The Misplaced Reliance

The Misplaced Reliance

by Peter John A Vitaliano


No one shall enrich himself at the expense of the other. This is the rationale behind one of the most common form of quasi-contracts – solutio indebiti. Oftentimes, we tend to apply this when there are overpayment of obligations, such as debt and interest payments. Knowing that this may even be considered as a recovery for debtors, do we really understand how this principle should be applied? 

the misplaced reliance

Article 2154 of the Civil Code of the Philippines provides how solutio indebiti is established. The first requisite is when something was received when there is no right to demand and second, when it is unduly delivered through mistake.

At all times, these two elements shall be present in order that the debtor may be entitled to the reimbursement. In any case, should the debtor prove that the recovery is properly in place, then the payee who accepts the undue payment, whether in good faith or not, shall return the payment up to the amount benefited by him. Of course, if in bad faith, Article 2159 of the Civil Code provides that the amount to be reimbursed shall include legal interest if a sum of money is involved, or shall be liable for fruits received or which should have been received if the thing produces fruits.

So, how do we relate this principle in taxation? And can this be employed to justify the most sought after claim of taxpayers – the tax refund?

In the case of Commissioner of Internal Revenue (“CIR”) (petitioner) vs. Manila Electronic Company (MERALCO) (respondent) G.R. No. 181459 dated June 9, 2014, the sole issue raised is whether or not the respondent is entitled to a tax refund relative to its payment of final withholding taxes (“FWT”) on interest payments made to Norddeutsche Landesbank Girozentrale (NORD/LB) Singapore Branch from January 1999 to September 2003.

Considering that MERALCO was able to submit a certification issued by the Embassy of the Federal Republic of Germany establishing the fact that NORD/LB is owned, controlled or enjoying refinancing from the Federal Republic of Germany pursuant to Section 32(B)(7) of the National Internal Revenue Code (“NIRC”) of 1997 (“Tax Code”), as amended, such interest payment is not subject to Philippine income tax and accordingly, not subject to ten percent (10%) FWT.

However, the Supreme Court (“SC”) still denied the respondent’s claim on the basis that such claim has already prescribed in line with Section 229 of the Tax Code, as amended, emphasizing that no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment.

It is evident that MERALCO relied on the BIR Ruling issued to them declaring the tax-exempt status of NORD/LB. Being confirmatory in nature, the SC reiterated that such ruling is not the operative act from which an entitlement to refund is determined. Hence, SC confirmed that there is misapplication of the 6-year prescriptive period for initiating an action on the ground of quasi-contract or solutio indebiti by the petitioner on the issuance of the BIR Ruling.

As mentioned in this case, there is solutio indebiti when (1) payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause. In this case, the first element is already lacking considering that there is a binding relation between the petitioner, BIR, as the taxing authority and respondent, MERALCO, who is bound to act as the withholding agent of the foreign taxpayer.

Another recent case involves Philip Morris Philippines Manufacturing, Inc. (petitioner) and CIR (respondent) in CTA Case No. 8968 dated 03 August 2018 where the petitioner seeks a tax refund on its advance payment of excise taxes intended for export under Revenue Regulations (“RR”) No. 3-08 amounting to Php152,877,472.10.

The petitioner argued that the above RR is in conflict with the provisions of the Tax Code, as amended, particularly in Sections 129 and 130(D). Further, having complied with the requirements for claiming refund under Section 130(D) of the Tax Code, as amended, the petitioner hereby claims that the respondent is duty-bound to return the same amount under the principle of solutio indebiti.

However, the Court of Tax Appeals, rendered the same RR as valid for the reason that RR are issued for the effective enforcement of the provisions of the Tax Code, as amended. Specifically, RR No. 3-08 was issued to regulate the collection and administration of excise tax on certain excisable articles. Hence, the petitioner failed on both elements since there exists a binding relation to pay the excise tax due and that the advance payment was made in compliance with the above RR and not through mistake.

Based on the above cases, it is noteworthy that the principle of solutio indebiti is difficult to establish on tax refund cases. This is mainly due to the fact that unlike the 6-year prescriptive period provided for quasi-contracts, the Tax Code, as amended, is a special law providing a mandatory period for claiming refund for taxes erroneously paid which is 2 years. With respect to tax payments, the government and taxpayer are not mutually creditors and debtors to each other. Further, the claim for taxes do not partake the nature of a debt, demand, contract or judgment to which offsetting may be proper. As such, offsetting of tax refund from the tax liabilities is also misplaced.

Lastly, it is of utmost importance for every taxpayer pursuing entitlement to any refund from the government to be mindful that the burden to prove would still lie on the taxpayer considering that the granting of tax exemption is strictly construed against the taxpayer claiming such. Aside from that, it will be an added burden on their part to observe the applicable prescriptive period within which to file the claim. Otherwise, non-compliance on the due process might result to the taxpayer’s claim being all for naught. 

Peter John A. Vitaliano is an Associate from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email or

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