Withholding Taxes Deducted from Monetization of Employees' Leave Credits Cannot be Offset Against Future Tax Remiittances

January 11, 2002 BIR RULING NO. 003-02 RR 2-98 000-00 Pambansang Korporasyon Sa Elektrisidad (National Power Corporation) Visayas Regional Center Cebu City Attention: Ricarte M. Polloso Finance Manager Gentlemen : This refers to your letter dated November 28, 2000 requesting for authority to offset the withholding taxes deducted from the monetization of leave credits of your employees for the years 1999 and 2000 against future tax remittances. It is represented that under Executive Order No. 291 dated September 27, 2000, President Joseph Estrada confirmed that the monetization of leave credits shall continue to be exempted from income tax and that the off-setting of the withholding taxes deducted from the monetization of leave credits for the years 1999 and 2000 against future tax remittances is the fastest and most convenient way to relieve the BIR of the administrative costs involved in the computation and issuance of tax credits to the countless government employees who have availed of the benefit of leave monetization. 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 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 offset the withholding taxes deducted from the monetization of leave credits of your employees for the calendar years 1999 to 2000 against future tax remittances. In reply, please be informed that after consideration of the facts and the applicable law thereto, we cannot grant you the authority to offset the withholding taxes deducted from the monetization of leave credits of your employees for the calendar years 1999 to 2000 against future tax remittances. Granting arguendo that the collection of taxes under Section 2.78.1 (A) (7) of Revenue Regulations 2-98 was erroneous, still the authority sought cannot be granted. It is well-settled that a taxpayer may not offset taxes due from the claims that he may have against the government. This was the ruling of the Supreme Court in the case of PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS, respondents [G.R. No. 125704. August 28, 1998], viz .: "In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction. Prescinding from this premise, in Francia v. Intermediate Appellate Court ,we categorically held that taxes cannot be subject to set-off or compensation, thus: "We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government." cDCIHT The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit ,which reiterated that: "...a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off." Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. ,wherein we ruled that a pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the Commissioner, is no longer without any support in statutory law. It is important to note that the premise of our ruling in the aforementioned case was anchored on Section 51(d) of the National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was based was omitted. Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex." Accordingly, we regret to inform you that your aforesaid request is denied for lack of legal basis. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue