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MERGERS and acquisitions are like marriages. They are often characterized by two entities agreeing to pool their resources and, in one way or another, become one. As one entity’s liabilities become the liabilities of the other, so do the assets. While the possibility of absorbing liabilities often deters the faint-hearted, it should be noted that there are perks, too.
This is exemplified in Court of Tax Appeals (CTA) decision dated June 19, 2024, where the court held that in a merger, the surviving corporation is entitled to claim the unutilized input value-added tax (VAT) of the absorbed firm even if there is an ongoing tax investigation and a pending tax clearance.
(A petition for review has been filed against the CTA Second Division’s ruling in this case, which is now pending before the CTA en banc.)
Based on the articles and plan of merger approved by the Securities and Exchange Commission (SEC), the merger took effect on June 1, 2021. On June 14, 2021, the Bureau of Internal Revenue (BIR) issued Letters of Authority to both parties to the merger, authorizing the examination of their books and other accounting records for all internal revenue tax liabilities from Jan. 1, 2020 to May 31, 2021.
Meanwhile, on July 22, 2021, the surviving corporation filed its second quarter (Q2) 2021 VAT return, reflecting allowable input VAT including the excess input VAT declared by the absorbed corporation in its May 2021 monthly VAT return. This resulted in the surviving corporation having no output VAT payable and an excess input VAT for Q2 2021, which was carried over to the succeeding month. Conversely, in the absorbed corporation’s Q2 2021 VAT return, the amount utilized by the surviving firm was deducted from the former’s available input VAT credits.
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Subsequently, the BIR assessed that the surviving corporation had a VAT deficiency. It asserted that the application of excess input VAT was premature pending the completion of the BIR’s audit of both parties to the merger.
In denying the surviving corporation’s protest, the BIR said that it should first comply with Revenue Regulations (RR) 7-2012 and 13-2018, which outline the procedures for the cessation or cancellation of the status of VAT-registered persons, whether they choose to pass on the utilized input VAT or apply for a refund. According to the BIR, both options require an application for cancellation of registration. The cancellation will be signified by the issuance of a tax clearance by the BIR following the full settlement of tax liabilities related to the cessation of business or change in the taxpayer’s status.
The surviving corporation filed a request for reconsideration with the Commissioner of Internal Revenue, which was denied. Thereafter, it filed a petition for review with the CTA.
The CTA ruled that the pending tax investigation into the absorbed corporation should not prevent the transfer of its unutilized input VAT to the surviving corporation. The court held that if the investigation resulted in unresolved tax liabilities for the absorbed corporation, such obligations would logically transfer to the surviving corporation as well. Thus, the surviving corporation is entitled to claim the unutilized input VAT of the absorbed corporation regardless of its ongoing tax investigation and the pending issuance of its tax clearance.
Under the plan of merger approved by the SEC, the effective date of the merger was June 1, 2021, subject to the approval of the merger application. By the time the surviving corporation applied the excess input VAT in its Q2 2021 VAT return, it had already legally acquired the rights to the absorbed corporation’s assets, including the unutilized input VAT.
The CTA clarified that the cancellation of registration pursuant to RRs 7-2012 and 13-2018 pertained to the closure or dissolution of registered entities and was not a prerequisite for the merger to take legal effect. Under Sections 78 and 79 of the Revised Corporation Code, a statutory merger is effective upon the issuance of the certificate approving the articles and plan of merger.
This results in the transfer of all rights, privileges, immunities, franchises, and other assets of the absorbed corporation without the need for any further act or deed. The CTA noted that the BIR recognized this principle in RR 16-2005, which states that the unutilized input VAT of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed by the surviving or new corporation.
While the CTA’s ruling significantly streamlines the process and provides a clear legal basis for the utilization of unclaimed VAT credits, it also underscores the need for thorough due diligence during mergers to ensure proper documentation of all transactions and understanding of tax implications that can impact post-merger claims for VAT credits.
The author is a director at the tax and legal practice of Deloitte Philippines, a member of the Deloitte Asia Pacific Network. For comments or questions, email [email protected].
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