Taxes are said to be the lifeline of the government, which is why tax compliance is a must. Through taxes, the government generates revenue to fund government services and projects – which in the long run prompt economic stability. A pleasing and reliable tax system can attract investors. Tax compliance is a must to avoid legal consequences and reputational damage. Citizens would always seek ways on how to minimize their tax duties, and they would resort to doing tax avoidance or tax evasion. The difference between the two is their legality and the underlying intent. One is a legal form of tax planning, while the other is a criminal act. Despite these being different in intent, both of these result in a loss of government revenue and may potentially increase one’s income.
TAX AVOIDANCE
Tax avoidance is the genuine and legal method to minimize one’s tax liability through taking advantage of loopholes or allowable tax incentives, all of which involve transparent actions. It is permissible, as long as it does not constitute fraud or misinterpretation. It is a legitimate exercise of taxpayer rights when it is done properly, typically executed through tax holidays, exemptions, and or deductions.
Generally, there are no penalties for tax avoidance. However, aggressive tax avoidance schemes with insufficient economic substance or business purpose may be challenged by the government.
There are various ways on how tax avoidance can be manifested. One of its common forms is through maximizing allowable deductions and personal exemptions by availing of the senior citizen discount for the elderly and the PWD tax exemptions for those with disabilities. Establishing or structuring a business as a corporation is another way to indulge in tax avoidance. Through this, one can take advantage of corporate tax rates and deductions. This can be done through setting up subsidiaries. Another one is through contributing to a retirement fund.
TAX EVASION
On the other hand, tax evasion is the illegal means employed to avoid paying taxes. There is a clear and willful intent to defraud the government which constitutes this as a criminal offense. This is also governed by the National Internal Revenue Code, the foundational framework for taxation. This is manifested through many forms such as underreporting of income, overstating deductions or expenses, falsifying documents, and or hiding assets or operating “ghost” companies.
Tax evasion is punishable under sections 253, 254, and 255 of the National Internal Revenue Code. For criminal charges, the legal consequences are fines and imprisonment. Other legal consequences are surcharge, forfeiture of assets, payment of tax deficiencies with interest1.
In the case of Commissioner of Internal Revenue vs. The Estate of Benigno Toda, Jr., Cibeles Insurance Corporation, controlled by Benigno Toda Jr., owned a prime property in Makati and Baguio. Toda sold the property twice. The first instance was in August 1989 wherein it was bought for Php 100M by Rafael Altonaga. The latter sold the same property on the same day for a higher price to Royal Match Inc. The former paid a capital gains tax of Php 10M. The following year, the corporation filed their annual income tax return for 1989, wherein the Bureau of Internal Revenue assessed a deficiency in their income tax. The supreme court ruled that the arrangement made by Benigno Tado Jr. was a tax evasion scheme in order to avoid paying proper corporate income tax2.
LEGAL FRAMEWORKS
Other than the NIRC, there are other legal frameworks governing taxation, especially on the obligations of the taxpayer. RA 8424 or the Tax Reform Act of 1997 reforms to simplify the country’s tax collection and to further impose stricter penalties for evasion activities3. RA 10963 or the Tax Reform for Acceleration Act and Inclusion (TRAIN) Law introduced new provisions on tax compliance and penalties4. Furthermore, the Bureau of Investigation has also mandated various memos on the rules and regulations for tax compliance.
Summary
| ASPECT | TAX AVOIDANCE | TAX EVASION |
| Definition | Taking advantage of allowable tax incentives to minimize tax liability | There is a willful intent not to pay taxes |
| Legal | Yes | No |
| Common forms | Maximizing allowable deductions and personal exemptions, structuring a business as a corporation, contributing to a retirement fund | Underreporting of income, overstating of deduction or expenses, falsifying documents, hiding assets |
| Consequences | Generally no penalties as long as it does not involve fraud or misinterpretation | Fines, imprisonment, surcharge, forfeiture of assets, payment of tax deficiencies with interest |
- National Internal Revenue Code of 1997, as amended, §§ 253–255 (Philippines) ↩︎
- Commissioner of Internal Revenue v. Estate of Benigno Toda, Jr., G.R. No. 147188, 438 SCRA 290 (Phil. 2004). ↩︎
- Republic Act No. 8424, Tax Reform Act of 1997. (1997). Philippines ↩︎
- Republic Act No. 10963, Tax Reform for Acceleration and Inclusion (TRAIN) Law. (2017). Philippines ↩︎
