The Supreme Court’s decision in Rhombus Energy, Inc. v. Commissioner of Internal Revenue clarifies the application of the irrevocability rule concerning excess creditable withholding tax (CWT). The Court ruled that a taxpayer’s choice to either request a refund or carry over excess CWT is binding once made in the annual Income Tax Return (ITR). Rhombus Energy initially signified its intent to be refunded for its 2005 excess CWT. The CTA En Banc erred in denying the refund based on the fact that Rhombus had reported prior year’s excess credits in its quarterly ITRs for the year 2006. This decision emphasizes the importance of carefully selecting the preferred option on the annual ITR, as subsequent actions cannot reverse this initial choice, thereby impacting tax strategies for businesses.

Rhombus’s Taxing Dilemma: Refund or Carry-Over?

This case revolves around Rhombus Energy, Inc.’s claim for a refund of P1,500,653.00 representing excess and/or unutilized creditable withholding tax (CWT) for the taxable year 2005. The core legal issue is whether Rhombus is barred from claiming a refund due to the irrevocability rule, which stipulates that a taxpayer’s choice between claiming a refund or carrying over excess CWT is binding for that taxable period. The Commissioner of Internal Revenue (CIR) argued that Rhombus’s actions implied a carry-over option, making a refund impermissible.

The factual backdrop involves Rhombus initially indicating in its 2005 Annual Income Tax Return (ITR) that it wanted its excess CWT to be refunded. However, in the subsequent quarterly ITRs for 2006, Rhombus included the 2005 excess CWT as prior year’s excess credits. Later, in its 2006 annual ITR, Rhombus reported zero prior year’s excess credits. This series of actions led to a dispute, with the CIR arguing that Rhombus had constructively chosen to carry over the excess CWT, making the refund claim invalid based on the irrevocability rule enshrined in Section 76 of the National Internal Revenue Code (NIRC).

Section 76 of the NIRC outlines the options available to corporations regarding excess tax payments, stating:

Section 76. Final Adjusted Return. – Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar of fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either:

(A) Pay the balance of the tax still due; or

(B) Carry over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry over and apply the excess quarterly income tax against income tax due for the taxable years of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.

The Court emphasized that the controlling factor is the taxpayer’s explicit choice of an option on the annual ITR. Once this choice is made, it becomes irrevocable for that taxable period, preventing the taxpayer from altering their decision later. The CTA En Banc initially sided with the CIR, citing previous decisions that uphold the irrevocability rule. However, the Supreme Court reversed this decision, underscoring the importance of the initial manifestation of intent in the annual ITR. The Supreme Court cited Republic v. Team (Phils.) Energy Corporation, elaborating on the irrevocability rule:

In Commissioner of Internal Revenue v. Bank of the Philippine Islands, the Court, citing the pronouncement in Philam Asset Management, Inc., points out that Section 76 of the NIRC of 1997 is clear and unequivocal in providing that the carry-over option, once actually or constructively chosen by a corporate taxpayer, becomes irrevocable. The Court explains:

Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option; and once it had already done so, it could no longer make another one. Consequently, after the taxpayer opts to carry-over its excess tax credit to the following taxable period, the question of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the option to carry over has been made, “no application for tax refund or issuance of a tax credit certificate shall be allowed therefor.”

The Court highlighted that Rhombus had clearly indicated its intention to be refunded in its 2005 annual ITR by marking the corresponding box. The Court considered this action as the operative choice, making the subsequent reporting of prior year’s excess credits in the 2006 quarterly ITRs inconsequential. The Supreme Court’s decision underscores the significance of the taxpayer’s initial declaration in the annual ITR as the definitive expression of intent, thereby setting a clear precedent on how the irrevocability rule should be applied. The ruling emphasizes that the taxpayer’s initial election on the annual ITR is the controlling factor, ensuring that subsequent actions do not negate this original choice.

To further clarify the requirements for entitlement to a refund, the Supreme Court reiterated the requisites outlined in Republic v. Team (Phils.) Energy Corporation:

1. That the claim for refund was filed within the two-year reglementary period pursuant to Section 229 of the NIRC;
2. When it is shown on the ITR that the income payment received is being declared part of the taxpayer’s gross income; and
3. When the fact of withholding is established by a copy of the withholding tax statement, duly issued by the payor to the payee, showing the amount paid and income tax withheld from that amount.

The Court affirmed the CTA First Division’s findings that Rhombus met all these requisites, reinforcing the decision to grant the refund. This ruling has significant implications for taxpayers, as it emphasizes the importance of carefully considering and clearly indicating their chosen option on the annual ITR. Once this choice is made, it is binding, regardless of subsequent actions. Therefore, taxpayers should ensure that their initial declaration accurately reflects their intent, as any inconsistency may lead to disputes with the BIR. The Supreme Court’s decision provides clarity and guidance on the application of the irrevocability rule, helping taxpayers make informed decisions and avoid potential tax-related issues.

FAQs

What is the irrevocability rule concerning excess CWT?	The irrevocability rule states that once a taxpayer chooses either to claim a refund or carry over excess Creditable Withholding Tax (CWT), that choice is binding for the taxable period. The taxpayer cannot later change their option.
What was the key issue in this case?	The key issue was whether Rhombus Energy was entitled to a refund of its excess CWT for 2005, considering it initially indicated a refund but later reported excess credits in its quarterly ITRs. The Commissioner argued that this implied a carry-over, barring the refund.
How did Rhombus Energy indicate its choice in the annual ITR?	Rhombus Energy marked the box “To be refunded” in its 2005 Annual Income Tax Return (ITR), signifying its intention to claim a refund for the excess creditable withholding tax. This initial declaration was crucial in the Supreme Court’s decision.
Why did the CTA En Banc initially deny Rhombus’s claim?	The CTA En Banc initially denied the claim because Rhombus included the 2005 excess CWT as prior year’s excess credits in the first, second, and third quarterly ITRs for taxable year 2006. This was seen as an indication that Rhombus had opted to carry over the excess CWT.
On what basis did the Supreme Court reverse the CTA’s decision?	The Supreme Court reversed the decision, holding that Rhombus’s initial choice to be refunded, as indicated in its 2005 annual ITR, was the controlling factor. The subsequent reporting in quarterly ITRs did not negate this original choice.
What are the requisites for entitlement to a CWT refund?	The requisites include filing the refund claim within the two-year reglementary period, showing on the ITR that the income payment is part of the taxpayer’s gross income, and providing a withholding tax statement showing the amount paid and tax withheld. Rhombus met all these requirements.
What is the practical implication of this ruling for taxpayers?	The ruling emphasizes the importance of carefully considering and clearly indicating the chosen option on the annual ITR, as this choice is binding. Taxpayers must ensure their initial declaration accurately reflects their intent.
What happens if a taxpayer makes inconsistent declarations?	Inconsistent declarations can lead to disputes with the BIR. The Supreme Court’s decision clarifies that the initial declaration in the annual ITR is the definitive expression of intent. This underscores the importance of accuracy and consistency in tax filings.
Can the option to carry over excess income tax be repeatedly carried over?	Yes, unlike the option for refund which prescribes after two years from the filing of the FAR, there is no prescriptive period for carrying over the excess. The excess can be repeatedly carried over to succeeding taxable years until actually applied or credited to a tax liability.

In conclusion, the Supreme Court’s ruling in Rhombus Energy, Inc. v. Commissioner of Internal Revenue provides essential guidance on the irrevocability rule for excess creditable withholding tax. The decision underscores the importance of carefully selecting and clearly indicating the preferred option on the annual ITR, as this initial choice is binding and cannot be reversed by subsequent actions. Taxpayers should ensure accuracy and consistency in their tax filings to avoid potential disputes with the BIR.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Rhombus Energy, Inc. vs. Commissioner of Internal Revenue, G.R. No. 206362, August 01, 2018