By Nica Marsha Gasapo on August 19, 2021

The Bureau of Internal Revenue (BIR) recently issued Revenue Regulations (RR) 13-2021, which implement amendments to the National Internal Revenue Code of 1997’s (the “Tax Code”) penalty provisions as amended by Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (Train) Law.

The Train Law amended penal provisions on attempts to evade or defeat taxes in the Tax Code, among others, by imposing higher and tougher fines and penalties (including increased jail time, when applicable) for such offenses. It also added new penalty provisions.

The issuance of RR 13-2021 shows that the BIR is serious in penalizing tax evasion. In fact, it has been stepping up efforts against tax evaders.

But what really is tax evasion?

In Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr. (G.R. 147188, September 14, 2004), the Supreme Court differentiated tax avoidance from tax evasion. According to the court, tax avoidance is a tax-saving device within the means sanctioned by law. It should be used by the taxpayer in good faith and at arm’s length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

As discussed by the Supreme Court, tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind described as being “evil,” in “bad faith,” “willful,” or “deliberate and not accidental”; and (3) a course of action or failure of action which is unlawful.

Moreover, in Ungab v. Judge Cusi Jr. (186 Phil. 604 (1980), it was ruled that tax evasion is deemed complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all of the tax. Further, an assessment of the tax deficiency is not required in a criminal prosecution for tax evasion. The Supreme Court, has, however, explained that even if a deficiency assessment is not necessary, the fact that a tax is due must be proven first before one can be prosecuted for tax evasion.

The Bureau of Internal Revenue (BIR) recently issued Revenue Regulations (RR) 13-2021, which implement amendments to the National Internal Revenue Code of 1997’s (the “Tax Code”) penalty provisions as amended by Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (Train) Law.

The Train Law amended penal provisions on attempts to evade or defeat taxes in the Tax Code, among others, by imposing higher and tougher fines and penalties (including increased jail time, when applicable) for such offenses. It also added new penalty provisions.

The issuance of RR 13-2001 shows that the BIR is serious in penalizing tax evasion. In fact, it has been stepping up efforts against tax evaders.

But what really is tax evasion?

In Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr. (G.R. 147188, September 14, 2004), the Supreme Court differentiated tax avoidance from tax evasion.

According to the court, tax avoidance is a tax-saving device within the means sanctioned by law. It should be used by the taxpayer in good faith and at arm’s length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

As discussed by the Supreme Court, tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind described as being “evil,” in “bad faith,” “willful,” or “deliberate and not accidental”; and (3) a course of action or failure of action which is unlawful.

Moreover, in Ungab v. Judge Cusi Jr. (186 Phil. 604 (1980), it was ruled that tax evasion is deemed complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all of the tax. Further, an assessment of the tax deficiency is not required in a criminal prosecution for tax evasion. The Supreme Court, has, however, explained that even if a deficiency assessment is not necessary, the fact that a tax is due must be proven first before one can be prosecuted for tax evasion.

Thus, in Bureau of Internal Revenue v. Court of Appeals (G.R. 197590, November 24, 2014), the Supreme Court discussed that the government is allowed to resort to all evidence or resources available to determine a taxpayer’s income and to use methods to reconstruct his income.

One commonly used method by the government is the expenditure method, which reconstructs a taxpayer’s income by deducting aggregate yearly expenditures from the declared yearly income. When the amount of the money that a taxpayer spends during a given year exceeds his reported or declared income and the source of such money is unexplained, it may be inferred that such expenditures represent unreported or undeclared income.

Further, underdeclaration of more than 30 percent of a taxpayer’s reported or declared income constitutes prima facie evidence of false or fraudulent return pursuant to Section 248 (B) of the Tax Code. Prima facie evidence is one that will establish a fact or sustain a judgment unless contradictory evidence is produced.

As to what constitutes “willfulness”, the Court of Tax Appeals (CTA), in the case of People of the Philippines v. Judy Anne Santos y Lumagui (CTA Crim. Case O-012, January 16, 2013 or the “Judy Anne Case“), had the occasion to clarify that “willful” in tax crimes statutes is defined as “voluntary, intentional violation of known legal duty”. The element of willful failure to supply correct and accurate information must be fully established as a positive act or state of mind and that it cannot be presumed or attributed to mere inadvertent or negligent acts.

Hence, in the Judy Anne Case, the CTA gave credence to Judy Anne’s testimony (as well as that of the external auditor hired by the manager of Judy Anne) that she had no knowledge of how much she was earning per project, Judy Anne’s denial of the signature appearing above her name “Judy Anne Santos” in the income tax return for year 2002, and her intention to settle the case were it not for the opposition of her manager and then counsel.

The CTA concluded that the prosecution was able to prove that Judy Anne failed to supply correct and accurate information in her income tax return for year 2002. However, the CTA held that mere understatement of tax is not itself proof of fraud for the purpose of tax evasion. The records were bereft of any evidence to prove the key element of willfulness on the part of Judy Anne. While the CTA found that she was negligent, such finding was not enough to convict her. Lastly, the CTA held that Judy Anne’s intention to settle the case (were it not for the opposition of her manager and then counsel) negated any motive on her part to commit fraud.

Since tougher fines and penalties for tax evasion and other violations of the Tax Code have been introduced by Train Law, it is important that every taxpayer take compliance and observance of tax statutes seriously to avoid tax evasion problems with the BIR.

#TaxEvasion #TRAINLaw #RA10963 #TaxFraud #TaxCompliance #FraudulentReturns #TaxCriminalProsecution

Nica Marsha V. Gasapo is a junior associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). 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 the MTF website at www.mtfcounsel.com.

https://www.manilatimes.net/2021/08/19/business/top-business/taking-tax-evasion-seriously/1811508