Most probably, If you are the head of accounting or finance in your organization, you must have considered securing a ruling from the Bureau of Internal Revenue (BIR). Quite a number of taxpayers, corporate or individual, write to the BIR for a confirmation of the tax implications of a given transaction.

What does a BIR ruling offer them? A business transaction may turn awry when the tax implications of such transaction are either ignored or incorrectly estimated. Thus, to assure that everything would go according to plan, at least with regard to the tax aspect of the transaction, businessmen find it expedient to secure a BIR ruling. To put it simply, a BIR ruling gives the taxpayer peace of mind. To the minds of many taxpayers, if the BIR, through a ruling, says the transaction is not subject to tax, then the taxpayer can wake up the next morning, rest assured that the transaction would still have the same tax impact.

The power of the BIR to issue revenue rulings may well stem from its power to interpret tax laws. The power of the commissioner of internal revenue, under the 1997 Tax Code, is not absolute, though, but is subject to review by the secretary of finance. Thus, BIR rulings involving the provisions of the 1997 Tax Code and other tax laws may be reversed by the secretary of finance.

Not only the secretary of finance, but the BIR itself, can reverse its own rulings. In other words, the BIR can still go back on its word by revoking a previously issued ruling. Good thing, though, the law is clear that if the revocation would be prejudicial to the taxpayer, such revocation cannot be given retroactive application. The rule on nonretroactivity in case the revocation is prejudicial to the taxpayer is fairly established in our jurisprudence.

It is an established doctrine that “a taxpayer cannot be convicted for taking the tax authorities at their word.” (International Business Machines v. US, 343 F 2d [1965] p. 923.) Thus, the government is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom.

However, there are instances where a revocation can be applied retroactively, even if prejudicial to a taxpayer. One is when a taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the BIR. Another is when the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based. Also, when the taxpayer acted in bad faith, the revocation may have retroactive effect.

BIR rulings may also be set aside by courts, if found to be contrary to law.

Although the courts may uphold administrative rulings, especially those that are not contrary to law, it should be noted that administrative rulings are not binding on the courts.

The law does not prescribe in what form a revocation should be embodied in. In one case, the court ruled that the revocation was made when the BIR filed its answer to a taxpayer’s petition for review before the Court of Tax Appeals, with a position inconsistent with the ruling previously issued. What is important to note, though, is that the taxpayer is entitled to the benefits of the ruling prior to its revocation.

The fact that BIR rulings can still be revoked, either by the BIR, the secretary of finance or by the courts, does not lessen the importance of getting a BIR ruling for business transactions. The stability that a BIR ruling offers may far outweigh the risk that the ruling would be revoked or that the revocation would be applied retroactively. Thus, for many business transactions, a BIR ruling is indispensable.

Source: BusinessMirror