Set-off: Compensation in Taxation

Rule on Compensation of Taxes: There can be no off-setting of taxes against the claims that the taxpayer may have against the government. Government and taxpayer are not mutually creditors and debtors of each other under Article 1278 of the Civil Code and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. (REPUBLIC vs. MAMBULAO LUMBER COMPANY, ET AL. , ENGRACIO FRANCIA vs. INTERMEDIATE APPELLATE COURT, ET AL.)

Exception to the rule: When both taxes and claim against the government is overdue, demandable and fully liquidated. Government has been recognized and an amount has already been appropriated for the purpose by a corresponding law (MELECIO R. DOMINGO vs. LORENZO C. GARLITOS, ET AL. )

Cases:

REPUBLIC vs. MAMBULAO LUMBER COMPANY, ET AL.
G.R. No. L-17725. February 28, 1962

Facts:

Defendants have a liability for forest charges to the Republic of the Philippines. Defendants contended that since the Republic of the Philippines has not made use of those reforestation charges (RA 115) collected from it for reforesting the denuded area of the land covered by its license, the Republic of the Philippines should refund said amount, or, if it cannot be refunded, at least it should be compensated with what Mambulao Lumber Company owed the Republic of the Philippines for reforestation charges.

Issue:

May reforestation charges be set-off to forest charges owed by defendants to the government?

Ruling:

No. Appellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on compensation is inapplicable. The forest charges which the defendant Mambulao Lumber Company has paid to the government, are in the coffers of the government as taxes collected, and the government does not owe anything, crystal clear that the Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of each other, because compensation refers to mutual debts.

MELECIO R. DOMINGO vs. LORENZO C. GARLITOS, ET AL.
G.R. No. L-18994. June 29, 1963

Facts:

The government has a claim against the estate of the Walter Scott Price of estate and inheritance taxes, charges and penalties amounting to P40,058.55. The government is at the same time indebted to the estate under administration in the amount of P262,200.

Issue:

May the claim by the government against the estate be deducted from its debt to the estate? May compensation take place?

Ruling:

Yes. The claim of the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount. compensation takes effect by operation of law, and extinguished both debts to the concurrent amount.

ENGRACIO FRANCIA vs. INTERMEDIATE APPELLATE COURT, ET AL.
G.R. No. L-67649. June 28, 1988

Facts:

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00.

Issue:

May compensation take place?

Ruling:

There can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes.

Government and taxpayer are not mutually creditors and debtors of each other under Article 1278 of the Civil Code and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.