Tax administration and the paradigm of non-retroactivity of tax issuances

In a nutshell, the agencies of the government which are involved in tax law enforcement or tax administration are the Bureau of Internal Revenue and the Bureau of Customs for internal revenue and customs law enforcement, respectively; and the provincial, city and municipal treasurers for local and real property taxes. The Courts, however, are not exactly part of the administrative process, but in the tax milieu they do play an important role since sound tax administration must move along the correct interpretation of tax laws.

Occupying the forefront of tax law enforcement is the Bureau of Internal Revenue (BIR) which is under the supervision and control of the Department of Finance. The BIR is the country’s leading tax collecting agency contributing over 75 percent of total national government tax revenue. It plays an important role in the government’s commitment to attain sustainable progress by raising the  revenues needed   to pursue development programs and projects.

Under Section 3 of the National Internal Revenue Code of 1997 (NIRC), the Bureau of Internal Revenue shall have a chief to be known as commissioner of Internal Revenue. Definitely, such a position accompanies certain powers and duties which only seek effect the proper tax law enforcement and administration.

Among the various powers of the BIR commissioner, one distinct power which the law grants to the commissioner is the power to interpret tax laws and other tax related laws which shall be under his exclusive and original jurisdiction, subject to review by the Secretary of Finance.

As a result of this power to interpret the provisions of the Tax Code and other related laws, the BIR commissioner can issue, Revenue Regulations (RR), Revenue Memorandum Circulars (RMC), Revenue Memorandum Order (RMO), Revenue Delegation Authority Orders (RDAO) and Revenue Administrative Orders (RAO).

Just like any other power vested by law, this power to interpret tax laws is not absolute. It is subject to limitations that ensure it is properly exercised and implemented, thus safeguarding taxpayers from the abuses by the BIR against the right of taxpayers. This is the limitation on non-retroactivity of tax issuances which was highlighted by the Court of Tax Appeals (CTA) in its very recent case of Commissioner of Internal Revenue (CIR) vs. COL Financing Group, Inc., CTA EB Case No. 1187, June 30, 2015.

In this case, the taxpayer COL Financing Group, Inc. filed its income tax return for the first three quarters of the taxable year 2009 using the itemized method of deduction for claiming its expenses. At the time of its filing, RR No. 16-2008 allows the taxpayer to use either the Itemized or Optional Standard Deduction (OSD) method, but the option to choose the method of deduction shall be determined in its annual ITR.

However, on Feb. 24 and 26, 2010, the BIR issued RR No. 02-2010 and RMC 16-10, respectively, which now provides the method of deduction shall be determined in the taxpayer’s first quarterly ITR instead of the annual ITR, and that this rule shall be applicable for taxable year 2009.

Despite this new regulation, COL filed its annual ITR on April 12, 2010 using the OSD.  It, however, paid under protest, an additional income tax under that would have been due had it used the itemized deduction.  It then filed an application for refund with the BIR on the excess income tax paid. 

In arriving at a decision to allow a refund to COL, the CTA in an en banc decision applied the principle of non-retroactivity of laws. This principle of law prohibits the application of a retrospective law, which in the legal sense, is one which takes away or impairs vested rights acquired under existing laws, or creates a new obligation and imposes a new duty, or attaches a new disability, in respect of transactions or considerations already past. The court explained that when COL filed its first 3 quarterly ITRs for 2009, it was with the belief that it can still change its method of deduction for its annual ITR. With the issuance of RR 02-2010, it had lost this option. It then ruled that the issuance of RR No. 02-2010 should not be given retroactive application for being prejudicial to the rights of the taxpayers. 

The Court emphasized the NIRC itself prohibits retroactive rulings under Section 246 stating that any revocation, modification or reversal of any of the rules and regulations shall not be given retroactive application, if prejudicial to the taxpayers. This rule, however, is subject to three exceptions: (a) If the taxpayer deliberately misstates or omits material facts from his return or any document required by the BIR; (b) If the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or (c) If the taxpayer acted in bad faith.

Since there was no showing by the BIR that there exist any of the exceptions enumerated in Section 246 of the NIRC against the taxpayer, the Court ruled RR No.02-2010 cannot be given retroactive application.

With this principle of non-retroactivity of laws, taxpayers can resort to this principle in those instances where they believe that issuances by the BIR would prejudice their rights as a taxpayer.

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Glenn D. delos Santos is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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