A snapshot of refund claims

A snapshot of refund claims

TAXPAYERS should not sleep on their right to reclaim from the government what is legally due them. The Tax Code expressly grants taxpayers the right to recover taxes which have been erroneously or illegally collected. However, such right must be exercised within the confines of the law (i.e. both substantive and procedural requirements must be satisfied).

It is crucial that the claim for refund be filed within the two- year period from the date of payment of the tax as prescribed under Section 229 of the Tax Code; otherwise, the taxpayer will be barred from exercising his rights.

Under the same Tax Code provision, a taxpayer should initially file the claim for refund before the Bureau of Internal Revenue (BIR). Thus, failure to seek relief initially at the administrative level would result in dismissal of the judicial claim for refund once it is elevated to the Court of Tax Appeals (CTA). This is also in line with the doctrine of non-exhaustion of administrative remedies, which means that recourse through court action cannot prosper until after all administrative remedies have first been exhausted.

There have been instances, however, when the taxpayer would elevate the claim for refund to the CTA, although no decision had yet been rendered at the administrative level, since the two-year prescriptive period was about to lapse. There are CTA cases allowing the simultaneous filing of both judicial and administrative claims for refund on the same day (Asianbank Corp. v. Commissioner of Internal Revenue, CA-G.R. SP No. 69129, Dec. 6, 2010), or the filing of the judicial claim just two days after the filing of the administrative claim (Unilever Philippines, Inc. v. Commissioner of Internal Revenue, CTA Case No. 6517, July 26, 2006), for as long as the CTA filing was made within the two-year prescriptive period as provided under the Tax Code.

Please note, however, that this simultaneous filing of the administrative and judicial refund claims may not apply to refunds of excess unutilized input value-added tax (VAT) credits, which is governed by its own distinct rules.

Another essential requirement is proof that the taxpayer is entitled to claim a refund. At the administrative level, the BIR would require submission of documentary evidence to support the taxpayer’s claim. For example, in case of refund of creditable withholding taxes, the taxpayer’s return must show that the income received was declared as part of the gross income; and the withholding of tax must be established by a copy of the relevant certificates of creditable tax withheld (BIR Form 2307) issued by the taxpayer’s customers, showing the amount paid and the amount of tax withheld. In addition to the factual basis, the legal basis should also be laid down.

Failure to submit documentary evidence at the administrative level is not, however, a fatal procedural defect that would be a ground for dismissal of a judicial claim. The principle finds affirmation in the recent CTA decision of CIR vs. Philippine Bank of Communications (CTA EB No. 933, Oct. 7, 2013). Here, the taxpayer filed with the BIR a request for issuance of a tax credit certificate (TCC) for excess creditable tax withheld. Its intention to apply for a TCC was previously indicated in its Annual Income Tax Return. For failure of the BIR to act on its claim, the taxpayer elevated the case to the CTA.

In its argument, the BIR specifically stated that the taxpayer’s judicial claim for refund is procedurally defective since the taxpayer failed to submit the required documents to support its administrative claim.

On this issue, the CTA disagreed with the BIR. It reaffirmed its position that "(n)on-submission of supporting documents in the administrative level is not fatal to a claim for refund. Judicial claims are litigated de novo (which means litigants should prove every aspect of their cases) and decided based on what has been presented and formally offered by the parties during the trial." In support of its decision, the CTA also cited a 2005 Supreme Court decision which emphasized that it is the evidence presented before the CTA which is vital in proving a taxpayer’s judicial claim.

Thus, a taxpayer claiming for refund before the CTA must prove before the said court that it is entitled to such refund by providing documents to support its claim. The CTA will then decide the case based on the evidence presented by the petitioner-taxpayer. Well-settled is the rule that the burden of proof lies upon the claimant to prove the factual basis of its claim. This is because tax refunds are construed strictly against the taxpayer and liberally in favor of the government as they are in the nature of tax exemptions.

Further, the taxpayer should be aware that a claim for refund will automatically trigger a tax audit. Technically, the tax audit should be limited to those taxes covered by the claim for refund.

With a snapshot of the procedural and substantive aspects of the right to claim for refund, one may say that the exercise of this right is not an easy route to take, but a challenge to be won by a determined taxpayer.

The author is a director at the tax services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network. Readers may send feedback to sylvia.r.salvador@ph.pwc.com.

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.