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Liability to pay in tax evasion cases

By Nica Marsha Gasapo on June 30,2022

UNDER the Rules of Court, civil action deemed instituted with a criminal action is only the action to recover civil liability arising from the crime. In a criminal action for tax evasion, such as those filed pursuant to Sections 254 and 255 of the Tax Code, the accused’s liability to pay the unpaid tax is not deemed instituted in the action.

Jurisprudence has settled that the liability to pay tax is one that arises from law and not from the offense of tax evasion. A tax evasion case filed by the state against a taxpayer has for its purpose the imposition of criminal liability.

Thus, in the 1967 case of Republic of the Philippines v Patanao, the Supreme Court held that the “liability to pay taxes arises from the fact, for instance, that one has engaged himself in business, and not because of any criminal act committed by him.” Likewise, in the 2006 case of Proton Pilipinas Corp.  v Republic of the Philippines, the Supreme Court clarified that payment of taxes was an obligation created by statute.

It is the statute that creates the obligation to pay. This obligation is not created as a consequence of a felony charged in a criminal proceeding. In addition, the obligation to pay is not a mere civil liability that may be obliterated by a judicial determination that no criminal offense actually existed.

As decided in the Patanao case, an acquittal does not result in the exoneration of the taxpayer from the liability to pay tax. The acquittal in the criminal proceeding cannot operate to discharge the taxpayer from the duty to pay taxes. The reason is that the obligation to pay is not due to the attempt to evade payment but because it is a duty imposed independently by law.

The provisions of the Tax Code are equally important. Section 205 provides the remedies for the collection of delinquent taxes. Under this are two remedies for the collection of internal revenue taxes, fees or charges and any increment resulting from delinquency: first, by distraint of goods or other personal properties and by levy upon real property, and second, by civil or criminal action. Section 205 further provides that the judgment in the criminal case shall not only impose the penalty but also order payment of the taxes subject of the case as finally decided by the Commissioner of Internal Revenue (CIR).

Thus, the liability to pay tax may only be imposed if there is a final determination of such liability. Such determination by the CIR is what is contemplated under a formal assessment governed by Section 228 of the Tax Code and Revenue Regulations 12-1999, as amended.

It must be emphasized that a deficiency tax assessment is not necessary in the prosecution of tax evasion cases. In the 1980 case of Ungab v Cusi, the Supreme Court ruled that “while there can be no civil action to enforce collection before the assessment procedures provided in [Tax] Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code.” This finding was echoed in CIR v Pascor Realty and Development Corp., (GR 128315, June 29, 1999), wherein the Supreme Court ruled that the filing of a criminal complaint for tax evasion need not be preceded by a tax assessment.

Meanwhile, in Lim Gaw Jr. v CIR (GR 222837, July 23, 2018), the Supreme Court said that offenses under Sections 254 and 255 of the Tax Code are committed when the taxpayer knowingly and willfully files a fraudulent return with the intent to evade and defeat the tax or part of it. Accordingly, it is not required that there be a tax assessment before the tax evasion case can prosper. Finally, the court clarified that, even when the tax evasion case is pending, the taxing authority is not precluded from issuing a final assessment decision.

Nica Marsha V. Gasapo is a junior associate of Mata-Perez, Tamayo and Francisco (MTF Counsel).

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