Revisiting irrevocability rules on income tax

Tax filing season has just ended for taxpayers who use the calendar year as their accounting period. Taxpayers whose total income tax due exceeded the total tax credits/payments for the year remitted their net tax payable to the Bureau of Internal Revenue (BIR). Taxpayers whose total income tax due did not exceed the total tax credits/payments for the year, on the other hand, either filed an application for a refund or sought the issuance of a tax credit certificate (TCC) or carried over their excess credits to the quarterly income tax returns of the succeeding taxable year.

In the Supreme Court (SC) case of University Physicians Services, Inc-Management, Inc. vs. Commissioner of Internal Revenue on March 27, 2018, the taxpayer chose “to be issued a tax credit certificate” in its annual income tax return (ITR) for its unused creditable withholding taxes for 2006. In 2005, the taxpayer changed its taxable period from calendar year to fiscal year ending on the last of day March. Thus, it filed an annual ITR covering the short period because of the change in taxable year on Nov. 14, 2007. In the original 2007 short-period ITR, the total amount of unused creditable withholding tax, including the amount subject of the refund claim in 2006, was inadvertently reported under the line “Prior year’s excess credits.” Consequently, taxpayer amended the return to correct the amount of carry-over on the same day.

The SC held that the irrevocability rule only applies to the taxpayer’s option to carry over the excess creditable withholding tax. The Court also emphasized that, once the taxpayer decides to change its option to carry over, it may no longer revert to the original choice. Any taxpayer who originally chose the option for a refund or tax credit certificate, however, can change the option to carry over the excess creditable withholding taxes to the taxable quarters of succeeding taxable years.

When a taxpayer, during the pendency of the application for a refund or issuance of a tax credit certificate, changes its option and decides to carry over the excess credit, the taxpayer will have recovered twice the same amount of creditable withholding tax. What would be the government’s remedy?

In the same ruling, the SC explained that Section 228 of the Tax Code provides the government a remedy if a taxpayer, who had previously claimed a refund or TCC for excess creditable withholding tax, subsequently applies the amount as automatic tax credit, to wit:

“SEC. 228. Protesting of Assessment. — When the Commissioner or his duly authorized representative find that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a pre-assessment shall not be required in the following cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or

(d) When the excise tax due on excisable articles has not been paid; or

(e) When the article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.”

The SC explained that paragraph (c) contemplates a double recovery by the taxpayer: (1) grant of refund or TCC; and (2) excess creditable withholding taxes used as tax credits. The BIR may dispense the issuance of the preliminary assessment notice (PAN) and directly proceed issuing the final assessment notice (FAN). However, such a remedy is applicable only to taxpayers who were granted a claim for refund or issuance of a TCC by the BIR.

If the administrative claim for a refund or TCC is pending, the SC ruled that the only course of action the BIR may take is to deny the said claim. If the BIR were to first grant the refund claim and then assess the taxpayer for the claim of automatic tax credit for disallowance, such a process is inefficient and involves government costs. One of the principles of a sound tax system is administrative feasibility, which proposes that tax laws should be capable of efficient and effective administration. Such a procedure would hinder the implementation of a sound tax system.

While the option to claim for a refund or TCC is revocable, taxpayers should be cautious and consistent in reflecting the same in their annual income tax return. Inadvertently carrying the excess creditable withholding tax credits that were previously claimed as a refund may invalidate the said claim, applying the irrevocability rule. Taxpayers should bear in mind the consequences, even if it is due to an error; inadvertence will have significant consequences. Nonetheless, the true intention of the taxpayer should still be considered, and should not be overturned by an honest mistake.

Anthony Joseph A. Cometa is a senior 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 29 May 2018