By: Euney Marie J. Mata-Perez on August 23, 2018

To date, our Tax Code doesn’t contain general anti-tax avoidance rules or general principles or rules to check potential tax avoidance in general.

The “Tax Reform for Acceleration of Better and High-quality Opportunities” or “TRABAHO Bill” attempts to address this by introducing amendments to Section 50 of our Tax Code.

The existing Section 50 of the Tax Code empowers the Commissioner of Internal Revenue (CIR) to “distribute, apportion or allocate” gross income or deductions between or among related parties in a controlled transaction (entities owned or controlled directly or indirectly by the same interests) if he determines that such distribution, apportionment or allocation is necessary “to prevent evasion of taxes” or to reflect the income of any such parties.

This provision, however, doesn’t expressly grant to CIR the power to “impute” income.

In the case of CIR v. Filinvest Development Corporation (GR No. 163653, July 19, 2011), the Supreme Court held that the CIR can’t impute “theoretical interest” and assess a corporation with intercompany transaction deficiency income tax, when no such interest was agreed upon by the parties.

The Supreme Court also based its decision on Art. 1956 of our Civil Code, which provides that a loan obligation or forbearance of sum of money shall incur interest only where it’s stipulated in writing by the parties to the loan agreement.

Thus, on the basis of this decision and in the absence of any legislation, the power of the CIR to impute income could be assailed.

The TRABAHO Bill proposes to amend Section 50 of the Tax Code to expand the powers of the CIR to include in clear terms the power of the CIR to “impute” income if it is necessary “to prevent avoidance of taxes” or to clearly reflect the income of parties in a controlled transaction.

It should also be noted that the proposed amendment uses the phrase “to prevent avoidance of taxes,” in place of the phrase “to prevent evasion” of taxes in the current Section 50.

Does this mean now that transactions whose objective is tax avoidance (not evasion) will no longer be acceptable?

The additional amendments which TRABAHO Bill proposes to Section 50 are telling. The bill further proposes to amend Section 50 to state that where a transaction, directly or indirectly, has tax avoidance as its purpose or effects, and such purpose is “not merely incidental,” the CIR is authorized to disregard and consider such transaction as void for income tax purposes.

In this regard, it authorizes the CIR “to adjust” the taxable income of a person affected by the arrangement in a way that he or she thinks appropriate “to counteract a tax advantage obtained by the person from or under the arrangement.”

The TRABAHO Bill further proposes to incorporate a definition of “tax avoidance” as a transaction or arrangement that’s motivated by obtaining a tax benefit or advantage “with no commercial reality or economic effect”, and the use of tax law provisions on transactions or arrangements in a manner contrary to the law’s intention.

The tax avoidance principles espoused in the foregoing proposed amendments, however, are not new. They are consistent with the principles of the “business purpose test” and the “substance over form test” which have been applied by our courts to distinguish between tax avoidance and tax evasion.

Under the “business purpose test,” the CIR may ignore tax benefits for certain transactions motivated solely by tax avoidance or a non-business purpose. Thus, transactions must have some purpose other than the mere avoidance of taxes; otherwise, they can be struck down as tax evasion.

In the case of Commissioner of Internal Revenue v. Estate of Benigno P. Toda, Jr. (G.R. No. 147188, September 14, 2004), the Supreme Court declared that a transaction “prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion”.

According to the “substance over form test,” a test which originated in the USA, effect should be given to the substance, rather than to the form, of a transaction. Thus, steps in a transaction, when taken separately, that are without substance can be ignored or collapsed.

The same principles are set out in the proposed amendments which state that if tax avoidance is “not merely incidental”, and the transaction has “no commercial reality or economic effect,” the CIR can disregard the transaction for tax purposes.

It should be noted though that while criteria are set to determine what’s inappropriate tax avoidance, the proposed amendment granting the CIR the power to “counteract” a tax advantage in such instance “in a way that he or she thinks appropriate” seems to be very broad and subjective. The exercise of such power could be subject to potential abuse.

In sum, the proposed amendments to Section 50 of our Tax Code will make clear the power of the CIR to “impute” and “adjust” taxable income to counteract an inappropriate tax advantage, or even to declare transactions “void” if it’s solely entered for tax avoidance and without any business purpose or commercial reality.
If the amendment is passed, taxpayers should therefore exercise more care and diligence when structuring their transactions which contain tax avoidance measures.

#trabahobill #relatedparties #theoreticalinterest #taxavoidance #businesspurposetest #substanceoverformtest

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. 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

From the The Manila Times Website  August 23,2018

https://www.manilatimes.net/trabaho-bills-anti-tax-avoidance-rules/433667/