Non habemus decisione

By Roselle K. Yu, 14 March 2013

Coming from a trip abroad, a co-worker gave me a box of Bertie Bott’s Every Flavour Beans. Harry Potter fans would recognize this as a popular jelly bean candy from the fictional wizarding world with the ominous tag line -- "a risk with every mouthful".

What makes it special is that aside from ordinary candy flavours such as chocolate and peppermint, you could also end up getting odd flavours like spinach, liver or tripe. There are even flavours that are not actual food, like grass, soap, dirt and even vomit.Similarly, tax rulings nowadays can sometimes take taxpayers by surprise. One could go to the Bureau of Internal Revenue (BIR) with a set of facts and a sanguine disposition, reasonably certain about how the BIR would rule given existing precedents, and still get blindsided. In fact, it is not uncommon for rulings to get revoked; this is absolutely proper in cases where previous rulings are without legal basis.

Perhaps equally surprising to some are the "no-ruling" rulings issued by the BIR in recent past following the bureau’s strict implementation of Revenue Bulletin No. 01-2003 issued a decade ago.

The bulletin declared certain subject matters as "no-ruling areas" and instructed the concerned BIR offices not to accept any request for rulings covering such areas. The rationale is that the ruling function should be limited to purely legal issues, as opposed to questions of fact. Likewise, further BIR interpretation may be dispensed with where the applicable law, rule or regulation is clear.

True to its purpose, the bulletin’s list of no-ruling areas includes issues involving the determination of facts and not necessarily legal issues (e.g., determination of whether a corporation is a publicly-held corporation for purposes of exemption from improperly accumulated earnings tax), and those involving mere confirmation of tax implications that are indubitably clear under existing law or regulations (e.g., tax treatment of a de minimis benefit already expressly enumerated under existing regulations).

What’s interesting is that the BIR is also prohibited from ruling on "issues or transactions based on hypothetical situations".

This appears to be based on a long standing policy of the BIR since there is even a 1958 ruling where the BIR declared that, as a matter of policy, it refrains from issuing rulings on hypothetical questions (though notably, it proceeded to issue an opinion anyway, perhaps out of a sincere intent to provide public service).While there is value in the BIR not ruling on hypothetical issues, I think there should be a distinction between a hypothetical transaction and a future one.A hypothetical transaction is theoretical or speculative; it is based on a supposition and is not necessarily real or true. A future transaction, by contrast, is an actual transaction that is based on facts and reality, though it has not yet occurred.

Without question, proper planning contributes to the success of any endeavor. Thus, companies plan ahead especially for major transactions. Since the related tax can oftentimes be costly, some taxpayers seek BIR confirmation on their major transactions in advance. Unfortunately, the BIR has lumped future transactions together with hypothetical ones and has refused to rule on them. For years, a number of ruling requests have been treated as hypothetical. The transactions are varied, such as sale of property, projected sales to target customers, and declaration of dividends. These requests are deemed hypothetical because the transactions may or may not happen.There are, however, at least a couple of rulings issued in recent years that may not merit the no-ruling treatment that they received. One (issued in 2011) involves a treaty relief application that was treated as hypothetical because the facility that was to be used in the plan was still to be constructed. A more recent one (2012) involves a request for tax exemption on liquidation proceedings of a company which sustained heavy losses.The request was deemed hypothetical because the dissolution was still in the planning stage. If these rulings involve definite plans that are to be executed at a future date, securing the BIR’s confirmation in advance should be taken as a good initiative.

The revenue bulletin states that the list of no-ruling areas shall be expanded and updated from time to time by subsequent bulletins. To date, however, the list remains unchanged. If the BIR is up to the task of updating the list, it would be good for them to consider including tax treaty relief applications or request for rulings by the same taxpayer who has already secured a previous ruling for similar transactions with the same factual circumstances.

This could cover, for instance, repeat treaty applications covering dividend remittances by the same investee company to the same shareholder without any change in the equity interest percentage or residency of the shareholder. One could say that this is akin to a request for confirmation of tax implications that are already clear under existing rules, thus falling within the ambit of what a no-ruling area should cover.This would help cut down the number of treaty relief applications that are filed with the bureau. It will also benefit taxpayers as this gives them the peace of mind that comes from a BIR confirmation, while saving on valuable resources.As for requests involving hypothetical situations, there is wisdom in retaining them as no-ruling areas. It helps the BIR focus its resources on evaluating actual transactions, rather than waste them evaluating the implications of "what if" scenarios that may never happen. However, until the BIR starts treating definite future transactions (albeit to be executed at a later date) as falling outside the realm of conjecture or hypothesis, lodging a request for ruling on future transactions remains a tricky business.

Until then, the BIR could very well seem like a little chimney located in the world’s smallest independent state, spewing forth nothing but black smoke.


The author is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 


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.