In a previous article, we discussed that when the sum of the quarterly payments of a corporation exceeds its total annual tax due, it may carry over the excess credit to the succeeding taxable year/s, or be refunded of the excess amount or issued a tax credit certificate therefor. Section 76 of the Tax Code further provides:
X x x x x Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.
This portion of Section 76, referred to as the “Irrevocability Rule”, has been one of the issues in several cases decided by the Supreme Court. In the case of UPSI-MI v. CIR, the Court addressed the following matters:
Applicability of the “Irrecoverability Rule” to the option of tax refund or issuance of tax credit certificate; and
Applicability of the “Irrevocability Rule” if the taxpayer initially elected the option to be refunded and replace it later with the option to carry over.
University Physicians Services, Inc. – Management, Inc., petitioner, VERSUS Commissioner of Internal Revenue, respondent; G.R. No. 205955
On 16 April 2007, University Physicians Services, Inc. – Management, Inc. (UPSI-MI) filed its Annual Income Tax Return (ITR) for the year ended 31 December 2006. UPSI-MI chose the option, and marked the corresponding box, “To be issued a tax credit certificate” with respect to the unutilized excess creditable taxes for the taxable year ending 31 December 2006 amounting to ₱2,927,834.00..
In 2007, University Physicians Services, Inc. – Management, Inc. (UPSI-MI) changed its taxable period from calendar year to fiscal year ending on the last day of March. Thus, UPSI-MI filed on 14 November 2007 an Annual Income Tax Return (ITR) covering the short period from 01 January 2007 to 31 March 2007. The Annual ITR reflected an income tax overpayment of ₱5,159,341.00 as “Prior Year’s Excess Credit” consisting of the following items:
Taxable Year 2005 ₱2,231,507.00 Taxable Year 2006 ₱2,927,834.00
On the same day, UPSI-MI amended the Annual ITR for the short period by excluding the sum of ₱2,927,834.00 under the line “Prior Year’s Excess Credits”.
On 10 October 2008, UPSI-MI filed with the office of the Commissioner of Internal Revenue (CIR) a claim for refund and/or issuance of a Tax Credit Certificate (TCC) in the amount of ₱2,927,834.00, representing the alleged excess and unutilized creditable withholding taxes for taxable year 2006.
For failure of the CIR to act on the claim for refund/tax credit, UPSI-MI filed a Petition for review before the Court of Tax Appeals on 14 April 2009.
Whether UPSI-MI is barred from claiming a refund of its 2006 excess tax credits, for which it initially chose the option of refund/tax credit certificate in its 2006 ITR, when it subsequently indicated the option of carry-over in its ITR for the short period ending 31 March 2007.
Secrtion 76 of the NIRC provides:
SEC. 76. – Final Adjustment Return. – Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or (B) Carry-over the excess credit; or (C)Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor. (emphasis supplied)
The irrevocability rule applies only to the option of carry over and not to the option of cash refund/tax credit.
The irrevocability rule is limited only to the option of carry-over such that a taxpayer is still free to change its choice after electing a refund of its excess tax credit. The law does not prevent a taxpayer who originally opted for a refund or tax credit certificate from shifting to the carry-over of the excess creditable taxes to the taxable quarters of the succeeding taxable years.
The Irrevocability Rule Applies to the Subsequent Election of the Option to Carry Over
Once the taxpayer opts to carry over such excess creditable tax, after electing refund or issuance of tax credit certificate, the carry-over option becomes irrevocable. Accordingly, the previous choice of a claim for refund, even if subsequently pursued, may no longer be granted.
Application of Irrevocability Rule to UPSI-MI
Despite its initial option to refund its 2006 excess creditable tax, UPSI-MI subsequently indicated in its 2007 short period FAR that it carried over the excess creditable tax and applied the same against its 2007 income tax due. By doing so, UPSI-MI constructively chose the option of carry-over, for which reason, the irrevocability rule forbade it to revert to its initial choice. It does not matter that UPSI-MI had not actually benefited from the carry over on the ground that it did not have a tax due in the 2007 short period. Neither may it insist that the insertion of the carry-over in the 2007 FAR was by mere mistake or inadvertence. The irrevocability rule admits of no qualifications or conditions.
Hence, UPSI-Mi is barred from recovering the subject excess creditable tax through refund or TCC.
Based on this decision, the implication of the “irrevocability rule” may be summarized as follows:
If the taxpayer initially elects the carry over option, its choice is irrevocable; hence it cannot subsequently replace its choice of carry over with the tax refund or tax credit;
If the taxpayer initially elects to be refunded or issued a tax credit certificate, its choice is revocable; hence, it may subsequently elect to carry over the excess credit; and
If the taxpayer subsequently replace its initial choice of refund or tax credit with carry over, the carry over option is irrevocable; hence, it cannot revert back to its original choice of tax refund o r tax credit.