Tax Articles

Erroneous Collections Upon Renewal of Permits: Remedies

By Atty. Fulvio D. Dawilan

Fulvio D. Dawilan Managing Partner   +632 8403 2001 loc.310 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

Renewal of business permits by taxpayers engaged in business would usually require the payment of local business taxes, together with some other fees and charges. And it is not unusual for disputes to arise in relation to the amounts required to be paid and their bases. Despite disagreements - belief that the amount being imposed is erroneous or illegal -  taxpayers reluctantly pay for fear of being denied the necessary permit to continue doing business.  

When this happens, what are the remedies available to the taxpayer? Some taxpayers would be duped to seek refuge under Section 195 of the Local Government Code (“LGC”). Others proceed to pay and then recover the amount paid under Section 196 of the same Code. These two remedies are actually tricky, especially when involving the payments made as a result of an application for the renewal of business permits. That being said, we seek guidance on the pronouncements and clarifications made by the Courts in a number of cases (e.g., G.R. Nos. 230846, 198681, and 185622; CTA AC Nos. 268 and 270) on the applicability of these two remedies.

Sections 195 (protesting an assessment) and 196 (refund of erroneously or illegally collected taxes) of the LGC are two different remedies available to taxpayers. Section 196 is triggered by an assessment – through the issuance of an assessment notice. On the other hand, the remedy under Section 196 is initiated by a taxpayer who believes to have paid taxes erroneously or illegally. Knowing the differences between the two remedies is important because the required action and the periods to be observed are different.

In a local tax assessment, a taxpayer who receives an assessment need not pay the tax. The remedy would be strictly confined to Section 195. To proceed, a taxpayer must file a written protest with the local treasurer within 60 days from receipt of the assessment. If the protest is denied, or if the local treasurer fails to act on it, then the taxpayer must appeal the assessment before a court of competent jurisdiction within 30 days from receipt of the denial, or the lapse of the 60-day period within which the local treasurer must act on the protest.

The taxpayer, however, is not prohibited from paying the tax being assessed even if he believes that the assessment is without basis. This is resorted to for a number of reasons. If he does that and wants to recover, the taxpayer must still file a written protest within the 60-day period, and then bring the case to court within 30 days from either the decision or inaction of the local treasurer. In this court action, the taxpayer may, at the same time, question the validity and correctness of the assessment and seek a refund of the taxes it paid.

What procedure should be observed when there is no assessment preceding the payment of the tax? If there is no assessment notice issued by the local treasurer, and the taxpayer claims that it erroneously paid the tax, or the same has been illegally collected from him, Section 196 applies. This is initiated by filing a written claim for refund with the treasurer’s office. Both the written administrative claim as well as the claim with the proper court should be filed within two (2) years from the date of the payment of the erroneously or illegally collected tax.  

One important factor to consider is to determine whether a notice of assessment was issued that would trigger the procedures for contesting an assessment under Section 195. If none, and an erroneous payment or illegal collection had been made, Section 196 would properly apply.

Our Courts had relied on Section 195 itself in determining whether or not tax payments involve assessments.  Clearly, the wordings of Section 195 require the issuance of a notice of assessment when the local treasurer finds that correct taxes, fees, or charges have not been paid. Said notice of assessment should state the (1) nature of the tax, fee, or charge, and the (2) amount of: (a) deficiency, (b) surcharge, (c) interests, and (d) penalties. These are the important information that must be contained in an assessment notice.

On this basis, the Courts had also declared that what are usually referred to as “assessments”, covered by Billing Statements, Order of Payments, Statements of Account, and other similar documents which are to be paid as prerequisite for the renewal of business permit could not be considered as the notice of assessment. This is because said Billing Statements, Order of Payments, Statements of Account, and similar documents do not contain deficiency taxes, surcharges, interests, and penalties.

It can therefore be deduced that payments required to be made upon the application for renewal of business permit could not be considered as a notice of assessment that would trigger the procedures for contesting an assessment under Section 195 of the LGC. The amounts usually contain only the taxes due from the taxpayer for the current quarter/year. As such, there is no deficiency tax to speak of, and correspondingly, no surcharge, interest, or penalty to be imposed. It follows that if the taxpayer proceeds with the payment but believes that the payment is without basis, it may proceed to recover the same using the refund process.