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THE PITFALLS OF UNTRUTHFUL RETURNS AND DECLARATIONS

By Mark Anthony Tamayo on August 26, 2021

It is the basic duty and responsibility of every taxpayer and importer to provide truthful tax returns and import declarations.

Taxpayers are responsible for accurately determining their taxable incomes, computing their tax liabilities and submitting their tax returns in accordance with the rules as well as policies and guidelines issued by tax authorities.

In a similar vein, importers (and their customs brokers) are required to use reasonable care to enter, classify and determine the value of their imported goods and to provide any other information necessary. This is to enable the Bureau of Customs (BOC) to properly assess duties, collect accurate statistics, and determine whether other applicable legal requirements have been met.

Since tax returns and import declarations are based on self-assessment, the Bureau of Internal Revenue (BIR) and the BOC are tasked, within an ordinary three-year prescriptive period, to verify the truthfulness of the supplied information or declarations with the end goal of detecting short payments or non-compliance with the law, rules and regulations. An extraordinary period of 10 years may apply in certain cases, such as those involving false or fraudulent returns and declarations.

The BIR’s Letter of Authority will specify the type of tax to be examined and the particular taxable year. A BOC post-clearance audit (PCA), meanwhile, generally covers shipments for the last three years – counted backwards – from the date appearing in the Audit Notification Letter.

On false or fraudulent tax returns

A “false return” can be differentiated from a “fraudulent” one in the sense that the former implies deviation from the truth, whether intentional or due to an honest mistake. A “fraudulent return”, on the other hand, implies intentional or deceitful entry – one with intent to evade the taxes due (CIR vs. Philippine Daily Inquirer, G.R. No. 213943 [March 22, 2017]; Aznar vs. CTA, 57 Phil. 510, [Aug. 23, 1974]). A substantial under-declaration (resulting to over 30 percent) of taxable sales or income (or substantial overstatement of deductions) will constitute prima facie evidence of a false or fraudulent return.

In the case of Samar-I Electric Cooperative vs. CIR, G.R. No. 193100 (Dec. 10, 2014), the taxpayer failed to refute BIR findings of under-declaration. On this basis, the Supreme Court (SC) ruled that the substantial under-declaration of withholding taxes constituted a false return.

In CIR vs. Asalus Corp., G.R. No. 221590 (Feb. 22, 2017), meanwhile, the SC reiterated the Aznar case declaration that merely showing that the returns filed were false, notwithstanding the absence of intent to defraud, was sufficient to warrant the application of the 10-year prescriptive period.

In the Inquirer case, the taxpayer was able to refute the BIR’s false return allegation. The SC said the entry of wrong information due to a mistake, carelessness, or ignorance, without intent to evade tax, did not constitute a false return. It did not find enough evidence to prove fraud or intentional falsity on the part of the taxpayer.

Based on the above, it appears that in a false return allegation, the intent to evade tax must be present to be considered fraud. This therefore underscores the requirement of convincing and substantial evidence to prove (or negate) the existence of fraud or intentional falsity.

For tax fraud cases, the Tax Code provides a higher surcharge of 50 percent of the tax due.

On misclassification, misdeclaration and undervaluation

From a customs perspective, the terms “false return” or “fraudulent returns” relate to situations involving misclassification, misdeclaration and/or undervaluation of imported goods (see the TMT article “On Tariff Offenses” dated July 8, 2021). Discrepancies between the duty and tax that should have been paid and the amounts actually paid may give rise to a penalty that the BOC can impose at the border or during PCA.

At the border, the discrepancy may be subject to surcharges of 250 percent (in case of negligence) or 500 percent (for fraud), seizure and possible filing of a criminal case. In cases where the resulting discrepancy exceeds 30 percent, the discrepancy will constitute prima facie evidence of fraud.

If the issue is raised during the PCA, the importer will be penalized according to the degree of culpability (i.e., either negligence or fraud). In case of negligence, the imposable administrative fine is 125 percent of the revenue loss. In case of fraud, the fine is six times the revenue loss plus possible criminal action against the erring importer.

A 20 percent interest per annum on deficiency duties, taxes and other charges (plus fines and penalties, if any) will likewise be imposable.

Whether willfully committed or not, the offenses are also subject to provisions of Customs Memorandum Order 12-2021 with regard to imposable penalties arising from breaches of the importer’s responsibilities and violations of customs laws, rules and regulations.

The appropriate sanction (i.e., warning, one- to 12-month suspension, customs accreditation revocation or blacklisting), may be applied depending on the gravity of the offense and the presence of mitigating or aggravating circumstances. The sanctions will also be without prejudice to criminal, civil and other liabilities that may be incurred under the Customs Modernization and Tariff Act and other customs laws, rules, and regulations.

Issues raised by the BIR and the BOC during audits can be challenging and demanding, particularly if they involve allegations of untruthful returns or declarations. To mitigate the risks, taxpayers and importers need to be very circumspect in the preparation of tax returns and declarations.

#FalseReturns #FraudulentReturns #TaxFraud #BIRAudit #BOCAudit #TruthfulTaxReturns #TruthfulCustomsDeclarations #ImportDeclarations

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 one of the county’s recognized indirect tax leaders. The content of this article is not a substitute for professional advice where the specific circumstances warrant. If you have any questions or comments, email the author at info@mtfcounsel.com or visit the MTF website at www.mtfcounsel.com.

https://www.manilatimes.net/2021/08/26/business/top-business/the-pitfalls-of-untruthful-returns-and-declarations/1812347

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