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 que- ries 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. Since the sale transaction was treated as subject to income/ withholding tax, VAT and DST by reason of the issuance of the RMC, the Court held that the taxpayer was prejudiced when the ruling was overturned, and thus the same should only be applied prospectively.
Further, the CTA En Banc held that the BIR failed to prove the existence of any of the aforementioned exceptions. It merely alleged that the taxpayer deliberately misstated material facts or acted in bad faith when it sought confirmation. Neither was there any proof that the co-development scheme employed by the taxpayer and the developer is actually a pre-selling arrangement.
Additionally, the change in position by the BIR did not originate from a subsequent learning of a fact misrepresented or withheld by the taxpayer but was merely due to a change in the tax consequences of the same set of facts presented at the time the ruling was sought. The Court emphasized that mere allegations are definitely not evidence. Without proof, the BIR cannot deprive the taxpayer of the right that it already obtained by the issuance of the ruling until its revocation.
Incidentally, it is worthwhile to note that this case was not decided unanimously as there is a dissenting opinion which holds that the revocation was valid and proper due to the taxpayer’s misrepresentation of the facts, particularly for making it appear that the transactions under the scheme are not sale transactions when, in fact and law, they are taxable transactions as all the essential elements of a sales contract are present, and since the attributes of ownership of the condominium project are integrated in the agreement and are being exercised by the taxpayer.
In brief, a taxpayer may still rely on a ruling or confirmation issued by the BIR unless revoked due to deliberate misstatement and omission of facts or bad faith on the part of the taxpayer. At the end of the day, it is the taxpayer’s responsibility to disclose all material facts necessary for the BIR to formulate its decision.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.