Tax Assessment vs Tax Refund: Know Your Rights Under the Local Government Code

The Local Government Code gives taxpayers two distinct remedies when dealing with local taxes: one for contesting an assessment and another for claiming a refund. A recent Supreme Court decision clarifies when each applies, and highlights a critical due process requirement that local governments must observe when issuing tax assessments.

In Jose v. Tigerway Facilities and Resources, Inc. (G.R. No. 247331, February 26, 2024), the Court ruled that a tax assessment that fails to state its factual and legal basis is void. When that happens, the taxpayer may pursue a refund under Section 196 of the Local Government Code, even without filing a protest within the 60-day period under Section 195.

The Two Remedies Under the Local Government Code

Section 195 of the Local Government Code governs the protest of an assessment. When a local treasurer finds that correct taxes have not been paid, the treasurer must issue a notice of assessment stating the nature of the tax, the amount of deficiency, and the surcharges, interests, and penalties. The taxpayer has 60 days from receipt of that notice to file a written protest. If no protest is filed, the assessment becomes final and executory.

Section 196, on the other hand, governs claims for refund or credit of taxes erroneously or illegally collected. A taxpayer must first file a written claim with the local treasurer, then bring a court action within two years from the date of payment.

The key difference: Section 195 presupposes a valid assessment exists. Section 196 applies when there is no valid assessment at all.

What Happened in This Case

Tigerway Facilities and Resources, Inc. applied for renewal of its mayor's permit in Caloocan City in 2005. The city's Business Permit and Licensing Office issued an Order of Payment for PHP 219,429.80, which Tigerway paid. A mayor's permit was then issued.

Months later, the city issued a Final Demand for deficiency business taxes amounting to PHP 1,220,720.00, allegedly based on ocular inspections that revealed misrepresentations about Tigerway's business. Several notices followed, and the amount was eventually reduced to PHP 500,000.00, which Tigerway paid on December 29, 2005.

On December 27, 2007, Tigerway filed a written claim for refund with the City Treasurer, asserting the assessments lacked factual and legal basis. The next day, it filed a complaint for refund before the Regional Trial Court under Section 196.

The City Treasurer argued that Tigerway lost its right to contest the assessment because it failed to protest within 60 days under Section 195. The RTC, the Court of Tax Appeals Third Division, and the CTA En Banc all ruled in favor of Tigerway. The Supreme Court affirmed.

A Void Assessment Triggers Section 196

The Supreme Court explained that the critical question is whether a valid assessment exists. If an assessment was issued but is void for violating due process, then Section 195 does not apply. The taxpayer may instead invoke Section 196.

Under Section 195, the notice of assessment must inform the taxpayer of the factual and legal basis of the assessment. This is not merely a technical requirement. The Court emphasized that taxpayers must be informed of the facts and law on which an assessment is based so they can make an intelligent protest. An assessment that fails this requirement is void.

In this case, the notices issued by the City Treasurer merely alleged that ocular inspections were conducted. They did not explain how the amounts were computed, what specific misrepresentations were found, or what legal provisions or ordinances were violated. The Court found these notices void for failing to comply with due process.

Because no valid assessment existed, the 60-day protest period under Section 195 never began to run. Tigerway properly invoked Section 196 instead.

The Two-Year Prescriptive Period

The Court also clarified the procedural requirements under Section 196. A taxpayer must:

1. File a written claim for refund or credit with the local treasurer; and
2. Initiate a court action within two years from the date of payment.

Both requirements must be satisfied within the two-year period. In this case, Tigerway paid on December 29, 2005, filed its written claim on December 27, 2007, and filed its court complaint the next day. Both were within the two-year period, so the claim was timely.

No Interest on the Refund

While the Court affirmed the refund of PHP 485,195.01, it removed the award of legal interest. Interest on tax refunds is only allowed when authorized by law or when the tax collection was attended by arbitrariness. Neither condition existed here. The city acted honestly and upon due consideration, even if its assessment was ultimately void.

Practical Takeaways

• A tax assessment must state its factual and legal basis. A notice that merely alleges an ocular inspection without explaining the computation or citing the applicable ordinance is void for violating due process.

• A void assessment means Section 195 does not apply. If the assessment is void, the 60-day protest period never starts. The taxpayer may proceed under Section 196 for a refund.

• The two-year period under Section 196 is strict. Both the written claim to the local treasurer and the court action must be filed within two years from payment.

• A taxpayer may choose between remedies. When an assessment is valid, the taxpayer must protest within 60 days. When no valid assessment exists, the refund remedy under Section 196 is available.

• Interest on tax refunds is not automatic. It is only awarded when authorized by law or when collection was arbitrary.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.