Tax Articles

Local Business Tax Disputes: Remedies

By Atty. Fulvio D. Dawilan

I had previously written in this column an article articulating the remedies available to taxpayers in cases of disputes with the local tax authorities. With jurisprudence evolving and providing further clarity on these remedies, let me revisit the rules for proper guidance.

In this country, it is not only the national government that has the power of taxation. Local governments also do. The constitution itself grants local government units the power to create their own sources of revenues. The local taxation system is expressed with more details in the Local Government Code (LGC) of 1991. Based on the mechanisms and limitations provided in the LGC, a local government unit (LGU) may enact tax ordinance to pursue local taxation and impose tax upon its subjects. This includes the imposition of local business tax on individuals and entities doing business within its jurisdiction.

In the pursuit by the LGU’s local taxing power and in the compliance by taxpayers of their local tax obligations, disputes often arise. The common disputes involve disagreement on the extent of liability of the taxpayer, which usually results from an assessment or the overpayment or erroneous payment of the supposed taxes due.

Similar to national taxes, taxpayers are left with no remedies. In cases of an assessment, the procedures and remedies are provided in Section 195 (protest of an assessment). On the other hand, for the recovery of an overpayment of taxes, the same is governed by Section 196 (claim for refund or tax credit). These remedies separately cover two different subjects – one is for assessments and the other is for refund.

Clearly, the remedy under Section 195 applies when there is an assessment, that is, notice of assessment. A notice of assessment, as commonly understood, is issued upon review or examination conducted by tax authorities after a taxpayer has paid or supposed to have paid his taxes. This is the instance where Section 195 applies. On the other hand, the remedy of refund is available when the taxpayer pays a tax and claims erroneous or overpayment. In CTA AC No. 235, March 01, 2022, the Court clarified that a taxpayer may avail of the remedy of refund even without a prior protest and there is no assessment to assail in the first place.

But there are many instances where these remedies are confusing. There are also instances where both remedies need to be invoked.

In the same case, citing G.R. No. 185622, October 17, 2018, the Court clearly described the three situations and distinction as to when Section 195 and Section 196 of the LGC of 1991 will apply.

First situation - If the taxpayer receives an assessment and does not pay the tax, its remedy is strictly confined to Section 195 of the LGC. The taxpayer must file a written protest with the local treasurer within 60 days from the 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 remedy of a refund is not available since there is no tax payment.

Second situation - If the taxpayer opts to pay the assessed tax, fee, or charge, it must still file the 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. The taxpayer may, at the same time, question the validity and correctness of the assessment and seek a refund of the taxes paid. Once the assessment is set aside by the court, it follows as a matter of course that all taxes paid under the erroneous or invalid assessment are refunded to the taxpayer.

Third situation - If no assessment notice is issued by the local treasurer, and the taxpayer claims that it erroneously paid a tax, fee, or charge, or that the tax, fee, or charge has been illegally collected from him, then the remedy of a refund under Section 196 will apply.

To summarize, when the local tax authorities issue an assessment, the proper remedy is to protest the assessment if the taxpayer disputes the issues and/or amounts being assessed. When the taxpayer voluntarily pays the assessment or is compelled to pay the same, he may at the same time claim the return of the erroneous payment. When no assessment is involved, the only remedy is a refund.