BIR Ruling No. 047-11

February 16, 2011 BIR RULING NO. 047-11 Sec. 76, TC; 000-00 Nonwoven Fabric Philippines, Inc. Nonwoven Building 8404 Dr. A. Santos Ave. Paraaque City Attention: Ms. Victoria H. Asuncion Office Manager Gentlemen : This refers to your letter dated May 6, 2009 requesting for a ruling on whether a taxpayer's unutilized overpayment can be a valid component of the company's tax refund in next taxable year. As represented, Nonwoven Fabric Philippines, Inc.'s Income Tax Return for taxable year 2005 filed under E-filing system shows an Overpayment (Excess Creditable Taxes per BIR Form 2307) in the amount of P739,459.00. The company opted to carry-over as tax credit against its quarterly income tax liabilities for the next succeeding years the above-mentioned excess income tax credits. The company's Income Tax Return for taxable year 2006 filed under E-filing system shows an Overpayment (Excess Creditable Taxes per BIR Form 2307) in the amount of P1,220,178.00. This includes the carry over from year 2005 in the amount of P739,459.93 because its operations resulted to a gross loss, thus, there was no application for any tax liability. It opted and marked the box "to be refunded" the total amount of P1,220,178.00. In reply, please be informed that Section 76 of the Tax Code provides as follows: "SEC. 76. Final Adjustment Return. Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or 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 net income of that year the corporation shall either: IHEAcC (A) Pay the balance of 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 quarters 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." Applying the provision above, a taxpayer entitled to a tax credit or refund of the excess estimated quarterly income taxes paid has two options: (1) to carry over the excess credit or (2) to apply for the issuance of a tax credit certificate or to claim a cash refund. If the option to carry over the excess credit is exercised, the same shall be irrevocable for that taxable period. Your case is similar to the case of Systra Philippines, Inc. vs. Commissioner of Internal Revenue, G.R. No. 176290 promulgated on September 21, 2007. In that case, Systra Philippines, Inc. had an unapplied creditable withholding tax in the amount of P4,627,976 for the year 2000. It carried over the said excess tax to the following taxable year, 2001. In the next succeeding year, it had a tax due in the amount of P397,317 and a creditable withholding tax in the amount of P1,111,587. As such, the amount due for the year 2001 (P397,317) was credited to its P4,627,976 creditable withholding tax for that year. Thus, its 2000 creditable withholding tax in the amount of P4,627,976 remained unutilized. Thereafter, it filed a claim for refund with respect to the unapplied creditable withholding tax of P4,627,976 for the year 2000. The Court denied the claim. In deciding the issue on whether the exercise of the option to carry-over excess income tax credits under Section 76 of the Tax Code bars a taxpayer from claiming the excess tax credits for refund even if the amount remains unutilized in the succeeding taxable year, the Supreme Court held: "In exercising its option, the corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention either to carry over the excess credit or to claim a refund. To facilitate tax collection, these remedies are in the alternative and the choice of one precludes the other. This is known as the irrevocability rule and is embodied in the last sentence of Section 76 of the T ax Cod e. The phrase "such option shall be considered irrevocable for that taxable period" means that the option to carry over the excess tax credits of a particular taxable year can no longer be revoked. The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid: (1) as automatic credit against taxes for the taxable quarters of the succeeding years for which no tax credit certificate has been issued and (2) as a tax credit either for which a tax credit certificate will be issued or which will be claimed for cash refund. In this case, it was in the year 2000 that petitioner derived excess tax credits and exercised the irrevocable option to carry them over as tax credits for the next taxable year. Under Section 76 of the T ax Co de, a claim for refund of such excess credits can no longer be made. The excess credits will only be applied 'against income tax due for the taxable quarters of the succeeding taxable years.'" IaHDcT The Supreme Court determined the legislative intent, to make the option irrevocable, by comparing Section 76 of the Tax Code to Section 69 of the (old) 1977 Tax Code, as follows: "SEC. 69. Final Adjustment Return. Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total net income for the preceding calendar or 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 net income of that year the corporation shall either: (A) Pay the excess tax still due; or (B) Be refunded 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 refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year.' Under Section 69 of the 1 977 Tax C ode, there was no irrevocability rule. Instead of claiming a refund, the excess tax credits could be 'credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year,' that is, the immediately following year only. In contrast, Section 76 of the present T ax Co de formulates an irrevocability rule which stresses and fortifies the nature of the remedies or options as alternative, not cumulative. It also provides that the excess tax credits 'may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years' until fully utilized." Finally, the Court citing the case of Philam Asset Management, Inc. vs. Commissioner of Internal Revenue , 477 SCRA 761, decided on December 14, 2005, ruled that "Section 76 [is] clear and unequivocal. Once the carry-over option is taken, actually or constructively, it becomes irrevocable. Petitioner has chosen that option for its 1998 creditable withholding taxes. Thus, it is no longer entitled to a tax refund of P459,756.07, which corresponds to its 1998 excess tax credit. Nonetheless, the amount will not be forfeited in the government's favor, because it may be claimed by petitioner as tax credits in the succeeding taxable years." In view of the foregoing, Nonwoven Fabric Philippines, Inc. could no longer claim a refund since it elected to carry over its excess credits for the year 2005 in the amount of PhP739,459.93 as tax credits for the following year. At the risk of being repetitive, once the carry over option was made, actually or constructively, it became forever irrevocable regardless of whether the excess tax credits were actually or fully utilized. Nevertheless, as held in Philam Asset Management, Inc., the amount will not be forfeited in favor of the government but will remain in the taxpayer's account. Nonwoven Fabric Philippines, Inc. may claim and carry it over in the succeeding taxable years, creditable against future income tax liabilities until fully utilized. Please be guided accordingly. CSTDIE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue