I. Overview of the Issue

Credit card refunds in the Philippines often trigger a recurring dispute: a consumer returns goods or cancels a service, the merchant agrees to refund, but the merchant deducts (a) the merchant discount rate (MDR) or other acquiring/processing fees charged by the bank/payment processor, and/or (b) amounts framed as “tax,” “VAT,” “withholding,” or “government charges.” Consumers view this as an unlawful short-refund; merchants say they are merely passing on unavoidable costs.

This article explains—under Philippine legal concepts and typical regulatory principles—when deductions from refunds are permissible, when they are not, and what remedies are available.

II. Key Terms and How Card Refunds Work

A. Merchant Discount Rate (MDR) and processing fees

MDR is the percentage fee a merchant pays its acquiring bank/processor for accepting card payments (e.g., 2%–4% depending on risk and industry).
Some arrangements add gateway fees, terminal rental, chargeback handling, or cross-border fees.
These fees are part of the merchant’s cost of doing business in accepting cards.

B. Refund mechanics (simplified)

A card purchase is authorized, captured, and settled. A refund is typically processed as:

a reversal/void (same day, before settlement), or
a refund/credit (after settlement), which posts as a credit to the cardholder, often days later.

Whether the acquiring bank returns the MDR to the merchant depends on the merchant’s contract with the acquirer and card network rules. But those private rules do not automatically decide the merchant’s obligations to the consumer under Philippine consumer law principles.

C. What “refund” means legally

In consumer transactions, a “refund” ordinarily means return of the amount paid for the returned/cancelled item/service—subject only to validly disclosed and lawful charges (e.g., a permissible cancellation fee, restocking fee, or non-refundable booking fee clearly agreed upon).

III. Consumer-Protection Baselines in Philippine Law

Philippine consumer law is not “refund-everything-in-all-cases.” Merchants may set refund policies. However, several baseline rules strongly shape the legality of deducting MDR or “tax” from refunds:

Truth in pricing and full disclosure. Charges must be disclosed clearly and not misrepresented.
Unfair or unconscionable sales acts. Practices that mislead consumers, impose hidden charges, or take advantage of consumer weakness can be considered unlawful.
Contract and consent principles. If a deduction is not part of the agreement or is not clearly disclosed at the time of purchase, it is difficult to justify later.
No unjust enrichment. A party should not profit at another’s expense without legal ground, and should not retain money for a transaction that has been unwound.
Tax law character of VAT and official charges. “Taxes” are not optional add-ons; they have specific rules on invoicing, returns, and adjustments. Calling something “tax” does not make it a lawful refund deduction.

These principles apply across sectors, with special rules sometimes applicable to travel, hospitality, real estate, telecoms, and regulated services.

IV. The Core Question: Can a Merchant Deduct MDR or Card Fees From a Refund?

A. General rule: Deducting MDR from a refund is usually not defensible against consumers

In the typical retail scenario (goods returned, service cancelled, merchant agrees to refund), withholding MDR or processing fees from the consumer’s refund is generally problematic, because:

The consumer did not contract with the acquirer. The MDR is a cost incurred by the merchant for choosing to accept credit cards.
It turns the posted price into a conditional price. If the consumer is told an item costs ₱X and pays ₱X, the refund should ordinarily return ₱X when the sale is rescinded, absent a clearly lawful fee.
It resembles an undisclosed surcharge. If the merchant would not have been allowed to add a “credit card surcharge” at the time of sale (or did not disclose it), silently netting it out at refund is functionally the same.
The merchant can pursue the acquirer contractually; it cannot shift that burden by default. Whether the bank returns MDR is a merchant–bank issue, not automatically a consumer–merchant issue.

Practical consequence: if the consumer returns the item under a valid return/refund policy and the transaction is unwound, the expectation is a full refund of the amount charged to the card, not amount minus merchant fees.

B. Exception: a deduction may be permissible if it is a valid, clearly disclosed, and lawful cancellation/processing fee

Philippine law generally respects freedom to contract and merchants may impose certain fees—but only if they are clearly disclosed and not unfair.

A deduction aligned with a refund can be defensible when all these are present:

Clear pre-transaction disclosure (prominent, readable; not hidden in fine print; communicated before payment),
Express consumer assent (e.g., checkbox for online transactions; signed acknowledgment for in-store or service contracts),
A legitimate basis (e.g., administrative processing, reservation, partial performance),
Reasonableness/proportionality (not punitive or unconscionable),
Consistency (applied equally; not selectively or discriminatorily),
Not mislabeled as “tax” and not used to evade consumer protections.

Even then, calling it “MDR deduction” is riskier than calling it a processing/cancellation fee because MDR is inherently the merchant’s acquiring cost. If the fee is framed as “credit card fee,” it may be scrutinized as a surcharge or hidden charge—particularly if the merchant advertises “same price cash or card.”

C. When the refund is due to merchant fault, deductions are much harder to justify

If the refund occurs because of:

defective goods,
non-delivery,
wrong item,
merchant cancellation,
misleading advertising,
failure to perform service,

then deducting any “processing fee,” MDR, or “administrative charge” is typically viewed as unfair: the consumer should be restored to the position as if they never paid.

V. Special Situations That Affect Refund Deductions

A. “Change of mind” returns

If the merchant’s policy allows returns for convenience (not defect), it may impose a restocking fee or similar charge if clearly disclosed and reasonable. But a restocking fee should be tied to actual handling and inventory costs, not simply the merchant’s card acceptance cost. A flat “card fee deduction” remains questionable.

B. Partial performance services

For services already partially rendered (e.g., events, subscription periods consumed, customized work commenced), the merchant may retain amounts proportionate to work done if the contract supports it. A “refund” in such cases is not an undoing of the whole transaction; it is a recalculation of what is still owed.

C. Travel, bookings, and reservations

Airfare, hotels, and tours often have fare rules and cancellation penalties. A “non-refundable” fare or booking fee can be valid if properly disclosed. However:

The merchant should not disguise penalties as “tax.”
Any retained amount should correspond to the agreed rules and actual non-recoverable costs.
If cancellation is due to the provider’s fault, consumer-protective principles strengthen the claim for full return.

D. Chargebacks vs merchant refunds

A consumer can seek a chargeback through the issuing bank when the merchant refuses a proper refund, the goods were not delivered, or the transaction is unauthorized. Chargeback rules are contractual between banks/networks, but they serve as a practical remedy. Merchants sometimes try to deter chargebacks by offering a “refund minus fee”; that stance can increase consumer complaints and risk of adverse outcomes.

E. “No refund, exchange only” policies

Such policies may be permissible in some contexts if clearly posted, but they cannot defeat statutory rights related to defective products, misleading sales acts, or failures of performance.

VI. The Other Core Question: Can Taxes (Especially VAT) Be Withheld From Refunds?

A. General rule: If the consumer paid VAT-inclusive price, the refund should be VAT-inclusive

In Philippine practice, consumer prices are usually VAT-inclusive. If the sale is rescinded (goods returned, service cancelled and not rendered), the consumer should ordinarily receive back the total amount paid, including the VAT component embedded in the price.

Merchants sometimes say: “We can’t refund the VAT; that’s already paid to the government.” As a legal matter, that is typically not a valid reason to short-refund the consumer. The tax system provides mechanisms (e.g., sales returns/allowances and corresponding documentation) that allow sellers to adjust their VAT liabilities. A merchant’s internal tax remittance timing does not normally reduce the consumer’s right to be made whole when the sale is unwound.

B. When might a “tax” legitimately not be refunded?

Only in narrow, fact-specific situations, for example:

A government-imposed fee that is truly non-refundable by law and was properly disclosed as such (this is uncommon in ordinary retail).
Portions of a transaction not reversed (e.g., service already consumed; statutory charges tied to already-rendered services).
A separate, properly itemized fee that is not part of the sale price and is legally non-refundable (must be demonstrated).

For standard VAT on goods sold and returned, withholding the VAT portion from the consumer is generally inconsistent with the economic reality that the consumer paid a VAT-inclusive price for a sale that is now being reversed.

C. Mislabeling risk: “Tax” as a cover for merchant fees

Sometimes merchants label the MDR deduction as “tax” or “VAT deduction.” This is risky. VAT is governed by tax law; it is not a discretionary line item that a merchant may retain when it refunds the principal. Mislabeling can raise both consumer protection and tax compliance issues.

VII. Distinguishing Between “Refund Deductions” and “Surcharging” Card Payments

A key analytical lens is whether the merchant is effectively imposing a credit card surcharge. Consider:

If a merchant sells an item for ₱1,000 (cash or card) but later refunds only ₱970 because “card fee,” that is functionally a surcharge applied retroactively.
If the merchant instead offered two clearly disclosed prices at the outset—₱1,000 cash, ₱1,030 card—with transparent consumer choice, the analysis shifts to whether dual pricing is lawful and non-misleading (and whether it complies with applicable rules and advertising standards).

In consumer disputes, the merchant’s strongest defense is clear disclosure and consent before payment, not a post-hoc deduction.

VIII. Documentation and Evidence That Typically Matters

For consumers:

Sales invoice/official receipt and proof of card charge.
Merchant refund policy (posted signage, website policy, screenshots).
Messages/emails acknowledging return and agreeing to refund.
Evidence of defect/non-performance if applicable.
Proof of the refunded amount (card statement or bank advice).

For merchants:

Posted policy and proof consumer received it before purchase.
Contract terms for cancellation/restocking/processing fees.
Evidence of partial performance or custom work.
Proper documentation of sales returns/allowances (especially for tax reporting).

IX. Practical Legal Evaluation Framework

A refund deduction is more likely to be challenged successfully when it has these features:

Not disclosed before purchase
Framed as “bank fee” or “MDR” passed to consumer
Called “tax” without clear legal basis
Applied even when merchant is at fault
Disproportionate to the transaction
Inconsistent application or selective enforcement

A deduction is more likely to withstand scrutiny when:

It is clearly disclosed and the consumer affirmatively agreed,
It reflects partial performance or a reasonable restocking/cancellation cost,
It is not deceptive, not mislabeled, and not used to undermine basic consumer rights.

X. Remedies and Enforcement Paths in the Philippines (Non-Exhaustive)

A. Direct resolution with merchant and bank

Demand a full refund of the amount charged.
Request the merchant to process a full refund transaction rather than giving cash net of fees.
If the merchant refuses, pursue issuer dispute/chargeback channels (especially for non-delivery, defective goods, or merchant refusal to honor policy).

B. Consumer complaint channels

Common routes include:

Complaints filed with consumer protection authorities with jurisdiction over the merchant’s sector (general trade/retail, online commerce, specific regulated industries).
Local mediation mechanisms and complaint desks, where available.

C. Civil law options

If the amount is significant, a consumer may consider civil claims anchored on:

rescission/return of consideration,
damages for breach of obligation,
principles against unjust enrichment,
invalid or unconscionable stipulations.

The viability depends on evidence, amount, and the merchant’s written policy.

XI. Drafting and Compliance Guidance for Merchants

A merchant seeking to reduce dispute risk should:

Avoid MDR pass-through language as a default practice.
If imposing any fee, label it accurately (e.g., “restocking fee,” “cancellation fee”), disclose it prominently, and ensure the consumer agrees before payment.
Do not label fees as “tax.”
Apply fees consistently and reasonably, with waivers when the merchant is at fault.
Ensure refund processes return the same amount charged, unless a lawful fee applies and is properly documented.
Maintain proper documentation for sales returns/allowances to align consumer refunds with tax reporting.

XII. Guidance for Consumers Facing Short-Refunds

If a merchant deducts “MDR,” “bank fee,” or “tax”:

Ask for the written policy that authorizes the deduction and confirm it was disclosed before purchase.
If it was not disclosed, state that the refund should match the amount charged because the transaction is being reversed.
If the issue stems from merchant fault (defect/non-delivery), emphasize that fees should not be shifted to the consumer.
If unresolved, initiate a card dispute through the issuing bank, attaching proof of return/cancellation and the merchant’s refusal to refund in full.

XIII. Bottom Line

Merchant fees (MDR/processing fees): generally a merchant cost, not something that may be automatically deducted from consumer refunds. Deductions are only plausibly defensible if they are part of a clearly disclosed, agreed, reasonable, and lawful fee structure—and even then, passing MDR specifically is legally risky in consumer settings.
Taxes (VAT): if the sale is reversed, a refund should ordinarily return the full amount paid, including VAT embedded in the price. Withholding “VAT” from refunds is typically inconsistent with the concept of rescission/return and with standard tax adjustment mechanisms for sales returns.
Disclosure and fairness control the outcome: most disputes turn on whether the deduction was clearly disclosed and consented to before payment, and whether the merchant is deducting fees despite being at fault or despite reversing the transaction entirely.