Inherent in the three branches of our government are three core powers granted by the 1987 Philippine Constitution. The authority to make laws and to alter or repeal them is conferred on the Legislative Department. The implementation of laws is charged to the Executive Department. The power to interpret laws, to hear and decide cases when disputes arise, lies with the Judiciary. The existence of these independent co-equal bodies is a fundamental characteristic of a democratic government.
As part of the Executive Department, the Bureau of Internal Revenue (BIR) is vested with powers to assess and collect taxes. To some extent, it also exercises quasi-judicial and subordinate legislative functions. The Tax Code authorizes the Commissioner of Internal Revenue (“Commissioner”) to interpret tax laws, subject to review by the Secretary of Finance. Government agencies like the BIR also have the power of subordinate legislation to aid in the implementation of tax laws. In exercising these functions, the Commissioner recommends the promulgation of Revenue Regulations (RRs) and issues tax rulings and other revenue issuances such as Revenue Memorandum Circulars (RMCs), Revenue Memorandum Orders (RMOs), Revenue Audit Memorandum Orders (RAMOs) and Revenue Memorandum Rulings (RMRs), among others.
These issuances have different purposes and functions according to the BIR. RRs are issued by the Secretary of Finance, upon the recommendation of the Commissioner. They prescribe or define rules and regulations for the effective enforcement of the provisions of the Tax Code and related statutes. Tax rulings on the other hand, are official positions of the BIR on inquiries of taxpayers who request clarification on certain provisions of the Tax Code, other tax laws, or their implementing regulations, usually to seek tax exemptions. RMCs contain pertinent and applicable portions, as well as amplification of laws, rules, regulations and precedents issued by the BIR and other agencies/offices. RMOs provide directives or instructions, prescribe guidelines and outline processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated policies, objectives, plans and programs of the BIR in all areas of operations, except audit. Lastly, RMRs are rulings, opinions and interpretations of the Commissioner with respect to the provisions of the Tax Code and other tax laws, as applied to a specific set of facts, with or without established precedents, and which the Commissioner may issue from time to time to inform taxpayers of the tax consequences on specific situations.
On the BIR’s power of subordinate legislation, the Supreme Court (SC) has explained that although the power to legislate is non-delegable and belongs exclusively to Congress, such authority may be delegated to implement laws and effectuate policies whenever Congress finds it impracticable, if not impossible, to anticipate situations that may be met in carrying the law into effect. It is required, however, that the regulations be germane to the objects and purposes of the law, and conform to the prescribed standards of the law. Although courts usually accord these regulations with great respect, such interpretation is not conclusive and will be ignored if judicially found to be erroneous.
Applying this well-settled principle, over the past few years, the SC had overruled the Commissioner’s issuances and interpretations of the law because such were found to be erroneous.
In a 2013 case on availment of tax treaty benefits, the SC highlighted the time-honored international law principle of pacta sunt servanda which requires both parties to comply with their treaty obligations in good faith, since treaties have the force and effect of law in our jurisdiction. (G.R. 188550, 19 August 2013.) In that case, the taxpayer filed a claim for refund on its overpayment of branch profit remittance tax (BPRT) on the basis of a preferential tax treaty rate of 10% (instead of the 15% rate that the taxpayer used). However, it failed to timely file a tax treaty relief application (TTRA) as required by RMO No. 1-2000.
The SC disagreed with the BIR that the timely filing of a TTRA is necessary for availing of tax treaty benefits. Further, it held that failure to strictly follow the requirement for a TTRA should not operate to divest entitlement to the relief in violation of the pacta sunt servanda doctrine. Therefore, the BIR must not impose this additional requirement when the tax treaty does not provide for said prerequisite.
With this development, subsequent decisions of the Court of Tax Appeals (CTA) have been in favor of the taxpayer notwithstanding the non-filing or belated filing of the TTRA. Notwithstanding, the BIR still requires the filing of TTRA although they are no longer strict as to the period of filing (i.e., before the first taxable event as required under RMO No. 72-2010, which subsequently amended RMO No. 1-2000).
Another instance of overturned administrative issuances would be BIR Ruling Nos. 370-2011 and 378-2011. In January 2015, the SC invalidated these tax rulings which covered the imposition of a 20% final withholding tax (FWT) on the interest income from the issuance of Poverty Eradication and Alleviation Certificates (PEACe) Bonds by the Bureau of Treasury for being deposit substitutes (G.R. No. 198756, 13 January 2015). The Tax Code defines deposit substitutes as “an alternative form of obtaining funds from the public (the term ‘public’ means borrowing from twenty [20] or more individual or corporate lenders at any one time), other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account.”
In striking down these issuances, the SC applied the 20-lender rule (i.e., 20 or more lenders at any one time) to determine whether a debt instrument is considered a deposit substitute, subject to 20% FWT. The SC found that these rulings disregarded the 20-lender rule by considering all treasury bonds, regardless of the number of purchasers/lenders at the time of origination/issuances, to be deposit substitutes. As a result, the SC ruled that the BIR’s interpretation created a distinction between government debt instruments and private bonds where there was none in the tax law.
The SC further explained that the phrase ‘at any one time’, for purposes of determining the 20-lender rule, would refer to every transaction executed in the primary or secondary market relative to the purchase or sale of the securities. The SC also ruled that there is a deemed public borrowing and the bonds are considered deposit substitutes when funds are simultaneously obtained from 20 or more lenders through any of the transactions connected in the issuance/trading of the government bonds (e.g., issuance by the Bureau of Treasury; sale/distribution of government dealers; and trading in the secondary market).
As a result, there is currently a temporary restraining order on implementing RR No. 1-2014 and RMC No. 5-2014. These issuances required disclosure of recipients of income, including investors who receive income payments and dividends, and disallowed listed companies to name a Philippine Central Depositary nominee as payee of the income.
Likewise, taxpayers are now questioning the implementation of RR No. 4-2011. This RR provides that a bank may deduct only those costs and expenses attributable to the operation of its Regular Banking Unit (RBU) to arrive at its taxable income. Any cost or expense related to or incurred in the operation of its foreign currency deposit unit (FCDU)/expanded FCDU (EFCDU) or offshore banking unit (OBU) is not allowed as deduction from the RBU’s taxable income.
To safeguard taxpayers from the implications of erroneous administrative rulings, the non-retroactivity rule under Section 246 of the Tax Code provides that modifications or reversals of any BIR rules, regulations and rulings shall not be given retroactive application if it will be prejudicial to the taxpayers, subject to certain exceptions (e.g., deliberate omission of certain facts, taxpayers acted in bad faith, and material facts subsequently gathered by the BIR are different from the facts presented in its ruling). It is derived from a statutory presumption that all laws should be interpreted to have only future effects unless expressly stated otherwise.
The collective efforts of the BIR to source needed funds for public welfare are commendable, but its powers should be exercised judiciously and consistently with its legislative purpose and within the procedural standards of the law. As an administrative agency, the BIR must act within the limits of its delegated power of subordinate legislation and its limited adjudication power with deference to the courts. Such fundamental principles cannot be ignored. Without restraint of their powers, taxing authorities would be left unchallenged. And more regrettably, taxpayers may find themselves having to pay more than their fair share.
Sylvia B. Salvador is a director at the tax services department of Isla Lipana & Co., the Philippine member firm of PwC network.
sylvia.r.salvador@ph.pwc.com.
source: Businessworld
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