Proposed Revenue Regulations on the Binding Effect of Rulings Prior to the Tax Reform Act of 1997

March 12, 2012 DOF MEMORANDUM FOR : Commissioner Kim S. Jacinto-Henares Bureau of Internal Revenue SUBJECT : Proposed Revenue Regulations on the Binding Effect of Rulings Prior to the Tax Reform Act of 1997 We refer to the Proposed Revenue Regulations (RR) on the Binding Effect of Rulings Prior to the Tax Reform Act of 1997. The proposed RR provides that "all rulings prior to January 1, 1998 will no longer have any binding effect. Consequently, these rulings cannot be invoked as basis for any current business transaction/s. Neither can these rulings be used as basis for securing legal tax opinions/rulings." We understand that the necessity of the proposed RR springs from the reliance of many taxpayers on the rulings issued before the issuance of the present tax code. Despite the amendments to the same code, such rulings issued prior to 1998 have continued to be used in support of various taxpayers' (not necessarily a party to the ruling itself) position. Further, we understand that there is a need to settle the gray areas in the law, which settlement has been delayed by the improper reliance on rulings issued pursuant to the previous tax code. Mindful of the legal affects of an administrative ruling in general, we find the proposed RR in order. We, however, respectfully submit that the proposed RR is without prejudice to the application of Section 246 of the NIRC of 1997, as amended, which provides: DIcSHE SEC. 246. Non-Retroactivity of Rulings. 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, except in the following cases: (a) Where the taxpayer deliberately misstates or omits material facts from his return or 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. To this end, the Supreme Court has consistently held that rulings and circulars, rules and regulations, promulgated by the Commissioner of Internal Revenue, would have no retroactive application if to so apply them would be prejudicial to the taxpayers. 1 But even if prejudicial to a taxpayer, retroactive application is still allowed where: (a) a taxpayer deliberately misstates or omits material facts from his return or any document required by the BIR; (b) where subsequent facts gathered by the BIR are materially different from which the ruling is based; and (c) where the taxpayer acted in bad faith. Further, considering that a material difference in the facts will warrant inapplicable the ruling as basis for subsequent requests, we find the proposed RR to be actually a mere reiteration of such rule. Accordingly, a revision of the proposed RR is recommended to emphasize that a material deviation from the facts as presented in the ruling sufficiently renders such ruling inappropriate as basis for other transactions. For your consideration. (SGD.) ASEC. PETER L. CALIMAG Revenue Operations and Legal Affairs Group ATTACHMENT Revenue Regulations No. 005-12 April 2, 2012 Footnotes 1. CIR v. Benguet Corporation, G.R. No. 145559, July 2006, citing CIR v. Court of Appeals, Court of Tax Appeals & Alhambra Industries, Inc., G.R. No. 117982, February 6, 1997, 267 SCRA 557, 564; CIR v. Telefunken Semiconductor Phils., Inc., et al., G.R. No. 103915, October 23, 1995, 249 SCRA 401, 407; CIR v. Burroughs Limited and CTA, G.R. No. L-66653, June 19, 1986, 142 SCRA 324, 328; ABS-CBN Broadcasting Corporation v. CTA and CIR, G.R. No. L-52306, October 12, 1981, 108 SCRA 142, 148.