BIR Ruling [DA-099-04]

March 1, 2004 BIR RULING [DA-099-04] 2-98; 016-66; 002-02; 018-02 Department of Education, Culture and Sports Region III Maimpis, San Fernando, Pampanga Attention: Atty. Ricardo T. Sibug Director III Gentlemen : This refers to your letter dated November 28, 2000 requesting for authority to offset the taxes claimed for refund by your officials and employees covering the calendar years 1998 and 1999 in the aggregate amount of P369,036.55 against the current year remittances of withholding taxes. It is represented that Section 2.78.1(A)(7) of Revenue Regulations No. 2-98 had been abrogated by Executive Order 291 (MONETIZATION OF LEAVE CREDITS OF GOVERNMENT OFFICIALS AND EMPLOYEES) dated September 27, 2000; that in view of the implementation of the said Executive Order, you have to refund to your officials and employees the amount of P369,036.55. P63,971.08 for calendar year 1998 and P305.065.47 for calendar year 1999; and that taxes withheld from the monetized leave credits of your officials and employees for calendar year 2000 were already deducted from the total summary of taxes withheld submitted to the DBM for the month of November 2000. It can be gleaned from your letter that it is your position that the abrogation of Section 2.78.1(A)(7) of Revenue Regulations 2-98 by Section 2 of Executive Order 291 renders erroneous the withholding of the income tax on your official's and employees' monetized leave credits entitling said employees to the refund thereof under Section 229 of the NIRC of 1997. Thus, you are asking for authority to set-off the taxes claimed for refund by your officials and employees covering the calendar years 1998 and 1999 in the aggregate amount of P369,036.55 from the current year remittances of withholding taxes. In reply, please be informed that after consideration of the facts and the applicable law thereto, we cannot grant you the authority to off-set from the current year withholding taxes the income taxes withheld from your officials' and employees' monetized leave credits for the calendar years 1998 and 1999. EHTCAa In BIR Ruling No. 016-66 dated May 11, 1966, this Office ruled that internal revenue taxes cannot be subject to a set-off or compensation, to wit: "In reply thereto, I have the honor to inform you that internal revenue taxes, such as estate and inheritance taxes, cannot be subject to a set-off or compensation. The reason is that "taxes are not in the nature of contracts between party and party, but grow out of a duty to and are the positive acts of the government to the making and enforcing of which the personal consent of individual taxpayers is not required. A practical and at the same time an amply sufficient reason for the rule is to be found in the fact that the amount of the annual tax levy and the various purposes for which taxes are imposed are fixed and defined in advance of the levy, and the money raised must be expended for the purposes so defined. If the taxpayer can properly refuse to pay his tax when called upon by the collector because he has a claim against the governmental body which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile, the financial affairs of the government will be thrown into great confusion." (47 Am. Jur. p. 766767). Moreover, the Court, in the case of Republic v. Mambulao Lumber Co . (G.R. No. L-17725, Feb. 28, 1962) held that "a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set off under the statutes of set-off which are construed uniformly in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they proper subjects of recoupment since they do not arise out of the contract or transaction sued on." We reiterate the position of this Office in BIR Ruling No. 002-02 dated January 12, 2002, that Executive Order No. 291 dated September 27, 2000 shall not be given retroactive application. The fact that a regulation under which a tax is collected is subsequently abrogated does not, ipso facto , render refundable the tax collected pursuant thereto. This is supported by the jurisprudence on the matter. In the case of Commissioner of Internal Revenue vs. Republic, G.R. No. 35668 August 30, 1983, the Supreme Court citing the case of Cebu Portland Cement Co. vs. Collector of Internal Revenue, G.R. No. L-20563, October 29, 1968, ruled: "Indeed, like other statutes, tax laws operate prospectively, whether they enact, amend or repeal, unless, as aforesaid, the purpose of the Legislature to give retrospective effect is expressly declared or may clearly be implied from the language used. . . . It was enough for the Court to say in effect that even assuming Republic Act 1299 had re-classified cement as a mineral product, the reclassification could not be given retrospective application (so as to justify the refund of sales taxes paid before Republic Act 1299 was adopted) because laws operate prospectively only, unless the legislative intent to the contrary is manifest, which was not so in the case of Republic Act 1266. [The situation would have been different if the Court instead had ruled in favor of refund, in which case it would have been absolutely necessary (1) to make all unconditional ruling that Republic Act 1299 re-classified cement as a mineral product (not subject to sales tax), and (2) to declare the law retroactive, as a basis for granting refund of sales taxes paid before Republic Act 1299.]" Section 2 of Executive Order 291 does not provide that it be given retroactive application, to wit: "SEC. 2. ABROGATION OF BIR RULING ON MONETIZED LEAVE CREDITS. Hence, pursuant to Section 17, Article VII of the Constitution, I hereby abrogate all previous rulings, including Section 2.78.1(A)(7), p. 27 of Revenue Regulations No. 2-98 dated April 17, 1998 issued by the Bureau of Internal Revenue which subjected the monetization of leave credits to income tax, which I have noticed to be inconsistent with the provision of Republic Act (R.A.) No. 8424, the "Tax Reform Act of 1997", as well as the intention on the grant of such benefits." Clearly, the fact that Section 2.78.1(A)(7) of Revenue Regulations 2-98 was abrogated by Section 2 of Executive Order No. 291 does not automatically render refundable the taxes collected therein as it is not expressly provided for under the latter law that it be given retroactive application. The effect of said Executive Order 291, therefore, is that upon its effectivity, the monetization of leave credits even in excess of ten (10) days is not anymore subject to income tax. It is instructive to note that Section 229 of the NIRC of 1997 allows the refund of erroneously or illegally collected taxes. The withholding of taxes from your employees monetization of leave credits for the year 1998 and 1999 was not erroneous. Section 2.78.1(A)(7) of Revenue Regulations 2-98 specifically provided that the monetized leave credits in excess of ten days is subject to income tax, to wit: "Sec. 2.74. Withholding of Income Tax on Compensation Income "(A) Compensation Income Defined . . . . "(7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or sick leave, which are paid notwithstanding his absence from work, constitutes compensation. However, the monetized value of the unutilized vacation leave credits of ten (10) days or less which were paid to the employee during the year are not subject to income tax and to the withholding tax.'' cDTACE There is no dispute that at the time said taxes were collected Section 2.78.1(A)(7) of Revenue Regulations 2-98 was a valid regulation implementing all existing law. It was promulgated by the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, by virtue of the power vested in him under Section 244 of the NIRC of 1997. It is a well-settled rule in administrative law that administrative regulations and policies enacted by administrative bodies to interpret the law which they are entrusted to enforce have the force and effect of law ( Sierra Madre Trust vs. Secretary of Agriculture and Natural Resources , 121 SCRA 384 [1983]; Asturias Sugar Central Inc. vs. Commissioner of Customs , 29 SCRA 617 [1969]; Antique Sawmill Inc. vs. Zayco, et al ., 17 SCRA 316 [1966] so that even if it is subsequently repealed, the taxes collected as mandated by law are not considered erroneously collected so as to entitle the taxpayers for the refund thereof. The fact that Section 2.78.1(A)(7) of Revenue Regulations 2-98 was subsequently abrogated by his Excellency President Joseph E. Estrada under Executive Order No. 291 does not render erroneous the withholding of income tax on employees' monetized leave credits in excess of ten days as, at the time it was collected, a valid and existing law mandated its collection. ( BIR Ruling No. 018-02 dated May 3, 2002 ) Accordingly, we regret to inform you that your request for authority to off-set from the current year withholding taxes the income taxes withheld from your officials' and employees' monetized leave credits for the calendar years 1998 and 1999 is denied for lack of legal basis. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group