One of the greatest fears a commuter occasionally faces is riding a bus on a Monday morning, only to find out that all the cash he has consists of a thousand peso bill. Since there is no option but to pay the fare, he’ll need to pay hoping that he gets change for the P20 cost of the rider. With the destination drawing closer, he starts to feel uneasy about his P980 in change.

Such a situation is not unusual in taxation. At times, taxpayers find themselves paying taxes in excess of what is required. Just like the commuter who hopes to get proper change, the taxpayer also has remedies available to him. The Tax Code provides for two kinds of tax refund: (1) refund of unutilized creditable input VAT under Section 112; and (2) the recovery of any erroneously paid or illegally collected taxes under Section 229. It’s important to know the difference between these, as the applicable rules and requirements will depend on it.

In the Supreme Court (SC) case of Manila Peninsula Hotel, Inc. vs. Commissioner of Internal Revenue (Manila Peninsula case), an opportunity to clarify the differences between the two remedies arose when the taxpayer filed for a tax refund under Section 229 over what it argued to be erroneously paid or illegally collected VAT from its sales to Delta Air.

In its decision, the SC differentiated the provisions according to their nature. Section 112 pertains to unutilized creditable input VAT arising from expenses that are attributable to zero-rated sale transactions. In other words, this is a tax cost incurred by, and legally paid by, a VAT-registered seller of goods, property, or services which are considered zero-rated transactions. In this type of refund case, the input VAT collected is deemed correct and proper. Any input VAT passed over cannot be regarded the same as taxes erroneously paid or collected. This tax refund is a legislative grace in the form of a tax exemption, which is construed against the taxpayer.

On the other hand, Section 229 is limited to recovering taxes that are “erroneously, illegally, excessively, or in any manner wrongfully collected.” A wrongful payment must be present, whether partly or wholly, and should not be legally due. Relating this case to other SC cases, it can be observed that Section 229 is anchored on the principle of unjust enrichment. There is no obligation to pay taxes but, nevertheless, it was paid to and collected by the government. In other words, unlike the other type of refund, Section 229 applies only in instances where there is wrongful payment.

To illustrate how unjust enrichment occurs in the latter type of refund, let’s assume a scenario where a parent company performs management services for its subsidiary. By mistake, the subsidiary withheld taxes on compensation from the management services performed by the parent company’s employees. Since there is no employer-employee relationship between the subsidiary and the parent company’s employees, the subsidiary erroneously withheld tax on compensation and the government has unjustly received taxes. The government received taxes on compensation income when there was no legal duty to collect or right to receive such taxes in the first place, effectively resulting in its unjust enrichment. In this case, Section 229 is a remedy to refund the taxes erroneously paid by the subsidiary.

Another difference between the two remedies is the period to file for a refund before the Commissioner of Internal Revenue (CIR) and the Court. In line with the amendments introduced in the Tax Code by the Ease of Paying Taxes Act, it’s important to distinguish how the refund should be filed. At the administrative level, the refund of unutilized creditable input VAT must be filed within two years after the close of the taxable quarter when the zero-rated sales were made. The CIR is given 90 days to decide on the application, and within 30 days from the denial of the CIR or the lapse of the 90-day period due to inaction from the CIR, the taxpayer may resort to a judicial claim for refund before the Court of Tax Appeals (CTA).

In contrast, for tax refund cases involving taxes erroneously, illegally, excessively, or in any manner wrongfully collected, the application for refund must be filed before the CIR within two years from the payment of the erroneously or excessively collected taxes. Unlike unutilized input VAT, the reckoning point here is the date of actual payment of tax. Moreover, the CIR is given 180 days (not 90) to decide on the tax refund case. Nonetheless, the same rule applies for the judicial elevation, i.e., it should be filed within 30 days from receipt of denial or lapse of the period to decide. For both kinds of refund, the judicial claim assumes the existence of prior administrative application.

As a final note, it is important to understand the differences between the two modes of tax refund as this will dictate the proper procedure to follow. Is it a state privilege to grant or a state burden to reimburse? Either way, it is good to know that our laws give us the chance to get our rightful change back, whether it be from bus fares or taxes. Nonetheless, to do so, taxpayers should be well aware of the rules so that they do not miss out on their right to recover what is due to them.

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.

Francis Jeffrey C. Valerio is an associate of the Tax department of Isla Lipana & Co., the Philippine member firm of the PwC global network.

francis.jeffrey.valerio@pwc.com