DIGESTS
Remedies (under the NIRC of 1997): Refund
Erroneous or illegal tax
Governing provisions.
Sections 204 and 229 of the NIRC pertain to the refund of erroneously or illegally collected taxes. Section 204 applies to administrative claims for refund, while Section 229 to judicial claims for refund. In both instances, the taxpayer’s claim must be filed within two (2) years from the date of payment of the tax or penalty. However, Section 229 of the NIRC further states the condition that a judicial claim for refund may not be maintained until a claim for refund or credit has been duly filed with the Commissioner.
Indubitably, CBK Power’s administrative and judicial claims for refund of its excess final withholding taxes covering taxable year 2003 were filed within the two-year prescriptive period.
Also, while it may be argued that, for the remittance filed on June 10, 2003 that was to prescribe on June 10, 2005, CBK Power could have waited for, at the most, three (3) months from the filing of the administrative claim on March 4, 2005 until the last day of the two-year prescriptive period ending June 10, 2005, that is, if only to give the BIR at the administrative level an opportunity to act on said claim, the Court cannot, on that basis alone, deny a legitimate claim that was, for all intents and purposes, timely filed in accordance with Section 229 of the NIRC. There was no violation of Section 229 since the law, as worded, only requires that an administrative claim be priorly filed.
In the foregoing instances, attention must be drawn to the Court’s ruling in P.J. Kiener Co., Ltd. v. David (Kiener) [92 Phil. 945 (1953)], wherein it was held that in no wise does the law, i.e., Section 306 of the old Tax Code (now, Section 229 of the NIRC), imply that the Collector of Internal Revenue first act upon the taxpayer’s claim, and that the taxpayer shall not go to court before he is notified of the Collector’s action. In Kiener, the Court went on to say that the claim with the Collector of Internal Revenue was intended primarily as a notice of warning that unless the tax or penalty alleged to have been collected erroneously or illegally is refunded, court action will follow.
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Section 229 of the Tax Code states that judicial claims for refund must be filed within two (2) years from the date of payment of the tax or penalty, providing further that the same may not be maintained until a claim for refund or credit has been duly filed with the CIR.
Verily, the primary purpose of filing an administrative claim was to serve as a notice of warning to the CIR that court action would follow unless the tax or penalty alleged to have been collected erroneously or illegally is refunded. To clarify, Section 229 of the Tax Code – [then Section 306 of the old Tax Code] – however does not mean that the taxpayer must await the final resolution of its administrative claim for refund, since doing so would be tantamount to the taxpayer’s forfeiture of its right to seek judicial recourse should the two (2)-year prescriptive period expire without the appropriate judicial claim being filed.
In the case at bar, records show that both the administrative and judicial claims for refund of respondent for its erroneous withholding and remittance of FWT were indubitably filed within the two-year prescriptive period. Notably, Section 229 of the Tax Code, as worded, only required that an administrative claim should first be filed. It bears stressing that respondent could not be faulted for resorting to court action, considering that the prescriptive period stated therein was about to expire. Had respondent awaited the action of petitioner knowing fully well that the prescriptive period was about to lapse, it would have resultantly forfeited its right to seek a judicial review of its claim, thereby suffering irreparable damage.
Thus, in view of the aforesaid circumstances, respondent correctly and timely sought judicial redress, notwithstanding that its administrative and judicial claims were filed only 13 days apart.
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We agree with the CTA that the IGC was able to comply with all the requisites in order for its claim for refund to be granted. To be granted a refund, the IGC, in addition to being able to point out the specific provision of law creating such right, the taxpayer must be able to establish the fact of payment of the tax sought to be refunded and that the filing of the claim for refund was made within the reglementary period provided for under Section 204 of the NIRC for its administrative claims for refund and Section 229 for its judicial claims for refund.
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Interpretation of Section 229 (then Section 306) of the NIRC of 1997.
Section 306 (now Section 229) of the Tax Code seems at first blush conflicting. It will be noticed that, whereas the first sentence requires a claim to be filed with the Collector of Internal Revenue before any suit is commenced, the last makes imperative the bringing of such suit within two years from the date of collection. But the conflict is only apparent and the two provisions yield to reconciliation, which it is the office of statutory construction to effectuate, where possible, to give effect to the entire enactment.
To this end, and bearing in mind that the Legislature is presumed to have understood the language it used and to have acted with full idea of what it wanted to accomplish, it is fair and reasonable to say without doing violence to the context or either of the two provisions, that by the first is meant simply that the Collector of Internal Revenue shall be given an opportunity to consider his mistake, if mistake has been committed, before he is sued, but not, as the appellant contends that pending consideration of the claim, the period of two years provided in the last clause shall be deemed interrupted. Nowhere and in no wise does the law imply that the Collector of Internal Revenue must act upon the claim, that the taxpayer shall not go to court before he is notified of the Collector’s action. Having filed his claim and the Collector of Internal Revenue having had ample time to study it, the claimant may, indeed should, within the statutory period of two years proceed with his suit without waiting for the Collector’s decision. We understand the filing of the claim with the Collector of Internal Revenue to be intended primarily as a notice of warning that unless the tax or penalty alleged to have been collected erroneously or illegally is refunded, court action will follow. Previous and timely notice is, in other cases and for diverse salutary reasons, made a prerequisite to the prosecution of contemplated proceedings without imposing on the party to whom the notice was sent any obligation to make any move.
~~~P.J. Kiener Co. Ltd. vs. David (G.R. No. L-5163, 22 April 1953, En Banc, J. Tuason)
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From a reading of Section 306 of the Tax Code, it is also equally clear that aside from the requirement that before a suit or proceeding could be maintained in any court for the recovery of any tax said to have been erroneously or illegally assessed or collected, a claim for refund of said overpayment or illegal collection should first be made, the taxpayer is entitled to refund only if he brought the action within two years from the due of the payment. In other words, all overpayment or illegal collection made beyond the said two year period may not be refunded.
~~~Panay Electric Co., Inc. vs. The Collector of Internal Revenue, et al. (G.R. No. L-10574, 28 May 1958, En Banc, J. Montemayor)
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It is clear that Section 306 of the NIRC should be construed together with Section 11 of RA No. 1125. In fine, a taxpayer who has paid the tax, whether under protest or not, and who is claiming a refund of the same, must comply with the requirements of both sections, that is, he must file a claim for refund with the Collector of Internal Revenue within 2 years from the date of his payment of the tax, as required by said Section 306 of the NIRC, and appeal to the CTA within 30 days from receipt of the Collector’s decision or ruling denying his claim for refund, as required by said Section 11 of RA No. 1125. If, however, the Collector takes time in deciding the claim, and the period of two years is about to end, the suit or proceeding must be started in the CTA before the end of the two-year period without awaiting the decision of the Collector. This is so because of the positive requirement of Section 306 and the doctrine that delay of the Collector in rendering decision does not extend the peremptory period fixed by the statute.
~~~Gibbs, et al. vs. Collector of Internal Revenue, et al. (G.R. No. L-13453, 29 February 1960, En Banc, J. Barrera)
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The taxpayer must file action within 2 years from payment of the tax, and need not wait for a decision of the Collector on his claim for refund before taking the matter to court. The reason is that the inaction of the Collector upon the taxpayer’s claim for refund of the taxes paid, constitutes or may be construed as a reaffirmation of the original action taken by him which the taxpayer claim to be erroneous or wrongful; and such original action can be subjected to court review, without awaiting its affirmance by the Collector
~~~Muller & Phipps (Manila), Ltd. vs. The Collector of Internal Revenue (G.R. No. L-10694, 20 March 1958, En Banc, J. J.B.L. Reyes)
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The two-year prescriptive period is mandatory.
Section 229 of the NIRC provides that the claim for refund should be filed within two (2) years from the date of payment of the tax.
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In any event, pursuant to Section 306 (now Section 229) of the Tax Code, no suit or proceeding for refund or credit of any national internal revenue tax erroneously or illegally assessed or collected shall be begun after the expiration of two (2) years from the date of payment. This provision, which is mandatory, is not subject to any qualification, and hence, it applies regardless of the conditions under which the payment has been made.
~~~The Guagua Electric Light Plant Company, Inc. vs. The Collector of Internal Revenue, et al. (G.R. No. L-14421, 29 April 1961, En Banc, J. Concepcion)
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The specific provision of RANo. 1125 regarding appeal (Section 11) was intended to cope with a situation where the taxpayer, upon receipt of a decision or ruling of the CTA instead of paying the tax. For this reason the latter part of said Section 11 provides that no such appeal would suspend the payment of the tax demanded by the Government, unless for the special reasons, the CTA would deem it fit to restrain said collection. Section 306 of the Tax Code, on the other hand, contemplates of a case wherein the taxpayer paid the tax, whether under protest or not, and later on decides to go to court for its recovery. We can, therefore, conclude that where payment has already been made and the taxpayer is merely asking for its refund, he must first file with the Collector of Internal Revenue a claim for refund before taking the matter to the court, as required by section 306 of the NIRC and that appeals from decisions or rulings of the Collector of Internal Revenue to the CTA must always be perfected within 30 days after the receipt of the decision or ruling that is being appealed, as required by Section 11 of RA No. 1125. We see no conflict between the aforementioned sections of said laws.
The filing of a claim for refund is mandatory and a prerequisite or a condition precedent to the prosecution of a suit for the recovery of taxes said to have been erroneously or illegally collected, and non-compliance therewith bars and its fatal to the action. As a condition precedent to the accrual of plaintiff’s right of action, it should have been averred as an essential allegation (Rule 15, Section 10, Rules of Court; Government vs. Inchausti and Co., 24 Phil. 315), and plaintiff’s failure to allege the same rendered his complaint defective and subject to dismissal for lack of cause of action.
~~~Johnston Lumber Co., Inc. vs. Court of Tax Appeals, et al. (G.R. No. L-9292, 23 April 1957, En Banc, J. Felix)
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The two-year period of limitation affects only the remedy.
The law fixing limitations of time against taxpayers in claiming refunds, constitute a growing and often altered system not to be viewed as conditions on the right to tax, but, like other limitation laws, as affecting by their own force only the remedy.
~~~The Collector of Internal Revenue vs. Clement, et al. (G.R. No. L-12194, 24 January 1959, En Banc, J. J.B.L. Reyes)
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Importance of the two-year period of limitation.
This limitation period is important to the Government, so that it may know what revenues are controversial and may not be counted on for purposes of expenditure.
~~~Intestate Testate of the late Jovito Co, et al. vs. Collector of Internal Revenue (G.R. No. L-9352, 29 November 1956, En Banc, J. Bengzon)
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When Section 229 of the NIRC of 1997 need not be complied with.
The case has a striking resemblance to the controversy in Roman Catholic Archbishop of Cebu vs. Collector of Internal Revenue (4 SCRA 279).
The petitioner in that case paid under protest the sum of P5,201.52 by way of income tax, surcharge and interest and, forthwith, filed a petition for review before the CTA. Then respondent Collector (now Commissioner) of Internal Revenue set up several defenses, one of which was that petitioner had failed to first file a written claim for refund, pursuant to Section 306 of the Tax Code (now Section 229 of the NIRC of 1997), of the amounts paid. Convinced that the lack of a written claim for refund was fatal to petitioner’s recourse to it, the CTA dismissed the petition for lack of jurisdiction. On appeal to this Court, the tax court’s ruling was reversed; the Court held:
“We agree with petitioner that Section 7 of Republic Act No. 1125, creating the Court of Tax Appeals, in providing for appeals from –
‘(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of the law administered by the Bureau of Internal Revenue –
allows an appeal from a decision of the Collector in cases involving ‘disputed assessments’ as distinguished from cases involving `refunds of internal revenue taxes, fees or other charges, x x x’; that the present action involves a disputed assessment’; because from the time petitioner received assessments Nos. 17-EC-00301-55 and 17-AC-600107-56 disallowing certain deductions claimed by him in his income tax returns for the years 1955 and 1956, he already protested and refused to pay the same, questioning the correctness and legality of such assessments; and that the petitioner paid the disputed assessments under protest before filing his petition for review with the Court a quo, only to forestall the sale of his properties that had been placed under distraint by the respondent Collector since December 4, 1957. To hold that the taxpayer has now lost the right to appeal from the ruling on the disputed assessment but must prosecute his appeal under section 306 of the Tax Code, which requires a taxpayer to file a claim for refund of the taxes paid as a condition precedent to his right to appeal, would in effect require of him to go through a useless and needless ceremony that would only delay the disposition of the case, for the Collector (now Commissioner) would certainly disallow the claim for refund in the same way as he disallowed the protest against the assessment. The law, should not be interpreted as to result in absurdities.”
The Court sees no cogent reason to abandon the above dictum and to require a useless formality that can serve the interest of neither the government nor the taxpayer. The tax court has aptly acted in taking cognizance of the taxpayer’s appeal to it.
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In case of installment payment of the tax, the two-year prescriptive period is counted from the last payment of the tax.
In the case of Collector of Internal Revenue v. Antonio Prieto (2 SCRA 1007 [1961]), this Court held that when a tax is paid in installments, the prescriptive period of two years provided in Section 306 (Section 292) of the National internal Revenue Code should be counted from the date of the final payment. This ruling is reiterated in Commission of Internal Revenue v. Carlos Palanca (18 SCRA 496 [1966]), wherein this Court stated that where the tax account was paid on installment, the computation of the two-year prescriptive period under Section 306 (Section 292) of the Tax Code, should be from the date of the last installment.
~~~Commissioner of Internal Revenue vs. TMX Sales, Inc., et al. (G.R. No. 83736, 15 January 1992, En Banc, J. Gutierrez, Jr.)
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Conditions or requisites for the grant of refund of creditable withholding tax
There are three conditions for the grant of a claim for refund of creditable withholding tax: 1) the claim is filed with the CIR within the two-year period from the date of payment of the tax; 2) it is shown on the return of the recipient that the income payment received was declared as part of the gross income; and, 3) the fact of withholding is established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld therefrom.
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In Commissioner of Internal Revenue v. Far East Bank & Trust Company (now Bank of the Philippine Islands), the Court enumerated the requisites for claiming a tax credit or a refund of creditable withholding tax:
1) The claim must be filed with the CIR within the two-year period from the date of payment of the tax;
2) It must be shown on the return that the income received was declared as part of the gross income; and
3) The fact of withholding must be established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld.
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In claiming for the refund of excess creditable withholding tax, petitioner must show compliance with the following basic requirements:
(1) The claim for refund was filed within two years as prescribed under Section 229 of the NIRC of 1997;
(2) The income upon which the taxes were withheld were included in the return of the recipient (Section 10, Revenue Regulations No. 6-85);
(3) The fact of withholding is established by a copy of a statement (BIR Form 1743.1) duly issued by the payor (withholding agent) to the payee showing the amount paid and the amount of tax withheld therefrom (Section 10, Revenue Regulations No. 6-85).
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In order to be entitled to a refund claim or issuance of a tax credit certificate representing any excess or unutilized creditable withholding tax, it must be shown that the claimant has complied with the essential basic conditions set forth under pertinent provisions of law and existing jurisprudential declarations.
In Banco Filipino Savings and Mortgage Bank v. Court of Appeals, this Court had previously articulated that there are three essential conditions for the grant of a claim for refund of creditable withholding income tax, to wit: (1) the claim is filed with the Commissioner of Internal Revenue within the two-year period from the date of payment of the tax; (2) it is shown on the return of the recipient that the income payment received was declared as part of the gross income; and (3) the fact of withholding is established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld therefrom.
The first condition is pursuant to Sections 204(C) and 229 of the NIRC of 1997, as amended.
The second and third conditions are anchored on Section 2.58.3(B) of Revenue Regulations No. 2-98.
In addition to the abovementioned requisites, the NIRC of 1997, as amended, likewise provides for the strict observance of the concept of the irrevocability rule, the focal provision of which is Section 76 thereof.
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The requirements for entitlement of a corporate taxpayer for a refund or the issuance of tax credit certificate involving excess withholding taxes are as follows:
(1) That the claim for refund was filed within the two-year reglementary period pursuant to Section 229 of the NIRC;
(2) When it is shown on the ITR that the income payment received is being declared part of the taxpayer’s gross income; and
(3) When the fact of withholding is established by a copy of the withholding tax statement, duly issued by the payor to the payee, showing the amount paid and income tax withheld from that amount.
~~~RP vs. Team (Phils.) Energy Corp. (G.R. No. 188016, 14 January 2015, 1st Div., J. Bersamin)
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As implemented by the applicable rules and regulations and as interpreted in a vast array of decisions, a taxpayer who seeks a refund of excess and unutilized CWT must:
1) File the claim with the CIR within the two year period from the date of payment of the tax;
2) Show on the return that the income received was declared as part of the gross income; and
3) Establish the fact of withholding by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld.
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The requisites for claiming a refund of excess creditable withholding taxes are: (l) the claim for refund was filed within the two-year prescriptive period; (2) the fact of withholding is established by a copy of a statement duly issued by the payor (withholding agent) to the payee, showing the amount of tax withheld therefrom; and (3) the income upon which the taxes were withheld was included in the income tax return of the recipient as part of the gross income.
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Determining whether the income payments subjected to withholding tax were declared as part of gross income.
Here, it is undisputed that the claim for refund was filed within the two-year prescriptive period prescribed under Section 229 of the NIRC of 1997 and that the taxpayer was able to present its certificate of creditable tax withheld from its payor. However, records show that petitioner failed to reconcile the discrepancy between income payments per its income tax return and the certificate of creditable tax withheld.
A perusal of the certificate of tax withheld would reveal that petitioner earned P146,355,699.80. On the contrary, its annual income tax return reflects a gross income from film rentals in the amount of P145,381,568.00. However, despite the P974,131.80 difference, both the certificate of taxes withheld and income tax return filed by petitioner for taxable year 1999 indicate the same amount of P7,317,785.00 as creditable tax withheld. What’s more, petitioner failed to present sufficient proof to allow the Court to trace the discrepancy between the certificate of taxes withheld and the income tax return.
Parenthetically, the Office of the Solicitor General correctly pointed out that the amount of income payments in the income tax return must correspond and tally to the amount indicated in the certificate of withholding, since there is no possible and efficacious way by which the BIR can verify the precise identity of the income payments as reflected in the income tax return.
Therefore, petitioner’s claim for tax refund for taxable year 1999 must be denied, since it failed to prove that the income payments subjected to withholding tax were declared as part of the gross income of the taxpayer.
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Competent proof to establish the fact that creditable taxes are withheld
The CIR is of the opinion that Mirant’s non-presentation of the various payors or withholding agents to verify the Certificates of Creditable Tax Withheld at Source (CWT’s), the registered books of accounts and the audited financial statements for the various periods covered to corroborate its other allegations, and its failure to offer other evidence to prove and corroborate the propriety of its claim for refund and failure to establish the fact of remittance of the alleged withheld taxes by various payors to the BIR, are all fatal to its claim.
Citing the CTA First Division, Mirant argues that since the CWT’s were duly signed and prepared under pain of perjury, the figures appearing therein are presumed to be true and correct. The CWT’s were presented and duly identified by its witness, Magdalena Marquez, and further verified by the duly commissioned independent CPA, Ruben R. Rubio, on separate hearing dates, before the CTA First Division. Moreover, these certificates were found by the duly commissioned independent CPA to be faithful reproductions of the originals, as stated in his supplementary report dated March 24, 2003.
The Court agrees with the conclusion of the CTA En Banc.
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In fine, the document which may be accepted as evidence of the third condition, that is, the fact of withholding, must emanate from the payor itself, and not merely from the payee, and must indicate the name of the payor, the income payment basis of the tax withheld, the amount of the tax withheld and the nature of the tax paid.
At the time material to this case, the requisite information regarding withholding taxes from the sale of acquired assets can be found in BIR Form No. 1743.1. As described in Section 6 of RR No. 6-85, BIR Form No. 1743.1 is a written statement issued by the payor as withholding agent showing the income or other payments made by the said withholding agent during a quarter or year and the amount of the tax deducted and withheld therefrom. It readily identifies the payor, the income payment and the tax withheld. It is complete in the relevant details which would aid the courts in the evaluation of any claim for refund of creditable withholding taxes.
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The certificate of creditable tax withheld at source is the competent proof to establish the fact that taxes are withheld. It is not necessary for the person who executed and prepared the certificate of creditable tax withheld at source to be presented and to testify personally to prove the authenticity of the certificates.
In Banco Filipino Savings and Mortgage Bank v. Court of Appeals, this court declared that a certificate is complete in the relevant details that would aid the courts in the evaluation of any claim for refund of excess creditable withholding taxes.
Moreover, as correctly held by the CTA En Banc, the figures appearing in the withholding tax certificates can be taken at face value since these documents were executed under the penalties of perjury, pursuant to Section 267 of the 1997 NIRC, as amended.
Thus, upon presentation of a withholding tax certificate complete in its relevant details and with a written statement that it was made under the penalties of perjury, the burden of evidence then shifts to the CIR to prove that (1) the certificate is not complete; (2) it is false; or (3) it was not issued regularly.
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Anent, the CIR’s argument, questioning the authenticity and due execution of the Certificates of Creditable Taxes Withheld, the same should be given scant consideration. Foremost, said argument is belatedly raised before this Court. These documents were admitted at the initial stage of the proceedings before the CTA Third Division and records show that no such objection was made during the formal offer of said documents. Moreover, these Certificates of Final Tax Withheld, complete in relevant details, were declared under the penalty of perjury. As such, they may be taken at face value.
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Legal personality to claim a tax refund
The right of a withholding agent to claim a refund of erroneously or illegally withheld taxes comes with the responsibility to return the same to the principal taxpayer.
Pursuant to [Sections 204(c) and 229 of the NIRC], the person entitled to claim a tax refund is the taxpayer. However, in case the taxpayer does not file a claim for refund, the withholding agent may file the claim.
In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation [G.R. No. 66838, 2 December 1991], a withholding agent was considered a proper party to file a claim for refund of the withheld taxes of its foreign parent company.
Petitioner, however, submits that this ruling applies only when the withholding agent and the taxpayer are related parties, i.e., where the withholding agent is a wholly owned subsidiary of the taxpayer.
We do not agree.
Although such relation between the taxpayer and the withholding agent is a factor that increases the latter’s legal interest to file a claim for refund, there is nothing in the decision to suggest that such relationship is required or that the lack of such relation deprives the withholding agent of the right to file a claim for refund. Rather, what is clear in the decision is that a withholding agent has a legal right to file a claim for refund for two reasons. First, he is considered a “taxpayer” under the NIRC as he is personally liable for the withholding tax as well as for deficiency assessments, surcharges, and penalties, should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law. Second, as an agent of the taxpayer, his authority to file the necessary income tax return and to remit the tax withheld to the government impliedly includes the authority to file a claim for refund and to bring an action for recovery of such claim.
In this connection, it is however significant to add that while the withholding agent has the right to recover the taxes erroneously or illegally collected, he nevertheless has the obligation to remit the same to the principal taxpayer. As an agent of the taxpayer, it is his duty to return what he has recovered; otherwise, he would be unjustly enriching himself at the expense of the principal taxpayer from whom the taxes were withheld, and from whom he derives his legal right to file a claim for refund.
As to Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue cited by the petitioner, we find the same inapplicable as it involves excise taxes, not withholding taxes. In that case, it was ruled that the proper party to question, or seek a refund of, an indirect tax “is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another.”
In view of the foregoing, we find no error on the part of the CTA in upholding respondent’s right as a withholding agent to file a claim for refund.
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In relation to indirect taxes, Section 204(c) of the NIRC states that it is the statutory taxpayer which has the legal personality to file a claim fo refund. Accordingly, in cases involving excise tax exemptions on petroleum products under Section 135 of the NIRC, the Court has consistently held that it is the statutory taxpayer who is entitled to claim a tax refund based thereon and not the party who merely bears its economic burden.
However, the above mentioned rule should not apply to instances where the law clearly grants the party to which the economic burden of the tax is shifted an exemption from both direct and indirect taxes. In which case, the latter must be allowed to claim a tax refund even if it is not considered as the statutory taxpayer under the law.
The propriety of a tax refund claim is hinged on the kind of exemption which forms its basis. If the law confers an exemption from both direct or indirect taxes, a claimant is entitled to a tax refund even if it only bears the economic burden of the applicable tax. On the other hand, if the exemption conferred only applies to direct taxes, then the statutory taxpayer is regarded as the proper party to file the refund claim.
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Can a non-resident foreign corporation which collects dividends from Philippines sue here to claim tax refund?
Section 133 of the Corporation Code provides:
SEC. 133. Doing business without a license. — No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.
The aforementioned provision bars a foreign corporation “transacting business” in the Philippines without a license access to our courts. Thus, in order for a foreign corporation to sue in Philippine courts, a license is necessary only if it is “transacting or doing business” in the country. Conversely, if an unlicensed foreign corporation is not transacting or doing business in the Philippines, it can be permitted to bring an action even without such license.
In the case of B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing Industries, Inc. [551 Phil. 231 (2007)], the court categorically explained:
The law is clear. An unlicensed foreign corporation doing business in the Philippines cannot sue before Philippine courts. On the other hand, an unlicensed foreign corporation not doing business in the Philippines can sue before Philippine courts.
Explaining the rationale for this rule, the Court held:
The purpose of the law in requiring that foreign corporations doing business in the country be licensed to do so, is to subject the foreign corporations doing business in the Philippines to the jurisdiction of the courts, otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts.
The same danger does not exist among foreign corporations that are indubitably not doing business in the Philippines. Indeed, if a foreign corporation does not do business here, there would be no reason for it to be subject to the State’s regulation. As we observed, in so far as the State is concerned, such foreign corporation has no legal existence. Therefore, to subject such corporation to the courts’ jurisdiction would violate the essence of sovereignty.
Apparently, it is not the absence of the prescribed license, but the “doing of business” in the Philippines without such license which debars the foreign corporation from access to our courts. The operative phrase is “transacting or doing business.”
The threshold question therefore is whether the IGC was doing business in the Philippines when it collected dividend earnings from sources within the Philippines. The Corporation Code provides no definition for the phrase “doing business.”
In the old case of The Mentholatum Co. v. Mangaliman [72 Phil. 524 (1941)], the Court discussed the test to determine whether a foreign company is “doing business” in the Philippines, thus:
No general rule or governing principle can be laid down as to what constitutes “doing” or “engaging in” or “transacting” business. Indeed, each case must be judged in the light of its peculiar environmental circumstances. The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization. (Citations omitted)
The foregoing definition found its way in RA No. 7042, otherwise known as the Foreign Investments Act of 1991, which repealed Articles 44-56, Book II of the Omnibus Investments Code of 1987. Said law enumerated not only the acts or activities which constitute “doing business,” but also those activities which are not deemed “doing business.” Thus, Section 3(d) of RA No. 7042 provides:
SEC. 3. Definitions. – x x x
x x x x
d) The phrase “doing business” shall include soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase “doing business” shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account[.] (Underscoring supplied)
Inferring from the aforecited provision, mere investment as a shareholder by a foreign corporation in a duly registered domestic corporation shall not be deemed “doing business” in the Philippines. It is clear then that the IGC’s act of subscribing shares of stocks from McCann, a duly registered domestic corporation, maintaining investments therein, and deriving dividend income therefrom, does not qualify as “doing business” contemplated under RA No. 7042. Hence, the IGC is not required to secure a license before it can file a claim for tax refund.
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When the principal-agent relationship of a branch office and its principal (head office) is set aside.
The CIR argues that since IGC was already maintaining an RHQ in the Philippines, which was subsequently converted into an ROHQ, said headquarters should be the proper claimant of the tax refund. The IGC explained that the ROHQ had no involvement, whatsoever, in IGC’s investments in McCann. It was only the IGC that is entitled to receive dividend income arising from such investment.
True, the alleged overpayment of FWT were incurred from the dividend income earned by IGC, which is a separate and distinct income taxpayer from their ROHQ in the Philippines. As explained by IGC, the ROHQ has a sole purpose of servicing IGC’s affiliates, subsidiaries, branches and markets in the Asia-Pacific Region, but certainly not of investing in McCann. It can be concluded then that the investment in McCann was made for purposes peculiarly germane to the conduct of IGC’s corporate affairs and the same was not shown to be coursed through the ROHQ. Having made an independent investment, then it is the ICG that should face the tax consequence and avail of tax reliefs (i.e., refund, credit, preferential tax rate) appurtenant to such investment. Thus:
The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation.
Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation.
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Not authorized to refund taxes as a matter of gratuity.
The Collector of Internal Revenue simply collects that which the law has said that he must collect. He is not authorized to refund taxes as a matter of gratuity.
~~~Chui vs. Posadas, Jr. (G.R. No. 23487, 11 February 1925, En Banc, J. Malcolm); Koppel (Phils.), Inc. vs. The Collector of Internal Revenue (G.R. No. L-1977, 21 September 1950, En Banc, CJ. Moran)
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Effects of repealing statutes or laws on collected taxes–whether they are still refundable.
Regarding the effects of repealing statutes, the argument has been advanced, that taxes assessed (but not collected) under the law before its repeal, may not be collected after such repeal — except, always, provisions to the contrary. But the courts permit such collection.
“The rule favoring a prospective construction of statutes is applicable to statutes which repeal tax laws. Accordingly it is held that where such statute is not made retroactive a tax assessed before the repeal is collectible afterwards; and where taxes are levied under a law which is repealed by a subsequent act, unless it appears clearly that the legislature intended the repeal to work retrospectively, it will be assumed that it intended the taxes to be collected according to the law in force when they were levied.” (Cooley, Taxation Section 538 Vol. 2.)
So, if taxes assessed may still be demanded after the repeal of the law, it follows that taxes already collected may be and should be retained after the repeal. Unless of course the repealing statute provides otherwise.
~~~Intestate Testate of the late Jovito Co, et al. vs. Collector of Internal Revenue (G.R. No. L-9352, 29 November 1956, En Banc, J. Bengzon)
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On the requirement that claims for refund must be in writing.
The mere fact that [the letter] was couched in polite courteous language ought not to be construed against the [taxpayer-claimant].
~~~Asiatic Petroleum Co.(Phil. Islands), Ltd. vs. Posadas, Jr. (G.R. No. 30136, 4 February 1929, En Banc, J. Johns)
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As a rule, there is no payment of interest on tax refunds.
It is well-settled in this jurisdiction that our national government cannot be required to pay interest on tax refunds.
In the absence of a statutory provision clearly or expressly directing or authorizing such payment, the National Government cannot be required to pay interest.
~~~Commissioner of Customs vs. Borres, et al. (G.R. No. L-12867, 28 November 1959, En Banc, J. Bautista Angelo)
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Likewise, it is the rule that interest may be awarded only when the collection of tax sought to be refunded was attended with arbitrariness.
~~~Atlas Fertilizer Corp. vs. Commissioner of Internal Revenue, et seq. (G.R. Nos. L-26686 and L-26698, 30 October 1980, 1st Div., J. De Castro)
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Tax paid under protest may be refunded.
While there is much conflict in the authorities upon what amounts to a voluntary or involuntary payment of money, as will be seen from the citation of authorities by the appellant and appellee, yet in this jurisdiction the rule has been established for many years, that, where an entity of the Government, without legal right, has demanded of a taxpayer the payment of an alleged tax, the taxpayer may pay the tax under protest of record and sue for the recovery thereof. It is reasonable that a man who denies the legality of a tax should have a clear and certain remedy. The rule being established that, apart from special circumstances, he cannot interfere by injunction with the state’s collection of its revenues, an action at law to recover back what he has paid is the alternative left; and where, as is common, the State has a summary remedy — such as distress — and the party indicates by protest that he is yielding to what he cannot prevent, courts have been a little too slow to recognize the implied duress under which the payment is made. Where a citizen by refusing to pay an illegal tax is put at a serious disadvantage in the assertion of his legal rights with respect to such tax, justice requires that he should be at liberty to avoid that disadvantage by paying the tax and bringing suit for its recovery. (Ayala de Roxas vs. City of Manila, 27 Phil., 336; Viuda e Hijos de Pedro P. Roxas vs. Rafferty, 37 Phil., 957.)
Inasmuch as a rule has been established for years in this jurisdiction that a mere protest of record against the payment of an illegal demand, is sufficient to constitute an involuntary payment, and justifies an action for its recovery we find no reason for invoking the doctrine announced in other jurisdictions. Inasmuch as the money in the present case was paid under protest of record, it was paid involuntarily, and the payor is entitled to bring an action for its recovery any time before the same is barred by the statutes of limitations
~~~Zaragosa vs. Alfonso (G.R. No. L-21414, 13 September 1924, En Banc, J. Johnson)
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Prior application pursuant to RMO No. 1-2000 vs. Claim for refund.
Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation and/or application of the treaty provisions. The objective of the BIR is to forestall assessments against corporations who erroneously availed themselves of the benefits of the tax treaty but are not legally entitled thereto, as well as to save such investors from the tedious process of claims for a refund due to an inaccurate application of the tax treaty provisions. However, as earlier discussed, noncompliance with the 15-day period for prior application should not operate to automatically divest entitlement to the tax treaty relief especially in claims for refund.
The underlying principle of prior application with the BIR becomes moot in refund cases, such as the present case, where the very basis of the claim is erroneous or there is excessive payment arising from non-availment of a tax treaty relief at the first instance. In this case, petitioner should not be faulted for not complying with RMO No. 1-2000 prior to the transaction. It could not have applied for a tax treaty relief within the period prescribed, or 15 days prior to the payment of its Branch Profit Remittance Tax (BPRT), precisely because it erroneously paid the BPRT not on the basis of the preferential tax rate under the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the prior application requirement becomes illogical. Therefore, the fact that petitioner invoked the provisions of the RP-Germany Tax Treaty when it requested for a confirmation from the ITAD before filing an administrative claim for a refund should be deemed substantial compliance with RMO No. 1-2000.
Corollary thereto, Section 229 of the NIRC provides the taxpayer a remedy for tax recovery when there has been an erroneous payment of tax. The outright denial of petitioner’s claim for a refund, on the sole ground of failure to apply for a tax treaty relief prior to the payment of the BPRT, would defeat the purpose of Section 229.
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In the case of CBK Power Company Ltd. v. Commissioner of Internal Revenue, the Court emphasized the binding effect of international treaty which we entered into, thus:
The Philippine Constitution provides for adherence to the general principles of international law as part of the law of the land. The time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement. In this jurisdiction, treaties have the force and effect of law.
Specifically, the RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into and to which we are expected to observe compliance therewith in good faith. As explained by the Court, the purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods.
On the other hand, the mandatory wording of RMO No. 1-2000, reads:
III. Policies:
x x x x
2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e., payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief. x x x
The objective of RMO No. 1-2000 in requiring the application for treaty relief with the ITAD before a party’s availment of the preferential rate under a tax treaty is to avert the consequences of any erroneous interpretation and/or application of treaty provisions, such as claims for refund/credit for overpayment of taxes, or deficiency tax liabilities for underpayment.
This apparent conflict between which should prevail was settled in the case of Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue, where the Court lengthily discussed that the obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000.
Since the RP-US Tax Treaty does not provide for any other prerequisite for the availment of the benefits under the said treaty, to impose additional requirements would negate the availment of the reliefs provided for under international agreements.
At any rate, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief. This is only applicable to taxes paid on the basis of international agreements and treaties. Once it was settled that the taxpayer is entitled to the relief under the tax treaty, then by all means it could pay its tax liabilities using the tax relief provided by the treaty. In other words, the requirements under RMO No. 1-2000 applies only to a taxpayer who is about to pay their taxes on the basis of tax reliefs provided by international agreements and treaties and to confirm its entitlement to the said reliefs.
The application for tax treaty relief is not applicable on claims for tax refund.
In the same manner, it would be illogical for the IGC to comply with the prior requirement under RMO No. 1-2000 before it paid the FWT on the dividends earned. At the time of the payment transaction, the IGC was not availing of the 15% preferential tax rate as prescribed pursuant to the treaty, but it was applying the 35% regular tax rate. RMO No. 1-2000 is clear that application must be filed 15 days before the transaction (time of payment). It appears then that the prior application requirement under RMO No. 1-2000 is no longer a condition precedent to refund an erroneously paid tax on the basis of the regular tax rate under the Tax Code.
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Granting tax refunds pursuant to an Exchange of Notes.
Sections 204 (C) of the NIRC grants the CIR the authority to credit or refund taxes which are erroneously collected by the government.
The authority of the CIR to refund erroneously collected taxes is likewise reflected in Section 229 of the NIRC.
In this case, it is fairly apparent that the subject taxes in the amount of P52,612,812.00 was erroneously collected from petitioner, considering that the obligation to pay the same had already been assumed by the Philippine Government by virtue of its Exchange of Notes with the Japanese Government. Case law explains that an exchange of notes is considered as an executive agreement, which is binding on the State even without Senate concurrence. In Abaya v. Ebdane [544 Phil. 645 (2007)]:
An “exchange of notes” is a record of a routine agreement that has many similarities with the private law contract. The agreement consists of the exchange of two documents, each of the parties being in the possession of the one signed by the representative of the other. Under the usual procedure, the accepting State repeats the text of the offering State to record its assent. The signatories of the letters may be government Ministers, diplomats or departmental heads. The technique of exchange of notes is frequently resorted to, either because of its speedy procedure, or, sometimes, to avoid the process of legislative approval.
It is stated that “treaties, agreements, conventions, charters, protocols, declarations, memoranda of understanding,modus vivendi and exchange of notes” all refer to “international instruments binding at international law.”
x x x x
Significantly, an exchange of notes is considered a form of an executive agreement, which becomes binding through executive action without the need of a vote by the Senate or Congress.
Paragraph 5 (2) of the Exchange of Notes provides for a tax assumption provision whereby:
(2) The Government of the Republic of the Philippines will, itself or through its executing agencies or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products of Japan and services of Japanese nationals to be provided under the Loan. (Emphases and underscoring supplied)
To “assume” means “[t]o take on, become bound as another is bound, or put oneself in place of another as to an obligation or liability.” This means that the obligation or liability remains, although the same is merely passed on to a different person. In this light, the concept of an assumption is therefore different from an exemption, the latter being the “[f]reedom from a duty, liability or other requirement” or “[a] privilege given to a judgment debtor by law, allowing the debtor to retain [a] certain property without liability.” Thus, contrary to the CTA En Banc‘s opinion, the constitutional provisions on tax exemptions would not apply.
As explicitly worded, the Philippine Government, through its executing agencies (i.e., NPC in this case) particularly assumed “all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products of Japan and services of Japanese nationals to be provided under the [OECF] Loan.” The Philippine Government’s assumption of “all fiscal levies and taxes,” which includes the subject taxes, is clearly a form of concession given to Japanese suppliers, contractors or consultants in consideration of the OECF Loan, which proceeds were used for the implementation of the Project. As part of this, NPC entered into the June 21, 1991 Contract with Mitsubishi Corporation (i.e., petitioner’s head office in Japan) for the engineering, supply, construction, installation, testing, and commissioning of a steam generator, auxiliaries, and associated civil works for the Project, which foreign currency portion was funded by the OECF loans. Thus, in line with the tax assumption provision under the Exchange of Notes, Article VIII (B) (1) of the Contract states that NPC shall pay any and all forms of taxes that are directly imposable under the Contract:
Article VIII (B) (1)
B. FOR ONSHORE PORTION.
1.) [The] CORPORATION (NPC) shall, subject to the provisions under the Contract [Document] on Taxes, pay any and all forms of taxes which are directly imposable under the Contract including VAT, that may be imposed by the Philippine Government, or any of its agencies and political subdivisions. (Emphases supplied)
This notwithstanding, petitioner included in its income tax due the amount of P44,288,712.00, representing income from the OECF-funded portion of the Project, and further remitted P8,324,100.00 as BPRT for branch profits remitted to its head office in Japan out of its income for the fiscal year that ended on March 31, 1998. These taxes clearly fall within the ambit of the tax assumption provision under the Exchange of Notes, which was further fleshed out in the Contract. Hence, it is the Philippine Government, through the NPC, which should shoulder the payment of the same.
It bears stressing that the CIR had already acknowledged, through its administrative issuances, that Japanese contractors involved in the Project are not liable for the subject taxes. In RMC No. 42-99, the CIR interpreted the effect of the tax assumption clause in the Exchange of Notes on petitioner’s tax liability, to wit:
The foregoing provisions of the Exchange of Notes mean that the Japanese contractors or nationals engaged in EOCF-funded projects in the Philippines shall not be required to shoulder all fiscal levies or taxes associated with the project. x x x
x x x x
x x x Since the executing government agencies are mandated to assume the payment of [income taxes] under the Exchange of Notes, the said Japanese firms or nationals need not pay taxes due thereunder. (Emphases and underscoring supplied)
The CIR subsequently affirmed petitioner’s non-liability for taxes and entitlement to tax refunds by issuing Revenue Memorandum Order (RMO) No. 24-2005 addressed to specified BIR offices. The RMO provides:
Pursuant to the provisions of [RMC] No. 32-99 as amended by RMC No. 42-99, Japanese contractors and nationals engaged in OECF-funded projects in the Philippines shall not be required to shoulder the fiscal levies or taxes associated with the project. Thus, the concerned Japanese contractors are entitled to claim for the refund of all taxes paid and shouldered by them relative to the conduct of the Project.
You are, therefore, directed to expedite/ prioritize the processing of the claims for refund of Japanese contractors and nationals so [as] not to delay and jeopardize the release of the funds for OECF funded projects. (Emphases and underscoring supplied)
Therefore, considering that petitioner paid the subject taxes in the aggregate amount of P52,612,812.00, which it was not required to pay, the BIR erroneously collected such amount. Accordingly, petitioner is entitled to its refund.
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