Under Section 75 of the National Internal Revenue Code, corporations, in general, are required to make quarterly income tax payments. In the event that the the sum of the quarterly payments exceeds the total income tax due for the entire year, Section 76 provides two alternative options to the corporation concerned:
- Carry-over the excess credit; or
- Be credited or refunded with the excess amount paid.
If the taxpayer elects the carry-over option, such election is permanent; the corporation is precluded from subsequently changing its mind and replacing its choice with the option of refund or tax credit. It is known as the irrevocability rule.
What if the corporation opts for refund or tax credit, does the irrevocability rule also apply?
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...
University Physicians Services, Inc. – Management, Inc., petitoner, VERSUS Commissioner of Internal Revenue, respondent
G.R. No. 205955
March 7, 2018
Is the Irrevocabilty Rule Under Sec. 76 Applicable to Tax Refund
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.
Ruling of the Court of Tax Appeals
The CTA Division
The CTA Division denied the petition for review for lack of merit. It reasoned that UPSI-MI effectively exercised the carry-over option under Section 76 of the National Internal Revenue Code of 1997 (NIRC). On motion for reconsideration, UPSI-MI argued that the irrevocability rule under Section 76 of the NIRC is not applicable for the reason that it did not carry over to the succeeding taxable period the 2006 excess income tax credit. UPSI-MI added that the subject tax credits were inadvertently included in its original 2007 ITR, and such mistake was rectified in the amended 2007 ITR. Thus, UPSI-MI insisted that what should control is its election of the option “To be issued a Tax Credit Certificate” in its 2006 ITR.
The CTA Division ruled that UPSI-MI’s alleged inadvertent inclusion of the 2006 excess tax credit in the 2007 original ITR belies its own allegation that it did not carry over the said amount to the succeeding taxable period. The amendment of the 2007 ITR cannot undo UPSI-MI’s actual exercise of the carry over option in the original 2007 ITR, for to do so would be against the irrevocability rule.
The CTA En Banc
The CTA En Banc ruled that UPI-MI is barred by Section 76 of the NIRC from claiming a refund of its excess tax credits for the taxable 2006. The barring effect applies after UPSI-MI carried over its excess tax credits to the succeeding quarters of 2007, even is such carry-over was allegedly done inadvertently. The CTA En Banc emphasized that the prevailing law and jurisprudence admit of no exception or qualification to the irrevocability rule.
UPSI-MI appealed to the Supreme Court contending, in part, that the irrevocability rule applies not only to the carry-over option but also to the option of refund or tax credit. Thus, considering that it originally opted to be issued a tax credit certificate, its inadvertent inclusion of the subject excess tax credit in its short period ITR has no effect.
Whether UPSI-MI is entitled to the refund of its 2006 excess tax credits, for which it originally chose the option of refund/tax credit in its 2006 ITR, when it thereafter 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 law is very clear. 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 the 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.