Doctrine of operative fact

THE ADAGE that "nothing is constant except change" holds most true for tax rules and regulations. We, as taxpayers, have to be constantly vigilant not just of changing rules and regulations but of changing interpretations of old rules and regulations. Most of us are now reeling from the realization that some practices that we hold sacrosanct are actually erroneous interpretations of the Tax Code.

One case in point is the practice relevant to the filing of the judicial claim for refund of input value-added tax (VAT). Prior to Oct. 6, 2010, taxpayers would rush to the Court of Tax Appeals (CTA) to file the judicial claim for refund prior to the lapse of the two-year period believing that the prescriptive period is mandatory and jurisdictional.

However, said practice was struck down by the Supreme Court (SC) in the Aichi case where it declared that the judicial claim for input VAT refund does not follow the two-year prescriptive period but the 120+30-days rule. In the Aichi case, the SC held that the taxpayers must file the judicial claim within 30 days from the issuance of the Bureau of Internal Revenue (BIR) decision or after the lapse of 120 days in case of inaction by the BIR. Thus, the prior practice of filing the judicial claim within the two-year period was held in most cases as either premature or delayed. As a result, a number of pending CTA cases have been denied for failure to observe the 120+30-days rule. This meant loss of millions of pesos for some taxpayers.

The Aichi case was further reiterated in the consolidated cases of San Roque, Taganito and Philex, which were decided by the SC on Feb. 12 this year. As expected, the parties filed a motion for reconsideration.

In its motion, San Roque Power Corp. prayed that the new 120+30-day rule be given only a prospective effect, arguing that the manner by which the BIR and the CTA actually treated the 120+30-days periods prior to the controversial Aichi decision constitutes an operative fact, the effects and consequences of which cannot be erased or undone.

Deciding on the case, the SC denied the motion for reconsideration on Oct. 8, 2013. It held that the doctrine of operative fact does not apply in this case.

Under the general rule, a void law or an administrative act cannot be the source of legal rights or duties. However, the doctrine of operative fact is an exception to the general rule. Under the doctrine, a judicial declaration of invalidity may not necessarily eliminate all the effects and consequences of a void act prior to such declaration.

Prior to the declaration of nullity, such challenged legislative or executive act must have been in force and had to be complied with as they were presumed to be valid. Only the courts can declare a law invalid, and without such declaration, taxpayers would have had no other choice but to follow the existing rules or in this case the practice of filing the judicial claim within the two-year period.

In rejecting the application of the doctrine of operative fact, the SC emphasized that there must be a law or executive issuance that is invalidated by the court for the doctrine to apply. In the present case, however, there is no such law or executive issuance that has been invalidated. What were held erroneous were the BIR and the CTA’s actual practice of not observing and requiring taxpayers to comply with the 120- and 30-day periods.

The SC reiterated that the 120- and 30-day rules are in accordance with Section 112(C) of the Tax Code and must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA as there will be no decision or deemed denial decision by the BIR Commissioner for the CTA to review.

The SC’s decision emphasized that tax refunds are construed st rictly against the taxpayers. Therefore, taxpayers should now be able to interpret tax laws and regulations and not just rely on the existing practices upheld by the BIR and the CTA. We should now meticulously examine every law and regulation as if we are the SC and anticipate if the current practice runs counter to the strict interpretation of the law. And if we have somehow decided that the current interpretation is incorrect, we must now bravely go where others have not dared tread and pray most heartily that our interpretation will be upheld by the SC. Such daunting burden we all must face every day as we diligently pay our taxes and painstakingly seek our refunds. 

Lea L. Roque

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Punongbayan and Araullo