There have been substantial developments in the reform of the tax system. The President, in his latest State of the Nation Address, sought the assistance of legislators to expedite the approval of the tax reform bill. A significant amendment in this tax reform bill is the lowering of individual income tax rates and estate tax rates. While the lowering of these tax rates is greatly anticipated, I believe that there are other areas in our tax laws which must be given attention to in order to provide adequate relief to taxpayers.
One particular area in our tax laws which must be addressed is the rules and procedures for claiming tax refunds. A major area of concern for taxpayers is the administration of the refund rules.
The application for a tax refund in the Philippines is tedious. As a rule, taxpayers applying for a refund are subject to a mandatory audit by the Bureau of Internal Revenue (BIR). In practice, tax audits conducted by the BIR involve all internal revenue taxes for the year of the claim and are not limited to the types of tax being sought for refund. This being so, taxpayers are obliged to provide voluminous documents to comply with the requirements of the BIR during the latter’s audit. Considering the scope of review of the revenue officers, tax audits usually take a long time. Based on experience, a tax audit may take one to five years.
Except for the input VAT refund related to the VAT zero-rated sales wherein the BIR is given 120 days from the taxpayer-applicant’s submission of complete documents to decide on the refund, it appears that our present Tax Code does not provide a certain period within which the BIR has to complete its evaluation for other types of tax refunds. Given the absence of an administrative deadline, the period of review is then subject to the discretion of the assigned revenue officers. Consequently, most cases for tax refund have been elevated to the courts without any action or decision on the part of the BIR. In this situation, taxpayers are forced to elevate their case to the courts even without the decision of the BIR in order to prevent the lapse of the two-year prescriptive period to file a refund claim.
The agony of taxpayers seeking a refund usually does not end at the administrative level. At the court level, refund claims can take more than five years to be finally resolved up to the Supreme Court (SC). This is because, even if the taxpayer wins at the Court of Tax Appeals, the BIR, normally, will contest the ruling until the case reaches the SC. Considering the case load of the SC, it may take some time before a decision is rendered.
Given the state of the refund process in the Philippines, it makes the exercise very costly as taxpayers usually need to hire consultants to handle the refund, especially if the claim reaches the courts. Thus, when deciding on whether to claim a refund or not, taxpayers always have to do a cost-benefit analysis. The question that is always asked is, is the amount to be refunded worth all the work and cost?
It must be emphasized that the refund is actually the taxpayer’s money which was, in effect, advanced to the government. Thus, the foregoing scenario described above is frustrating for taxpayers since the latter is prevented from enjoying or using its own money due to the procedural inefficiencies in the refund process. Should the taxpayer eventually get the tax refund, the taxpayer is still at a disadvantage since it lost the time value of the money had the amount refunded been given immediately the BIR level. The taxpayer would have had the chance to earn interest on the amount refunded had it been deposited in the bank rather than letting it go stale in the coffers of the government during the long period of waiting for the resolution of the claim.
Considering the government’s promises of change, I hope that the current administration, with the support of the legislature, can bring meaningful change to our tax laws in order to provide relief to taxpayers who are unfairly deprived of their money due to our flawed tax refund process.
It bears stressing that clear tax rules play an important part in improving the ease of doing business here in the Philippines. Improving the tax refund process may help make our country more attractive for entrepreneurs and foreign investors, which in turn, could bring about development and inclusive growth.
Jennylyn V. Reyes is a tax manager with the Tax Advisory and Compliance division of P&A Grant Thornton.
As published in BusinessWorld, dated 01 August 2017