The principle of non-retroactivity of tax rulings

AS a general principle, our laws are prospective and forward-looking in nature. As expressed in Article 4 of the Civil Code of the Philippines, laws shall have no retroactive effect unless the contrary is provided. In other words, the law shall apply only to cases that arise upon its effectivity, except when otherwise provided.

Relative to this rule, the decisions of the Supreme Court, made in the exercise of its power to interpret the law, retroact to the date the law was enacted. As explained in the case of San Miguel Corporation v. Commissioner of Internal Revenue (CIR) (GR 257697, April 12, 2023), citing the 1996 case of Columbia Pictures, Inc. v. Court of Appeals (CA) (GR 110318), these judicial decisions simply reflect the legislative intent behind the law. However, if the Supreme Court reverses its previously established doctrine, the new interpretation must be applied prospectively and should not prejudice those who have relied on the old doctrine in good faith.

On the matter of tax rulings and regulations, the CIR is authorized under the National Internal Revenue Code of 1997, as amended (Tax Code), to interpret tax laws and to reverse, revoke, or modify an existing ruling of the Bureau of Internal Revenue (BIR).

In this context, Section 246 of the Tax Code sets forth the general rule 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 this provision, the revocation of the rulings of the CIR is generally applied retroactively, except in instances when such application would prejudice the interests of the taxpayer.

However, three exceptions to the above exception permit the retroactive application of the CIR’s rulings, regardless of whether such would be prejudicial to the interests of the taxpayer: (1) when the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR; (2) when the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or (3) when the taxpayer acted in bad faith.

To illustrate, in the case of CIR v. Meridien East Realty & Development Corporation (CTA EB Case 2287, July 14, 2022), the CIR issued BIR Ruling DA-245-05 confirms to the taxpayer that its conveyance of land and common areas of a condominium in favor of a condominium corporation is not subject to income tax, withholding tax, and value-added tax. Later, the CIR revoked the said BIR Ruling through Revenue Memorandum Circular (RMC) 20-2010, holding the taxpayer liable for deficiency taxes. Since to retroactively apply the revocation of the BIR Ruling would prejudice the interest of the taxpayer and thus violate the rule on non-retroactivity of rulings, the CTA En Banc ruled that BIR Ruling DA-245-05 should remain in effect.

The interpretation as to the authority of the revocation, modification, or reversal of rules, circulars and rulings in light of Section 246 has evolved.

In the 1999 case of Philippine Bank of Communications v. CIR (GR 112024), it was held that for Section 246 to apply, it is the CIR himself, and not the court, who must nullify or reverse the CIR’s issuance. In this case, the taxpayer filed a claim for tax refund or credit three years after payment, mistakenly relying on BIR RMC 7-85, which stated a 10-year prescriptive period for filing instead of the correct two-year period.

The Court of Tax Appeals (CTA) and the CA nullified the said BIR RMC for being contrary to the provisions of the Tax Code and consequently denied the taxpayer’s claim for refund or credit. Eventually, the Supreme Court upheld the CTA and CA’s decisions, holding that the rule on non-retroactivity does not apply when it is the court, rather than the CIR, which nullifies the BIR issuance.

However, in the 2013 case of CIR v. San Roque Power Corporation (GR 187485), the Supreme Court expressed that Section 246 of the Tax Code applies to reversals by either the CIR or the Supreme Court since the law expressly states “any revocation, modification, or reversal,” without stating who makes the revocation, modification, or reversal. This interpretation was cited in the 2021 case of Energy Development Corporation v. CIR (GR 203367).

In other words, reversals made by the courts, such as the Supreme Court, of BIR rules and regulations cannot, as a general rule, be retroactively applied.

The doctrine of non-retroactivity of rulings is an important concept in our tax laws. It protects taxpayers who have, in good faith, relied on the BIR issuances as they existed at the time.

Raida Argeli G. Grefiel is an associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any questions or comments regarding this article, you may email the author at [email protected] or visit the MTF website at www.mtfcounsel.com.