On OSD rule: A post ITR fiing appeal
On OSD rule: A post ITR filing appeal
The income tax returns (ITRs) for the calendar year 2009 have been filed. Prior to the April 15 ITR filing, there have been criticisms to the Bureau of Internal Revenue (BIR) circular pertaining to the new rule on optional standard deduction (OSD) [Revenue Memorandum Circular (RMC) No. 16-2010 in relation with Revenue Regulation (RR) No. 2-2010]. Nonetheless, the said circular is still a standing BIR pronouncement as of this time.
Let us recall the issue on the new OSD rule.
Effective July 2008, by virtue of a revenue regulation (RR No. 16-08), the taxpayers were allowed to adopt either the itemized deduction or the 40-percent OSD in determining the taxpayers’ taxable income. Under the said regulation, the taxpayers may use either method in preparing their quarterly ITRs, provided that in preparing the annual ITR, only one method shall be applied by the taxpayers covering its entire taxable year. Thus, the taxpayers, in preparing their quarterly ITRs, are allowed to shift from itemized deduction to OSD, and vice-versa, from quarter to quarter, within the same taxable year.
However, upon issuance by the BIR of RMC No. 16-2010 in relation to RR No. 2-2010, the taxpayers are no longer allowed to change methods from quarter to quarter within the same taxable year. The said RMC provides that the method adopted for the 1st quarter shall be the same method to be applied to the succeeding quarters of the same taxable year as well as in the preparation of the annual ITR of the said taxable year. This new rule, although issued only in 2010, was made effective by the BIR to cover even the year 2009 – a retroactive application of the rule.
Since the ITRs for the calendar year 2009 have already been filed, is it still necessary for the BIR to reconsider the retroactive application of the rule?
It should be noted that after the filing of the ITRs, the BIR may now issue a letter of authority to taxpayers signifying the notice of a BIR audit. In such audit, the examiners would likely look at the taxpayer’s compliance with the new rule on OSD which, as per BIR issuance, has a retroactive effect to cover the year 2009. In this regard, a probable source of dispute between the taxpayer and the BIR examiners is when a taxpayer, for example, used an itemized deduction in the first quarter 2009 and adopted the OSD for computing its annual 2009 ITR, or when a taxpayer used an OSD in the first quarter and adopted the itemized deduction for the annual 2009 ITR. Hence, it is at the time of the BIR investigation, that the enforcement of RMC 16-2010 would be more endured between the taxpayers and the BIR examiners, and thus, the said RMC may have to be reconsidered by the BIR.
Several legal issues have already been raised in some commentaries regarding RMC 16-2010. Among the comments, the provision of the Tax Code, no less, could be highlighted to evaluate the validity of the retroactive application of the said RMC. Under Section 246 of the 1997 Tax Code, as amended, any revocation, modification or reversal of any of the rules and regulations, or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers.
Therefore, now we ask: Is the retroactive application of RMC 16-2010 prejudicial to the taxpayers?
A taxpayer made a choice of deduction in the 1st quarter of 2009. In making such choice, the taxpayer, by virtue of RR 16-2008, had a full knowledge that in the subsequent preparation of the annual 2009 ITR, he would still be allowed to evaluate whether to adopt either the itemized deduction or the OSD at the end of the year. The 1st quarter 2009 ITR was filed on such basis.
When the BIR issued RMC 16-2010 after the 1st quarter 2009 ITR had already been filed, the BIR, in effect, was conveying to t
he taxpayer that he had a wrong knowledge at the time of his selection of the method of deduction, and that his choice for the 1st quarter should also be his choice for the annual 2009 ITR. The related adverse consequences of having a wrong knowledge at the time of making a choice are not hard to perceive, and the scenario was not even the fault of the taxpayer. Hence, it is inevitable for certain taxpayers to think that they were somehow defrauded by the retroactive application of the RMC in year 2009.
Not a few commentaries have been written about RMC 16-2010. Some taxpayers still trust that the BIR would reconsider lifting the retroactive application of RMC 16-2010. Such retraction would have the benefit of avoiding the related possible disputes between the taxpayers and examiners at the time of the BIR audit. Would the BIR reconsider? The taxpayers hope so.