“The irrevocability rule” by Rex S. Austria (March 7, 2011)

Business World (03/07/2011)

Tax filing season is just around the corner for taxpayers that use the calendar year as their accounting year.

Aside from the more stringent regulatory requirements when preparing financial statements, company officers also need to consider the choices they have as the company’s income tax return (ITR) is prepared, since these may affect the tax position of the company.

For example, corporate taxpayers with excess income tax credits earned in 2010 need to carefully consideration what to do with these unused tax credits. Recent jurisprudence dictates such caution.

Under Section 76 of the Tax Code, a corporation with excess income tax payments in a taxable year has two options:

• to carry-over the excess amount and credit it against its income tax liabilities for the succeeding quarters or years; or

• to apply for a cash refund or a tax credit certificate for the excess amount.

Once the option to carry over and apply the excess income tax payments to succeeding quarters/year is taken, that option is irrevocable, pursuant to the irrevocability rule found in Section 76 of the Tax Code.

Consequently, a taxpayer is barred from securing a refund of, or tax credit certificate for, the excess amount that it has initially opted to carry-over.

The now-settled doctrine is that once the option to carry-over is taken, it cannot be changed, regardless of whether the taxpayer is able to utilize the excess tax credits in the succeeding periods.

On the other hand, a company that opted to apply for a cash refund or tax credit certificate needs to file a formal claim with the Bureau of Internal Revenue (BIR) and with the Court of Tax Appeals, if necessary, within two years from the date of filing of the ITR.

Aside from the added costs that this process entails, the company officers’ challenge, then, is to observe prudence in deciding what is best for the corporation’s excess income tax payments in a taxable year.

Modifying, changing or amending any return, statement or declaration filed with the BIR is allowed by Section 6(A) of the Tax Code, subject, however, to the following conditions:

• that it is done within three years from the date of filing; and

• that the taxpayer has not been served a notice for audit or investigation of the return, statement or declaration.

Even if the above requisites for amendment were met, a taxpayer will still not be allowed to amend its ITR if the intention is to change the carry-over option chosen in the original ITR.

Should this be permitted, the irrevocability rule under Section 76 will be rendered useless — even circumvented — by a taxpayer’s exercise of the right to amend as allowed by Section 6(A) of the Tax Code.

The Supreme Court recently revisited and explained the irrevocability rule in Belle Corp. vs. Commissioner of Internal Revenue (CIR), Jan. 10, 2011 and in Commissioner of Internal Revenue vs. Bank of the Philippine Islands (BPI), July 7, 2009.

More importantly, the SC also reversed in the BPI case the less restrictive opinion of the Court of Appeals (CA) that the irrevocability of the carry-over option is qualified by the phrase, “for that taxable period,” which the CA misinterpreted as an expiration (prescriptive) period for the irrevocability rule.

To illustrate the CA’s position, a taxpayer that chose to carry over its excess income tax payments in 2010 would be banned from claiming a refund or tax credit for its 2010 excess income tax credits only in 2011, because the carry-over option is irrevocable only “for that taxable period.”

Through the BPI case, however, the High Court has foreclosed the taxpayer’s chance to claim a refund of, or tax credit for, the excess income tax payments that it opted to carry over.

Would not the disallowance of the taxpayer’s claim for refund or tax credit for excess income tax payments that it previously opted to carry over, but could not use because it suffered a net loss in succeeding periods, result in the government’s unjust enrichment?

In the BPI case, the SC reiterated that the denial of the taxpayer’s claim for refund or tax credit, as a consequence of the irrevocability rule, would not lead to unjust enrichment on the part of government, because there would be no forfeiture of any amount in favor of the government.

The SC explained that the amount being claimed as refund or tax credit would remain in the account of the taxpayer until utilized, applied or credited to tax liabilities in succeeding taxable periods, pursuant to Section 76.

In a case promulgated a few years ago (Systra Philippines, Inc. vs. CIR, Sept. 21, 2007), the SC even posited by way of a footnote that if the taxpayer permanently ceases its operations before using fully the tax credits that it opted to carry-over, it may then be allowed to claim the refund of the remaining tax credits. In such a case, the remaining tax credits can no longer be carried over and the irrevocability rule ceases to apply.

While the High Court recognizes the rights of a taxpayer constrained from claiming a refund or tax credit due to the irrevocability rule, it hardly eases the pressure on company officers to make the right choice.

While obtaining a refund or tax credit certificate would seem the better option than carrying over income tax credits, management needs to assess comprehensively the company’s projected performance — which is easier said than done — in deciding on the more appropriate option to take for excess income tax credits.

(Rex S. Austria is a 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.