Act No. (R.A.) 9337 removed the remedy of taxpayers to file a claim for refund
or to be issued a tax credit certificate for excess input taxes from imported or locally
purchased capital goods. Furthermore, R.A. 9337 also impeded the immediate
availability of the full amount of input taxes paid on imported or locally purchased capital
goods, requiring taxpayers to amortize their claim for input tax credits arising from such
importations or local purchases. Analogous to depreciation deductions from gross
income for depreciable assets, only a reasonable allowance of input taxes can be
claimed by a taxpayer from importations or local purchases of capital goods.
Nonetheless, different rules still apply to depreciation and amortization in the income tax
context, on one hand, and VAT, on the other.

For VAT purposes, amortization of input tax credits on depreciable goods only applies
when the aggregate costs of importations or local purchases of capital goods in a
calendar month exceeds P1,000,000, exclusive of VAT. Otherwise, the full amount of
input taxes may be credited against output taxes of the taxpayer in the month of
acquisition. However, it must be noted that the Bureau of Internal Revenue (BIR) issued
Revenue Regulations clarifying that aggregate acquisition cost of a depreciable asset in
any calendar month refers to the total price agreed upon for one or more assets
acquired, but not to the payments actually made during any calendar month (Revenue
Regulations Nos. 16-05, September 1, 2005 and 04-07, February 7, 2007) Thus, an
asset acquired on installment for an acquisition cost of more than P1,000,000, excluding
VAT, will still be subject to amortization of input taxes although the installments do not
exceed P1,000,000 per month.

Also, while R.A. 9337 makes reference to deduction for depreciation is allowed under
the Tax Code and Revenue Regulations of the BIR refer to depreciable assets for
income tax purposes (Revenue Regulations No. 16-05) and goods or properties with
estimated useful life greater than one (1) year and which are treated as depreciable
assets under Section 34(F) of the Tax Code, R.A. 9337 provides a definite method of
amortizing input taxes from acquisition of capital goods. Thus, Section 110 (A) of the
Tax Code, as amended, particularly provides that where the aggregate acquisition costs
of depreciable assets for a calendar month exceeds P1,000,000 excluding VAT
component, input taxes therefrom shall be spread evenly over the month of acquisition
and the succeeding 59 months. On the other hand, if the estimated useful life of the
depreciable asset is less than five years, then the input taxes shall be spread for such
shorter period. This should not be confused with the manner of determining reasonable
allowance for depreciation deduction for income tax purposes under Section 34(F) of the
Tax Code, i.e. using certain methods and rates in accordance with rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the Commissioner of
Internal Revenue (CIR), or based on an agreement in writing between the taxpayer and
the CIR dealing specifically with the useful life and rate of depreciation of the asset(s).

Moreover, in order for input taxes from importations or local purchases of capital goods
to be creditable against output tax liabilities of a taxpayer, such should be attributable to
transactions subject to VAT. This means that the capital goods acquired are used
directly or indirectly in the production or sale of taxable goods or services. Input taxes
attributable to VAT-exempt sales, on the other hand, are not treated as credit against
output tax liabilities but as part of cost or expense of the taxpayer. In case the input
taxes of a taxpayer cannot be directly attributed to either VAT-taxable or VAT-exempt
transaction, the input taxes should be pro-rated accordingly, and only the ratable portion
pertaining to transactions subject to VAT may be recognized as input tax credit.(Section
4.110-4 of Revenue Regulations 16-05, as amended by Revenue Regulations No. 04-
07). These qualifications as to the use of the depreciable goods, i.e. whether they are
for VAT-taxable or VAT-exempt transactions are not relevant in computing and claiming
deductible depreciation allowances for purposes of computing income tax liabilities of
the taxpayer.

Likewise, the BIR provides special rules in claiming input taxes with respect to so-called
Constructions in Progress (CIP) or the costs of construction work which is not yet
completed. Normally, it is only upon completion that a CIP item is reclassified then
capitalized and depreciated. The BIR does not consider CIP costs as acquisition of
capital goods for VAT purposes. Generally speaking, CIPs are considered as purchases
of services. Hence, input taxes incurred by a taxpayer in CIPs are not subject to
amortization. Where only labor will be supplied by the contractor and the materials will
be purchased by the taxpayer from other suppliers, input tax credits on the labor
contracted may still be recognized on the month the payment was made based on
progress billings while input taxes on the purchase of the materials could also be
recognized at the time the materials were bought. Simply put, the full amount of input
taxes incurred by a taxpayer can be immediately recognized and off-set against his
output taxes in the month payments were made, subject to the condition that no
additional input tax can be claimed by the taxpayer upon completion of the asset when it
has been reclassified as a depreciable capital asset and depreciated. What come into
play then would be the rules under Section 34(F) of the Tax Code on claiming
depreciation allowances from gross income of the taxpayer for purposes of computing
his income tax liabilities.

Based on the foregoing, while depreciation and amortization are pertinent to both
income tax and VAT, particularly in computing the reasonable depreciation allowance to
be deducted from the gross income of a taxpayer and the input taxes from importations
or local purchases of capital goods, each context still remains to be governed by
different rules which are not to be confused.