A roadmap to success: A guide to tax credit/refund

The goal of every taxpayer is to ensure timely payment of taxes in order to avoid penalties. Many taxpayers hire accountants and auditors to maintain accurate financial records and facilitate proper tax payments. Despite these efforts, errors or discrepancies may still occur, resulting in erroneously or illegally collected taxes, or overpayments on tax returns filed by taxpayers with the Bureau of Internal Revenue.

Following the passage of the Ease of Paying Taxes (EOPT) Law, the BIR issued Revenue Memorandum Order (RMO) 27-2024 to provide guidelines for processing and granting of claims for the issuance of tax credit certificates or cash refund (tax credit or refund) of taxes erroneously or illegally received or collected, or penalties imposed without authority, pursuant to Section 204(C) in relation to Section 229 of the Tax Code.

To fully grasp the definition of tax credit and tax refund, the Supreme Court, in a case, clarified that a tax credit differs from a tax refund: “(T)ax refund is defined as the money that a taxpayer overpaid and is thus returned by the taxing authority. Tax credit, on the other hand, is an amount subtracted directly from one’s total tax liability. It is any amount given to a taxpayer as a subsidy, a refund or an incentive to encourage investment.”

In accordance with the issued RMO, the BIR discussed that for a taxpayer to validly claim a tax credit or refund pursuant to Section 204(C), in relation to Section 229 of the Tax Code, the following essential requisites must be met:

1. The tax credit or refund claim pertains to taxes erroneously or illegally received or collected or penalties imposed without authority.

2. Filing of a claim for tax credit or refund shall be done within two years after payment of the tax or penalty.

3. The erroneously or illegally received or collected taxes must be supported with a copy of the duly filed tax return with the corresponding payment remitted to the BIR.

The BIR further explained that for a taxpayer to qualify for a refund of erroneously or illegally received or collected taxes, or penalties imposed without authority under Section 204(C) of the Tax Code, there must be a written claim for tax credit or refund filed with the BIR within two years from the date of the payment of tax or penalty. However, the same section also states that if the taxpayer’s filed return indicates an overpayment, the return itself serves as a written claim for tax credit or refund.

The BIR commissioner may issue a refund or credit any tax without a formal claim, provided that the overpayment is evident from the face of the tax return on which the payment was based.

Moreover, a taxpayer-claimant would want to know the location where to file claims for tax credit or refund of erroneously or illegally received or collected taxes, or penalties imposed without authority, pursuant to Section 204(C) in relation to Section 229 of the Tax Code. The BIR designates specific offices responsible for processing, reviewing and approving tax credit or refund claims:

1. If the Processing Office is Regional District Office (RDO), the Reviewing Office is the Assessment Division, and the Approving Official is the regional director.

2. If the Processing Office is Large Taxpayer Audit Division/ Large Taxpayer District Office, the Reviewing Office is the Head Revenue Executive Assistant, LTS, and the Approving Official is the assistant commissioner (ACIR), LTS.

The BIR aims to fully assist taxpayer-claimants by ensuring that the time frame for granting, in full or in part, claims for credit or refund of erroneously or illegally received or collected taxes, or penalties imposed without authority, is 180 days from the date of submission of complete documents. The BIR also advised that the payment for the approved tax refund claims is subject to availability of funds from the Department of Budget and Management. Consequently, the BIR clarified that tax credit or refund claims of erroneously or illegally received or collected taxes filed beyond the two-year prescriptive period will see an outright denial recommendation from the processing office.

Finally, the outcome of the tax credit or refund claim must be communicated by the BIR officials to the taxpayer-claimant. The right to be informed is granted to the taxpayer-claimant pursuant to Section 204(C), in relation to Section 229 of the Tax Code, which states that should the commissioner deny, in full or in part, the claim for refund, the Commissioner shall state the legal and/or factual basis for the denial. This provides the taxpayer-claimant grounds to pursue a judicial remedy if the result of the administrative claim is unfavorable.

In summary, the BIR is taking steps to ease the burden of the taxpayers by streamlining the process for claiming tax credits and refunds. Notwithstanding the new RMO, the BIR encourages taxpayers to maintain orderly financial records and pay the correct amount of taxes upfront instead of pursuing tax credit or refund later, considering the challenges of obtaining refunds.

Genelyn Baguilat is a supervisor from the Tax Group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Tax Supervisor Genelyn Baguilat or Tax Principal Kathleen Saga through [email protected], social media or visit www.home.kpmg/ph.