TWO weeks ago, I was given the opportunity to facilitate a seminar on handling Bureau of Internal Revenue (BIR) tax assessments. During the open forum, a participant shared her experience with the BIR’s “Project 2307” in which taxpayers are issued a letter to authorize BIR examiners to check the validity and completeness of creditable withholding taxes claimed in the taxpayers’ filed income tax returns (ITRs). Taxpayers normally targeted by this project are those who have resulting tax overpayment or excess creditable taxes on their ITRs. As the discussion shifted to excess creditable tax, another participant raised a question about the irrevocability rule, specifically the option ticked by the taxpayer on the annual income tax return about the preferred treatment for overpaid or excess creditable taxes.
When a taxpayer overpays on income tax liability for a certain taxable year — whether in the form of actual payment of quarterly income taxes due or through the withholding of taxes from income earned from withholding agents — there are two ways the taxpayer can treat the overpayment — (1) opting for a refund through cash or tax credit certificate (TCC), or (2) carrying over the overpayment to the succeeding taxable quarters or years to be applied as a credit against income tax due. In case the taxpayer chooses the carry over option, it becomes irrevocable, meaning that the taxpayer cannot later claim a refund or a tax credit certificate. However, what if the taxpayer chooses to pursue a refund on the tax overpayment or excess tax credit?
In a Supreme Court (SC) case decided on Aug. 1, the taxpayer marked the box “To be refunded” in the annual ITR for excess creditable withholding taxes (CWT) for taxable year 2005. Upon filing of quarterly income tax returns for the three quarters of the succeeding taxable year, however, the taxpayer inadvertently indicated the excess CWT as the prior year’s excess credits, which consequently were claimed against the taxes due for the three quarters. Nonetheless, upon filing of the 2006 ITR, the taxpayer no longer indicated the excess CWT as creditable excess carryover from the previous year.
The Court of Tax Appeals (CTA) en banc denied the taxpayer’s claim for a refund due to the carryover of the unused CWT for the succeeding quarters, based on its interpretation of the irrevocability rule as provided under Section 76 of the National Internal Revenue Code (NIRC), as amended. The SC, however, ruled in favor of the taxpayer.
According to the SC, the intent of the irrevocability rule is to keep the taxpayer from flip-flopping on the options, and to avoid confusion and complications with the taxpayer’s excess tax credit. It eliminates the possible double recovery of the taxpayer on excess or unused creditable withholding taxes through carryover as tax credits and grant of tax refund or TCC.
The SC held that the irrevocability rule articulated in Section 76 of the NIRC, as amended, is clear and unequivocal in providing that the carryover option, once actually or constructively chosen by a taxpayer, becomes irrevocable, to wit:
“The controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option; and once it had already done so, it could no longer make another one. Consequently, after the taxpayer opts to carry-over its excess tax credit to the following taxable period, the question of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the option to carry over has been made, ‘no application for tax refund or issuance of tax credit certificate shall be allowed therefore.’ “
The irrevocability rule only applies to the taxpayer’s option to carry over the excess CWT. Once the taxpayer decides to change its option to carry over, it may no longer revert to the original choice. On the other hand, when the taxpayer originally chose a refund or TCC, it may opt to carry over the excess CWTs until fully utilized in succeeding taxable years, but can no longer seek a refund or TCC.
The SC explained that the irrevocability rule took effect when the option made by the taxpayer in the annual ITR was exercised. The marking of the box either as: (1) “To be refunded” or “To be issued a TCC” or (2) “To be carried over as tax credit for next year/quarter” constitutes the taxpayer’s exercise of the option and precluded from selecting the other choice. If the taxpayer marked the option “To be refunded” or “To be issued a TCC” on excess or unutilized CWTs, the taxpayer became prohibited from carrying over the same. However, the fact is that the prior year’s excess credits marked as “to be refunded/to be issued a TCC” were reported in the succeeding quarterly ITRs, and the taxpayer did not report the same on the succeeding annual ITR. Ultimately, the original intent of the taxpayer to refund the prior year excess credit was not reversed by the treatment applied to the quarterly ITRs.
Regardless of the SC’s clarification on the extent of the irrevocability rule, taxpayers should still be wary and consistent in reflecting their preferred options in quarterly and annual income tax returns. While it is usually human nature to become indecisive, especially when choosing between similarly beneficial options, we should always bear in mind the possible consequences of our choices, as one’s success depends on making the right choices.
Marvin K. Villarama is a senior of the Tax Advisory and Compliance of P&A Grant Thornton.