January 24, 2007

BIR RULING NO. 002-07

RR 16-05 008-06 000-00

Isla Lipana & Co.

29th Floor Philamlife Tower
8767 Paseo de Roxas
Makati City

Attention: Atty. Alexander B. Cabrera

Partner

Gentlemen :

This refers to your letter dated January 5, 2007 requesting on behalf of your
client, Pilipinas Makro, Inc. (Makro for brevity), for a supplemental ruling or a
confirmation that BIR Ruling No. 008-2006 dated September 8, 2006 can be applied
retroactively and that the deduction of input VAT as part of inventory cost can be
made prior to the application of the 70% cap on input VAT imposed by Republic Act
(RA) No. 9337.

In reply, please be informed that revenue rulings are interpretations of the law
and should apply simultaneously with the latter. They are opinions and interpretations
of the Commissioner of Internal Revenue with respect to the provisions of the Tax
Code and other tax laws which are issued in response to a specific request for ruling
filed by a taxpayer. Being interpretations, revenue rulings should generally take effect
from the time the law became effective. However, an exception to this rule is provided
under Section 246 of the Tax Code of 1997, as amended, which we quote 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
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 prejudicial to the taxpayers.''

Based on the foregoing, retroactive application shall not be allowed in case of

rulings which revoke, modify or reverse previous rulings and such revocation,
modification, or reversal is prejudicial to the taxpayers. In other words, as long as the
rulings are not prejudicial to the taxpayer, the same may be given retroactive effect.

Retroactive application of rulings finds support in court decisions. In the case

of Commissioner of Internal Revenue vs. Court of Tax Appeals and Warner-Lambert
Philippines, Inc. (CA-G.R. SP No. 31025 January 12, 1994), the Court of Appeals
(CA) affirmed the decision of the Court of Tax Appeals which ruled, among others,
that rulings of the Commissioner of Internal Revenue which are not prejudicial to
taxpayers must be given retroactive application. The CA, thus, declared:

"It is clear from the foregoing that circulars or rulings promulgated by the
Commissioner of Internal Revenue have no retroactive application where to so
apply them would be prejudicial to taxpayers. Conversely, if the ruling or
circular is beneficial to taxpayers, the same must be given retroactive
application to lighten the taxpayer's tax burden. The power of taxation should
be exercised with caution to minimize injury to the rights of a taxpayer (Roxas
vs. Court of Tax Appeals, 23 SCRA 276)" 3uptpe07

Moreover, in the case of Commissioner of Internal Revenue vs. Burroughs

Limited and the Court of Tax Appeals (G.R. No. L-66653, June 19, 1986), the
Supreme Court retroactively applied the Revenue Ruling of January 21, 1980 to a
transaction which took place on March 14, 1979. In the same decision, the Court
upheld the rule that retroactivity shall not apply in case of revocation, modification or
reversal of any rulings issued by the Commissioner of Internal Revenue when the
same is prejudicial to the taxpayer. We quote hereunder the relevant portion of the
decision, to wit:

"Petitioner's aforesaid contention is without merit. What is applicable in the

case at bar is still the Revenue Ruling of January 21, 1980 because private
respondent Burroughs Limited paid the branch profit remittance tax in
question on March 14, 1979. Memorandum Circular No. 8-82 dated March
17, 1982 cannot be given retroactive effect in the light of Section 327 of the
National Internal Revenue Code which provides —

"Sec. 327. Non-retroactivity of rulings. — Any revocation,

modification, or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or any of

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 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 taxpayer
except in the following cases (a) where the taxpayer
deliberately misstates or omits material facts from his return or
in 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." (ABS-CBN Broadcasting Corp. v. CTA, 108
SCRA 151-152)"

Based on the foregoing, this Office hereby clarifies that BIR Ruling No.
008-2006 dated September 8, 2006, which allows deduction of input VAT as part of
inventory cost prior to the application of the 70% cap, may be applied retroactively
from November 1, 2005 which is the effectivity date of R.A. No. 9337. aDCIHE

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be disclosed that the facts are different, then
this ruling shall be considered null and void.

Very truly yours,

(SGD.) JOSE MARIO C. BUÑAG

Commissioner
Bureau of Internal Revenue

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