Tax Articles

Utilization of Excess Tax Credits Against Tax Assessments

Atty. Fulvio D. Dawilan

It is not unusual for taxpayers to incur excess input tax credits and excess income tax payments in a taxable period. Excess input tax ensues when the value-added taxes paid or incurred on inputs exceed the value-added tax liability dues on outputs. And this is due to a number of reasons, such as the entitlement to VAT zero-rating of sales by the seller or simply because substantial purchases are made in a period compared to sales made in the same period. For the excess income tax scenario, this normally happens due to the withholding tax requirements imposed on the customer, where taxes withheld by the customers exceed the ultimate income tax liability for the seller. This also happens when the quarterly income tax payments exceed the annualized income tax due.

In both cases, the law allows the unutilized tax to be carried over and credited against the taxes due in the succeeding periods. Although there are other available options to the taxpayer, the carry-over for utilization in the succeeding periods is more convenient, especially for taxpayers who don’t want to avail of the refund option and foresees taxes to be due in the future.

A question arises when an examination is conducted by the BIR and a taxpayer is found to have deficiency taxes. May the excess credits be applied as credit against the deficiency tax assessment?

The tendency of the examiners is to exclude the excess credit carried-over to the succeeding year from the available tax credits on the ground that the excess credit has already been carried-over to the succeeding taxable periods. In essence, in case there are upward adjustments in the tax due for the year under audit, the supposed tax credits are not allowed to be utilized or to reduce the deficiency tax assessment, since the same is already forwarded to the succeeding taxable periods. In other words, the tax credits may only be utilized against the taxes due in the period to which the excess credit was forwarded to. The exclusion is presumably to recapture the tax benefit realized by the taxpayer in carrying the amount to the succeeding year - the examiners would sometimes use that as a reason to justify the non-inclusion of the credit.

A number of cases had been decided by the Tax Court on this issue. In those cases, the Court consistently ruled in favor of the taxpayer. According to the Court, the disallowance is not proper since any tax benefit derived from the carry-over redounds to the succeeding year, which is not the period covered by the assessment. Since the tax benefit will be in the succeeding year, at most, the taxpayer may only be assessed in the said succeeding year.

While the explanation of the Court is very limited, what it says is that it is inappropriate to deduct the tax credit carried-over to the succeeding period as part of the available tax credits of the taxpayer that may be utilized in the year under audit. As such, if there are findings for deficiency taxes, the tax carry-over may be utilized against such deficiency tax liability.

Let me add that unutilized input taxes as well as unutilized creditable withholding taxes and excess quarterly income tax payments form part of the assets of a taxpayer. In fact, these are advance tax payments made by the taxpayer. The input taxes are payments made on purchases which are supposed to be utilized as credits against the same taxes due on the sales. On the other hand, creditable withholding taxes are advance income tax payments made by the payor of the income in behalf of the income recipient. Similarly, the quarterly income tax payments are advance payments made quarterly for the annual income taxes due.

Being advance tax payments, the same should be utilized at the very first instance that the taxpayer is found to be liable for the same type of tax. It shouldn’t matter therefore that the excess credit was already carried-over to the succeeding period. Had the tax due been determined to be as the resulting taxes due upon examination, that advance tax payment would have been utilized against the whole taxes due. It makes no difference if the additional taxes are determined only upon examination. In fact, the law also does not distinguish the taxes against which the credit may be applied. The advance taxpayment may be used against the tax that is determined voluntarily by the taxpayer himself or taxes due that are determined involuntarily upon examination by the tax authority. Hence, the same could be utilized against deficiency taxes for the same type of tax.

To summarize, Court decisions had already established that unutilized input taxes as well as unutilized creditable withholding taxes and quarterly income tax payments may be applied against deficiency taxes due, regardless of the carry-over to the succeeding period. Despite this, almost all the assessment cases involving taxpayers with excess carry-overs include the same finding. I hope that future examinations give due consideration to this established rule and allow the utilization of excess tax credits against deficiency tax assessments.