One of the well-known and time-honored principles in the Law on Obligations and Contracts is solutio indebiti. The rule is that no person shall unjustly enrich himself at the expense of another. Accordingly, if something is received when there is no right to demand it, and it was unduly delivered by mistake, the obligation to return it arises. In such a situation, a creditor-debtor relationship is created under a quasi-contract. The payor becomes the creditor with the right to demand the return of payment made by mistake while the payee, who has no right to receive the payment, is obligated to return it.
As decisional law teaches, even the government is not exempt from the application of this doctrine. If a person has unduly delivered payment to the government by mistake, the government is obligated to return it. Arguably, if a tax payment was made erroneously, a refund must be granted following the principle of solutio indebiti.
There are two common types of tax refunds in the Philippines. The first one is for erroneously or illegally assessed and collected taxes under Section 229 of the Tax Code. The second one is for unutilized input value-added tax (VAT) regarding zero-rated sales under Section 112 of the Code. These two types of refunds are different in a lot of ways, such as in the procedure and the prescriptive periods for filing the refund application, among others.
To differentiate, both the administrative claim and judicial claim for refund under Section 229 of the Tax Code must be made within two years from the date of the erroneous payment of the tax. On the other hand, the administrative claim for refund of unutilized input VAT must be filed within two years after the close of the taxable quarter when the sales were made. In case of denial of the claim, the tax authorities must state in writing the legal and factual basis for the denial within 90 days from the submission of the application. Upon receipt of the denial, the taxpayer has 30 days to institute the judicial claim for refund.
One of the most significant distinctions between these two types of refunds, according to the Supreme Court, is the application of the principle of solutio indebiti. Under the law, there is solutio indebiti when: (1) there is absence of a right to collect the payment, and (2) the payment was made by mistake, and not through liberality or some other cause. In one case, the taxpayer erroneously paid VAT to the government, without any obligation on its part, on the mistaken belief that it is not exempt from the payment of the VAT. Since both the elements of solutio indebiti were present, the taxpayer’s application for erroneously paid VAT was granted.
However, such is not the case for refunds of unutilized input VAT related to a taxpayer’s zero-rated sales. In another decision, the Supreme Court ruled that the elements of solutio indebiti were absent to be entitled to the refund of unutilized input taxes. The first element was unsatisfied since a binding relationship between the taxpayer and the local tax authorities existed arising from the legal obligation of the taxpayer to pay the VAT. For the second element, the payment of the input taxes was not a mistake, since the taxpayer was legally obligated to pay for such liability. The entitlement to a refund of excess input tax is solely based on the nature of the VAT system; however, in this case, the amount paid as input tax was correct and proper.
Nonetheless, in both cases, the Supreme Court said reliance on the principle alone is not sufficient. Apart from proving their entitlement to the refund, claimants must also comply with the procedural due process, which includes the observance of the prescriptive period for filing the administrative claim, and if necessary, the judicial claim for refund. Since a tax refund partakes the nature of an exemption, which cannot be allowed unless granted in the most explicit and categorical language, it is strictly construed against the claimant who must discharge such burden convincingly. In case of failure to observe the procedures, particularly the deadline for filing the refund application, the claim may be barred by prescription.
In the words of Supreme Court Justice Sandoval-Gutierrez, substantial justice, equity, and fair play are on the side of the taxpayers who erroneously paid the tax. Mere technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it, thereby enriching itself at the expense of its law-abiding citizens.
However, considering that the principle of solutio indebiti does not apply to refunds of unutilized input VAT, the leniency recognized by the High Court may not be applied in this instance. Instead, the claimants must ensure that they comply with the requirements set forth by the law. More so, because of the Enhanced VAT Refund System implemented last year where refund claims are decided within a 90-day processing period, it is best to plan and prepare before bringing about any claims against the government.
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.
Abigael S. Demdam is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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