Tax refund, anyone?

By Alfredo Merto

DO a web search for "refund" and you will end up with over a billion results, many associated with dissatisfaction on the part of a customer. A refund is given by a seller to a customer who is not happy with a product or a service. Sellers often promise that if a customer is not satisfied with a purchase, the amount paid will be refunded, no questions asked. One can view a refund as a noble act by a granting party by way of appeasing a dissatisfied party.

In contrast and in the context of a tax refund, a claimant must comply with factual requirements and prove under the law that it is entitled to a tax refund. With all the complexities of the tax refund process, how can a taxpayer appease the granting tax authority?

The Philippine tax landscape is sprinkled with withholding taxes aimed at collecting revenue efficiently. A withholding tax, whether creditable or final, is a mechanism designed to allow a payor to collect tax on behalf of the payee and remit the same to the government. The payor acts as an agent of the government and simplifies the payee's tax obligation by taking on the duty to withhold. While tax withholding simplifies a payee's compliance, a refund claim for overpaid or erroneous payments involves a tedious process.

Let's look at the intricacies of a final withholding tax (FWT). Setting aside tax treaty provisions, income sourced within the Philippines by a nonresident taxpayer is subject to FWT in general. A Philippine payor deducts the FWT and remits it to the Bureau of Internal Revenue (BIR). There are situations, however, when the tax withheld and remitted is more than what was due. If a claim for refund is to be exercised for erroneous payment, a claimant encounters, among others, several challenges.

Administrative requirements, for one, are a maze. Securing a tax refund in the Philippines can seem like driving on a long, winding road. The administrative procedures are tedious, need frequent follow-ups and can be circuitous. Businesses, especially small enterprises, have long complained about the burden of applying for a refund, which tends to result in noncompliance.

Documentary requirements also seem unclear. Like any other tax refund, FWT refunds can be complex and often lead to confusion about the required documents and eligibility criteria. Then there are the instances when additional and nonexistent documents are required. Clarity is key, and the lack of it often results in taxpayer frustration and disputes between taxpayers and tax authorities, prolonging the refund process.

There is also a manpower resources gap. The BIR handles a tremendous number of refund claims, which is exacerbated by the lack of manpower for efficiently processing such claims. Consequently, there are further delays.

What can be done to address the frustrations on all sides?

Simplify rules and regulations. This is a fundamental way forward. Tax authorities should do a comprehensive review of existing administrative regulations with an eye toward simplifying and clarifying the rules governing tax refunds, making for a fair playing field. A withholding tax system that is simple and convenient for taxpayers encourages compliance.

Capitalize on technology and enhance integration capabilities. The refund process can benefit greatly from advanced technologies that are changing the ways we do business. An efficient online platform for submitting refund claims and tracking their status can significantly reduce administrative bottlenecks. The BIR has intensified the use of online and electronic means in the areas of tax filing and payment. Why not do the same for claiming refunds?

Expedite processing. Unlike a value-added tax refund, which administratively has a 90-day period within which to be granted or not, withholding tax refunds have no such prescribed window. Had a window been approved under the Create Law, legitimate claims could have been settled promptly. Allocating additional resources and manpower or employing dedicated teams for refund processing can help expedite the resolution of claims.

Intensify taxpayer education. Encouraging taxpayers to understand FWT or the withholding tax system, for that matter, can prevent over-withholding or mitigate erroneous payments. Providing guidance and educational resources to businesses and withholding agents can help them better navigate tax refund complexities.

Enhance alternative dispute resolution (ADR). The Department of Finance has institutionalized ADR in itself and its bureaus, which include the BIR. It is timely then for the BIR to enhance and expand this avenue and maximize the benefits for both taxpayers and tax authorities to avoid long and costly legal battles.

The Philippine tax environment has long been plagued with challenges. As such, our legislators and tax authorities must always take proactive steps in addressing these. Rules and administrative procedures must be simplified further, taxpayer education programs should be ramped up, and the use of technology to improve the transparency of and to streamline processes should be a priority.

There is a way out of the frustrating refund process and on the other side of that is optimum tax compliance on the part of taxpayers and a business-friendly tax environment for the entire country.

As published in The Manila Times on 25 September 2023. Fred Merto is a Senior Manager with the Tax & Corporate Services group of Deloitte Philippines.