1. Cabatac, Johnryan Anthony 2. Delos Angeles, Lei Christianne 3. Gaspe, Christine 4. Gresunes, Jessie Kris 5. Jumalon, VInarose 6.

Naragas, Vanissa 7. Uy, Caress Ishmaiah

BSA 5

F 7:30-10:30AM

June 28, 2013

Taw Laws Misinterpretations Leads to Tax Manipulations

In the words of Benjamin Franklin, "In this world nothing can be said to be certain, except death and taxes" .The laws governing taxation in the Philippines are contained within the National Internal Revenue Code. The NIRC is the body of laws governing taxation that can have a profound effect from minimum wage earner individuals to large tax payers, it also has a significant impact on both household and corporate budgets. Tax laws are extremely complex and subject to frequent changes yet the Philippine government made it a point that the ignorance of the law is not an excuse. However misinterpretation of tax rules/regulations are still happening frequently at present, to make matters worse these misinterpretations and other tax errors can have consequences, including legal expenses and additional penalties or liability. Considering the assumed knowledge of the Filipino citizen on the tax laws and the tax laws that the government has legislated and implemented, the question is why are there still tax misinterpretations? What causes these of these misinterpretations? And how is the government addressing the massive tax misinterpretations? Since the start of the Aquino administration, the Bureau of Internal Revenue (BIR) has filed with the Department of Justice (DOJ) a total of more than 100 tax evasion cases worth almost P40 billion. It appears that the BIR is trying to send a strong message to the public: that the government will consider all available courses of action to take what it believes has been unlawfully withheld from it by taxpayers. The current movement of BIR is unearthing the actual tax payables the businesses and individuals are supposed to disclose and pay. One of the most common used ways to manipulate amounts of tax payable is tax avoidance and tax evasion. Simply defined, tax evasion is the act of reducing tax liabilities by illegal or fraudulent means. It is a violation of the tax law, which makes the taxpayer liable to administrative or legal actions from authorities. Tax avoidance, on the other hand, reduce tax liabilities through legal means like taking advantage of tax rate differentials and loopholes in the tax code. The Philippine Tax Code does not explicitly ban tax avoidance. Misinterpretations of tax laws may root from different interpretations by the different enactment, implementation and interpretation

of government branches. The distinction between permissible and impermissible tax avoidance would depend on the branch of government one is dealing with. To Congress, tax avoidance is permissible as long as it is not prohibited by the Tax Code. To the Court, tax avoidance transaction is permissible provided it is not fraudulent or abusive or contrary to law. To the BIR, these two concepts are used interchangeably. The different treatment accorded to tax avoidance practices by the three branches of the government will necessarily hamper the efforts of the BIR in successfully prosecuting tax avoidance cases. They both talk about how the piecemeal administrative pronouncements of the BIR raise a lot of concerns. Tax evasion cannot be addressed by implementing policies and administrative measures in a piece-meal and half-finished fashion. First, there are instances when the administrative pronouncements are not reasonable in a sense that the conditions imposed therein have no statutory basis. Because taxpayers perceive the regulations and other issuances as unreasonable, or lacking in legal basis, many believe that they are not bound by these pronouncements. Second, given the complexity of the Philippine Tax Code, the reliance on existing and future administrative pronouncements to deter tax avoidance will further complicate the current tax system, which is already hard to comprehend from a layman's point of view. Definitional distinctions are not always clear cut. Tax leakages have generally been associated with non-compliance of taxpayers. Such behavior has been described as an attempt to escape the tax net through tax evasion and avoidance. Simply defined, tax evasion is the act of reducing tax liabilities by illegal or fraudulent means. It is a violation of the tax law, which makes the taxpayer liable to administrative or legal actions from authorities. Tax avoidance, on the other hand, reduces tax liabilities through legal means like taking advantage of tax rate differentials and loopholes in the tax code. Tax leakage is pervasive in the direct and indirect taxes collected by the BIR. Studies worldwide identify a wide range of factors that may cause and sustain tax evasion and tax avoidance. These can be broadly categorized into economic, legal, and administrative, social and psychological factors. Although both articles/studies talked about certain tax laws that can easily be misinterpreted and bent which would lead to tax avoidance, one article aimed to make the tax system responsive to economic growth, simple to administer, and consequently, improve taxpayer compliance. It wanted to determine the success or failure of policies and administrative enforcement mechanisms in addressing

tax evasion as well as guide legislative and executive decision-making on tax policy and the allocation of resources for tax administration. Another article pointed out that a modified version of specific anti-avoidance law is an effective way to solve the problems presented by tax avoidance in the local setting. The law should clearly set forth the types of anti-avoidance transactions that congress would like to discourage. It must contain certain conditions that existence of which will trigger the presumption that the transaction falls under the prohibition. We agree that while Congress has not categorically prohibited all types of tax avoidance transactions, they have introduced new taxes into the Tax Code which will make tax avoidance practices more costly to enter into. Another way to remedy the injustice and inefficiencies of the current tax system is to enact a law that would target corrupt officials and guilty tax evaders. This is because presently the usual tax evasion schemes are not only because of the incentives of the taxpayer but also on the inducements to the tax collector for personal gain. And the collaboration between the two players makes it harder for the BIR to detect tax evasions. A more effective penalty system should be introduced in case of violators. Tax avoidance transactions proliferate in situations where the tax-benefit to be derived far outweighs the cost. To come up with an effective deterrent, apart from setting a fixed amount of penalty (which should not be criminal in nature), violators should be disallowed from enjoying the tax benefits intended. This would decrease the probability of a person to be tempted to go far beyond tax avoidance because of the greater risk faced. The taxpayers probability of detection is assumed a function both of his own evasion and of his own observations/perception of other taxpayers amounts of evasion. If the perception of the amount evaded by others increases, the taxpayers probability of detection falls, and he therefore decides to evade more. Others now perceive that he evades more and therefore evade more themselves. Implementing a more stringent penalty system would affect how these evaders think. They would think twice of committing fraud no matter how easy it would be if they think of how grave the consequences are. The tax administrations ways on increasing the probability of detecting taxpayer evasion or avoidance are effective in reducing tax leakages. Tax authorities are diligent in implementing tax laws and administration measures to improve taxpayer compliance. But this movement to prevent tax avoidance entails huge resources that are to be allocated each year for the BIR officials to conduct

investigations and to file cases in courts. Taxpayers, on the other hand, waste huge amount of time and resources defending themselves with the BIR and in court. Given this way, the taxpayers and the government does not gain anything in this cycle of defending whos right or wrong. In a tax evasion case, the state of mind of the taxpayer is being labeled by the BIR as in "bad faith", or "willful". The difficulty on the part of the taxpayers, however, is on how the BIR determines whether there is indeed a case for tax evasion. Because if there is an error but there is no intention to defraud the government, then there should be no tax evasion case. Given this possibility of endless cycle, both the government and the taxpayers are wasting resources and time. Tax evasion and tax avoidance can be lessened if only the Government can change their motivations from focusing on efforts on increasing revenue to paying more attention on the tax policies and administration methods which can reduce tax evasion and tax avoidance. Creating or implementing laws and policies that pursues tax evaders, can be effective if it causes taxpayers to be hesitant in committing those acts because of fear of prosecution. Aside from implementation, tax evasions and tax avoidance will be easily detected if there is a strong constant monitoring like putting in place a taxpayer compliance control systems. Although tax evasion is difficult to eliminate, reducing it is not impossible. Tax evasion or tax avoidance is too complex to be solved by simple policy adjustments. And a set of administrative instruments required for controlling it is immense. Tax evasion cannot just be addressed by implementing policies and administrative measures in a implement now, forget tomorrow attitude but it should be executed in a consistent, progressive, and well-targeted manner until objectives are attained. Tax manipulations are pervasive in all countries, and tax structures are undoubtedly skewed by this reality. The possibilities for tax manipulations and the difficulties of administration and implementation have always shaped tax systems. Tax evasion does not only depend on the incentives to the taxpayer but also on the incentives to the tax collector and the interaction between the two players. ( one of the causes to why its is hard to control effective implementation, because not only the taxpayers are able to evade but some officials are helping them because of bribe) In order to remedy the injustice and inefficiencies of the current tax system, there is a need for Congress to enact a law.

A modified version of laws is an effective way to solve the problems presented by tax issues in the local setting. The law should clearly set forth the types of transactions that Congress would like to discourage. It must contain certain conditions, the existence of which will trigger the presumption that the transaction falls under a certain prohibition. More importantly, the law should specifically indicate how tax is to be computed if the transaction falls under the prohibition, without the need of striking down the entire transaction. The constitutional requirement of due process requires that the law should be applied prospectively so as not to prejudice taxpayers. All matters covered by the law should be deemed prohibited, and conversely, matters not covered therein should be respected. While Congress has not categorically prohibited all types of tax avoidance transactions, it has introduced new taxes into the Tax Code which will make tax avoidance practices more costly to enter into. Tax authorities should set out proposals to take a more strategic approach to the risk of current issues by building in sustainable defenses against these dilemmas and of course, this would entail cooperation from other government agencies and professionals as well. It would also be better if tax rules are to be drafted in simpler and clearer terms for it to be an effective deterrent against artificial and abusive tax manipulations, and will over time influence the culture of tax planning.
Sources: The Legality Of The Assault On Tax Avoidance Practices In The Philippines by: Evelyn Kho-Sy, 2009

http://journals.upd.edu.ph/index.php/pmr/article/view/1797
Philippine Tax Leakages: An Assessment by Francis Xavier M. Vicente, 2006

http://pdf.usaid.gov/pdf_docs/PNADH572.pdf
100 tax evasion cases by: Olivier D. Aznar, 2012

http://www.punongbayan-araullo.com/pnawebsite/pnahome.nsf/section_docs/AX827C_19-6-12