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THE QUEST TO CONTAIN CREATIVITY

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By: Atty. Mark Anthony Tamayo on August 6,2020

Any scheme that has to do with minimizing, eliminating or altering the incidence of taxation may be closely scrutinized and ultimately questioned by tax authorities.

There is no question that the adoption of fraudulent means to deliberately reduce, deceive or conceal one’s correct and proper tax results in tax evasion. This is explicitly illegal and, thus, criminally punishable. In contrast, tax avoidance is exactly what the term suggests. As long as the scheme adopted does not contravene any specific tax law, it is considered within the bounds of the law, but arguably may not necessarily be within its spirit. The distinction between these two lies not in the results, as both results in the avoidance of tax, but in the legality of the transaction.

While the distinction between these two is theoretically quite clear, confusion and misimpressions among stakeholders continue to linger as their imbricating concepts are, perhaps, either understood superficially or misunderstood entirely. The misunderstanding further escalates when one indulges in excavating the demarcation line between what are considered acceptable or permissible tax avoidance practices and those that are not. Any uncertainty in the tax system is something businesses either want or not, depending on the level of their sense of creativity.

From the taxpayer’s perspective, as long as the tax avoidance scheme adopted is not expressly prohibited within the four corners of the tax laws, the same should be considered allowable.

As ruled in the case of Marinduque Iron Mines Agents Inc. v. Municipal Council of Hinabangan, Samar, G.R. L-18924, statutes are to be construed strictly against the subjection to tax liability and not be construed as imposing a tax, unless it does so clearly. In other words, burdens are not (nor presumed) to be imposed beyond what the statutes clearly import (CIR v. CA, G.R. 115349).

It is through the ambiguities and imperfections of the law that taxpayers try to take advantage of reducing their burden, subject, of course, to the risk of being questioned on its propriety by the tax authorities.

The tax authorities’ view, albeit understandably, bends toward the assumption that tax avoidance is not absolutely legal. It would seem that this notion stems from the position that there exists no discernable difference between permissible and impermissible tax avoidance, notwithstanding the fact (without delving into the proposed amendments to the Tax Code) that the Tax Code (and certain Bureau of Internal Revenue regulations issued) only provides specific anti-avoidance rules that target specific “known and identified” arrangements with very limited scope of application.

From the tax authorities’ view, tax mitigation schemes fall within the gray area between tax avoidance and evasion. These schemes, whether international or local in character, are perceived to undermine the tax system and often regarded as forms of tax noncompliance, especially in cases involving profit-shifting from high-tax to low-tax jurisdictions or regimes.

On the other hand, courts would resolve cases on the basis of whether a transaction is deemed abusive, aggressive, fraudulent or simply contrary to the letter or spirit of the law. Without these factors, the judicial outlook is not to nullify the transaction, even if the scheme, as a consequence, effectively results in attaining the aim to minimize or avoid taxes.

Jurisprudence on this matter has thus evolved based on the application of the statutory construction rules, the principles on corporate law and the adoption of certain common law doctrines, among others.

In applying a corporate law principle as legal basis in determining the proper amount of taxes, the traditional, as well as the reverse “piercing of veil of corporate fiction,” has been adopted by the courts on instances where the notion of legal entity is used as a vehicle for, among others, the circumvention of statutes (see Yutivo v. CTA, G.R. L-13203; Liddell and Co. v. Collector, G.R. L-9687; and I/AME v. Litton, G.R. 191525).

The “test of reasonableness” has also been applied to counter practices in claiming excessive and disproportionate deductible expense (see Kuenzle and Streiff Inc. v. CIR, G.R. L-18840). The “reasonableness” requirement under the Tax Code is resolved by the courts on a case-to-case basis, taking into consideration the interplay of various factors that include the size of the business and economic conditions (C.M. Hoskins and Co v. CIR, G.R. L24059).

The courts also adhere to the time-honored principle of “substance over form or catch all,” which was elucidated in the case of Gregory v. Helvering, 293 U.S. 465, where the court pronounced that, as a general rule, the incident of taxation depends on the substance, rather than form, of the transaction. Based on this principle, the courts could recharacterize a transaction to give more importance to the true spirit and intention of the law than its literal interpretation (see Keppel Bank Phils. Inc. v CIR, CTA Case 6560; CIR v. Marubeni Corporation, G.R. 137377). A transaction could be ruled out if the same was designed not for a proper commercial reason, but for the purpose of avoiding tax.

The “economic substance” and “business purpose” doctrines have also been applied to resolve issues on whether a particular scheme is prompted more on the mitigation of tax liabilities than for legitimate business purposes (see CIR v. Estate of Benigno P. Toda Jr., G.R. 147188).

The quest to achieve competitiveness in business is one of the driving forces that propels creativity in tax avoidance. Gaps in the law open up opportunities, which, in turn, give birth to creativity. As long as the adopted schemes neither clash with the doctrines laid down by the courts nor contravene any specific provision of the Tax Code, the same should be respected, even if these result in a tax advantage or benefit.

Containing creativity may not be the solution to neutralize or thwart tax avoidance. Certainty in the tax system may be what businesses want.

Mark Anthony P. Tamayo is a CPA-lawyer and a partner of Mata-Perez, Tamayo & Francisco (MTF) Counsel. He is a recipient of the 2016 Asia Tax Practice Leader award and is consistently voted as one of the recognized indirect tax leaders in the Philippines by the International Tax Review.

https://www.manilatimes.net/2020/08/06/business/columnists-business/the-quest-to-contain-creativity/751361/

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