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Let's Talk Tax

Can you impose interest on a refund?

Edward D. Roguel Edward D. Roguel

Which of these cases would you prefer?

Case 1: You receive an assessment from the Bureau of Internal Revenue (BIR) after failing to pay taxes. You protested it, but eventually, lost the case and paid the corresponding deficiency tax, plus interest and other penalties.

Case 2: You receive an assessment from the BIR due to your alleged failure to pay taxes. You protested it. BIR subsequently issued a collection letter, then a Warrant of Distraint and/or Levy (WDL) and, eventually, collected the alleged deficiency taxes through garnishment. You filed a case with the Court of Tax Appeals (CTA), and won. Accordingly, the CTA ordered the BIR to refund the erroneously collected taxes.

Some would prefer the second case, which results in a refund from the BIR. However, most would rather not be involved in either case because the taxpayers in any event are at the losing end. Although in Case 2, the taxpayer was able to win a refund, he will have failed to recover the foregone interest on erroneously collected taxes (and, of course, the additional cost of litigation). The taxpayer could have earned more had these funds been applied to operations. This is the sad reality of taxes: if you owe the government, you pay, including interest and penalties; if the government owes you, the government will refund the amount, but without interest. The longer the process takes, the more disadvantageous to the taxpayer.

Some taxpayers would probably ask if there is an instance where interest may be imposed on a refund, especially if there is a delay on the part of the government. Yes, there is. In the Supreme Court (SC) decision in G.R No. 198756 (Banco De Oro, et. al. vs. Republic, et. Al.), the Bureau of Treasury (BoT) was held liable to pay legal interest of 6% per annum on the amount of final withholding tax. It was imposed against the government due to the BoT’s unjustified refusal to release the funds to be deposited in escrow, despite the SC’s orders.

In CTA Case No. 9437 dated Aug. 31, 2018, the CTA further explained that the condition where interest may be imposed on the amount of refund — i.e., it must either be authorized by law or the collection of the tax was attended by arbitrariness.

In the said case, the taxpayer received a Preliminary Collection Letter (PCL) demanding the payment of alleged deficiency income tax and VAT and compromise penalty. Afterwards, the BIR issued a WDL. Thereafter, the BIR issued Warrants of Garnishment to the taxpayer’s banks. One of the banks then placed the taxpayer’s deposit account amounting to P17 million in a separate block account, prompting the taxpayer to file a Petition for Review with the CTA with an Urgent Motion for the Issuance of an Order to Suspend the Collection of Tax. However, while waiting for the CTA’s resolution on the motion to suspend the collection of taxes, the BIR issued an Order for Delivery of checks amounting to P17 million to the bank, to which the bank complied.

The taxpayer filed an amended petition for review, which sought to refund the amount garnished since the assessment has no basis. It also sought damages equivalent to the legal interest rate of 6 % per annum on the garnished amount computed from the date of the BIR’s collection until the full refund.

With regard to the merit of the assessments, the CTA ruled in favor of the taxpayer. The assessment was cancelled on the following grounds: (1) The BIR failed to prove that the taxpayer actually received the Preliminary Assessment Notice (PAN) and Final Assessment Notice (FAN); (2) The PAN and FAN were void, since these were issued pursuant to Letter Notice only without any Letter of Authority; and (3) The right of the BIR to assess the taxpayer had prescribed.

Consequently, the CTA ruled that, since the PAN and FAN are void, the WDL is, likewise, void. The tax authority has no right to collect the amount of P17 million from the taxpayer and, therefore, the BIR erroneously or illegally collected the said amount. The taxpayer is entitled to refund the same.

The CTA, however, denied the taxpayer’s request to impose interest on the erroneously collected taxes. The CTA pointed out that, for the payment of interest to accrue on the amount to be refunded to the taxpayer, it must be either authorized by law or the collection of the tax was attended by arbitrariness.

The 1997 Tax Code, as amended, however, does not contain any provision for interest in case of improperly collected taxes. Hence, interest cannot be imposed on taxes to be refunded, even if the BIR is the one at fault, which resulted in the erroneous collection of taxes.

Arbitrariness, on the other hand, presupposes inexcusable or obstinate disregard of legal provisions. As explained by the CTA, an action is not arbitrary when it is exercised honestly and upon due consideration where there is room for two options, however much it may be believed that an erroneous conclusion was reached. In the case at bar, there was no legal provision violated when the BIR collected the garnished amount during the pendency of the proceeding on the Urgent Motion for the Issuance of an Order to Suspend the collection of tax.

As a general rule, an injunction is not available to restrain the collection of tax pursuant to Section 218 of the 1997 Tax Code, as amended. However, the suspension of collection may be allowed if, in the Court’s opinion, the collection may jeopardize the interest of the government and/or taxpayer pursuant to Section 11 of Republic Act (RA) No. 1125, as amended by RA No. 9282.

Since there was no order yet from the CTA to suspend the collection of tax, the BIR was not precluded from collecting the said amount.

I could just imagine how much income the taxpayer in the cited CTA case could have earned in using the P17 million to fund operations. Placing that amount in an investment that yields an annual return of 3% could earn half a million per year.

It is about time our lawmakers consider in the proposed TRAIN 2 (or TRABAHO Bill, as it is now called) a provision imposing interest on a refund due to the fault or delay caused by the government. Imposing interest on a refund is not unusual. In fact, some countries such as Australia, India, Singapore, and Malaysia allow interest on refunds. Such a provision will safeguard the rights of taxpayers and help the government ensure that the refund and assessment process are performed in a timely manner and with due diligence.

We hope our lawmakers, in drafting TRAIN 2, not only focus on revenue generation, but on creating a tax law that is fair, adequate, simple, transparent, and administratively easy so that taxpayers could say that we have a Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO).


Edward L. Roguel is a partner of the Tax Advisory and Compliance of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.


As Published in BusinessWorld dated 24 September, 2018