The countdown has started and taxpayers have barely 4 days before the last day for filing the final adjustment return otherwise known as the Annual Income Tax Return for the taxable year ended December 31, 2015. Specifically, corporate taxpayers are required to file a final adjustment return covering the taxable income for the preceding calendar year on or before the 15th day of April and, likewise, to pay the income tax due thereon at the time the declaration or return is filed in accordance with the provisions of Section 76 and 77 of the National Internal Revenue Code of 1997 (Tax Code), as amended.
Save for the mandatory requirement for all taxpayers to file on time, the burden of paying the correct taxes is not the only thing corporate taxpayers must mind -- they are faced with managing excess/unutilized creditable withholding taxes (CWTs) arising from income earned or received that has been subjected to withholding tax. For them, the tedious process of a claim for refund or credit awaits at the end of the tunnel.
Accordingly, Section 76 of the Tax Code lays down the options available to a corporate taxpayer with excess/unutilized CWT credits, to wit:
1. Carry over the excess credit; or,
2. Be credited or refunded with the excess amount paid, as the case may be.
It should be noted that said options are alternative and not cumulative in nature, and the choice of one precludes the other.
In the event the taxpayer opts to claim a refund, the taxpayer-claimant has the burden to establish proof of entitlement. In accordance with the prevailing jurisprudence and implementing regulations of the Bureau of Internal Revenue, 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 in 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.
Revenue Regulations (RR) No. 2-98, as amended, further requires a taxpayer opting for a refund of excess/unutilized CWT credits to indicate in its income tax return such option. The option is considered irrevocable for that taxable year.
However, compliance with the third condition of establishing the fact of withholding through a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld encountered conflicting interpretations in case of withholding taxes on sale of real property classified as ordinary assets.
The Court of Tax Appeals (CTA) ruling in the case of Mermac, Inc. (CTA Case No. 7758, June 28, 2010) relied heavily on the ruling of the Supreme Court in Banco Filipino (BF) Savings and Mortgage Bank (G.R. No. 155682, March 27, 2007). In the said CTA case, the taxpayer-claimant submitted BIR Form No. 1606 (Withholding Tax Remittance Return) instead of the BIR Form No. 2307. Form 1606 is the return used, many times by the seller itself, to remit to the BIR the withholding tax on the purchase of real property. Accordingly, the CTA denied the claim for refund based on the ground that the BIR Form No. 1606 does not suffice because it was not filed by the withholding agent itself and is contrary to the requirement under RR No. 2-98, as amended, that a copy of withholding tax statement should be issued by the payor to the payee. As such, it was emphasized that the submission of BIR Form No. 1606 cannot substitute for the requirement of presenting the BIR Form No. 2307 in a claim for refund of CWTs.
Despite this, taxpayers should not fret. A recent en banc decision of the CTA dated March 21, 2016 affirmed the findings of its Second Division that taxpayer-claimant has sufficiently complied with the requirements for refund of unutilized CWT in the amount of P14.39 million and granted an additional amount of P20.40 million for a total of P34.78 million with respect to the latter’s sale of its Real and Other Properties Owned and Acquired.
In the said case, the tax court consistently applied the ruling of the Supreme Court in the recent case of PNB (G.R. No. 206019, March 18, 2015). The Supreme Court held that BIR Form No. 1606 contains the very same key information that would be obtained from BIR Form No. 2307 which suffices to prove the fact of withholding. Relative thereto, citing the clear intention of the pertinent provisions of Revenue Regulations No. 2-98, as amended, that 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 paid and the amount of tax withheld therefrom does not preclude a taxpayer-claimant to adduce alternative pieces of evidence to prove that it did not use the claimed CWT to pay its tax liabilities.
It is noteworthy to mention that while it is true that tax refunds partake the nature of tax exemptions and are thus strictly construed “strictissimi juris” against the person or entity claiming the exemption. The burden in claiming tax refund rests upon the taxpayer. However, in the event that the taxpayer-claimant has satisfied the conditions to be entitled for the claim of refund, release should be made from such unnecessary burdensome obligation of proving entitlement to the claim for refund.
It is in this light that all taxpayers, especially for those that are accumulating millions of unutilized CWTs in their books, fervently hope that a more consistent and liberal application of tax rules should be followed in so far as tax exemptions and refunds are concerned as long as the import of law has been complied with meritoriously.
As a reminder, taxpayer-claimant should comply with the statutory requirements provided for under the Tax Code in order to successfully pursue one’s claim and avoid disallowances due to procedural technicalities.
Daryl Matthew A. Sales is a tax manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.