Have you ever purchased something and ended up paying too much for it, only to find out that the retailer won't refund the difference? How do you feel about being stuck with the extra cost? Thankfully, that is not the case for taxpayers with excess creditable withholding taxes (CWT). The Tax Code provides remedies to recover such unutilized tax credits. This article will focus on how companies that are dissolving or ceasing operations can recover their excess CWTs.
The Bureau of Internal Revenue is committed to improving the tax refund process. Given the withholding tax rules in the Philippines, it is not uncommon for some corporations to accumulate excess creditable withholding tax. While the option to refund the excess CWTs can be exercised annually, most taxpayers would opt to carry forward their excess CWTs in the hope of being able to fully utilize their CWTs without the tedious and sometimes costly refund process. However, when the Corporation decides to close its business and undergo the dissolution process, they may be left with significant excess CWTs. Part of the action items in deciding to dissolve the corporation is an evaluation of how the corporation can recover or refund the excess taxes.
Fortunately, several BIR issuances have provided rules specific to the refund of excess CWTs for dissolving corporations.
Section 5(B) of Revenue Regulation (RR) No. 5-2024 provides that in cases of dissolution or cessation of business, wherein carry-over of the excess income tax credit is no longer an option, the taxpayer shall file an application for refund of any unutilized income tax credit. This exempts the taxpayer from the irrevocability rule under Section 76 of the Tax Code.
The BIR has two (2) years from the date of the dissolution or cessation of business to decide on the claim for refund. The 2-year period starts with the submission of the "Application for Registration Information Update/Correction/Cancellation" (BIR Form No. 1905) together with the complete documentary requirements.
The approved refund, if any, shall be released only after the completion of the mandatory audit of all internal revenue tax liabilities covering the immediate preceding year, the short period return, and the full settlement of all tax liabilities.
On July 3, 2024, the BIR issued Revenue Memorandum Order (RMO) No. 25-2024 and Revenue Circular Memorandum (RMC) No. 75-2024 to provide guidelines, policies, procedures, and mandatory requirements in the processing of claims for tax credit or refund of excess/unutilized CWT. Discussed below are the salient provisions of the issuances.
Enhancements that taxpayers can take advantage of
Annex A.2 of RMO 25-2024 lists the documentary requirements for taxpayers undergoing dissolution or cessation of business. Only applications with completed documentary requirements shall be accepted by the BIR.
The required documents are: (a) application for tax credit/refund; (b) Attorney for registration information update/ correction/cancellation; (c) all Audited Financial Statements (AFS) with notes tracing back from the taxable period where the excess income tax commenced, if the AFS was not submitted to BIR eAFS; (d) all Certificates of Creditable Tax Withheld at Source (BIR Form No. 2307) or Withholding Tax Remittance Return for Onerous Transfer of Real Property Other Than Capital Asset (BIR Form No. 1606); (e) Board Resolution for the Shortening of the Corporate Term; (f) hard and soft copies (in MS excel format) of Summary of Revenues/Income declared for all applicable Income Tax Returns (ITR) and the corresponding taxes withheld per BIR Form No. 2307/1606; (g) original copy of the duly notarized Taxpayer’s Attestations; (h) original copy of Notarized Secretary's Certificate or Special Power of Attorney for the authorized representative/s.
The list of requirements notably does not include tax returns or information that has already been filed with the BIR. Based on the RMO, it is now the assigned RO’s responsibility to secure/print copies of the documents from the records/database of the BIR. If the document or information is with another BIR office, said office must furnish the requesting processing office the requested document within fifteen (15) days from receipt of such a request. This is a huge improvement that can expedite the process, as the taxpayer need not spend time and effort submitting such voluminous documents.
However, despite the above, RMC No. 75-2024, states that the books of accounts and accounting records shall be presented by the taxpayer-claimant upon written request of the assigned Revenue Officers (ROs). Failure to present the books of accounts and accounting records relevant to the claims may be grounds for denial of the application for TCC/refund.
Additionally, the same RMC mandates the taxpayer-claimant to fully cooperate and ensure the availability of all documents that may be requested by the assigned RO. Failure to cooperate or submit the requested documents may result in the full or partial denial of the claims.
The taxpayer claiming for the income tax credit/refund must prove the authenticity and veracity of BIR Form No. 2307 or BIR Form No. 1606, whichever is applicable. This is without prejudice to the BIR establishing whether the withholding tax payments, which are the source of the claimed creditable taxes, have been declared and included in the Alphabetical List of Payees filed by the taxpayer-claimant's respective withholding agents, and that the aforementioned withholding agents have also remitted the corresponding amounts to the government.
The RMO provided specific rules for the BIR to verify CWT claims from prior years. However, if any of the taxable years covered have already been subjected to audit of all internal revenue taxes, verification as to whether or not the taxes withheld are included as part of the gross income declared in the AITR of the taxpayer-claimant where the corresponding income is reported may no longer be necessary for the taxable year covered by the LOA.
The assigned Revenue Officer (RO) needs only to attach printouts of the result of the audit, copies of the LOA, or the result of the audit and/or termination letter, if any.
For processing the claim for refund under Section 76(C) for dissolving taxpayers, the eLA or TVN, whichever is applicable, shall be issued to authorize the mandatory audit of all internal revenue tax liabilities. The audit shall cover the immediately preceding year and the short period return.
What still needs to be done
While there have been significant issuances released by the BIR to expedite the refund process, the BIR may still consider some further improvements to the system.
The BIR can consider creating a separate division for the processing of refunds and imposing different Key Performance Indicators (KPIs) for this group. Right now, the most important focus of all BIR personnel is the collection of taxes, and every refund is a natural anathema to them.
If the refund division’s KPI is focused on the expeditious processing of refunds, the refund system may become a more reliable system for the taxpayer. Taxpayers can now expect that their claims for refunds are processed properly and in a timely manner.
I am optimistic that the continuous actions of the BIR in issuing rules and regulations to expedite and streamline the refund process will restore taxpayers’ faith in the tax refund process. It will go a long way in encouraging local businesses and attracting foreign investors in the Philippines.
As published in BusinessWorld, dated 06 August 2024
