Compensation or set-off in taxation

Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (Civil Code of the Philippines) Compensation is a civil law concept and, as a rule, it does not apply in the realm of tax law.

There are three (3) reasons why this concept does not apply in taxation. First is category of obligation. Second is category of law. Third is public policy.

Category of law. The applicable laws are different. Compensation is governed by the Civil Code of the Philippines but taxation, its collection and other aspects thereof are governed by the National Internal Revenue Code (NIRC) as amended and other tax laws.

Category of obligation. What is referred to in Article 1278 is ordinary obligations where there is a creditor and a debtor and both of them are creditors and debtors of each other. In the case of tax laws, the government and the taxpayers are not creditors and debtors because tax is not a debt.

Public policy. Taxes are the lifeblood of the government. They are an integral and independent obligation. Their speedy collection and their availability are an imperious need.

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