Without taxes, government cannot function properly. The simple truth of the “lifeblood” doctrine forms the basis for the government taxing individuals and corporations alike. It is also for this reason that the government keeps a tight rein on tax refunds.
Tax refunds are construed strictissimi juris against the taxpayer. This means that the burden of proving entitlement to a refund rests with the taxpayer-claimant. That’s because in the event that a refund claim is granted, the government must take out funds from its coffers which it could have otherwise used to finance its spending.
To prove entitlement to a refund, the claimant must show that it met the conditions laid down under the rules. Of the many conditions in a refund claim, one of the main requisites is that the party filing the claim must be a party in interest. In most cases, it is the income payor that files a refund claim, considering that it is the party that overpaid. It is the party that stands to benefit or lose depending on the outcome of the refund claim. Hence, it has the personality to file the claim for refund.
Notwithstanding the foregoing, several court decisions have been rendered confirming that aside from the income payor, the withholding agent also has the personality to file a claim for refund. Recently, the Court of Tax Appeals (CTA), in En Banc Case No. 2359, touched on this issue when the court upheld the decision of the CTA First Division that a withholding agent can file a refund claim.
In that ruling, the Philippine taxpayer/withholding agent contracted the repair services of a non-resident foreign corporation (NRFC). Prior to paying the NRFC, it withheld taxes based on the applicable tax rate per the Tax Code and remitted the same to the BIR. Subsequently, within the period prescribed by law, the withholding agent filed on behalf of the NRFC a claim for refund of erroneously paid final withholding taxes. The refund claim is anchored on the Philippines-Japan Tax Treaty which provides that the business profits/service income derived by a Japanese tax resident that does not conduct business in the Philippines as a permanent establishment are exempt from income tax, and consequently from withholding tax.
In arguing against the legal personality of the withholding agent to file a refund, the Commissioner of Internal Revenue (CIR) contended that the withholding agent is not the statutory taxpayer who is the proper person to file a claim for refund or tax credit; therefore, it has no legal standing to pursue the refund claim since it is not the real party in interest. The CIR reiterated that it is the NRFC, the statutory taxpayer, that is the proper party to file the claim for refund.
In its decision, the CTA, sitting En Banc, affirmed the ruling of the CTA First Division and denied the CIR’s Petition for Review for lack of merit. In ruling so, the Tax Court stressed that pursuant to Section 204(C) and 229 of the 1997 Tax Code, the person entitled to claim a tax refund is the taxpayer. Moreover, the Tax Court cited the case of CIR vs. Smart Communication, Inc., where the Supreme Court ruled that the withholding agent has a legal right to file a claim for refund for two reasons:
1. He is considered a “taxpayer” under the Tax Code as he is personally liable for the withholding tax as well as for deficiency assessments, surcharges, and penalties, should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law; and
2. As an agent of the taxpayer, his authority to file the necessary income tax return and to remit the tax withheld to the government impliedly includes the authority to file a claim for refund and to bring an action for recovery of such claim.
The option to have the withholding agent file the refund claim can prove practical and advantageous on the part of the NRFC.
Having the withholding agent file the refund claim may mean that the NRFC may exert less time, energy and resources to support the refund claim. In pursuing the administrative claim for refund, logistics-wise, it may also be easier for the withholding agent to coordinate with the local revenue office. Furthermore, should the need to file a judicial refund claim arise, in comparison to the NRFC, the withholding agent may be more readily available for court hearings.
Of course, however reasonable, these are mere assumptions, and whether having the withholding agent file on behalf of the NRFC would prove more beneficial would depend on the circumstances of the parties involved. Whatever the case may be, it bears stressing that once a refund claim filed by a withholding agent is granted, the ultimate party with the right over the refunded amount is the party that actually bore the cost of the tax, which is more often, the income payor. Hence, in such case, the withholding agent-customer has the obligation to remit the amount of taxes recovered to the supplier.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Kathleen Galano is an assistant manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.