BDB Laws Tax Law for Business appears in the opinion section of Business Mirror every Thursday

Application for refund is a mere scrap of paper

FOR several years now, taxpayers are painstakingly waiting for the rules on value-added tax
(VAT) refund to be crystal clear. The frequent flip-flopping of rules by the Bureau of Internal
Revenue (BIR) and the belated clarifications by the Supreme Court (SC) on the confusion is
always to the detriment of taxpayers. Whenever the rules change, almost always, it will be
retroactive and without regard to the plight of taxpayers.

The story of the VAT-refund confusion started with the reversal of the Atlas case (GR 141104 &
148763, June 8, 2007) by the Mirant case (GR 172129, September 12, 2008), where the SC
clarified that VAT refund must be claimed within two years from the close of the taxable quarter
and not two years from the end of filing of the VAT return. As a result, claims that were filed
based on the prescriptive period laid down in the Atlas case were all dismissed for having been
filed out of time. Billions of pesos worth of input VAT that taxpayers are entitled to went down
the drain.

After several years, the landmark case of Aichi (GR 184823, October 6, 2010) was promulgated
by the SC. In this case, aside from affirming that VAT-refund claims prescribe in two years
counting from the end of every quarter, it interpreted the neglected 120-day provision of the
Tax Code of 1997, which provides that the commissioner shall grant a refund or issue a tax
credit certificate for creditable input taxes within 120 days from the date of submission of
complete documents in support of the application filed in accordance with subsection (A)
thereof. The new rule laid down by Aichi, which was applied retroactively (with some
exceptions), limits the time within which the commissioner may act on an application for VAT
refund to 120 days from the filing of the administrative claim, as opposed to the old rule where
the taxpayer may choose to wait for the commissioners decision for as long as two years. Many
claims for refund were also dismissed because of the retroactive application of the Aichi case.
Some were ruled to have been filed to the Court of Tax Appeals (CTA) prematurely, since the
taxpayer did not wait for the 120-day period to expire. Other claims were dismissed for having
been filed late, since the appeal to the CTA was made beyond 30 days after the expiration of
the 120-day period.

There were lingering questions on what happens if the commissioner does not issue a decision
within the 120-day period. This concern was laid to rest by the SC in the recent case of ROHM,
(GR 168950, January 14, 2015), where it was further clarified that the inaction of the
commissioner within the 120-day period is equivalent to a decision. Thus, a taxpayer has 30
days to appeal the inaction to the CTA.

Unfortunately, the Aichi case is not clear when to reckon the counting of the 120 days. The law
provides that the 120-day period must be reckoned from the date of submission of complete
documents, and not from the filing of the application for tax refund. This fumes confusion, since
filing of an application for refund and submission of complete documents are two different
actions under the law. In tax assessments, it is clear that a taxpayer must file his protest within
30 days from receipt of the Formal Letter of Demand, and he has 60 days thereafter to submit
supporting documents. In a claim for refund, however, there is no specific period provided by
law within which the taxpayer must submit the complete documents. It appears that the taxpayer
has the discretion when to submit the complete documents and, in effect, has also the power to
determine when the counting of the 120-day period should commence. The SC in the very
recent case of Hedcor Inc. (GR 207575, July 15, 2015) had the opportunity to finally clarify this
matter. The Chief Justice said, The law intends the filing of an application for a refund to
necessarily include the filing of complete supporting documents to prove entitlement for the
refund. Otherwise, the mere filing of an application without any supporting document would be
as good as filing a mere scrap of paper. In ruling against the taxpayer, the Chief Justice
reasoned, To allow petitioners allegations to prevail would set a dangerous precedent, as the
reckoning period for the 120 days would be at the mercy of taxpayers. They will then submit
complete supporting documents, even after the two-year prescriptive period for filing an
administrative claim has lapsed. This is obviously not the intention of the law. Because of this
ruling, it is now clear that filing of an application for refund must be simultaneous with the
submission of complete documents. Failure to submit the complete documents, together with
the application for refund, is tantamount to filing a mere scrap of paper.

Piece by piece, the SC is doing its part to enrich jurisprudence that would clarify the rules on
VAT refund. There are, however, many issues that are still left unresolved. The BIR usually
issues a letter of authority (LOA) once a taxpayer files a claim for refund. The said LOA is
accompanied by request for documents.

The CTA in recent cases counted the 120-day period from the submission of additional
documents by the taxpayer, because the additional submission arose from a BIR letter request.
Does the Hedcor rule apply in such case? The BIR in Revenue Memorandum Circular (RMC)
54-2014 listed down the documents that a taxpayer must submit before a claim for refund may
be acted upon. How can this RMC be reconciled with the consistent ruling by the CTA, that it is
the taxpayer that determines what a complete document is?
From the Atlas case to the Hedcor case, all these new jurisprudence are generally applied
retroactively to the detriment of taxpayers. It is, therefore, important that taxpayers know the
current jurisprudence, and they must also learn how to preserve their rights in a very fluid and
hostile environment.

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The author is a partner of Du-Baladad and Associates Law Offices (BDB Law), a member-firm
of World Tax Services (WTS) Alliance.

The article is for general information only and is not intended, nor should be construed as a
substitute for tax, legal or financial advice on any specific matter. Applicability of this article to
any actual or particular tax or legal issue should be supported, therefore, by a professional
study or advice. If you have any comments or questions concerning the article, you may e-mail
the author at irwin.nidea@bdblaw.com.ph or call 403-2001, local 330.