Imposition of interest is a fairly common concept. The cases of Eastern Shipping Lines Inc. and Nacar take it a step further by familiarizing us with what legal interest is. In those cases, the Supreme Court clarified that when the judgment of the court awarding a sum of money becomes final and executory, legal interest may be imposed.
In cases where the court grants a tax refund, which represents an award of sum of money to a taxpayer, may legal interest be likewise awarded?
This question was explored by the Tax Court in the recent case of South Luzon Tollway Corp. v. CIR (Court of Tax Appeals [CTA] Case 9272, July 27, 2018). Here, the South Luzon Tollway Corp. (SLTC) sought to recover from the Bureau of Internal Revenue deficiency taxes paid under protest with legal interest. The Tax Court granted the refund but denied the imposition of legal interest. Interestingly, while it denied the legal interest, the Court offered a spirited discussion on why it should be imposed on tax refund.
Surprisingly, the imposition of legal interest on tax refund is not a novel theory. The case of Carcar Electric & Ice Plant Co. Inc. v. Collector of Internal Revenue (GR L-9257, November 27, 1956) held that, under the then Internal Revenue Code, the Collector of Internal Revenue may be made to answer for interest at the legal rate on taxes improperly collected. The Supreme Court then restricted the rule in the case of Collector of Internal Revenue v. St. Paul’s Hospital of Iloilo (GR L-12127, May 25, 1959) wherein the Court held that legal interest may not be imposed on tax refunds unless there is a clear statutory authority clearly or expressly directing or authorizing such payment.
The rule was further modified in subsequent Supreme Court cases by declaring that tax refunds are not subject to legal interest in the absence of statutory authority and when there is no arbitrariness in the denial of the refund by the Commissioner of Internal Revenue.
Despite the Supreme Court’s pronouncements, the Tax Court, by way of an obiter dictum in the SLTC case, believes that the rule should be revisited. The Court believes that pertinent provisions of the Civil Code constitute as statutory authority in the imposition of interest. Also, while the pronouncement in the Eastern Shipping Lines Inc. and Nacar cases is confined to “loans or forbearance of money,” the amount of tax refund which the taxpayer is entitled to, and which the government is obliged to pay on the basis of a final and executory judgment, is no different from a “forbearance of money.”
There being no specific provision in the NIRC, as amended, categorically stating that the payment of refund is without interest, a tax refund may be considered as subject to the legal rate of interest upon finality of judgment until its satisfaction. The CTA further reasoned that unreasonable delay in the payment of refund to the taxpayer, sans any adverse consequence to government, should no longer be countenanced.
However, despite its extensive and profound discussion, the CTA’s recognizes the role of the Supreme Court as the final arbiter of any justiciable controversy. Since the prevailing doctrine, as pronounced by the Supreme Court, prohibits the imposition of interest on tax refunds, the CTA is thereby bound.
Now that the CTA has given its proverbial two cents on the issue and called for a revisiting of the current doctrine, will the Supreme Court listen when a pertinent case comes to its hallowed halls? Will it stand firm and uphold the doctrines from its decisions past? Only time will tell.
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The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at jomel.manaig@bdblaw.com.ph or call 403-2001 local 370.