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1. Cabatac, Johnryan Anthony BSA 5 F 7:30-10:30AM June 28, 2013

2. Delos Angeles, Lei Christianne

3. Gaspe, Christine

4. Gresunes, Jessie Kris

5. Jumalon, VInarose

6. Naragas, Vanissa

7. Uy, Caress Ishmaiah

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 Fi lipino 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

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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

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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

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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.

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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 casesby: Olivier D. Aznar, 2012

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

http://journals.upd.edu.ph/index.php/pmr/article/view/1797http://pdf.usaid.gov/pdf_docs/PNADH572.pdfhttp://www.punongbayan-araullo.com/pnawebsite/pnahome.nsf/section_docs/AX827C_19-6-12http://www.punongbayan-araullo.com/pnawebsite/pnahome.nsf/section_docs/AX827C_19-6-12http://www.punongbayan-araullo.com/pnawebsite/pnahome.nsf/section_docs/AX827C_19-6-12http://pdf.usaid.gov/pdf_docs/PNADH572.pdfhttp://journals.upd.edu.ph/index.php/pmr/article/view/1797