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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 dele gate 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 aud it 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 rig hts,
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 delega te 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 rule s 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 mod ify 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 c ontains 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
Buyers Protective Decree, and the taxpayer allegedly misrepresent ed 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 gat hers 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 i n 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 jurisdict ion 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 taxpayers
best and last chance to obtain adequate relief.

Cecille S. Visto is a Tax Director of SGV & Co.


This article was origina lly pub lished in the Bus inessWorld n ewspaper. It is for general information only and is not a
substitute f or professiona l ad vice where the facts and circu mstances warrant. The views and opinion expressed
above are those of the auth or and do not necessarily represent the views of SGV & Co.

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