Whether a Tax Credit of a Given Taxpayer Can be Transferred to Another Taxpayer and Under What Circumstances Can It be Effected.

November 6, 2003 DILG LEGAL OPINION NO. 142-03 Atty. Engdian I. Kong OIC, City Treasurer Davao City Dear Atty. Kong : This pertains to your letter requesting for opinion concerning local tax credit endorsed to this Office by the Commission on Audit. As per attached letters, San Miguel Foods, Inc. (SMFI) claimed for a tax credit before the Davao City Treasurer's Office. This tax credit originally pertained to Purefoods Corporation (PFC). This claim for tax credit by SMFI was brought about when SMFI acquired all the assets of PFC; the Office of the City Legal Office, however, is of the view that there was " no absolute buy-out that transpired between the SMFI and PFC as the transaction between them involved a "Spin-off" through which the PFC transferred a segment of its operations to SMFI but PFC's stockholders remained and are still entitled to their shares . . . ". Hence, the query on whether SMFI can validly claim for a tax credit. To answer this we need to resolve first on whether or not a tax credit of a given taxpayer can be transferred to another taxpayer and under what circumstances can it be effected. Before going any further, it is worthy to treat the nature of tax credit. Section 196 of the Local Government Code (RA 7160) provides in pertinent that no case or proceeding shall be maintained in any court for the recovery of any tax, fee, or charge erroneously or, illegally collected until a written claim for refund or credit has been filed with the local treasurer. Article 286 of the Rules and Regulations Implementing the Local Government Code requires taxpayers to support their claim for tax refund or tax credit by evidence of payment e.g ., official receipts, tax clearance, and such other proof evidencing overpayment. Hence, the right to a tax refund or credit is predicated upon the fact of erroneous or illegal collection of taxes. What is therefore to be refunded or credited here is the amount paid by the taxpayer which may be in excess (overpayment) of his tax liability, a tax which a person may not at all be liable to pay (e.g., he is exempt), or may have already paid the tax. Tax credit, then, may be treated for purposes of the succeeding discussion as akin to tax refund insofar as both are brought about by the fact of erroneous or illegal collection of taxes though they are distinct modes in which a taxpayer may claim for his entitlement thereto. In case of tax credit, the same shall, pursuant to the 2nd par of Article 286 of the same implementing rules, be applied to future tax obligations of the same taxpayer for the same business. It shall not be refunded in cash. In case of tax refund, the same can, pursuant to the 3rd par of the same Article, be only refunded in cash in the event the taxpayer terminates his business operation. DcTAIH A claim for tax refund is in the nature of solutio indebiti ( Ramie Textiles, Inc. vs. Mathay No. L-32364 dated April 30, 1979). Taxes erroneously given is an example of solutio indebiti ( Oquinena and Co., v. Muertequi , 32 Phils. 261). Solutio indebiti is a quasi-contract that arises when a person is obliged to return whatever received by him through no error or mistake or received by him although there was no right to demand it (Paras, Edgardo, New Civil Code of the Philippines). It is a claim created by law, based upon equity and independent of any agreement between the person against whom the claim is made and the claimant (Philippine Legal Encyclopedia, by Sibal, Agaton). This is referred to as implied-in-law contracts (Black's Law Dictionary). Hence, in this case, a quasi-contract existed between Davao City Government and Purefoods Corporation. We now consider whether SMFI can claim tax credit under such implied contract. Worthy to consider at this point is Article 1311 of the New Civil Code of the Philippines which provides that " Contracts take effect only between the parties, their assigns, and heirs except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law . . . ". The word " assign ", as defined in the Phil. Legal Encyclopedia, is a word used in older formal documents for assignee, especially in the words of conveyance, where the combination " heirs, successors and assigns " is common. It is to transfer to another a chose in action, i.e ., a claim of any sort in contract or quasi-contract. We cannot ascertain whether PFC's claim for tax credit was assigned to SMFI. If not, SMFI cannot validly claim for tax credit. This fact of assignment, however, may not at all be relevant in determining whether SMFI is entitled to tax credit if SMFI, by way of investing with PFC, merely acquired the latter's assets without PFC being dissolved. In which case, PFC continues its business operation but its capital stock may already be owned and controlled by SMFI. A corporation may sell all its assets without necessarily dissolving or terminating its existence. If such sale is made to another corporation and there is no intent to combine, the selling corporation may continue in a state of suspended animation (Ballantine, p. 666), subject to the effect of non-use of corporate powers and continued inoperation of a corporation provided in Section 22 of the Corporation Code. (SEC Opinion, July 8, 1987.). In such a case, SMFI cannot claim for, itself the tax credit because the same really, pertains to PFC, SMFI being merely an investor. This also holds true in a case where SMFI merely took over the business operations of PFC by virtue of a management contract. If what was acquired by the SMFI were only the physical assets including the business operation itself of the PFC such that PFC does not anymore continue its business operation, but SMFI itself continues the same, SMFI cannot claim the tax credit that originally pertained to PFC because Article 286 of the Rules and Regulations Implementing the Local Government Code explicitly provides that " any unapplied balance of the tax credit shall be refunded in cash in the event that the (taxpayer) terminates operation of the business involved within the locality ." (emphasis ours) The same is true with " spin-off ". SMFI cannot for itself claim the tax credit. Spin-Off is a form of corporate divestment that results in a subsidiary or division of a corporation becoming an independent company. Spin-off occurs where part of assets of a corporation is transferred to a new corporation and stock of transferee is distributed to shareholders of transferor without surrender by them of stock in transferor ( C.I.R. v. Baan, C.A . Cal., 382 F 2d 485, 491 cited in Black's Law Dictionary). This is a type of reorganization wherein, for example, A corporation transfers some assets to B corporation in exchange for enough B stock to represent control. A corporation then distributes the B stocks to its shareholders. (Black's Law Dictionary) HCDAac Hope we have enlightened you on the matter. Very truly yours, (SGD.) AGRIPINO G. MORGA Acting Secretary Department of Interior and Local Government