More on VAT refund

A couple of weeks ago I ended my column with the question: “As applied to VAT (value-added tax) refund, do the equities of the case demand only prospective application of the rule?”

The rule I was referring to, of course, was the “operative fact” rule. The rule, which is of American origin, says: “The actual existence of a statute, prior to such a determination (of unconstitutionality), is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects, with respect to particular relations, individual and corporate, and particular conduct, private and official.”

Clearly, the rule does not say prospectivity only. Prospectivity or retroactivity will depend on “various aspects, with respect to particular relations, individual and corporate, and particular conduct, private and official.”

As recently shown by the Hacienda Luisita case, the invalidation of the stock transfer system was first applied prospectively only, but was later reversed to make the invalidation retroactive as demanded by the equities of the case. Even American decisions do not apply the rule in a unidirectional case.

The background for my article which I ended with a question was this: Under the law, for investors to be able to bring in capital equipment, they must pay the VAT but with the promise that the VAT will be refunded upon the filing of a proper claim.

There are two steps in the refund process. The first step is administrative: filing a claim for refund in the Bureau of Internal Revenue (BIR).  The second step, when needed, is filing for refund in the Court of Tax Appeals (CTA). The law says that the investor has 120 + 30 days from the denial of the claim by the BIR or from the inaction of the BIR to file the claim for refund in the CTA.

The practice allowed in the past was that the investor need not wait for the lapse of 120 days before going to the CTA. But if he does go to the CTA early and in the meantime the BIR approves his claim for refund, that terminates the case before the CTA. This was the practice followed by the BIR and the CTA for several years, and it had the approval of the Supreme Court.

A recent decision of the Court, however, held that this practice was all wrong and that investors who had filed their claim following the old practice could not avail of the “operative fact rule” and must suffer invalidation of their still pending claims. The decision, in other words, was applied retroactively and not prospectively. Thus my question: Do the equities of the case demand only prospective application of the rule?

I deliberately did not answer my own question because weighing the equities of the case is not a simple matter.

A concurring opinion on the case, however, had a simple answer: “The capacity to bear the costs of these (official) mistakes in interpretation is generally better internalized by the private taxpayers rather than carried by the public as a whole.”

The question, however, is not about who has the better capacity to bear the cost of official mistakes. The question is:

What is fair? The fact that a taxpayer has a bottomless pocket does not mean that he has no right to be treated fairly.

The taxpayer, after all, will receive the refund only after a finding that the VAT already paid was not due; that is, it did not belong to the government. In the first place, the taxpayer had paid the tax in advance because he had no other choice if he wanted to do business. Advance payment was required by law.

A letter of the Joint Foreign Chambers (JFC) to Finance Secretary Cesar Purisima says: “The rule established by the Supreme Court should only be given a prospective effect. Otherwise, it will result (in) grave damage (to) and prejudice of . . . taxpayers who have complied fully and in good faith with the then prevailing procedures sanctioned by the BIR and accepted by the courts. The long line of decisions by the Supreme Court, the Court of Appeals and the Court of Tax Appeals clearly indicate that prior to the (latest) ruling, the BIR and the CTA did not observe the 120 + 30-day period in actual practice. We believe that if these decisions are taken into consideration, it will radically change the outcome of the case. We also believe that the failure of the courts to rule in favor of a prospective application will undeniably result in an unwitting yet palpable and grave violation of the constitutional guarantee of due process (notice requirement) as well as equal protection. . . .”

It is understandable that the JFC should speak in such categorical terms. But they were speaking mainly of the San Roque et al. cases and what they claimed was that the equities of the case should favor San Roque et al. But there are other VAT refund cases awaiting decision. They should be reviewed individually to determine where the equities of each case are.

In all fairness, this is probably what the concurring opinion I cited also meant when it said that the cost is “generally  better internalized by the private taxpayers rather than carried by the public as a whole.” The language admits of exceptions. True, the life blood of a state are taxes; but they should be collected fairly.