Can BIR rulings be declared void ab initio?

Last month, President Rodrigo R. Duterte revoked the amnesty that former president Benigno Aquino III granted to Duterte’s antagonist and critic, Senator Antonio F. Trillanes IV.

Under Section 19, Article VII of the Constitution, the President has the power to “grant amnesty with the concurrence of a majority of all the Members of the Congress.” It may be granted to persons or communities who may be guilty of political offenses, generally before or after the institution of the criminal prosecution and sometimes after conviction.

Through Presidential Proclamation No. 572, Mr. Duterte declared that the amnesty granted to Mr. Trillanes was void ab initio (void from the moment it was issued). The basis for the revocation was that the senator did not comply with the minimum requirements to qualify under the amnesty program. With the amnesty declared void ab initio, the case filed against Mr. Trillanes in relation to his participation in the Oakwood mutiny and the occupation of the Manila Peninsula hotel can be pursued by the government, according to the Department of Justice.

Can the same thing happen to a taxpayer? Let us say a taxpayer secures a favorable ruling from the Commissioner of the Internal Revenue (CIR) on the tax exemption of a transaction it has entered. The CIR confirms the tax exemption and, consequently, the taxpayer never paid tax on the said transaction. Years later, the CIR declares that same ruling void for some reason. A tax assessment follows, demanding deficiency taxes on the same transaction.

Why would the CIR revoke the ruling that they issued in the first place? Does the CIR have the power to revoke rulings? If so, what are the grounds for revocation? Would the revocation be applied retroactively or prospectively? Can the CIR chase the taxpayer who relied on the ruling and assess deficiency taxes? These questions require convincing answers.

Before we dive into the answers, let us first define what is a tax ruling and what is its purpose.

A tax ruling is an official position of the CIR on the inquiries of a taxpayer who requests clarification or confirmation on certain provisions of the Tax Code, other tax laws, or their implementing rules and regulations.

Taxpayers usually request a ruling to seek tax exemptions or ask for confirmation on the proper tax treatment of a transaction, contract, or agreement. Although the ruling is personal to the taxpayer who sought it, taxpayers in a similar situation may also refer to the tax ruling as guidance for the tax treatment of their transactions and seek a similar confirmation.

Rulings also serve as legal references and basis to refute the tax assessment of the CIR. It has been proven many times that, when faced with a tax assessment, rulings issued in favor of the taxpayer can be presented to Bureau of Internal Revenue (BIR) examiners as the basis for cancelling the particular assessment.

If one has a ruling in their favor, does it mean the ruling is permanent, absolute, and conclusive? The power to issue rulings carries with it the power to revoke. While the CIR has the power to interpret tax laws and issue rulings, it alone also has the power and authority to reverse, revoke, and/or modify its previous rulings. In BIR Ruling DA-566-04, dated Nov. 9, 2004, the BIR lengthily and comprehensively stressed that this power is resorted to after a critical and deeper analysis and only upon a clear showing that the law and the facts warrant revocatory action.

Why would the CIR do this? The ruling further explained that there are previous CIR positions that must be made adaptable to present circumstances, and so, must be changed to prevent injustice. When revocation is made, is it often rooted in the doctrine that the government is never estopped from collecting a tax legally due it.

In addition, other grounds for revocation include: when the rulings of the first impression were delegated to and issued by subordinate officials; if upon investigation, it will be disclosed that the facts on which the ruling is based are different, then the ruling shall be considered null and void; and when the interpretation of the executive officers like the CIR is judicially found to be incorrect.

When the CIR’s ruling is revoked or modified, when does the revocation or modification apply? Is it void ab initio?

The general rule is that BIR rulings are not void ab initio. Revocation or modification shall not be given retroactive application if revocation, modification or reversal will be prejudicial to the taxpayers who, in good faith, relied on the ruling prior to its reversal. However, retrospective application is warranted in the following cases: when the taxpayer deliberately misstates or omits material facts from their return or any document required of them by the BIR; where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or where the taxpayer acted in bad faith.

Though the general rule states no retrospective application, can the CIR chase the taxpayer who relied on the ruling and assess for deficiency taxes? No, except for when any of the three exceptions discussed earlier are present.

Several court decisions have held that the CIR is precluded from adopting a position contrary to one previously taken where injustice would result to the taxpayer. In that case, the court further explained that, if an assessment was made three years after a new BIR circular reversed a previous one, upon which the taxpayer had relied upon, such an assessment was prejudicial to the taxpayer. To rule otherwise would be contrary to the tenets of good faith, equity, and fair play.

Mr. Trillanes’ legal team believes that the declaration by the President alone of the amnesty granted to Senator Trillanes as void is unconstitutional. To them, the President does not have absolute power to void an amnesty previously given. They sought the expert interpretations of the justices of the Supreme Court to shed light on this matter.

In tax law and jurisprudence, however, the rule is clear. The CIR has the sole power to reverse, revoke, and/or modify previous rulings. While the CIR is given this power, the law recompenses and protects the taxpayer from possible adverse effects so as not to prejudice the taxpayer.

Nikkolai F. Canceran is a Director of the Tax Advisory and Compliance of P&A Grant Thornton.

As Published in BusinessWorld dated 01 October 2018