Tax Articles

Disposition of Excess Income Tax Payments

By Atty. Fulvio D. Dawilan

It is not unusual for taxpayers to incur excess income tax payments in a given taxable year. This happens because of the practices under our existing tax system: the requirement to pay quarterly income tax and the advance payments through the withholding tax system. But it is mostly because of the latter.

The withholding tax system forces the payor (customer) to deduct and remit to the tax authority a portion of the income, which is considered advance payment of the income tax due from the income recipient. Because of the high rate of withholding taxes and because most income are subject to withholding taxes, the sum may exceed the total income tax due from the taxpayer for the year. And this is more apparent now with the reduction of the income tax rate to 25%/20%, without a corresponding reduction in the withholding tax rates.

If this happens, what are the remedies available to the taxpayer? This is nothing new. But since it is the income tax filing season, I thought of reminding taxpayers of the options available to them for these excess income tax payments, as any misstep may jeopardize the recovery of the excess tax payments.

The annual income tax return contains a portion which enumerates the options which the taxpayer may select from for the disposition of the overpayment. These are: (a) To be refunded, (b) To be issued a Tax Credit Certificate (TCC), and (c) To be carried over as a tax credit for next year/quarter. “To be issued a TCC” is the same as “To be refund” except that a certificate is issued instead of a cash refund. But that has also been discarded in the rules, so the choice is between “Refund” and “Carry-Over”.

There is also a notation that “once the choice is made, the same is irrevocable”. This is where the tricky part is. What is really irrevocable?

The Courts had been inconsistent on this. Earlier decisions declared that both choices (refund and carry-over) are irrevocable, such that the choice of one precludes the other. It was then understood that the choice of either refund or carry-over makes it irrevocable. As such, the choice for carry-over excludes the refund remedy, and once refund is chosen, a taxpayer is no longer entitled to apply the overpayments as credit in the subsequent periods.

This had been the notion, until a clarification was later made in G.R. No. 205955, March 7, 2018. In this case, the taxpayer filed its annual income tax return for the year 2006 showing an excess income tax payment, and marked the option “to be issued a tax credit certificate”. When it filed the following year’s annual income tax return, it actually carried over the excess from the previous year. Realizing its error, it amended the return on the same date and excluded the excess income tax payment for 2006 in the amount carried-over to 2007. Later, it applied for a refund for the 2006 excess income tax payment.

The Court denied the refund, noting that the irrevocability rule applies only to the option to carry-over. A taxpayer who originally opts for refund/issuance of TCC is not prevented from shifting to the carry-over of the excess taxes to the next periods. But once it decides to shift, it may no longer revert to its original choice due to the irrevocability rule.

Essentially, what the Court said is that a refund option is not irrevocable. That option can be changed to a carry-over. But once carry-over is made, that could no longer be changed. A taxpayer may no longer go back to the refund option.

Just as when that rule started to sink in, a decision (G.R. No. 206362, August 1, 2018) made a few months after again recognized that a refund option originally made precluded the carry-over. In that case, the taxpayer filed its income tax return for the year 2005 showing an excess income tax payment for which the option it indicated was “to be refunded”. In the three quarters of the following year, the excess tax payment was carried over as prior year’s excess credit. The taxpayer then applied for refund. The fund was granted, with the Court noting that the irrevocability rule took effect when the option was exercised. In marking “to be refunded” in the 2005 annual ITR, that constituted the option, and from then onwards, taxpayer became precluded from carrying-over the excess tax. The fact that the excess credits were reported in the quarterly income tax return of the following year did not reverse the option to be refunded of the 2005 excess tax payments.

Interpretations still appear to be vague. But a simple reference to the provisions of the Tax Code would show that the irrevocability rules refers only to the carry-over option. To be prudent, however, a taxpayer has to decide what remedy it has to make on its overpayments. That decision has to be made when the annual income tax return is prepared, tick the appropriate box and stick with that decision. If it’s a refund, no carry-over should be made in the following years’ quarterly and annual income tax return. If it’s a carry-over, then actual carry-over should be made, otherwise the excess tax payments would be lost.

Related to this, taxpayers are making advance tax payments for taxes that may eventually be recovered after a number of years, either through refund or through utilization in the following years. This is not to mention the possible loss simply because the taxpayer fails to comply with the prescribed procedures. As most excess income tax payments come from creditable withholding taxes, perhaps it’s time for the authorities to revisit the withholding tax rules, and limit the application to specific transactions. Also, with the reduction of the income tax rates, lowering the withholding tax rates should also be considered.