Equity and consistency in granting tax refunds

By Susan M. Aquino, 15 August 2013

The dynamic character of tax laws is due in large part to the wealth of jurisprudence that through the years have helped interpret, clarify and elaborate Tax Code provisions and their implementing rules and regulations. On some occasions, court rulings have even upheld the constitutionality of tax issuances and looked favorably on decisions and policies made by tax officials. Judicial interpretations both from the Court of Tax Appeals (CTA) and the Supreme Court (SC) breathe new life to tax laws, introducing insightful perspectives. Nowhere is this more evident than in the refunds of excess creditable withholding tax (CWT).

CWT pertains to taxes withheld on certain income payments. Under Revenue Regulations No. 2-98, CWT is intended to equal, or at least approximate, the corresponding tax due of the payee on said income. The income recipient is still required to file an income tax return (ITR), to report the income and to pay the difference between the tax withheld and the tax due on the income, if any. This basically describes the way the creditable withholding system works.

However, there are instances when the CWT withheld for a given taxable year results in excessive tax payments as compared with the total amount of tax actually due from the taxpayer. In such a situation, Section 76 of the Tax Code grants the taxpayer the option to ask for a refund of the excess payments made or to simply carry them over as credit against the quarterly income tax liabilities of the succeeding taxable years. In case the refund option is taken by the taxpayer, the CTA has, in a number of cases, spelled out the three (3) essential conditions for entitlement:1. That the claim for refund was filed within the two-year prescriptive period; 2. That the CWT is established by a copy of a statement issued by the withholding agent to the taxpayer, showing the amount paid and the amount of tax withheld; and3. That it is shown on the ITR of the taxpayer-claimant that the income received was declared as part of gross income.

As early as 1997, the foregoing requirements were affirmed by the SC in the case of Citibank, N.A. vs. Court of Appeals, G.R. No. 107434. Much later SC decisions reiterated these guidelines that continue to hold true even today, save for interpretative innovations or twists that further shaped the CWT refund landscape. One such tweak in the conditions is on the required documentary submissions to prove one’s entitlement to the excess CWT.

In two recent decisions promulgated sometime in June and July this year, the CTA rendered two opposing views on the need to submit quarterly ITRs of the succeeding year in order to prove one’s claim for excess CWT.

In the first case, the CTA En Banc denied the refund claim on the ground that the taxpayer failed to submit its quarterly ITRs for the succeeding year. The court ruled that such failure to submit made it difficult for the BIR to determine with reasonable certainty whether the claimant carried over and utilized the excess taxes of the previous year to the succeeding taxable quarters. Logically, if the taxpayer carried forward and utilized said excess CWT, the claim to a cash refund or tax credit certificate should rightfully be denied.
In a subsequent decision issued a month after, the CTA departed from its previous stance, stating that presentation of the taxpayer’s quarterly ITRs for the succeeding year is not an essential requirement for a CWT refund. Instead, citing the case of Philam Asset Management, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 156637/162004 dated Dec. 14, 2005, only the following documents are required: 1) withholding tax statements; 2) ITR of the present quarter to which the excess withholding tax credits are being applied; and 3) the ITR of the quarter for the previous taxable year in which the excess credits arose.

How can we make sense out of two divergent pronouncements?

This writer believes that the two vacillating views must be read in the light of the decision of the SC in the Philam Asset case. A vital issue raised in that case was whether or not the non-submission of the annual ITR of the succeeding calendar year is fatal to the claim for refund of excess CWT. Resolutely, the SC struck down the requirement of submitting the ITR of the succeeding year to prove excess CWT. The court declared that such requirement “has no basis in law and jurisprudence” since Section 76 of the Tax Code merely requires the filing of the ITR for the preceding, not the succeeding, taxable year. It was on the strength of this decision that subsequent cases of similar nature were penned on parallel interpretation of the law.

The author is a senior manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.