EoPT Law: Streamlining tax refunds

Perhaps one of the more welcome changes under the Ease of Paying Taxes (EoPT) Law is the clarified and streamlined process of tax refund applications. To implement the amendment, the Bureau of Internal Revenue (BIR) issued Revenue Regulation (RR) No. 5-2024, which covers VAT refund claims under Section 112(C), unutilized excess income tax credit/refunds under Section 76(C) and refund of taxes erroneously or illegally received or penalties imposed without authority under Sections 204(C) and 229 of the Tax Code.

In today’s article, I’d like to focus on the revised rules on the refund or issuance of a tax credit certificate (TCC) for excess income taxes and taxes/penalties erroneously paid.

CREDIT/REFUND OF UNUTILIZED EXCESS INCOME TAX CREDIT
RR No. 5-2024 categorized the processing of TCCs/refunds of excess income taxes paid into two (2): regular claims of taxpayers of going-concern status; and those undergoing dissolution or have ceased business operations.

Regular Claims of taxpayers of going-concern status

Generally, a taxpayer who has paid excess income taxes during the year has three options to recover such excess taxes paid. First, he may opt to carry over such excess tax credits against the income tax liabilities in the succeeding period/s. Alternatively, he may choose to (1) be issued a TCC which may be used to settle other tax liabilities except withholding tax, or (2) file a claim for refund of the excess income taxes paid. Once a taxpayer chooses the carry-over option, it is irrevocable for that taxable period and no application of cash refund or issuance of TCC will be allowed.

On the other hand, if a taxpayer opts to file a claim for TCC or refund, such an application must be filed within two years from the date of filing of the Annual Income Tax Return (AITR). The BIR, on the other hand, has 180 days to decide upon the claim for refund/TCC.

To support the application, the taxpayer should show that the income upon which the taxes were withheld was included as part of the gross income declared in the AITR and provide a copy of valid withholding tax certificate/s showing the amount of income payment and the amount of tax withheld.

Claims of taxpayers undergoing dissolution or cessation of business

With the passage of the EoPT Law, new guidelines were introduced on claims for refund of excess income tax paid in case of dissolution or cessation of business. As an exception to the irrevocability rule discussed above, taxpayers who previously chose the option to “carry-over” may still claim a refund provided that they have permanently ceased operations. Furthermore, under RR No. 5-2024, the BIR has two years from the submission of the Application for Registration Information Update/Correction/Cancellation and complete documentary requirements for the business closure and the refund to decide and refund the excess taxes. Notably, the two-year timeframe for claims of taxpayers undergoing dissolution/cessation is longer than the 180-day general timeframe of processing TCC/refund presumably to accommodate the completion of the mandatory audit of the BIR. Any approved refund, if any, shall be released only after the completion of such mandatory tax audit covering the preceding year and the short period return.

CREDIT/REFUND OF TAXES AND/OR PENALTIES ERRONEOUSLY/ILLEGALLY COLLECTED

To be entitled to a refund of erroneously or illegally collected tax, there must be a written claim for credit or refund filed with the BIR within two years from the date of payment of tax, or penalty. Prior to the EoPT Law, in case a judicial claim is still warranted, the same should similarly be filed within two years from the date of payment of tax or penalty.

Given that there was only a two-year prescriptive period within which to file both the administrative and judicial claim for refund, some taxpayers previously resorted to filing the judicial claim even before receiving the final decision of the BIR if they were nearing the end of the two-year period. Otherwise, the taxpayer would be barred from seeking judicial recourse. This resulted in additional costs and burden on the part of the taxpayers to protect their right to refund. On the other hand, on the part of the BIR, this has been a source of dispute in the past as the BIR often argues that the administrative remedies were not yet exhausted before elevating the claim to the court.

With the EoPT Law and issuance of the RR No. 5-2024, a more systematic manner and timeline of such claims for refund of erroneously or illegally collected tax now applies. Under RR No. 5-2024, a written application for claim for refund must still be filed with the BIR within two years from date of payment of tax/penalty. However, the EoPT introduced a strict 180-day timeline for the BIR to process and decide on the claim for refund from the submission of complete documents to support the application. In case the BIR issues a full/partial denial of the claim or fails to act within the 180-day period, the taxpayer has 30 days from receipt of such denial or from the lapse of 180 days in case of inaction to appeal to the Courts of Tax Appeals.

To support the application, the taxpayer must provide a copy of the duly filed tax return with the corresponding payment remitted to the BIR.

One of the objectives of the EoPT Law is to improve the efficiency and effectiveness of tax administration by providing mechanisms that encourage proper and easy compliance at the least possible cost and resources possible. With the implementation of RR No. 5-2024, we are expecting to see a more seamless processing of tax refunds. Note, however, that despite the EoPT Law taking effect in January, RR No. 5-2024 only applies to tax credit/refund claims that are filed starting July 1, 2024 onwards.