This Circular is issued to clarify certain issues relative to the implementation of Section 19 of Republic Act No. 11976 (Ease of Paying Taxes Act), which added Section 110(D) of the National Internal Revenue Code of 1997, as amended (Tax Code), that introduced the Output Value Added Tax (VAT) Credit on uncollected receivables.
The rationale of Section 110(D) is that sales are either made in cash or on account. In cash sales, the seller, who has passed-on the VAT to the buyer has no problem in the corresponding VAT due thereon to the BIR since the seller has already collected the agreed selling price, including the corresponding VAT.
In credit sales, the seller, without having received the payment therefor, agreed to part the goods or properties, or lease the properties, or to part the goods or properties, or lease the properties, or to render service, upon sale, barter or exchange, secured only by a written agreement that the buyer thereof promises to pay the money owed including the VAT at a certain period (credit term). The seller, being the person statutorily liable for the payment of the VAT, pays in advance the VAT passed-on to the buyer to the BIR. In some cases, the receivables are not collected. Under these circumstances, the seller would ordinarily recognize the uncollected receivable including the VAT as a bad debt and claim the same as a deduction from gross income following the provisions set forth under Revenue Regulations (RR) No. 5-99, as amended by RR No. 25-2002.
Founded in the interest of justice, the provision therefore provides an avenue by which a VAT-registered seller of goods or services can recoup the VAT pain in advance which was passed-on to the buyer and made part of the consideration resulting from the sale, barter or exchange on account or on credit, where such trade receivable has not been collected after the agreed period with the buyer. This rule covers credit of VAT shouldered and paid for by the seller.
For purposes of the Circular, the phrase “after the lapse of the agreed upon period to pay” means that the buyer, to whom goods or properties were sold, bartered or exchanged or to whom a property has been leased, or to whom service has been rendered upon written promise to pay the money owed and the passed on VAT at a certain period and where such period or extended date, as the case may be, has lapsed without the buyer having fulfilled the promise.
Only the seller of goods and/or services may deduct output VAT credit which corresponds to the uncollected receivables originating from the sales on account that transpired upon the effectivity of RR No. 3-2024 from the output VAT of the next quarter after the lapse of the agreed upon period to pay.
Before a seller can credit the VAT paid on the uncollected receivables, the following requisites must be present:
- The sale or exchange has taken place after the effectivity of RR No. 3-2024;
- The sale is on credit or on account;
- There is a written agreement on the period to pay the receivable, i.e. credit term is indicated on the invoice or any document showing the credit term;
- The VAT is separately shown on the invoice;
- The sale is specifically reported in the Summary List of Sales covering the period when the sale was made and not reported as part of “various” sales;
- The seller declared in the BIR Form No. 2550Q or the quarterly VAT Return (QVR) the corresponding output VAT indicated in the invoice within the period prescribed under existing rules;
- The period agreed upon, whether extended or not, has lapsed; and
- The VAT component of the uncollected receivable was not claimed as a deduction from gross income (i.e. bad debt) pursuant to Section 34(E) of the Tax Code.
The preceding rules do not amend the conditions on the deductibility of bad debts expense in the income tax returns as provided in RR No. 25-2022. For the purposes of claiming output VAT credit on uncollected receivables, mere lapse of the agreed upon period to pay even without any effort on the part of the seller to collect the sales on account shall entitle the seller of output VAT credit subject to the conditions under Q&A No. 4 in the Circular.
The seller is not necessarily required to automatically credit the VAT paid every time there is an uncollected receivable due to the lapse of the agreed upon period especially so if the likehood of collectability is high. Availing of the benefit under Section 110(D) of the Tax Code is merely an option. This will save the hassle on the part of the seller to claim the said VAT credit, only to reverse the same in the eventual collection of the receivable.
The seller claim output VAT credit on uncollected receivables on the next quarter, after the lapse of the agreed upon period to pay as mandated by Section 110(D).
If there is subsequent recovery of uncollected receivables where the output VAT was already claimed as VAT credit, it shall be reported and declared in the taxable quarter in which the recovery or collection is made. In case of failure to declare, the penalties under existing rules and regulations shall apply.
The input tax claimed by a delinquent buyer when the seller availed of the output VAT credit was claimed for being uncollected receivable, the seller shall stamp “Claimed Output VAT Credit” on the duplicate/triplicate copy/ies (seller’s copy) of the corresponding invoice issued for the uncollected receivable. In case there is a partial payment on the said uncollected receivable, the amount collected therefrom and the balance of the uncollected receivable shall also be indicated.
The seller is not precluded from issuing supplementary sales document such as credit memo or credit note on top of the stamping of “Claimed Output VAT Credit” and must indicate the Invoice that is the origin of the transaction that was declared as uncollected.
The seller is required to provide the buyer a copy of the invoice stamped with the phrase “Claimed Output VAT Credit” and credit memo in credit note so the buyer can adjust and deduct the corresponding input VAT claimed accordingly. However, in case the seller failed to provide the buyer such documents, the buyer can voluntarily reverse its claimed input VAT credit in its Quarterly VAT Return (QVR).
If the buyer failed to deduct accordingly in the available input taxes in its QVR the corresponding input VAT from the unpaid account from the seller, they shall be liable for the deficiency VAT Due from the unpaid account from the seller, they shall be liable for the deficiency VAT due including applicable statutory penalties if it was found out during audit by the BIR or if the buyer decides to amend its QVR to reflect such adjustment.
As a work-around procedure or until such time that a new version of the BIR Form No. 2550Q has been issued, the output VAT credit shall be presented/declared in the QVR of the seller and the buyer as follows:
Filer | Version Used | Seller | Buyer |
EFPS | February 2007 (ENCS) | Line 26G “Others” | Line 23E “Others” |
eBIR Forms and Manual Filers | January 2023 (ENCS) | Line 19 “Other Credits/Payment and specify as “Output VAT Credit on Uncollected Receivables” | Line 53 “Other Credits/Payment and specify as “Input VAT Claimed from Unpaid Purchases on Account” |
For purposes of claiming the output VAT credit on uncollected receivables, the customer/buyer must be properly identified in the Summary List of Sales in the quarter when the sale was made. However, if the seller lumps all sales into one various “various” account entry, the lumping shall be considered invalid compliance with the requisites provided for purposes of claiming the output VAT credit on uncollected receivables and the output VAT cannot be used or allowed as VAT Credit should the transaction remain uncollected after the lapse of the agreed period to pay.
The following taxpayers are disqualified to avail output VAT tax credit on uncollected receivables:
- Those tagged as cannot be located (CBL) taxpayers;
- Those with duly filed complaints at the DOJ under the Run After Fake Transaction (RAFT) and Tun After Tax Evaders (RATE) programs;
- Other taxpayers that may be identified by the Commissioner.
If the goods were returned during the agreed upon period to pay and the output VAT is not yet paid, the return is treated as a sales return and therefore a deduction from gross sales in the quarter where the goods were returned.
If the goods were returned and accepted by the seller but the claim for output VAT credit has been made, it is treated as sales return but for purposes of VAT, no deduction on sales and output VAT shall be allowed since the claim for output VAT credit has already been made.
In case of partial or full collection of the previously uncollected receivable for which output VAT credit output had been claimed, the output VAT pertaining to that partial collection shall accrue and must be added to the output VAT of the seller during the period of recovery.
The seller is not required to issue an invoice upon the recovery of previously uncollected receivable but shall stamp the phrase “Recovered” in the Invoice that is the origin of the transaction that was previously declared as uncollected and the amount collected, if partial, on the same duplicate/triplicate copy/ies (seller’s copy) of the corresponding invoice for the uncollected receivable.
The seller is not precluded from issuing supplementary sales document such as debit memo or debit note to serve as proof thereto. In this instance, the seller shall indicate in the supplementary sales document the phrase “Recovery of Previously Reported Uncollected Receivable” and must indicate the Invoice that is the origin of the transaction that was previously declared as uncollected. Consequently, the seller shall provide a copy of the said documents to the buyer.
As a work-around procedure or until such time that a new version of the BIR Form No. 2550Q has been issued, the seller and the buyer shall reflect the corresponding output VAT of recovered or subsequently collected receivables presented/declared in the VAT Return as follows:
Filer | Version Used | Seller | Buyer |
EFPS | February 2007 (ENCS) | Line 23E “Others” | Line 20E “Others” |
eBIR Forms and Manual Filers | January 2023 (ENCS) | Line 53 “Others” and indicate “Output VAT on Recovered Previously Claimed Uncollected Receivable” | Line 40 “Others” and indicate “Input VAT o Paid Purchases on Account Previously Unsettled” |
The outstanding receivables on sale of goods where the corresponding output VAT has been declared but the period to collect has already lapsed as the effectivity of RR No. 3-2024 will not qualify for output VAT credit under Section 110(D) of the Tax Code. The output VAT credit on uncollected receivables shall only apply to sales of goods and/or services on account that transpired upon the effectivity of RR No. 3-2024.