Are your tax credit certificates valid?

Are your tax credit certificates valid?

by Catherine C. Dela Cruz

Good news for those holders of Tax Credit Certificates (TCCs) and for those would be transferees/assignees of TCCs: the Supreme Court has recently resolved certain issues on the validity of the transferred Tax Credit Certificates.

TCCs are not subject to suspensive condition, as generally provided in the Civil Code, since TCCs are governed by specials laws, rules and regulations. These special laws do not require that a TCC is issued subject to a suspensive condition nor is the outcome of a post-audit necessary for the validity of the TCCs. TCCs are immediately effective and valid after their issuance.

The post-audit referred to in the TCCs pertain to computational discrepancies that may have resulted from the transfer and utilization of the TCC.

The TCC issued to the claimant is applied first and foremost to any outstanding liability the claimant may have with the government. Thus, it may happen that upon post-audit, a TCC of a taxpayer may be reduced for whatever liability the taxpayer may have with the Bureau of Internal Revenue (BIR) which remains unpaid due to computational errors and such  Reduction necessarily affects the balance of the monetary value of the tax credit.

Other examples of computational errors would include the utilization of a single TCC to settle several internal revenue tax liabilities of the taxpayer or transferee, where errors committed in the reduction of the credit tax running balance are discovered in the post-audit resulting in the adjustment of the TCC utilization and remaining tax credit balance.

Also, a transferee registered with the Board of Investment (BOI), even if it is not a capital equipment supplier or a raw material and/or component supplier of the transferor, is a qualified transferee of the TCCs. It is not required by law that the transferee is a capital equipment provider or a supplier of raw material and/or component supplier to the transferors. What the law requires is for the transferee to be a BOI-registered company similar to the BOI-registered transferor.

It should also be noted that the solidary liability of the transferor and transferee stated in the TCC applies only to the sale of the TCC to the transferee by the original grantee. Any fraud or breach of law or rule relating to the issuance of the TCC to the transferor is his responsibility and liability, and not of the transferee. There is no liability for the transferee in the event that the validity of the TCC issued to the original grantee is impugned or where the TCC is declared to have been fraudulently procured by the said original grantee. The transferee in good faith and for value may not be unjustly prejudiced by the fraud committed by the transferor in the procurement or issuance of the TCC.

Moreover, transferee cannot be blamed for relying on the approval for the transfers of the TCCs and the acceptance of the TCCs for the payment of its tax liabilities.

Lastly, TCCs cannot be cancelled as these had already been cancelled and used up after the transferee applied such TCC against its tax liabilities. Once a Tax Debit Memo has been issued by the Bureau of the Internal Revenue the TCC is duly cancelled. What has been used up and cancelled cannot anymore be declared to be void, ineffective and cancelled anew.

With these clarifications from the Supreme Court, transferee-holders of the TCCs are assured that their TCCs are valid and effective even if it is still subject to post-audit as one of the conditions for the transfer of TCC. They should not be held liable for any tax liabilities that may arose due to a fraud committed by the transferor on the issuance of such TCC transferred, unless they are also part of the fraud.

(The author is a senior tax manager at Punongbayan & Araullo, member of Grant Thornton International. For comments and inquiries, e-mail the author or call landline 886-5511.)