Law Summary
Legal Interpretation and Conflict with VAT Law
- Upon merger, absorbed corporations cease business, triggering a "deemed sale" of merchandise inventory for VAT purposes under Section 106(B)(4) of the Tax Reform Code.
- Unused input taxes from absorbed corporations cannot be transferred to the surviving corporation; they only apply to the original buyer entitled to tax credit per Section 110(A)(2)(a) and Revenue Regulations No. 7-95.
- Absorbed corporations must pay VAT on deemed sale after deducting input taxes; any excess input tax may be claimed as a refund.
Illegality of the BIR Ruling No. S34-263-97 and Legal Precedents
- The BIR Ruling permitting tax-free transfer and input tax absorption by the surviving corporation violates VAT law.
- Supreme Court jurisprudence mandates administrative issuances must not override laws and regulations inconsistent with the law are void.
- Revocation/setting aside of the VAT-related portion of BIR Ruling S34-263-97 is warranted.
- The income tax provisions concerning tax-free exchange under Sections 34(c)(2) and 6(b) of the Tax Code remain unaffected.
Statute of Limitations and Filing Requirements for VAT on Deemed Sales
- Tax Code statute of limitations: three years from filing return, ten years from discovery of omission (Sections 203 and 222).
- Revenue Regulations No. 7-95 requires filing of "deemed sale" inventory within 30 days of cessation/retirement from business.
- This filing serves as the VAT return basis for the absorbed corporation's tax liabilities.
Enforcement and Tax Assessment Following Revocation of BIR Ruling
- All VAT liabilities resulting from mergers that availed the revoked ruling's preferential treatments should be assessed within limitation periods.
- Supreme Court supports collection of unpaid taxes despite prior erroneous administrative rulings.
- No vested taxpayer rights arise from erroneous or illegal tax exemptions or preferential treatments.
Non-Retroactivity of Administrative Rulings and Exceptions
- Cases such as ABS-CBN vs. CTA and Commissioner vs. Burroughs reflect non-retroactivity of rulings to avoid injustice when taxes have been paid.
- However, where preferential treatments are granted without legal basis, non-retroactivity does not protect taxpayers from lawful tax collection.
Government's Authority to Collect Taxes and Impact on Taxpayers
- Government's power to tax is an inherent sovereignty attribute; it must collect due taxes despite earlier administrative errors.
- Taxpayers have no acquired vested rights to illegal tax exemptions or preferences.
- Non-retroactivity clause in Section 246 does not prevent reassessment where no prejudice arises.
Implementation and Compliance Measures
- Audit teams must verify mergers/consolidations and ensure VAT dues are collected per this Circular.
- Revenue officials are mandated to widely publicize the Circular and enforce its provisions to recover tax revenue.
This summary captures the critical legal principles, procedural requirements, and administrative directives concerning VAT liabilities on merchandise inventories in mergers and the associated rulings and regulatory conflicts.