Revocation of BIR rulings

Posted on February 14, 2012

Let’s Talk
Tax
How important are the BIR Rulings issued by the Office Oliver Gil
of the Commissioner of Internal Revenue (CIR) to M. Beltran
taxpayers? What happens when a previously issued BIR
Ruling is revoked? Would the taxpayers in whose favor
such revoked ruling was issued be automatically liable
for deficiency taxes?

Basic is the rule that the interpretation placed upon a statute by the
executive officers -- whose main duty is to enforce the statute --
however inconclusive, is respected and acknowledged by the courts.
Although the CIR is given the power to interpret tax laws, such power is not
absolute. When the CIR’s interpretation contravenes the law and/or the regulations
issued pursuant to it, it becomes, according to the courts, ultra vires and invalid. As
such, said Ruling will be set aside if instead of remaining consistent and in harmony
with the law, it aspires to interpret, or is judicially found to be erroneous or
improper.

In conjunction with this power, the CIR is also authorized to reverse and/or modify
its previous rulings in order to make its stand "more adaptable to present
circumstances and/or in order to prevent injustice" as stressed in BIR Ruling DA-
566-04, dated Nov. 9, 2004. Moreover, the BIR can supposedly reverse its previous
stand on an issue based on the doctrine that the government is never stopped from
collecting a tax that is legally due it.

This was further implicitly affirmed by the Supreme Court in the case of CIR vs.
American Express International, Inc., (G.R. No. 152609, June 29, 2005) where it
declared, "though vested with the power to interpret the provisions of the Tax Code
and not bound by predecessors’ acts or rulings, the Bureau of Internal Revenue
(BIR) Commissioner may render a different construction to a statute only if the new
interpretation is in congruence with the law. Otherwise, no amount of interpretation
can ever revoke, repeal or modify what the law says."

In the abovementioned case, the respondent taxpayer relied upon a ruling

previously issued by the Commissioner, in filing its claim for refund of excess input
taxes. However, the BIR countered that such BIR Ruling was subsequently
overturned, thereby rendering the said taxpayer’s claim without legal basis.

The Supreme Court held that the contention of the CIR does not deserve merit
because such power is not without its limitations. As Section 276 of the Tax Code
specifically provides, any revocation of any of the rulings, whatsoever, promulgated
by the Commissioner shall not be given retroactive application if the revocation will
be prejudicial to the taxpayers except in the following cases: (a) where the
taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the [BIR]; (b) where the facts subsequently gathered
by the [BIR] are materially different from the facts on which the ruling is based; or
(c) where the taxpayer acted in bad faith.

"Consequently according to the Court, should a taxpayer rely on a ruling issued to

him for purposes of entering into a transaction, contract or agreement, the tax
consequences of a subsequent revocation or reversal of the ruling relied upon
cannot be made to apply to the said transaction, contract or agreement if
prejudicial to the affected taxpayer."

In this regard, it is noteworthy that previous revocations of the BIR of its position
on a certain issue were made through the issuance of an appropriate Revenue
Memorandum Circular (RMC). Examples of this include: RMC 48-04, wherein
previously issued Rulings concerning the taxability of the benefits received by an
employee who left the private sector in order to join the government where revoked
because of the issuance by the Court of Tax Appeals of an order stating a different
view on the matter; and RMC 006-09, which clarified the VATability of HMOs.

Here now comes BIR Ruling 014-2012, dated January 4, 2012, where the BIR
overturned its previous stand and emphasized that royalty payments of a PEZA-
registered enterprise under the 5% gross income tax regime, are not deductible
from the company’s gross revenues for purposes of computing its taxable income
subject to the 5% preferential tax rate. According to the BIR, royalty payments are
not included in the list of allowable deductions provided in Section 2, Rule XX of the
PEZA Implementing Rules and Regulations. More importantly, BIR Ruling 014-2012
provided that all existing rulings inconsistent with the declarations made therein are
now considered revoked.

With this, the BIR has now deemed it expedient to declare the revocation of BIR
Rulings through the mere issuance of a BIR Ruling that departs from its previous
stand on a certain tax issue, even without the issuance of an appropriate RMC like it
usually does in the past.

As such, taxpayers must really be extra watchful and be aware of their rights. And
as shown in the discussion above, it really is important for taxpayers to keep
abreast and be updated of whatever changes in the policies of the BIR.