“Taxation is the rule; exemption is the exception” by Cecille S. Visto (April 12, 2010)
SUITS THE C-SUITE By Cecille S. Visto
Business World (04/12/2010)
Administrative agencies have the power to issue rulings and opinions intended to interpret, clarify, or explain the laws that they enforce and administer. At the Bureau of Internal Revenue (BIR), this quasi-legislative or rule-making power is vested in the Commissioner of Internal Revenue under Section 4 of the Tax Code. The BIR Commissioner can also delegate this rule-making power to an appropriate subordinate, pursuant to Section 7 of the Tax Code.
BIR rulings are important and can be crucial to taxpayers. These can facilitate commercial transactions such as mergers or acquisitions; preempt potential audit issues before an actual BIR examination; ensure proper tax compliance with the enactment of a new tax law. Rulings are useful to tax planning and enable compliance with certain BIR requirements involving business deals.
There were roughly 1,000 rulings issued by the Legal Service of the BIR National Office last year, not to mention the hundreds more that emanated from the BIR regional offices nationwide. This number indicates that taxpayers continue to rely upon the BIR to obtain clarity on their tax rights, obligations and the consequences of certain transactions.
Some rulings are considered “first impression” rulings that need to be approved and signed by the Commissioner himself.
With the sheer number of filings, the BIR chief unavoidably had to delegate his power to issue rulings to certain subordinates like the Deputy Commissioner for Legal and Inspection, Assistant Commissioner for Legal, or his regional directors.
In Revenue Delegation Authority (RDAO) No. 3-2009, the Commissioner laid down the rules in signing rulings that grant or confirm tax exemptions, tax incentives or tax treaty relief. Pursuant still to Section 7 of the Tax Code, the Office of the Commissioner still reserves the power to issue first impression rulings or reverse, revoke or modify existing rulings.
The BIR has particularly stressed that exemption rulings (which the bureau considers “tax-eroding”) issued by unauthorized officials are void and considered invalid without need of revocation by the Commissioner.
For instance, tax exemption of joint ventures can be confirmed and granted only by the Deputy Commissioner for Legal and Inspection. If such tax exemption is extended by any lower BIR official, it is considered void. Although the Assistant Commissioner for Legal is allowed to sign exemption rulings with five precedents under RDAO 3-2009, the transaction must be “on all fours” with these five standing rulings; otherwise, the final signatory should either be the Deputy Commissioner or the Commissioner himself.
A BIR ruling also contains an express caveat that a ruling is being issued based on the facts represented by the taxpayer. Consequently, a ruling is voided should it turn out that the facts of the case had been misrepresented. Just recently, the BIR issued Revenue Memorandum Circular No. 20-2010, nullifying Ruling DA-245-2005 issued in 2005 because the “build-to-own” condominium structure violates Presidential Decree No. 957, or the Subdivision and Condominium Buyer’s Protective Decree, and the taxpayer allegedly misrepresented the facts.
In cases of revoked rulings, the aggrieved taxpayer will likely object to a retroactive application.
However, Section 246 of the Tax Code clearly allows for retroactivity when the taxpayer deliberately misstates material facts, or the BIR gathers facts different from those used as basis for the ruling, or when the taxpayer acted in bad faith.
Aside from nullifying rulings that grant tax exemptions, the BIR has made it more difficult for taxpayers to secure such rulings — or even just rulings in general. Under Revenue Memorandum Order No. 11-2010, a request for ruling must be referred either to the appropriate revenue region or to the Large Taxpayers Service for transactions exceeding P1 million. An endorsement from the BIR office with jurisdiction over the taxpayer is required for the processing of the ruling request. With this additional requirement, the turnaround for BIR rulings can be substantially delayed.
An option the taxpayer may consider is to advance the tax payment and later secure a refund if an exemption is granted. However, given the length of time that the refund process takes, this may be seen as a last resort.
For the C-suite, it is a matter of choosing between going conservative and taking the full tax hit even if a preferential rate or a tax relief may be available, or risking a possible full-blown inquiry into transactions in exchange for considerable tax savings.
The mantra of tax bureaucrats has always been that taxation is the rule and exemption is the exception. With the BIR tightening its rules, taxpayers may increasingly turn to other venues, including the courts. Although the judicial route can be long and tedious, it may be the taxpayer’s best and last chance to obtain adequate relief.
Cecille S. Visto is a Tax Director of SGV & Co.
This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.