Availing of a refund from illegally collected local business tax
By: Raida Argeli Grefiel on September 5,2024
The 1987 Constitution empowers local government units (LGUs) to create their own revenues, as well as to levy taxes, fees, and charges, subject to the guidelines and limitations set forth in the Local Government Code of 1991 (LGC). The LGC defines the extent and limitations of the taxing powers of LGUs, consistent with the State’s policy of upholding genuine local autonomy.
While LGUs have the extensive power to impose taxes, the LGC allows a taxpayer to avail of the remedy of protest in the case of an erroneous assessment by the LGU (Section 195) or the remedy of refund in the event of an erroneous payment of tax by the taxpayer (Section 196). Pursuant to Section 195, the taxpayer, when erroneously assessed, can file a written protest against the notice of assessment before the local treasurer within sixty (60) days from the receipt thereof, and later file an appeal in court within thirty (30) days from receipt of the decision, or within the lapse of sixty (60) days in case of inaction. On the other hand, when there is an erroneous or illegal collection of taxes, the taxpayer can recover such payment in accordance with Section 196 by filing a written claim for refund with the local treasurer and a judicial claim for refund before the proper court, both within two (2) years from the date of payment of the tax.
In the recent case of Jose v. Tigerway Facilities and Resources Inc. (G.R. No. 247331, February 26, 2024) (the “Jose case”), the Supreme Court discussed the correct application of Sections 195 and 196 of the LGC vis-à-vis the LGU’s power to levy or impose local business taxes (LBT).
In the Jose case, the taxpayer, while applying for the renewal of its mayor’s permit, was issued an Order of Payment by the Business Permits and Licensing Office (BPLO) of Caloocan City, requiring it [taxpayer] to pay an alleged deficiency LBT. Due to the taxpayer’s prompt payment of the alleged LBT, the LGU issued the mayor’s permit. Months later, or on December 29, 2005, the BPLO issued another Order of Payment to the taxpayer demanding the payment of deficiency LBT, fees and charges on the ground of the taxpayer’s misrepresentation of its nature of business, number of employees, and size of business area. On the same day, the taxpayer paid the alleged deficiency taxes.
On December 27, 2007, or almost two (2) years later, the taxpayer filed a written claim for refund or credit with the City Treasurer, asserting that the assessments issued were void for not stating the factual and legal basis for the tax assessed. The next day, the taxpayer filed a Complaint for Refund or Credit of Local Tax and Fees before the Regional Trial Court pursuant to Section 196 of the LGC.
Contrary to the position of the taxpayer, the City Treasurer claimed that the LGC does not go as far as expressly requiring the assessment to state the factual and legal basis for the taxes assessed, as it [LGC] merely requires that the assessment provide the details on the nature of taxes charged and the amount of deficiency. In saying so, the City Treasurer maintained that the Orders of Payment constituted valid assessments; thus the taxpayer should have availed of the remedy of protesting the assessments within sixty (60) days from receipt of the assessment in accordance with Section 195, instead of the remedy of a refund under Section 196.
In Jose, the Supreme Court echoed its previous ruling that availing of the remedy of protesting the assessment under Section 195 presupposes the existence of a validly issued assessment. Therefore, without a valid assessment, the taxpayer’s proper remedy is to seek refund of the illegally or erroneously collected LBT within the two-year period under Section 196.
In discussing what constitutes a valid assessment, the Supreme Court cited Yamane v. BA Lepanto Condominium Corporation (G.R. No. 154993, October 25, 2005) in which it noted that the LGC only requires the assessment to state the nature of the tax and the amount of deficiency, surcharges, interests, and penalties. However, the Court, in Jose, declared that the taxpayer must also be informed of the factual and legal basis for the assessment, in deference to the taxpayer’s constitutional right to due process of law.
Consistent with the findings of the lower courts, the Supreme Court in Jose held that the notices of assessment issued against the taxpayer were void for failing to state the legal and factual basis therefor. In view of the void assessments, the taxpayer thus properly availed of a refund under Section 196 of the LGC.
It is a long-standing principle in law that taxes are the lifeblood of the government. But even so, the power to tax must be exercised with due regard to the taxpayers’ right to be sufficiently informed of the basis of taxes assessed or collected by taxing authorities.
Raida Argeli G. Grefiel is an Associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com