Touch-move rule: Your choice is irrevocable

Under the touch-move rule in chess, if a player deliberately touches a piece on the board during his turn, he must move his piece or capture the opponent’s piece, whichever the case may be, provided that it is allowed within the rules of the game. Once the player has made his choice, it can no longer be changed.

There is a similar touch-move rule in tax, known as the irrevocability rule. Section 76 of the Philippine Tax Code provides that a corporation, which has an income tax overpayment in its annual income tax return (ITR), may opt to carry-over or apply for a refund or issuance of a tax credit certificate (TCC) of its excess tax credits. However, once it selects the option to carry-over and apply the excess tax credits to its income tax due for the taxable quarters of the succeeding taxable years, it shall be considered irrevocable and no application for cash refund or issuance of a TCC shall be allowed.

This provision, however, has brought confusion on whether or not the irrevocability rule applies exclusively to the carry-over option. After all, the law only explicitly mentioned the irrevocability of the option to carry-over. It does not mention that the option to refund or apply for issuance of a TCC is also irrevocable.

This issue was discussed in a March 2018 case involving a claim for refund of excess creditable withholding tax (CWT) filed by a company engaged in the supply of manpower. In this case, the taxpayer reported a tax overpayment amounting to P5,159,341 in its annual ITR for taxable year ended Dec. 31, 2006 and elected the option “To be issued a tax credit certificate” for such overpayment.

Subsequently, in view of the change in its accounting period from calendar year to fiscal year, the taxpayer filed an annual ITR for the short period fiscal year ended March 31, 2007 reflecting the income tax overpayment of P5,159,341 as “prior year’s excess credit.”

It, however, later amended the short period return to remove P2,972,834 from the “prior year’s excess credit” line item and filed a claim for refund and/or issuance of a TCC for the said amount.

In its decision, the Supreme Court denied the request for refund, stating that it assumes the interpretation that the irrevocability is limited only to the option of carry-over such that a taxpayer is still free to change its choice after electing a refund of its excess tax credit. It further explained that if the intention of the lawmakers was to make the option of cash refund or issuance of TCC also irrevocable, then they would have clearly provided so.

While it is evident in this March 2018 case that the Supreme Court is of the opinion that the intent of the lawmakers for introducing the irrevocability rule is to exclusively apply the said rule to the carry-over option, a different opinion was issued in an August 2018 case involving a claim for refund filed by a corporation engaged in the business of power conversion and energy management solutions. In this case, the taxpayer reported excess CWT amounting to P1,500,653 in its 2005 annual ITR and indicated therein that the same was “To be refunded.” Subsequently, it reported the same amount as prior year’s excess credits in its 2006 quarterly ITRs. Thereafter, it filed an administrative claim for refund of its excess CWT for the year 2005 in the amount of P1,500,653 and filed its 2006 annual ITR showing prior year’s excess credits of P0.00.

In ruling, on the case, the Supreme Court granted the refund stating that the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option and once it had already done so, it could no longer make another one. Thus, when the taxpayer marked the box “To be refunded” in its 2005 annual ITR, it exercised its option and from then onwards became precluded from carrying-over the excess CWT. The fact that the prior year’s excess credits were reported in its 2006 quarterly ITRs did not reverse the option to be refunded exercised in its 2005 annual ITR.

Although the taxpayer carried over its excess CWT in its subsequent quarterly ITR filings, it showed its intent to refund the excess CWT by reporting a nil prior year’s excess credits in its 2006 annual ITR which is considered as the final adjustment return. This indicates that the taxpayer stood by its initial option to refund the 2005 excess tax credits and was, perhaps, also appreciated by the Supreme Court. The decision further stated that the evident intent of legislature in adding the irrevocability rule is to keep the taxpayer from flip-flopping on its options and avoid confusion and complication with regard to the taxpayer’s excess tax credits.

This later decision of the Supreme Court seems to take the position that the irrevocability rule is not only exclusive to the carry-over option but is also applicable to the option, for tax refund.

While the August 2018 decision gives similarly situated taxpayers hope that errors which they have made in subsequent filings would not supersede their initial choice to claim a refund, there is no assurance that the same principles will be applied by the Supreme Court prospectively given its March 2018 decision.

Currently, there are still no decisions clarifying the two conflicting decisions. As such, it is prudent for taxpayers to treat both options as irrevocable and to ensure that returns are properly accomplished.

Mariah-Rose Rafaela S. Ong is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected].