A retro topic: Retroactivity of rulings

By Veronica Joy R. Catajoy, 22 September 2011

Tax practitioners have long-discussed retroactivity of rulings.

However, given the string of Revenue Memorandum Circulars (RMCs) issued by the Commissioner of Internal Revenue (Commissioner), it may be good to revisit this issue.
In the past year, we have seen the issuance of numerous RMCs which either clarified or revoked previous rulings, declaring them null and void in the latter case.

In addition, most of these RMCs also contained a provision instructing revenue officers to disregard previous rulings issued and assess taxpayer deficiency tax including interest and other penalties (i.e., surcharge and compromise penalties) from the time the transaction should have been taxed. This provision effectively retroacts the effectivity of the revocation of the rulings to the time of transactions covered, as if no ruling were ever issued.

It is a well-settled rule that since tax exemptions involve foregone revenues for the government, they should not be extended by implication and should be construed strictly against the one who asserts the claim for exemption.

For this reason, securing a formal confirmation of the tax-exempt status of a particular transaction from the Bureau of Internal Revenue (BIR) is required, e.g., tax treaty relief/ruling.

In fact, many taxpayers, as a matter of prudence, would still secure a ruling specific to their case even if there are precedents providing tax exemption for similar transactions.

Such specific confirmatory ruling would give them a certain level of confidence that questions will not be raised if the transaction is later examined.

Revenue rulings are in the nature of opinions and interpretations of the Commissioner on proper interpretation of provisions of the Tax Code, other revenue laws and rules and regulations as they apply to a particular transaction or contract. Power to interpret said tax laws is within the exclusive, original jurisdiction of the Commissioner, subject to review by the Secretary of Finance, as provided in Section 4 of the Tax Code.

Being interpretations, rulings generally should take effect simultaneously with the law which they are clarifying, from the commencement of the transaction/contract covered and in accordance with facts as represented by taxpayers in their request for ruling.

However, if for valid reasons the Commissioner later revokes a ruling previously issued, such revocation is generally prospective in application and cannot be made retroactive, which would be to the prejudice of the taxpayer who in good faith implemented the transaction in accordance with said ruling.

Section 246 of the Tax Code clearly provides such protection by stating that any revocation, modification or reversal of rules and regulations, or rulings or circulars promulgated by the Commissioner shall not have retroactive application if revocation, modification or reversal will be prejudicial to taxpayers, except in the following instances:

• where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR;
• where facts subsequently gathered by the tax authority are materially different from the facts on which the ruling is based; or
• where the taxpayer acted in bad faith.

I absolutely agree that the power of the Commissioner to assess and collect taxes should not be curtailed simply because of errors BIR agents and/or officers commit. I also agree that there is no vested right arising from an erroneous interpretation of the law. Thus, the right of the Commissioner to revoke, modify or reverse rulings previously issued is understandable and is inherently included in his/her power to interpret tax laws under Section 4 of the Tax Code.

However, this right is not absolute and must be exercised within the bounds of due process. This is precisely the underlying reason for Section 246 of the Tax Code.

Accordingly, unless it can be shown that any of the exceptions stated above is present, a ruling that was validly issued -- though later revoked -- cannot be rendered ineffective from the time of its original issuance if this will prejudice the taxpayer.

A taxpayer who acted in good faith should not be made to suffer unnecessarily in the guise of tax collection.

While revenue collection is important, I believe that the taxpayer’s right to due process guaranteed by the Constitution takes precedence.

In one of its rulings, BIR said “this Bureau does not resort to arbitrary reversal of rulings. In the event that a reversal of ruling cannot be avoided, such reversal is not done for light or flimsy reasons, but only in the interest of justice and fair play and after careful and judicious study of the case.”

Inherent in this pronouncement is BIR’s recognition of due process.

This embodies the very essence of one of the basic principles of taxation -- that “the power to tax does not include the power to destroy.”

It is therefore, expected that the BIR would adhere to this principle in the revocation of tax rulings it has previously issued.

I trust that the BIR will rectify the retroactivity of its revocations and clarifications by recalling its instruction to assess deficiency taxes arising from subject transactions.

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.