Why Paying a Tax Deficiency Doesn’t Automatically Guarantee a Refund Later On

G.R. No. 259309, February 13, 2023

Imagine receiving a tax assessment notice. Uncertain, you decide to pay the amount, hoping to avoid further complications. Later, after consulting with tax experts, you realize you might not have owed that tax after all. Can you get a refund? This recent Supreme Court decision involving Toledo Power Company highlights the complexities of informal tax settlements and the doctrine of estoppel, providing crucial lessons for taxpayers in the Philippines.

Introduction

This case revolves around Toledo Power Company’s attempt to recover PHP 6,971,071.10, representing a VAT deficiency they paid based on a Preliminary Assessment Notice (PAN). Toledo argued that the sale of power to Carmen Copper Corporation (CCC) should have been zero-rated, making the initial payment erroneous. However, the Supreme Court ultimately denied the refund, emphasizing the concept of informal tax settlements and the principle of estoppel.

Legal Context: Understanding Tax Assessments, Settlements, and Estoppel

Several key legal principles are at play in this case:

• Tax Assessment: The Bureau of Internal Revenue (BIR) assesses taxes based on its interpretation of tax laws and the taxpayer’s records.
• Preliminary Assessment Notice (PAN): A PAN is issued when the BIR believes there is a basis to assess deficiency taxes. The taxpayer has 15 days to respond. If they don’t, a Formal Letter of Demand and Final Assessment Notice (FLD/FAN) is issued.
• Informal Tax Settlement: This involves an agreement between the BIR and the taxpayer to resolve a tax dispute without formal litigation. The CIR is authorized to compromise or abate any tax liability under Section 204 of the National Internal Revenue Code (NIRC).
• Doctrine of Estoppel: This legal principle prevents a party from denying a fact that they previously admitted or acted upon, especially if another party relied on that admission to their detriment. Article 1431 of the Civil Code states that “an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon.”
• Zero-Rated Sales: Certain sales, particularly those to export-oriented enterprises, may be subject to a zero percent VAT rate. Revenue Memorandum Order No. 9-2000 outlines the conditions for zero-rating sales to Board of Investment-registered manufacturers/exporters with 100% export sales.

Example: Imagine a small business owner receives a PAN for underreported income. Instead of contesting it, they negotiate with the BIR and agree to pay a reduced amount. This agreement, even if informal, can prevent them from later claiming a refund based on the original assessment.

Case Breakdown: Toledo Power vs. CIR – A Timeline

The case unfolded as follows:

1. 2011: Toledo Power Company sells power to Carmen Copper Corporation.
2. April 5, 2013: The CIR issues a Letter of Authority, initiating a tax investigation on Toledo for the taxable year 2011.
3. July 28, 2015: Toledo receives a PAN detailing deficiency taxes, including a VAT deficiency of PHP 4,025,642.60 related to sales to CCC.
4. September 4, 2015: Toledo pays the VAT deficiency based on the PAN, totaling PHP 6,971,071.10 (including interest).
5. October 26, 2015: Toledo files a Letter Request for Administrative Claim, seeking a refund of the paid VAT deficiency.
6. March 18, 2016: Toledo refiles the same Letter Request for Administrative Claim.
7. March 21, 2016: Toledo files a Petition for Review with the Court of Tax Appeals (CTA).
8. October 9, 2019: The CTA Second Division grants Toledo’s petition and orders a refund.
9. July 12, 2021: The CTA En Banc affirms the Second Division’s decision.
10. February 13, 2023: The Supreme Court reverses the CTA En Banc’s decision, denying Toledo’s refund claim.

The Supreme Court emphasized the following points:

• “There was here an informal settlement of tax liability when Toledo paid PHP 6,971,071.10 on the assessed VAT deficiency on September 4, 2015…”
• “By paying the VAT deficiency for PHP 6,971,071.10, Toledo impliedly admitted the validity of the findings under the PAN.”

The Court viewed Toledo’s actions as an attempt to exploit the system, stating, “Indeed, to give imprimatur to Toledo’s *clear manipulative scheme* would be the highest form of injustice.”

Practical Implications: Lessons for Taxpayers

This case offers several important lessons for taxpayers:

• Paying an Assessment Can Be Interpreted as Acceptance: While paying a PAN might seem like a way to avoid further penalties, it can be seen as an implicit agreement with the assessment.
• Silence Can Be Detrimental: Failing to contest an assessment or explicitly reserving the right to a refund can weaken your position later on.
• Informal Settlements Are Binding: Agreements with the BIR, even if informal, can be legally binding and difficult to undo.

Key Lessons:

• Contest Assessments Promptly: If you disagree with a tax assessment, file a formal protest within the prescribed timeframe.
• Explicitly Reserve Your Rights: If you choose to pay an assessment while contesting it, clearly state that the payment is made under protest and that you reserve the right to seek a refund.
• Seek Expert Advice: Consult with a tax lawyer or accountant to understand your rights and obligations.

Hypothetical: A company receives a PAN for unpaid excise taxes. Believing the assessment is incorrect, they immediately file a written protest with the BIR, clearly stating their reasons for disagreement. Even if they make a partial payment to show good faith, their protest ensures that they haven’t implicitly accepted the assessment and can still pursue a refund.

Frequently Asked Questions (FAQs)

Q: What is a Preliminary Assessment Notice (PAN)?

A: A PAN is a notice issued by the BIR informing a taxpayer of a proposed assessment for deficiency taxes.

Q: What should I do if I receive a PAN?

A: You should carefully review the PAN and, if you disagree with the assessment, file a written response within 15 days, explaining your reasons and providing supporting documentation.

Q: What is the difference between a PAN and a Final Assessment Notice (FAN)?

A: A PAN is a preliminary notice, while a FAN is a final demand for payment. A FAN is issued after the taxpayer has had an opportunity to respond to the PAN.

Q: Can I pay a tax assessment and still contest it?

A: Yes, but it’s crucial to make the payment “under protest” and explicitly reserve your right to seek a refund. Otherwise, the payment may be interpreted as an acceptance of the assessment.

Q: What is the doctrine of estoppel?

A: Estoppel prevents you from denying something that you previously admitted was true, especially if another party relied on your admission to their detriment.

Q: How long do I have to file a claim for a tax refund?

A: Under Section 229 of the NIRC, you generally have two years from the date of payment to file a claim for a tax refund.

ASG Law specializes in tax law and litigation. Contact us or email hello@asglawpartners.com to schedule a consultation.