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Atty. Irwin Nidea Jr. gives a rundown on a recent Decision that could change the approach in recovering tax that has been illegally collected...

How to Recover an Ultra Vires Tax

By Atty. Irwin C. Nidea Jr.

Tax refunds are strictly construed against the taxpayer. This is the general doctrine that is followed by the courts. A taxpayer must prove every minute detail of its claim. It must show all the invoices, receipts and books of account to prove the erroneous or overpayment of tax. Otherwise, its claim for refund will be denied because of missing or defective documents. Is the doctrine of strict construction against tax refund absolute?

In a recent case (GR No. G.R. No. 255961. March 20, 2023), the Supreme Court ruled that “the rule on strict interpretation in construing tax exemptions does not apply if the taxpayer is not asking to be exempt from tax. In other words, strict construction of tax refund does not apply if the taxpayer is asking for the refund of the tax erroneously assessed and illegally collected from it on the ground that there is no law that authorizes such exaction.”

The SC held that not all claims for tax refund partake the nature of a tax exemption such that the rule of strict interpretation against the taxpayer is always applicable. The SC noted that it has long settled that "[t]here is parity between tax refund and tax exemption only when the former is based either on a tax exemption statute or a tax refund statute." In such case, the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, a legislative grace, which cannot be allowed unless granted in the most explicit and categorical language. (G.R. No. 255961)

However, according to the SC, “when the claim for tax refund is premised on the taxpayer's erroneous payment of the tax or the government's exaction in the absence of a law, the rule to be applied must be the well-settled doctrine of strict interpretation in the imposition of taxes, not the similar doctrine as applied to tax exemptions.”

The SC added that “if a taxpayer’s claim for tax refund is not in the nature of a tax exemption, it is not required to prove that the legislature intended to exempt it from tax. In the absence of a law expressly and clearly imposing a tax, the correct rule to be applied is the strict interpretation in the imposition of taxes such that the statute must be construed most strongly against the government and in favor of the taxpayer.”

According to the SC, “as burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is clearly subject to the tax being levied against him. Unless a statute imposes a tax clearly, expressly, and unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be presumed. Where there is doubt, tax laws must be construed strictly against the government and in favor of the taxpayer. This is because taxes are burdens on the taxpayer and should not be unduly imposed or presumed beyond what the statutes expressly and clearly import.”

This rule will make it easier for taxpayers to recover taxes that it believes was erroneously assessed against it. For example, if a taxpayer pays a tax assessment which it believes has no basis in law, but for one reason or another, it still opted to pay, the taxpayer now has a greater chance of recovering the tax that it paid. The burden of proving every minute detail of the case is no longer warranted. The taxpayer is only required to show that the tax assessment has no basis in law and that the same was paid. The burden of proof is shifted. The government is now obligated to show that the tax that it collected is due and is mandated by law.