DIGESTS
Remedies (under the NIRC of 1997): Refund
In General
Taxation vis-a-vis tax exemptions or refunds
Taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. And since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of refund or exemption from tax payments must be clearly shown and be based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception.
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Nature of tax refunds.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law.
Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted in the most explicit and categorical language, it is strictly construed against the claimant who must discharge such burden convincingly.
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Burden of proof.
The Court recognizes, as it always has, that the burden of proof to establish entitlement to refund is on the claimant taxpayer. Being in the nature of a claim for exemption, refund is construed in strictissimi juris against the entity claiming the refund and in favor of the taxing power. This is the reason why a claimant must positively show compliance with the statutory requirements provided for under the NIRC in order to successfully pursue one’s claim.
It must be emphasized that once the requirements laid down by the NIRC have been met, a claimant should be considered successful in discharging its burden of proving its right to refund. Thereafter, the burden of going forward with the evidence, as distinct from the general burden of proof, shifts to the opposing party, that is, the CIR. It is then the turn of the CIR to disprove the claim by presenting contrary evidence which could include the pertinent ITRs easily obtainable from its own files.
The CIR has the equally important responsibility of contradicting petitioner’s claim by presenting proof readily on hand once the burden of evidence shifts to its side. Claims for refund are civil in nature and as such, petitioner, as claimant, though having a heavy burden of showing entitlement, need only prove preponderance of evidence in order to recover excess credit in cold cash. To review, “[P]reponderance of evidence is [defined as] the weight, credit, and value of the aggregate evidence on either side and is usually considered to be synonymous with the term ‘greater weight of the evidence’ or ‘greater weight of the credible evidence.’ It is evidence which is more convincing to the court as worthy of belief than that which is offered in opposition thereto.
The Court reminds the CIR that substantial justice, equity and fair play take precedence over technicalities and legalisms. The government must keep in mind that it has no right to keep the money not belonging to it, thereby enriching itself at the expense of the law-abiding citizen or entities who have complied with the requirements of the law in order to forward the claim for refund. Under the principle of solutio indebiti provided in Article 2154 of the Civil Code, the CIR must return anything it has received.
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Verily, as consistently held by this Court, once the minimum statutory requirements have been complied with, the claimant should be considered to have successfully discharged its burden to prove its entitlement to the refund. After the claimant has successfully established a prima facie right to the refund by complying with the requirements laid down by law, the burden is shifted to the opposing party, i.e., the BIR, to disprove such claim. To rule otherwise would be to unduly burden the claimant with additional requirements which has no statutory nor jurisprudential basis.
It bears stressing that the power to decide matters concerning refunds of internal revenue taxes, among others, is vested in the CIR. It has the duty to ascertain the veracity of such claims and should not just wait and hope for the burden to fall on the claimant when the issue reaches the court.
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It bears stressing that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law.
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The burden of proving entitlement to a tax refund rests on the taxpayer.
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Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted in the most explicit and categorical language, it is strictly construed against the claimant who must discharge such burden convincingly. In the instant case, respondent Acesite had discharged this burden as found by the CTA and the CA. Indeed, the records show that Acesite proved its actual VAT payments subject to refund, as attested to by an independent Certified Public Accountant who was duly commissioned by the CTA. On the other hand, petitioner never disputed nor contested respondent’s testimonial and documentary evidence. In fact, petitioner never presented any evidence on its behalf.
One final word. The BIR must release the refund to respondent without any unreasonable delay. Indeed, fair dealing is expected by our taxpayers from the BIR and this duty demands that the BIR should refund without any unreasonable delay what it has erroneously collected.
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Mistake of fact.
Considering the foregoing discussion, there are undoubtedly erroneous payments of the VAT pertaining to the effectively zero-rate transactions between Acesite and PAGCOR. Verily, Acesite has clearly shown that it paid the subject taxes under a mistake of fact, that is, when it was not aware that the transactions it had with PAGCOR were zero-rated at the time it made the payments. In UST Cooperative Store v. City of Manila, (G.R. No. L-17133, 31 December 1965) we explained that “there is erroneous payment of taxes when a taxpayer pays under a mistake of fact, as for the instance in a case where he is not aware of an existing exemption in his favor at the time the payment was made.” Such payment is held to be not voluntary and, therefore, can be recovered or refunded.
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Solutio indebiti.
Tax refunds are based on the principle of quasi-contract or solutio indebiti and the pertinent laws governing this principle are found in Arts. 2142 and 2154 of the Civil Code, which provide, thus:
Art. 2142. Certain lawful, voluntary, and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another.
Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.
When money is paid to another under the influence of a mistake of fact, that is to say, on the mistaken supposition of the existence of a specific fact, where it would not have been known that the fact was otherwise, it may be recovered. The ground upon which the right of recovery rests is that money paid through misapprehension of facts belongs in equity and in good conscience to the person who paid it.
The Government comes within the scope of solutio indebiti principle as elucidated in Commissioner of Internal Revenue v. Fireman’s Fund Insurance Company (G.R. No. L-30644, 9 March 1987), where we held that: “Enshrined in the basic legal principles is the time-honored doctrine that no person shall unjustly enrich himself at the expense of another. It goes without saying that the Government is not exempted from the application of this doctrine.”
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The government has no right to retain what does not belong to it. “No one, not even the State, should enrich oneself at the expense of another.”
As the Court exhorted in Republic v. GST Philippines, Inc., while the taxpayer has an obligation to honestly pay the right taxes, the government has a corollary duty to implement tax laws in good faith; to discharge its duty to collect what is due to it; and to justly return what has been erroneously and excessively given to it.
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The government should not misuse technicalities.
While tax exemptions are strictly construed against the taxpayer, the government should not misuse technicalities to keep money it is not entitled to.
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When a tax refund should be granted.
Petitioner contends that according to well-settled doctrine, a tax refund, which is in the nature of a tax exemption, should be construed strictissimi juris against the taxpayer. However, when the claim for refund has clear legal basis and is sufficiently supported by evidence, as in the present case, then the Court shall not hesitate to grant the same.
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Assumption on the grant of refund; Necessity of presenting tax returns
The grant of a refund is founded on the assumption that the tax return is valid, i.e., that the facts stated therein are true and correct. Without the tax return, it is error to grant a refund since it would be virtually impossible to determine whether the proper taxes have been assessed and paid.
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Money illegally levied under one section cannot be retained under another.
After an action has been commenced to recover money levied and assessed under section 1462 of the Administrative Code in which the defendant admits that the tax was levied and assessed under that section, he cannot defeat the right of recovery and keep the money upon a claim or pretense that he could or might have made a valid levy under another and a different section of the Administrative Code. The fact remains that the defendant obtained plaintiff’s money under a void levy. After that fact was established, it became the legal duty of the defendant on demand to refund the money. This is specially true where, as in this case, there is no claim, allegation or proof that a valid levy was ever actually made under any other or different section.
~~~La Carlota Sugar Central vs. Trinidad (G.R. No. 20579, 4 October 1923, En Banc, J. Johns)
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When a tax refund is not forthcoming.
The fact that one person may not have paid or been required to pay his taxes does not exempt another from the payment of his legal taxes, or legally entitle him to a refund of any taxes which he has paid.
~~~Bank of the Philippine Islands vs. Trinidad (G.R. No. 20780, 9 November 1923, En Banc, J. Johns)
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May the tax liability/ies of a taxpayer be offset to the latter’s refund claim?
Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their liability under Sec. 28(A)(1), considering that there has not yet been any assessment of their obligation under the latter provision. Petitioner argues that such offsetting is in the nature of legal compensation, which cannot be applied under the circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal compensation, to wit:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue, thus:
In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit, which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.
Verily, petitioner’s argument is correct that the offsetting of its tax refund with its alleged tax deficiency is unavailing under Art. 1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals [G.R. No. 106611, 21 July 1994], however, granted the offsetting of a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s supplemental motion for reconsideration alleging bringing to said court’s attention the existence of the deficiency income and business tax assessment against Citytrust. The fact of such deficiency assessment is intimately related to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim of Citytrust was filed, provides that “(w)hen an assessment is made in case of any list, statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is proved that the said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines.”
Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved. This would necessarily require and entail additional efforts and expenses on the part of the Government, impose a burden on and a drain of government funds, and impede or delay the collection of much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that the taxpayer and the Government alike be given equal opportunities to avail of remedies under the law to defeat each other’s claim and to determine all matters of dispute between them in one single case. It is important to note that in determining whether or not petitioner is entitled to the refund of the amount paid, it would [be] necessary to determine how much the Government is entitled to collect as taxes. This would necessarily include the determination of the correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as to all the matters subject thereof or necessarily involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above pronouncements are, therefore, still applicable today.
Here, petitioner’s similar tax refund claim assumes that the tax return that it filed was correct. Given, however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a refund.
Be that as it may, this Court is unable to affirm the assailed decision and resolution of the CTA En Banc on the outright denial of petitioner’s claim for a refund. Even though petitioner is not entitled to a refund due to the question on the propriety of petitioner’s tax return subject of the instant controversy, it would not be proper to deny such claim without making a determination of petitioner’s liability under Sec. 28(A)(1).
It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based on taxable income, that is, gross income less deductions and exemptions, if any. It cannot be assumed that petitioner’s liabilities under the two provisions would be the same. There is a need to make a determination of petitioner’s liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a tax deficiency exists. The assailed decision fails to mention having computed for the tax due under Sec. 28(A)(1) and the records are bereft of any evidence sufficient to establish petitioner’s taxable income. There is a necessity to receive evidence to establish such amount vis-à-vis the claim for refund. It is only after such amount is established that a tax refund or deficiency may be correctly pronounced.
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We reject petitioner’s contention that the CTA erred in denying its claim for refund of erroneously paid GPB tax on the ground that it is subject to income tax under Section 28(A)(1) of the NIRC because (a) it has not been assessed at all by the BIR for any income tax liability; and (b) internal revenue taxes cannot be the subject of set-off or compensation, citing Republic v. Mambulao Lumber Co., et al. [114 Phil. 549 (1962)] and Francia v. Intermediate Appellate Court [245 Phil. 717 (1988)].
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue, we have ruled that “[i]n an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may determine whether there are taxes that should have been paid in lieu of the taxes paid.” The determination of the proper category of tax that should have been paid is incidental and necessary to resolve the issue of whether a refund should be granted.
Hence, the CTA properly denied petitioner’s claim for refund of allegedly erroneously paid tax on its GPB, on the ground that it was liable instead for the regular 32% tax on its taxable income received from sources within the Philippines. Its determination of petitioner’s liability for the 32% regular income tax was made merely for the purpose of ascertaining petitioner’s entitlement to a tax refund and not for imposing any deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited are based on different circumstances. In both cited cases, the taxpayer claimed that his (its) tax liability was off-set by his (its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al, Mambulao Lumber contended that the amounts it paid to the government as reforestation charges from 1947 to 1956, not having been used in the reforestation of the area covered by its license, may be set off or applied to the payment of forest charges still due and owing from it. Rejecting Mambulao’s claim of legal compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on compensation is inapplicable. On this point, the trial court correctly observed:
Under Article 1278, NCC, compensation should take place when two persons in their own right are creditors and debtors of each other. With respect to the forest charges which the defendant Mambulao Lumber Company has paid to the government, they are in the coffers of the government as taxes collected, and the government does not owe anything to defendant Mambulao Lumber Company. So, it is crystal clear that the Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of each other, because compensation refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can not be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. * * *. (80 C.J.S. 73-74.)
The general rule, based on grounds of public policy is well-settled that no set-off is admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal consent of individual taxpayers is not required. * * * If the taxpayer can properly refuse to pay his tax when called upon by the Collector, because he has a claim against the governmental body which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the taxpayer’s claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile the financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-767.) (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal compensation provided under Article 1279 were present. In that case, a portion of Francia’s property in Pasay was expropriated by the national government, which did not immediately pay Francia. In the meantime, he failed to pay the real property tax due on his remaining property to the local government of Pasay, which later on would auction the property on account of such delinquency. He then moved to set aside the auction sale and argued, among others, that his real property tax delinquency was extinguished by legal compensation on account of his unpaid claim against the national government. This court ruled against Francia:
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other;
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(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.
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There are other factors which compel us to rule against the petitioner. The tax was due to the city government while the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction.
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v. Commission on Audit [G.R. No. 92585, 8 May 1992] and Philex Mining Corporation v. Commissioner of Internal Revenue. In Caltex, this court reiterated:
[A] taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to beset-off. (Citations omitted)
Philex Mining ruled that “[t]here is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity.” Rejecting Philex Mining’s assertion that the imposition of surcharge and interest was unjustified because it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still had pending claims for VAT input credit/refund with the Bureau of Internal Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any tax payer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government. Moreover, Philex’s theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities. (Citations omitted)
In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay tax on the ground that the tax liabilities were off-set against any alleged claim the taxpayer may have against the government. Such would merely be in keeping with the basic policy on prompt collection of taxes as the lifeblood of the government.
Here, what is involved is a denial of a taxpayer’s refund claim on account of the CTA’s finding of its liability for another tax in lieu of the GPB tax that was allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected similar arguments on the denial of claim for tax refund.
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue, this court upheld the denial of the claim for refund based on the CTA’s finding that the taxpayer had, through erroneous deductions on its gross income, underpaid its GPB tax on cargo revenues for 1999, and the amount of underpayment was even greater than the refund sought for erroneously paid GPB tax on passenger revenues for the same taxable period.
In this case, the P5,185,676.77 GPB tax paid by petitioner was computed at the rate of 1 1/2% of its gross revenues amounting to P345,711,806.08 from the third quarter of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable under Section 28(A)(1) of the 1997 NIRC [32% of taxable income, that is, gross income less deductions] will exceed the maximum ceiling of 1 1/2% of gross revenues as decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.
N.B.:
For a unique case, where the SC allowed the issuance of a tax credit certificate, representing excess creditable taxes for a particular year (2002), but (at the same time) ordered the CIR to issue a final assessment notice and demand letter of the refund claimant’s tax liability for the succeeding year (2003), refer to the digest of Commissioner of Internal Revenue vs. Cebu Holdings, Inc. (G.R. No. 189792, 20 June 2018, 2nd Div., J. Carpio), infra.
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A unique case where the rule of tax set-off was not applied.
Respondent (the refund-claimant) argues that the alleged deficiency income tax for taxable year 2003 has no bearing on the case which merely involves a claim for a tax credit certificate for taxable year 2002.
We cannot subscribe to respondent’s reasoning. The ruling of the CTA First Division and the CTA En Banc clearly affects respondent’s income tax liability for taxable year 2003 precisely because respondent carried over the amount of P16,194,108.00 as prior year’s excess credits, to which it is not entitled. Respondent is once again trying to evade the adverse effect of the ruling of the CTA First Division that respondent (petitioner therein) failed to substantiate almost all of its claimed prior year’s excess credits, especially since respondent already carried over and applied the amount of P16,194,108.00 as prior year’s excess creditable tax against the income tax due for the succeeding taxable year 2003. To reiterate, the CTA First Division already ruled that respondent (petitioner therein) failed to substantiate its prior year’s excess credits of P30,150,767.00 except for the amount of P288,076.04, which can be applied against respondent’s income tax liability for taxable year 2002. Thus, since respondent’s prior year’s excess credits have already been fully applied against its 2002 income tax liability, the P16,194,108.00 unsubstantiated tax credits in taxable year 2002 could no longer be carried over and applied against its income tax liability for taxable year 2003.
Nevertheless, it is incumbent upon petitioner to issue a final assessment notice and demand letter for the payment of respondent’s deficiency tax liability for taxable year 2003 [pursuant to Section 228(c) of the NIRC of 1997].
In this case, no pre-assessment notice is required since respondent taxpayer carried over to taxable year 2003 the prior year’s excess credits which have already been fully applied against its income tax liability for taxable year 2002.
WHEREFORE, the petition is PARTIALLY GRANTED. We AFFIRM with MODIFICATION the 29 July 2009 Decision and the 9 October 2009 Resolution of the Court of Tax Appeals En Banc in C.T.A. EB No. 478. Petitioner Commissioner of Internal Revenue is ordered to: (a) issue a tax credit certificate to respondent Cebu Holdings, Inc. in the amount of P2,083,878.07, representing excess creditable taxes for taxable year 2002; and (b) issue a final assessment notice and demand letter for the payment of respondent’s deficiency tax liability in the amount of P8,540,182.00 for taxable year 2003.
SO ORDERED.
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A deficiency VAT may not be offset when the subject of the refund claim are input taxes.
But while TPC’s sales of electricity to CEBECO, ACMDC, and AFC are not zero-rated, we cannot hold it liable for deficiency VAT by imposing 10% VAT on said sales of electricity as what the CIR wants us to do.
As a rule, taxes cannot be subject to compensation because the government and the taxpayer are not creditors and debtors of each other. However, we are aware that in several cases, we have allowed the determination of a taxpayer’s liability in a refund case, thereby allowing the offsetting of taxes.
In Commissioner of Internal Revenue v. Court of Tax Appeals (G.R. No. 106611, 21 July 1994), we allowed offsetting of taxes in a tax refund case because there was an existing deficiency income and business tax assessment against the taxpayer. We said that “[t]o award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects” and that “to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits.”
Similarly, in South African Airways v. Commissioner of Internal Revenue, we permitted offsetting of taxes because the correctness of the return filed by the taxpayer was put in issue.
In the recent case of SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue, we also allowed offsetting because there was a need for the court to determine if a taxpayer claiming refund of erroneously paid taxes is more properly liable for taxes other than that paid. We explained that the determination of the proper category of tax that should have been paid is not an assessment but is an incidental issue that must be resolved in order to determine whether there should be a refund. However, we clarified that while offsetting may be allowed, the BIR can no longer assess the taxpayer for deficiency taxes in excess of the amount claimed for refund if prescription has already set in.
But in all these cases, we allowed offsetting of taxes only because the determination of the taxpayer’s liability is intertwined with the resolution of the claim for tax refund of erroneously or illegally collected taxes under Section 229 of the NIRC. A situation that is not present in the instant case.
In this case, TPC filed a claim for tax refund or credit under Section 112 of the NIRC, where the issue to be resolved is whether TPC is entitled to a refund or credit of its unutilized input VAT for the taxable year 2002. And since it is not a claim for refund under Section 229 of the NIRC, the correctness of TPC s VAT returns is not an issue. Thus, there is no need for the court to determine whether TPC is liable for deficiency VAT.
Besides, it would be unfair to allow the CIR to use a claim for refund under Section 112 of the NIRC as a means to assess a taxpayer for any deficiency VAT, especially if the period to assess had already prescribed. As we have said, the courts have no assessment powers, and therefore, cannot issue assessments against taxpayers. The courts can only review the assessments issued by the CIR, who under the law is vested with the powers to assess and collect taxes and the duty to issue tax assessments within the prescribed period.
N.B.:
It must be observed, however, that in the foregoing case, the deficiency VAT refers only to that which has been raised by petitioner CIR, not as that determined by the CTA. Here, the CTA determined, inter alia, that for the period of the claim, the refund claimant had an output VAT liability, which amount was deducted from the excess input VAT attributable to substantiated zero-rated sales. Such determination of the CTA was affirmed by the High Court.
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