Implementing Sections 76 (C), 112 (C), 112 (D), 204 (C), and 229 of the National Internal Revenue Code of 1997, as amended by the Ease of Paying Taxes Act on Tax Refunds

Revenue Regulations (“RR”) No. 5-2024 was issued by the Bureau of Internal Revenue (“BIR”) on 11 April 2024 to implement the changes in Sections 76 (C), 112 (C), 112 (D), 204 (C), 229, and 269 (J) of the National Internal Revenue Code of 1997, as amended, (“NIRC”) following the enactment of the Ease of Paying Taxes Act (“EOPTA”). We provide a brief discussion of these changes below:

Section 76 (C) on the refund of unutilized excess income tax credit in case of dissolution or cessation of business

As an exception to the irrevocability rule, the taxpayers who chose the option to “carry over” on their final adjustment returns may apply for a refund of any unutilized excess income tax credit if they have permanently ceased operations. The processing office of the BIR shall decide on the application and refund the excess taxes within 2 years from the date of the dissolution or cessation of business. The 2-year period shall commence from the submission of BIR Form No. 1905 together with the complete documentary requirements set by the BIR. The approved refund, if any, shall be released only after completion of the mandatory audit of all internal revenue tax liabilities covering the immediately preceding year and full settlement of all tax liabilities.

Section 112 (C) on the risk-based approach in verifying VAT refund claims

Value-added tax (“VAT”) refund claims filed under Section 112 (A) of the NIRC shall be classified into low, medium, and high-risk claims. In determining the risk level of each claim, the BIR will use the following main risk factors as a guide:

1. Amount of VAT refund claim;
2. Frequency of filing VAT refund claims;
3. Tax compliance history; and
4. Other risk factors that may be identified.

The scope of verification following the identified risks is as follows:

The following are the limitations of the above matrix:

• Claims filed by first-time claimants shall be automatically considered as high-risk and shall remain as such for the succeeding 3 VAT refund claims.
• In case of full denial of a claim, the succeeding claim filed shall be classified as high-risk.
• For medium-risk claims, verification shall be adjusted to 100% if the assigned Revenue Officer finds at least 30% disallowance of the amount of the VAT refund claim. 
• Claims classified as low risk for the 3 consecutive filing of VAT refund claims shall be subject to mandatory full verification on the fourth VAT refund claim regardless of risk classification.
• VAT credit/refund claims for an unused input tax under Section 112 (B) of the NIRC filed by a VAT-registered person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Section 106 (C) shall be classified as high-risk.
• For taxpayer claimants filing quarterly, the risk classification shall be made for every filing.

VAT Refund Claims under Section 112 (C)

Before EOPTA and RR No. 5-2024, in case of inaction by the Commissioner of Internal Revenue (“CIR”) on the application for refund within 90 days, the taxpayer-claimant may file a judicial claim with the Court of Tax Appeals (“CTA”) within 30 days from the lapse of 90 days. Otherwise, failure to file within 30 days constitutes late filing.

However, under RR No. 5-2024, in case the VAT refund application is not acted upon by the CIR within 90 days, the taxpayer-claimant may opt to:

1. Appeal to the CTA within 30 days after the expiration of 90 days required by law to process the claim; or
2. Forego the judicial remedy and await the final decision of the CIR on the application of the VAT refund claim.

Thus, the taxpayer-claimant has the option to forego judicial remedy and await the final decision of the CIR on its VAT refund application.

Section 112 (D) on the liabilities in case of disallowance by the COA

Approved VAT refunds under Section 112 of the NIRC shall be subject to post-audit by the Commission on Audit (“COA”). In the event of disallowance by the COA, only the taxpayer shall be liable for the disallowed amount without prejudice to any administrative liability on the part of any employee of the BIR who may be found to be grossly negligent in the grant of the refund.

Section 204 (C) on the processing of tax refund

The filing of a claim for tax credit/refund for tax or penalty erroneously or illegally collected must be done within 2 years after payment of the tax or penalty. The new rules mandate a 180-day time frame for BIR to process and decide on tax credit/refund (from the date of submission of complete documents).

In case of full or partial denial of the claim, the taxpayer affected may, within 30 days from receipt of the decision denying the claim, appeal the decision to the CTA. 

In case the claim was not acted upon within 180 days, the taxpayer may: 

1. Appeal to the CTA within 30 days after the expiration of 180 days; or 
2. Forego the judicial remedy and await the decision on the claim. 

If the taxpayer chooses to appeal following the inaction of the BIR, the administrative claim for refund shall be considered moot and shall no longer be processed.

Section 229 on the policies for judicial claim

No suit or proceeding shall be maintained in any court for the recovery of erroneously or illegally collected national internal revenue taxes or penalties unless:

1. A claim for refund or credit has been duly filed with the CIR; and
2. The claim was fully or partially denied, or the CIR failed to act on it within 180 days.

Note that the requirement to file the judicial claim within the 2-year prescriptive period, regardless of any supervening cause that may arise after payment, has been removed.