Double trouble? A drawback to a taxpayer’s double invoicing system

In taxation, it is a basic rule that every transaction must be supported by a valid and relevant proof to establish the existence of either a taxable or non-taxable event. However, no matter how many stacks of documents you keep, if these do not comply with the requirements of the tax laws, they will not serve their purpose.

For value-added tax (VAT)-registered taxpayers, compliance with the invoicing requirements, for both sale and purchase transactions, is a must to determine if: (1) the seller has reported the output tax due on the sale; and (2) the buyer is entitled to claim the input tax credit from the purchase.

The tax law provides the following invoicing requirements for VAT-registered taxpayers:

1. A VAT invoice for every sale, barter, or exchange of goods or properties; and
2. A VAT official receipt for every lease of goods or properties and every sale, barter or exchange of services.

In various cases, the Supreme Court has concluded that these documents should not be confused to refer to the same things or be used interchangeably.

In the case of VAT assessments/investigations, the taxpayer must submit relevant documents necessary to support all covered transactions.

Failure to comply with these requirements may result in drawbacks such that if the subject taxpayer is the buyer/purchaser, the Bureau of Internal Revenue (BIR) may have a basis to disallow the input tax claimed as credits against the output tax due. On the other hand, if the subject taxpayer is the supplier/seller, the BIR may impose penalties, which can lead the taxpayer to a separate investigation known as “Oplan Kandado” conducted against those who have deliberately failed to issue invoices or official receipts to document their transactions.

If, however, the case involves the issuance of both an official receipt and an invoice for the same transaction, can the taxing authorities hold the taxpayer liable for deficiency taxes or penalties?

In a case docketed as Court of Tax Appeals (CTA) No. 9217 dated 17 August 2018, the CTA confirmed that nowhere in the Tax Code does the law allow imposing the 12% VAT twice on the same transaction as a consequence of a taxpayer erroneously issuing both a VAT official receipt and a VAT invoice to document one sale.

The CTA’s decision is anchored on Section 113(D) of the Tax Code which specifically provides for the consequences of erroneously issuing a VAT invoice or VAT official receipt, quoted as follows:

1. "If a person, who is not a VAT-registered person, issues an invoice or receipt showing his Taxpayer Identification Number (TIN), followed by the word ‘VAT’:
   • The issuer shall, in addition to any liability to other percentage taxes, be liable to:
     • The tax imposed in Section 106 or 108 without the benefit of any input tax credit; and
     • A fifty percent (50%) surcharge under Section 248(B) of this Code;
   • The VAT shall, if the other requisite information required under Subsection (B) hereof is shown on the invoice or receipt, be recognized as an input tax credit to the purchaser under Section 110 of this Code.
2. If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the term ‘VAT-exempt sale,’ the issuer shall be liable to account for the tax imposed in Section 106 or 108 as if Section 109 did not apply.”

Thus, the mere issuance of double billing documents should not cause more trouble for the taxpayer who rightfully paid what is due. In form, two documents were issued, but in essence, both documents pertain to the same transaction. As the off-cited accounting principle states, cliché as it may sound, substance should prevail over form.

On a related note, though not covered in the court decision, the tax bureau may have basis to question the issuance of both official receipt and sales invoice to cover the same transaction since there is a possibility that the customers, on the other end, may have claimed the input tax twice based on the two supporting documents. Thus, the burden of proof rests upon the taxpayer to establish the fact that no double input tax was claimed by its customers. Perhaps a sworn declaration from the customers to support this claim may suffice as proof.

Of course, double invoicing will likely raise a red flag on the suspicion that the government is being cheated out of revenue taxes. All it takes is for two conniving parties to issue an invoice with a lower value for tax purposes and secretly issue a second one with a higher value for billing purposes. However, it is a different case where the taxpayer has rightfully declared and paid what is due to the government. After all, there is no revenue loss on the part of the taxing authority. The only mistake that the taxpayer may have committed is a mere error in the documentation — a minor slip up that may, at worst, deserve only reasonable penalties.