BIR Ruling No. 002-07

January 24, 2007 BIR RULING NO. 002-07 RR 16-05 008-06 000-00 Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Alexander B. Cabrera Partner Gentlemen : This refers to your letter dated January 5, 2007 requesting on behalf of your client, Pilipinas Makro, Inc. (Makro for brevity), for a supplemental ruling or a confirmation that BIR Ruling No. 008-2006 dated September 8, 2006 can be applied retroactively and that the deduction of input VAT as part of inventory cost can be made prior to the application of the 70% cap on input VAT imposed by Republic Act (RA) No. 9337. In reply, please be informed that revenue rulings are interpretations of the law and should apply simultaneously with the latter. They are opinions and interpretations of the Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax laws which are issued in response to a specific request for ruling filed by a taxpayer. Being interpretations, revenue rulings should generally take effect from the time the law became effective. However, an exception to this rule is provided under Section 246 of the Tax Code of 1997, as amended, which we quote as follows: "Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections 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.'' Based on the foregoing, retroactive application shall not be allowed in case of rulings which revoke, modify or reverse previous rulings and such revocation, modification, or reversal is prejudicial to the taxpayers. In other words, as long as the rulings are not prejudicial to the taxpayer, the same may be given retroactive effect. Retroactive application of rulings finds support in court decisions. In the case of Commissioner of Internal Revenue vs. Court of Tax Appeals and Warner-Lambert Philippines, Inc. (CA-G.R. SP No. 31025 January 12, 1994), the Court of Appeals (CA) affirmed the decision of the Court of Tax Appeals which ruled, among others, that rulings of the Commissioner of Internal Revenue which are not prejudicial to taxpayers must be given retroactive application. The CA, thus, declared: "It is clear from the foregoing that circulars or rulings promulgated by the Commissioner of Internal Revenue have no retroactive application where to so apply them would be prejudicial to taxpayers. Conversely, if the ruling or circular is beneficial to taxpayers, the same must be given retroactive application to lighten the taxpayer's tax burden. The power of taxation should be exercised with caution to minimize injury to the rights of a taxpayer ( Roxas vs. Court of Tax Appeals , 23 SCRA 276)" 3uptpe07 Moreover, in the case of Commissioner of Internal Revenue vs. Burroughs Limited and the Court of Tax Appeals (G.R. No. L-66653, June 19, 1986), the Supreme Court retroactively applied the Revenue Ruling of January 21, 1980 to a transaction which took place on March 14, 1979. In the same decision, the Court upheld the rule that retroactivity shall not apply in case of revocation, modification or reversal of any rulings issued by the Commissioner of Internal Revenue when the same is prejudicial to the taxpayer. We quote hereunder the relevant portion of the decision, to wit: "Petitioner's aforesaid contention is without merit. What is applicable in the case at bar is still the Revenue Ruling of January 21, 1980 because private respondent Burroughs Limited paid the branch profit remittance tax in question on March 14, 1979. Memorandum Circular No. 8-82 dated March 17, 1982 cannot be given retroactive effect in the light of Section 327 of the National Internal Revenue Code which provides "Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding section 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 taxpayer except in the following cases (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (c) where the taxpayer acted in bad faith." ( ABS-CBN Broadcasting Corp. v. CTA , 108 SCRA 151-152)" Based on the foregoing, this Office hereby clarifies that BIR Ruling No. 008-2006 dated September 8, 2006, which allows deduction of input VAT as part of inventory cost prior to the application of the 70% cap, may be applied retroactively from November 1, 2005 which is the effectivity date of R.A. No. 9337. aDCIHE This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue