By: Euney Marie J. Mata-Perez on August 9, 2018

As a general rule, corporate officers are not liable for a corporation’s liabilities because of the legal fiction that corporate entities have legal personality separate from the individuals that comprise it.

Obligations incurred by directors, officers and employees of corporations, acting as corporate agents, are not their own, but are the direct accountabilities of the corporations they represent.

However, courts may disregard this legal fiction and make officers personally and solidarily liable with the corporate taxpayer when the corporation is used to evade an existing obligation, to defeat public convenience, or to justify a wrong or commit fraud.

Also, by explicit mandate under Sec. 253 of the Tax Code, penalties imposed for crimes and other offenses punishable by the Tax Code on corporations shall, by operation of law, be imposed on the partner, president, general manager, branch manager, treasurer, officer-in-charge, and the employees responsible for commission of the offense.

Among the offenses subject of such penalties is the willful attempt in any manner to evade or defeat any tax under Sec. 254 of the Tax Code, or tax evasion.

“Willfulness” for tax evasion purposes connotes “voluntariness” or “knowledge”, or a refusal to pay, despite awareness by the taxpayer of the tax liability. Bad motive or intent to defraud the government need not be shown. Proving “willfulness” is sufficient.

Thus, officers have been held liable when it was proven that they voluntarily, knowingly and intentionally failed, neglected or refused to pay or cause the payment of a corporation’s tax liabilities.

In one instance, a president of a corporation was held personally and solidarily liable with the corporation for the corporation’s tax deficiencies because he ignored the BIR’s assessment notices and demand letter, and didn’t contest the same, despite receipt and knowledge of such assessment and demand.

That the president acted upon counsel’s advice was not considered a valid defense. (People v. Ongsiako, CTA Crim Case No. O-196, July 22, 2014.)

The CTA has also allowed the filing of a criminal information against the officers of a corporation who failed to comply with, or ignored a subpoena duces tecum, thereby depriving BIR officers of the opportunity to examine the corporation’s books and records.

However, courts have freed or acquitted officers from corporate tax when it was proven they acted in good faith, and with best efforts, complied with the demand to pay the assessed deficiency tax.

The court liability considered acts like responding to subpoena, offering to settle tax obligations, and attempting to avail of the BIR tax amnesty program as acts which negate “willfulness.”

Also, since the penalties for tax evasion are criminal in nature, the courts would dismiss the case if the BIR fails to prove willfulness or commission of punishable acts beyond a reasonable doubt.

This is what happened in the recent case of People of the Phils. v. Izumo Contractors, Inc., Cedric Lee, et. al. (CTA Crim. Case Nos. 0526-0529) where the BIR simply relied on general information sheets and failed to prove that the accused were the responsible officers of the taxpayer at the time of the commission of acts complained of, or were responsible for the failure to supply the correct information in the corporation’s tax returns.

Dismissal would also ensue if the BIR fails to prove that the taxpayer was duly served the assessment notices. Proper service is a must not only because of due process, but also because “willfulness” presupposes knowledge.

It should be stressed that Republic Act No. 10963 or TRAIN 1 increased the penalties for tax evasion tax under Sec. 254 of the Tax Code. It increased the fine from not more than P100,000 to not less than P500,000 but not more than P10 million, and increased the period of imprisonment from a period not exceeding four years to a period from six to 10 years.

The same increased penalties are also imposed for the (i) failure to issue receipts or sales or commercial invoices, (ii) issuance of receipts or invoices that don’t truly reflect and/or contain all the information required to be shown therein, or (iii) issuance of multiple or double receipts or invoices.

In addition, TRAIN 1 has also made punishable the failure to transmit sales data entered on cash register machine or point of sales system machines to the BIR’s electronic sales reporting system.

Considering that officers of corporations are now exposed to the risk of higher potential tax liabilities, they should exercise greater diligence and due care and attention to the settlement of the corporation’s tax liabilities.

Besides ensuring that proper taxes are paid, they should also ensure that BIR notices or demands are responded to properly, and not simply ignored.

Corporate officers should of course get proper tax advice on these matters.

#liabilityofcorporateofficer #taxpenalty #legalfiction #corporateveil #corporateofficer 

Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer. She acknowledges the contribution of Ms. Aziza Hannah A. Bacay to this article. 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 question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com