(BDB Laws Tax Law For Business appears in the opinion section of BusinessMirror every

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Tax Refunds
Are claims for refund always construed strictly against the taxpayer? Not necessarily, says the Supreme Court (SC) in the recently decided case of Commissioner of Internal Revenue v. Fortune Tobacco Corp. (G.R. 167274-75, July 21, 2008). It all depends on the basis for the claim for tax refund. Prior to the Fortune Tobacco case, the SC had already ruled in the case of BPI Leasing Corporation v. Court of Appeals (G.R. 127624, 416 SCRA 4, November 18, 2003) that tax refunds are in the nature of tax exemptions. As such, tax refunds are regarded as derogation of sovereign authority and are to be strictly construed against the person or entity claiming the exemption. Following the same argument used in the BPI Leasing case, the Bureau of Internal Revenue (BIR) argued in the Fortune Tobacco case that a tax refund partakes of the nature of a tax exemption and should be construed against the claimant. In the decision penned by Associate Justice Dante Tinga, however, the SC qualified that not all claims for tax refunds are in the nature of tax exemptions. A tax refund may only be considered as a tax exemption when it is based either on a tax-exemption statute or a tax-refund statute. In such cases, the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption. A tax exemption, according to the SC, is a legislative grace, and he who claims an exemption from the burden of taxation must justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken. The rule is tax exemption must be strictly construed such that the exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention.

Tax refunds or tax credits, on the other hand, are another matter. According to the decision, tax refunds or tax credits are not founded principally on legislative grace, but on the legal principle of quasi-contracts against a persons unjust enrichment at the expense of another. Under the Civil Code, the erroneous payment of tax as a basis for a claim of refund may be considered as a case of solutio indebiti, which may cover both mistakes (and errors) in fact and in law. The government, according to the SC, is not exempt from the application of solutio indebiti, and has the duty to refund without any unreasonable delay what it has erroneously collected. The fact that a claim for tax refund is based on the quasi-contract principle against unjust enrichment, a claim for tax refund may be made under the following instances: (a) erroneously or illegally assessed or collected internal-revenue taxes; (b) penalties imposed without authority; and (c) any sum alleged to have been excessive or in any manner wrongfully collected. Given the nature of claims for tax refunds as a case of solutio indebiti, the SC held that only a preponderance of evidence is required for the claimant to prove its claim for tax refund, as in any other ordinary civil case. According to the SC, as the State expects its taxpayers to observe fairness and honesty in paying their taxes, it must also hold itself against the same standard in refunding excess or erroneous payments of such taxes and should not unjustly enrich itself at the expense of taxpayers. Accordingly, in cases of a claim for tax refund, the strict interpretation of tax exemptions against taxpayers should not be applied, but rather a doctrine of strict interpretation of laws imposing taxes and other burdens, which must be applied against the government. The rule in the interpretation of tax laws is that a statute cannot be construed as imposing a tax unless it does so clearly, expressly and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter of the law in construing statutes applies with peculiar strictness to tax laws, and the provisions of a taxing act are not to be extended by implication. In answering the question of who is subject to tax statutes, it is basic that, in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. Applying these principles to the case of Fortune Tobacco Corp., the SC held that the companys claim for tax refund is not based on either a tax-exemption statute or a taxrefund statute, but is premised on either an erroneous payment of tax or the governments exaction in the absence of a law. The court held that the BIR was guilty of unauthorized administrative legislation when it imposed taxes in its revenue regulations which were not in accordance with law. The Fortune Tobacco case has changed how we view a claim for tax refund, by removing it from its previous classification as akin to a tax exemption, by making the strict interpretation of tax refunds as exception and by relaxing the weight of evidence necessary to prove the claim for refund.