Revocation of BIR Rulings

Revocation of BIR Rulings by: Oliver Gil M. Beltran

How important are the BIR Rulings issued by the Office of the Commissioner of Internal Revenue (CIR) to 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 empha sized 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.