“A call for caution in applying judicial precedent” by Rex S. Austria (October 26, 2009)

Business World (10/26/2009)

The Philippine tax system might appear Greek to many and tax professionals can help C-Suite members navigate through its complexity.

A few weeks ago, Suits the C-Suite discussed the issue of tax amnesty as an opportunity for erring taxpayers to mend their ways.

This time, the subject of tax credit refund — another area that taxpayers may need some handholding — is presented. Of late, tax credit refund has been a thorny topic for big taxpayers who have had to appeal for their refunds.

Just in the last five months, the Court of Tax Appeals (CTA) has denied over a billion pesos of taxpayers’ claims for refund or tax credit of unutilized input value-added tax (VAT) on zero-rated or effectively zero-rated sales of goods or services, or on imported or locally-purchased capital goods (when still permitted). The claims were disallowed on the technical ground that they were allegedly filed beyond the two-year period provided under Section 112 of the 1997 Tax Code.

The CTA, in denying the taxpayers’ claims, reckoned the two-year period from the date of the close of the taxable quarter when the sales were made, pursuant to the Sept. 12, 2008 decision of the Supreme Court in Commissioner of Internal Revenue vs. Mirant Pagbilao Corp.

However, the concerned taxpayers filed their claims based on the long-standing rule of counting the two-year period from the date of filing of the quarterly VAT return, which the SC expressly affirmed in Atlas Consolidated Mining and Development Corp. vs. Commissioner of Internal Revenue promulgated on June 8, 2007.

In the Mirant case, the SC declared that Mirant’s claim for refund or tax credit of unutilized input VAT for the third quarter of 1996 “prescribed [expired] two years after September 30, 1996 or, to be precise, on September 30, 1998.”

In doing so, however, the SC might have overlooked the existence of a contrary rule it had categorically upheld over a year earlier in the Atlas case. The rather unusual absence of any mention of the Atlas case in the Mirant case speaks for itself.

Yet, the CTA has assumed that the Mirant case changed the controlling rule of reckoning the two-year period from the date of filing of the quarterly VAT return to the date of the close of the taxable quarter when the sales were made.

The Constitution, however, provides that no doctrine or principle of law laid down by the SC in a decision rendered en banc or in division may be modified or reversed except by the SC sitting as a whole.
Both the Atlas and Mirant cases were rendered by the SC acting in a division. Whether the SC has intended to reverse or modify the doctrine in the Atlas case seems uncertain, because the Mirant case was not decided by the SC sitting en banc.

Hence, extreme caution is required in invoking the Mirant case as precedent on the proper reckoning point of the two-year period under Section 112 of the Tax Code for filing claims for refund or tax credit of excess input VAT.

Assuming that the SC has abandoned the prevailing doctrine sanctioned in the Atlas case, applying the Mirant case to claims for refund or tax credit that were filed even before its promulgation brushes aside established jurisprudence.

The hornbook rule is that judicial decisions enunciating new doctrines should be applied prospectively and not retroactively.

In the landmark case of People of the Philippines vs. Jabinal, the SC held that when a doctrine of the SC is overruled and a different view is adopted, the new doctrine should be applied prospectively. Moreover, it should not apply to parties who had relied on the old doctrine and acted on its faith.

The SC has invariably applied the principle in the Jabinal case to several succeeding criminal and civil cases. This proves that no less than the court of last resort believes that prospective application of new doctrines is vital to thwart a miscarriage of justice.

Tax refund cases deserve nothing less, notwithstanding the principle of strict interpretation of tax laws granting exemption or refund. As such, it would have been more justifiable had the Mirant case been given prospective effect.

The taxpayers whose claims have been denied pursuant to the Mirant case, whether on appeal or not, have undoubtedly “suffered” an injustice. This could have been avoided if the Mirant case was not applied to claims filed, and even heard and/or submitted for decision, before its issuance. In fact, the doctrine in the Jabinal case enjoins such judicial approach in the first place.

To prevent further injustice to affected taxpayers, the Mirant case should not be used to disallow claims filed before its promulgation. The SC may also issue a resolution, as it had previously done in Habaluyas Enterprises, Inc. vs. Judge Japson, instructing the prospective application of the Mirant case. With such directive, the CTA, tax practitioners, and taxpayers will be guided accordingly.

In a very recent development on this issue, the CTA First Division, in a case involving TeaM Energy Corp. and decided on Oct. 5, held that the Mirant case should not be applied retroactively because to do so would impair vested rights.

Hopefully, the CTA Second Division has subscribed or will subscribe to the same view.

If the CTA and/or the SC will heed this call soonest, the aggrieved taxpayers may no longer resort to appealing their denied claims all the way up to the SC due to the impact of the Mirant case. No less than the SC recognizes that “technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens.”
(Rex S. Austria is a Tax director of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.