By Oliver Beltran
If you’re fortunate in life, you get a lot of second chances. It’s a matter of learning from your mistakes and experiences, and vowing to do better the next time. But there are instances when fate intervenes, depriving us of that opportunity to rectify even the most trivial of mistakes, leaving us to suffer significant consequences and ponder, “if only,” or “what could have been.”
This is a story that bears repeating so that the pain and penalty suffered by the taxpayer will not befall others.
A few years ago, a bottling company filed a claim for refund on its alleged erroneously paid output value-added tax (VAT). The VAT arose from the company’s failure to claim some of the input taxes it incurred from its purchases, which were recorded in its books of accounts, but not reported in its quarterly VAT returns. By the time the error was spotted, it was already too late for the company to amend its VAT return to include the undeclared input taxes since the Bureau of Internal Revenue (BIR) had already issued a letter of authority to the taxpayer.
To recover its alleged overpayment, the company filed a claim for refund, which reached the Court of Tax Appeals (CTA) En Banc. In its claim for refund, the company argued that it should be entitled to a refund based on the following grounds: (a) the commissioner of internal revenue should return the amount erroneously paid or delivered to him pursuant to the principle of solution indebiti; (b) the claim for tax refund should not be strictly construed because it necessitates only a preponderance of evidence for its approbation like any other civil case; and (c) its claim for refund is in the nature of erroneous/overpayment of input taxes because of failure to apply a certain amount of input taxes in computing its output VAT.
On the taxpayer’s claim that the VAT it paid is considered erroneously or illegally collected tax, the CTA En Banc maintained that what the taxpayer is really claiming for tax refund/credit is its undeclared input VAT. Hence, Section 112 of the Tax Code should be the proper basis for its claim for refund, not Section 204(C), which applies to erroneously or illegally assessed taxes.
The CTA En Banc explained that under Section 112 of the Tax Code, there are two instances when excess input taxes may be claimed for refund, to wit: (a) when they are attributable to zero-rated or effectively zero-rated sales; and (b) upon cancellation of VAT registration due to retirement from or cessation of business. Consequently, the CTA En Banc held that the taxpayer does not qualify for tax refund or credit, since its claim for refund or credit of its undeclared input taxes does not fall under either of the instances provided by law
The CTA En Banc further explained that, while the company’s failure to consider a portion of its input taxes resulted in the payment of a higher output tax, it is still availing of the creditable input tax mechanism provided in Section 112 of the Tax Code. In this regard, the CTA En Banc held that it was erroneous for the company to treat the amount involved in the claim as output tax since an unreported or unclaimed input tax does not automatically become output tax.
Finally, as to petitioner’s prayer that the principle of strictissimi juris not be applied in the instant case, and for it to be consequently allowed to credit its undeclared input VAT in its VAT return, despite the BIR’s issuance of a letter of assessment, the CTA En Banc held that “to allow the unutilized input tax now would be in a way allowing an amended return. It is an elementary rule of reason that what may not be done directly, may not also be done indirectly.” According to the CTA En Banc, the company was not able to hurdle the heavy burden of proving that it deserved an exceptional treatment, in the face of the well-settled principle that tax refunds and credits, just like tax exemptions, are strictly construed against the taxpayer.
A single mistake, even an inadvertent and seemingly trivial one, can truly be costly when it comes to payment of taxes, much more when filing claims for tax refund. As such, it is imperative that taxpayers always be on their toes, and practice prudence when exercising their rights, especially when it is already certain that the odds are stacked against them in the face of all the legal doctrines and principles that favor the tax authorities.
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The author is a lawyer and a manager with Navarro Amper & Co.’s Tax and Corporate Services Division. Navarro Amper & Co. is the Philippine member-firm of Deloitte Touche Tohmatsu Ltd.