SADLY, even the Court of Tax Appeals (CTA), in many of its decisions, declares that a taxpayer must prove every minute detail of his case since tax refund has the same nature as tax exemption where the law requires strict construction. In other words, even the CTA in its decisions has the mind-set that a taxpayer must prove any type of refund beyond reasonable doubt. If not, his claim will fail.
It is very important to correct the mind-set that all claims for refund must be construed strictissimi juris against the taxpayer. The Supreme Court has ruled that there are two types of tax refunds and that these two types have different levels of proof required (GR 172129), to wit:
A claim for tax refund may be based on a statute granting tax exemption (the result of legislative grace); A claim for tax refund is predicated on tax refund provisions allowing a refund of erroneous or excess payment of tax.
For the first type of claim for refund, the same is construed strictly against the taxpayer and the claimant must show that he clearly falls under the exempting statute. For example, if charitable institutions or churches wish to claim for refund of an excess payment, it must prove that what it is claiming was actually, directly, and exclusively used for religious, charitable or educational purpose as provided for in the Constitution.
Excess input value-added tax (VAT) and excess withholding tax are covered by the second type of tax refund. In these types of refund only preponderance of evidence as the level of proof is required. What does preponderance of evidence mean? Preponderance of evidence is a phrase which, in the last analysis, means probability of the truth (GR 175021).
Thus, in claim for excess input VAT and excess creditable withholding tax (CWT), a lesser level of proof is required. Primarily because the taxpayer has advanced to the government something that it should not have paid in the first place.
On CWT, since taxpayers are taxed on their net income for a given taxable year, the CWT is to be deducted from the net income tax payable by the taxpayer at the end of the taxable year. This is so since CWT is just an approximation of one’s income taxes, and, if at the end of the taxable year, the income tax due is greater than the taxes withheld, then the taxpayer shall pay the difference. On the other hand, if the income taxes due is less than the tax withheld, the taxpayer will be entitled to a refund or tax credit.
Under such a system of withholding, if the amounts withheld from payments to a taxpayer for a given taxable year exceed that which is due from him as income taxes at the end of such year, then there is clearly excess and erroneous payment of taxes. Such payment of CWT to the government was made under the mistaken presumption that such amounts are due to it, when in truth and in fact, it is not.
In claims for refund or erroneously or illegally collected taxes, such as CWT in excess of a taxpayer’s income tax liability for a taxable year, there is no claim for immunity from taxes granted by the state. What is involved is a claim by the taxpayer that he is liable for taxes, but through mistake or through the imposition of a withholding tax system, there were excess payments thereof, which should be returned to him. Thus, the jurisprudential rule that “tax refunds are in the nature of tax exemptions” and should thus be “strictly construed against taxpayers,” should not apply.
The excess of the withheld tax over the tax due on a taxpayer’s income for a given taxable year should be refunded to the latter with preponderance of evidence as the only level of proof required and not strict construction.
The CTA, however, in most of its decisions made no distinction between the two types of claims for refund. It has resulted in confusion and injustice since the government was unjustly enriched by the mistaken impression that all claims for tax refund must be strictly construed against the taxpayer. It has lost sight of the second type of tax refund where evidentiary requirements should be relaxed as only preponderance of evidence is required.
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Irwin C. Nidea Jr. 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.