Payments made during tax assessments cannot be refunded

IN Commissioner of Internal Revenue v Toledo Power Corp. (GR 259309, Feb. 13, 2023) (the Toledo Case), the Supreme Court overturned the findings of the Court of Tax Appeals (CTA) both in division and en banc, and held that payments voluntarily made by a taxpayer in the course of a tax assessment cannot later be refunded in favor of the taxpayer.

In the Toledo Case, the taxpayer was initially assessed for various internal revenue taxes, including alleged deficiency income tax and value-added tax (VAT) for the year 2011. The Bureau of Internal Revenue (BIR) issued a preliminary assessment notice to the taxpayer. After receiving the preliminary assessment notice, the taxpayer voluntarily paid the VAT portion of the assessment, along with the accrued interests. Subsequently, no new notices or correspondences were issued by the BIR to the taxpayer. There was also no mention on whether the tax investigation and other portions of the assessment were terminated.

After settling the alleged deficiency VAT, the taxpayer decided to file an administrative claim for refund of the VAT paid. However, the BIR rejected the taxpayer’s claim, prompting the taxpayer to escalate the matter by filing a judicial claim for refund with the CTA.

In its judicial claim for refund, the taxpayer argued that it paid the alleged deficiency VAT by mistake. The taxpayer likewise invoked the doctrine of solutio indebiti. For its part, the BIR argued that the doctrine of solutio indebiti does not apply considering that the taxpayer failed to prove that its sale of power was actually VAT zero-rated.

The CTA in division found that the taxpayer was able to comply with the requirements for the refund of erroneously paid or illegally collected tax. The CTA in division also noted that the taxpayer’s sale of power, which was the subject of the alleged VAT deficiency assessment, was in fact zero-rated in compliance with BIR Revenue Memorandum Order 9-2000. On appeal, the CTA en banc affirmed the decision of the CTA in division.

The BIR then filed a petition for review under Rule 45 of the Rules of Court. In its petition, the BIR raised that there was no legal or factual basis to grant the claim for refund. The BIR also raised that the taxpayer’s voluntary payment of the alleged deficiency VAT implied that it had no objections to the assessment.

In deciding the case in favor of the BIR, the Supreme Court discussed and based its decision on the following civil and common law principles and concepts: (1) contract and meeting of minds, (2) estoppel and (3) abuse of rights.

First, the Supreme Court considered the taxpayer’s voluntary payment of alleged deficiency VAT as an “informal settlement of tax liability.” The Supreme Court noted that when the taxpayer paid the alleged deficiency VAT, there were no further communications or notices exchanged between the taxpayer and the BIR. The BIR ceased its pursuit of the assessment and refrained from issuing any formal letter demand or final assessment notice to the taxpayer. According to the Supreme Court, this lack of subsequent actions indicated a “meeting of the minds” between the BIR and the taxpayer. This implied an agreement wherein the BIR “agreed” to terminate its tax investigation against the taxpayer and relinquish its right to pursue the entire tax assessment due to the taxpayer’s settlement of the alleged deficiency VAT.

Second, based on the doctrine of estoppel, by paying the alleged VAT deficiency, the taxpayer impliedly acknowledged the BIR’s findings as provided in the preliminary assessment notice. The Supreme Court emphasized that if the taxpayer genuinely believed its sale of power were in fact zero-rated VAT, it would have contested the assessment. Additionally, the Supreme Court clarified that the taxpayer had ample opportunity to challenge the BIR’s conclusions but opted not to do so. Consequently, the taxpayer was precluded from seeking a refund of the amount paid under the preliminary assessment notice.

Third, on abuse of rights, the Supreme Court posited that the taxpayer’s silence as to its real reason for paying the alleged deficiency VAT and its omission to put on record that its payment thereof was in reality under protest are misrepresentations on the part of the taxpayer. According to the Supreme Court, had the BIR known about the taxpayer’s reservation to eventually seek a refund, the BIR would have been less inclined to forego the entire tax assessment against the taxpayer.

Nica Marsha V. Gasapo is a senior associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel. com or visit MTF website at www. mtfcounsel.com.