FACTS
In 1992, theBIR sent a letter to mining company Philex asking it to settle its tax liabilities amounting to P123,821,982.52. Philex protested the demand for payment of the tax liabilities, stating that it has pending claims for VAT input credit/refund for the taxes it had paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore, these claims for tax credit/refund should be applied against the tax liabilities.
The BIR dismissed the protest, arguing that since these pending claims have not yet been established or determined with certainty, it follows that no legal compensation can take place.
Ruling on Philex’s appeal, the CTA held that taxes cannot be subject to set-off on compensation since a claim for taxes is not a debt or contract.
RULING
The Court ruled in favor of BIR.
Taxes cannot be subject to legal compensation to be offset against tax refunds for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and debt: debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity.
The SC also emphasized that the argument stating that a pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the Commissioner is no longer without any support in statutory law.
