Prescriptive period for tax refunds

by: Jean Ross Abenasa-Miso

LAST MONTH, the Supreme Court (SC) en banc promulgated a consolidated decision (G.R. Nos. 187485, 196113 and 197156) that disposed of the appeals on the cases filed separately with the Court of Tax Appeals (CTA) by three taxpayers for the refund or credit of unutilized input value-added tax (VAT) incurred by them. In plain and unambiguous terms, the SC decision clarifies the existing rules on the proper period for the filing of a judicial claim for refund or credit of taxes.
 
The basic rules on the prescriptive period for the refund or credit of taxes are found in the provisions of Sections 112 and 229 of the 1997 National Internal Revenue Code (NIRC), as amended.

Section 112 prescribes that a VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax. The Commissioner of Internal Revenue (CIR) shall grant a refund or issue the tax credit certificate for creditable input taxes within 120 days from the date of submission of complete documents in support of the tax refund/credit application. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the CIR to act on the application within 120 days, the taxpayer affected may, within 30 days from the receipt of the decision denying the claim or after the expiration of the 120 day-period, appeal with the CTA the decision or the unacted claim.

On the other hand, Section 229 bars the filing of a suit or proceeding for the recovery of any national internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the CIR. In any case, no suit of proceeding shall be allowed after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment.

What happens if the taxpayer, without waiting for the 120-day period in his previously filed administrative claim, files a petition for review with the CTA for tax refund or credit?

In the aforementioned recent decision, the SC dismissed the first taxpayer’s judicial claim, holding that the filing of the CTA case 13 days after it filed its administrative claim for refund violated the doctrine of exhaustion of administrative remedies, and renders the petition premature. According to the SC, the 120-day waiting period given by law to the CIR to decide whether to grant or deny the refund or credit is mandatory and jurisdictional.

The SC rejected the taxpayer’s reliance on Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue (G.R. Nos. 141104 and 148763) which held that if the two-year prescriptive period for filing a claim for tax refund is about to expire without the BIR acting on the application, the taxpayer can file a petition for review with the CTA within the two-year period. Since the taxpayer filed its judicial claim on April 10, 2003 or more than four years before the promulgation of the Atlas case on June 8, 2007, the SC held that the Atlas doctrine was inapplicable. Moreover, the doctrine merely stated that the two-year prescriptive period should be counted from the date of payment of the output VAT, not from the close of the taxable quarter when the sales involving the input VAT were made. It does not interpret, expressly or impliedly, the 120+30 day periods under Section 112 of the 1997 NIRC.

[Note: The SC abandoned the Atlas doctrine with the promulgation of its decision in Commissioner of Internal Revenue vs. Mirant Pagbilao Corporation (G.R. No. 172129) on September 12, 2008. The Mirant doctrine counts the two-year prescriptive period from the close of the taxable quarter when the sales were made, following the rule that law should be applied exactly as worded since it is clear, plain and unequivocal.]

The SC allowed the CTA case filed by the second taxpayer for tax refund or credit. Interestingly, the second taxpayer filed the CTA case without waiting for the 120-day period to lapse and four months before the SC promulgated the Atlas doctrine. The SC granted the tax refund or credit because, unlike the first taxpayer, the CTA claim failed by the second taxpayer was filed after the issuance of BIR Ruling No. DA-489-03 on December 10, 2003, which allowed the taxpayer to seek judicial relief with the CTA on its claim for refund or credit, without waiting for the lapse of the 120-day period. The SC considered BIR Ruling No. DA-489-03 as a general interpretative rule which can be relied upon by all taxpayers. Boy, the second taxpayer got lucky!

[Note: The rule in BIR Ruling No. DA-489-03 was abandoned when the SC promulgated its decision in Commissioner of Internal Revenue vs. Aichi Forging Company of Asia, Inc. (G.R. No. 184823) on October 6, 2010. In the Aichi case, the SC held that the 2-year prescriptive period to file a refund for input VAT arising from zero-rated sales should be reckoned from the close of the taxable quarter when the sales were made. Moreover, the failure to wait the decision of the CIR or the lapse of the 120-day period prescribed in Section 112(D) of the 1997 NIRC amounts to premature filing.]

Finally, the SC denied the judicial claim filed by the third taxpayer, for being filed out of time. The third taxpayer filed its claim with the BIR within the two-year prescriptive period. The CIR failed to act on the taxpayer’s administrative claim within the 120-day period. Unfortunately, the taxpayer failed to elevate the inaction of the CIR before the CTA within the 30-day period prescribed by law. Unlike the claims filed by the first two taxpayers, the third case involves late filing, and had to be dismissed.

The lengthy discussion on the applicable laws and doctrines notwithstanding, the rules for filing a claim for tax refund or credit are simple:

1. The 30-day period to file the judicial claim need not fall within the two-year prescriptive period-as long as the administrative claim is filed within the two-year prescriptive period. The two-year period under Section 112 of the 1997 NIRC, as amended, does not refer to the filing of the judicial claim with the CTA but to the filing of the administrative claim with the CIR. The taxpayer can file his administrative claim for refund or credit anytime within the two-year prescriptive period. If he files his claim on the last day of the two-year prescriptive period, his claim is still filed on time.

2. Whether or not the CIR acts on the administrative claim, the taxpayer is required to observe the 120+30 day waiting period before lodging a petition for review with the CTA, otherwise, his claim can be dismissed due to premature filing.

3. A judicial claim for tax refund or credit filed beyond 30 days after the lapse of the 120-day waiting period will not be allowed, as this amounts to late filing.