Moving forward after the reversal of a BIR ruling

When taxpayers are in doubt as to whether a specific provision of the Tax Code or regulations apply to their specific transactions, they sometimes seek an opinion or confirmation from the agency that implements the law or regulation. One may ask, does the touch-move rule apply to the issued ruling or confirmation, or can it still be reversed by the same agency that issued it.

By definition, rulings of the Bureau of Internal Revenue (BIR) reflect its official position on queries raised by taxpayers regarding the interpretation of tax laws. Unless and until the position is reversed, the taxpayer can rely upon the ruling as issued. In the event of reversal, it cannot apply retroactively if prejudicial to the taxpayer except in those cases provided for under the law. This rule was applied in a recent decision of the Court of Tax Appeals (CTA) En Banc.

For context, the BIR issued a ruling in 2006 in favor of the taxpayer, in which it held that the “conveyance of land and common areas of the Project in favor of the condominium corporation being without money consideration, and is not in connection with a sale made to the condominium corporation, no income was generated and therefore no income and/or creditable withholding tax is payable and collectible.”  Not being a sale, the same is not subject to the value-added tax (VAT) and documentary stamp tax (DST).

Thereafter, in 2009, the Commissioner of Internal Revenue (CIR) issued a Revenue Memorandum Circular (RMC) revoking the ruling by declaring the taxpayers’ Build-to-Own model a pre-selling arrangement which should be subject to the aforementioned taxes. Under the scheme, the developer manages the construction of the condominium project and the individual investors/co-developers contribute funds for construction which are then pooled in a common fund, with the developer, as project manager, receiving a management fee.

A full-blown audit and investigation ensued as a result of the RMC. As the assessment was not resolved at the administrative level, the case was elevated to the CTA.

The BIR argued that the reversal of the taxpayer’s ruling can be given retroactive application because the taxpayer deliberately misrepresented material facts in its request for a ruling. On the other hand, the taxpayer claimed that the BIR failed to prove any misrepresentation and/or bad faith on their part in securing the ruling.

The CTA En Banc denied the Petition of the BIR for lack of merit. It held that Section 246 of the Tax Code prohibits the retroactive application of a reversal of a BIR ruling if it is prejudicial to the taxpayer, unless any of the following exceptions is present:

1. Deliberate misstatement and omission of material facts in the return or documents;
2. Facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or
3. The taxpayer acted in bad faith.

The reason behind the non-retroactivity provision is to preclude the BIR from adopting a position which is contrary to one previously taken that would result in injustice to the taxpayer or that would be contrary to the tenets of good faith, equity and fair play. Further, applying the doctrine of operative fact, the taxpayer has the right to rely upon a BIR ruling until the same has been reversed or overruled by the CIR or the Supreme Court.

Thus, employers may need to take into account whether they will continue to shoulder the tax. 

It is also important to note, however, that before RMC No. 79-2014, regardless of employment status, all equity awards were subject to WTC.

As the year draws to a close, I hope that the BIR will clarify whether the employer should begin reporting equity awards in October or November as income subject to WTC. By doing so, it will reduce the worries on the part of employers as to their duty as withholding agents. It will also give ample time to employers to manage expectations and properly communicate the new tax treatment of equity-based compensation and its impact on employees’ after-tax pay.