Proving Income Declaration for Creditable Withholding Tax Refunds in the Philippines

The Supreme Court recently clarified the rules on claiming refunds of excess and unutilized creditable withholding tax (CWT), providing important guidance for taxpayers who seek to recover overpaid taxes. In Tullett Prebon (Philippines), Inc. v. Commissioner of Internal Revenue (G.R. No. 257219, July 15, 2024), the Court ruled that the Court of Tax Appeals (CTA) committed grave error in denying a refund claim based solely on the absence of billing invoice numbers in the taxpayer's general ledger. The ruling underscores that no specific form of evidence is required to prove that income was declared, and that tax returns themselves may serve as sufficient proof of prior years' excess credits.

The Case: A Disputed Refund Claim

Tullett Prebon, a broker market participant, filed its annual income tax return for calendar year 2013 reporting a regular corporate income tax liability of PHP 7,676,632.00. After deducting its tax liability from its income tax credits, the company claimed an overpayment of PHP 42,428,486.00, including PHP 15,226,718.45 in excess and unutilized CWT for which it sought a tax credit certificate.

When the Bureau of Internal Revenue (BIR) failed to act on the administrative claim, Tullett Prebon filed a judicial claim before the CTA. The CTA Special Third Division partially granted the claim but reduced the refundable amount significantly. It found that only PHP 5,600,533.49 of the PHP 158,301,281.84 declared revenue relating to the claimed CWT was traceable to the total gross income reported. The CTA based this conclusion solely on the fact that the general ledger did not show the specific billing invoice numbers corresponding to the revenue amounts recorded.

The Issue: Proving the Third Requisite

To succeed in a claim for refund of excess CWT, a taxpayer must prove three things: (1) the claim was filed within the two-year period from payment of tax; (2) the fact of withholding is established by a copy of the withholding tax statement issued by the payor; and (3) the income received was declared as part of gross income in the taxpayer's return.

The dispute centered on the third requisite. The CTA rejected the report of the court-appointed independent certified public accountant (ICPA), which traced revenues declared in the general ledger against schedules, billing invoices, and official receipts. Instead, the CTA relied solely on the absence of invoice numbers in the general ledger.

The Ruling: No Prescribed Form of Evidence

The Supreme Court held that the CTA erred in disregarding the taxpayer's evidence on this sole ground. Examining the implementing rules of the withholding tax provisions of the National Internal Revenue Code, the Court found that unlike the second requisite—which requires a copy of the withholding tax statement—there is no prescribed evidence to prove that income has been declared as part of gross income.

The Court emphasized that the standard of proof in tax refund claims is merely preponderance of evidence. A taxpayer's claim should not rise or fall on the strength of a singular piece of evidence, especially when no specific proof is required by law or rules. While the Court did not adopt the position that the third requisite may be proved merely by showing that income subjected to CWT is less than total reported income, it noted that this circumstance should prompt the CTA to evaluate the evidence more carefully.

Prior Years' Excess Credits: Tax Returns as Proof

The Court also addressed the CTA's error in computing prior years' excess credits. The CTA had discounted excess credits for 2011 and 2012 because the taxpayer could not substantiate all its CWT with BIR Forms No. 2307 from the time of incorporation.

The Court ruled that under the implementing rules on carry-over of excess credits, a taxpayer may carry over excess credits so long as it submits a copy of the first page of the previous income tax return showing the excess credits. Since tax returns are filed under pain of perjury, they may be taken at face value. It is the Commissioner's burden to establish that these returns are incomplete, false, or irregularly issued. Requiring taxpayers to trace the entire history of prior years' excess credits would impose an excessive and absurd burden.

Practical Takeaways

• No single document is required to prove that income was declared for CWT refund claims. Taxpayers may present various evidence, including ledgers, schedules, invoices, and official receipts, taken cumulatively.
• Tax returns are strong evidence of prior years' excess credits. Since returns are filed under oath, they may be accepted at face value unless the BIR proves otherwise.
• The CTA is not bound by ICPA findings, but it must not disregard evidence without proper justification. The CTA may adopt or reject the ICPA's report subject to verification.
• Preponderance of evidence is the standard in tax refund claims. Taxpayers should present comprehensive documentation, but the absence of a particular detail—such as invoice numbers in a ledger—does not automatically defeat a claim.
• Keep complete records, including general ledgers, billing invoices, official receipts, and BIR Forms No. 2307, to support any future refund claim.

The case was remanded to the CTA to allow Tullett Prebon to present its expanded general ledger and to recompute the refundable amount in light of the Court's rulings.

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