Reflecting on tax avoidance by: Olivier D.

Aznar
The Lenten Season has just passed. People had more time to reflect on
what is just and what is not at least on a spiritual point of view. Reflecting
makes people realize that some things could have been done in the past
without flaws or some plans of action may be done in the future in a more
fitting way. For some, all that is needed is a time to reflect.
As for the taxpayers, lent might have made them realize to also take time to
reflect on their transactions. Recently, not a few stories have been published
wherein certain big-time personalities were involved in alleged tax evasion
issues while certain corporate-taxpayers have been sued by the Bureau of
Internal Revenue (BIR) for alleged unlawful avoidance of paying taxes. With
this scenario, should the taxpayers start to be anxious?
We all know that the BIR will always be there, as every government owes its
existence to dues collected from its citizens a principle established since
time immemorial. Tax is the lifeblood of the government. Thus, it is not
inconceivable to see that the BIR is vigorous on its tax collection efforts. On
whether this circumstance is daunting on the part of the taxpayer depends on
whether the taxpayer has a reason to fear or has something to hide.
Remember that a taxpayer could only have valid disputes against the BIR if
there is a violation of tax laws moreso, if the violation involves an unlawful
avoidance
of
tax
constituting
a
tax
evasion
case.
As cited in a Supreme Court (SC) case, tax evasion connotes the integration
of three factors: (1) the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of tax when it is
shown that a tax is due; (2) an accompanying state of mind which is
described as being "evil," in "bad faith," "willful," or "deliberate and not
accidental"; and (3) a course of action or failure of action which is unlawful
(Commissioner of Internal Revenue, petitioner, vs. The Estate of Benigno P.
Toda,
Jr.,
G.R.
No.
147188,
September
14,
2004).
Reading on the above three factors, it is undeniable that tax evasion is an act
of avoiding taxes that is not acceptable, in whatever way a taxpayer reflect
on
it,
as
such
act
is
unlawful.
On the other hand, in the same Supreme Court case cited above, the SC
differentiated tax evasion as against tax avoidance. It went on to say the
following: Tax avoidance and tax evasion are the two most common ways
used by taxpayers in escaping from taxation. Tax avoidance is the tax saving
device within the means sanctioned by law. This method should be used by
the taxpayer in good faith and at arms length. Tax evasion, on the other

hand, is a scheme used outside of those lawful means and when availed of,
it usually subjects the taxpayer to further or additional civil or criminal
liabilities.
It can be inferred from the foregoing that there are lawful means of avoiding
taxes. As a caution, however, these means should be used by the taxpayers
in good faith. Remember that the state of mind of the taxpayer is not evil
as described in the three factors constituting a tax evasion case.
How about an example of a tax avoidance that is permitted by tax rules?
Consider this An employer has numerous employees. He is evaluating on
providing his employees a higher amount of take-home pay. A concern
prompted him that if he raises the salaries of his employees, then there will
be consequent higher withholding taxes on compensation, as higher salaries
may fall under higher withholding tax rate bracket. What then could he do
legally to avoid the higher tax rates? In this situation, the employer may take
into account the provisions of the de minimis benefits rule (see recent
Revenue Regulatio ns No. 5-2011, March 16, 2011, on de minimis benefits
rule). The list of employee benefits enumerated in the said rule is considered
exempt from withholding tax on compensation. Thus, by giving de minimis
benefits to his employees, the higher withholding tax rates on compensation
could be avoided, as permitted by the tax rules; while at the same time, the
employer will be able to meet his objective of providing higher amount of
take-home
pay
for
his
employees.
The above example is just a simple illustration of a tax avoidance scheme
that is allowed under the rules. On whether there are other situations of legal
tax avoidance, circumstances have to be carefully evaluated on a case to
case basis, to ensure that tax laws are not violated and to ensure that the
taxpayers
are
in
good
faith.
Now, a taxpayer may wonder whether he has done in the past, acts of tax
evasion or acts of tax avoidance; or whether he has current plans of future
transactions wherein he is unsure to which act would these fall under.
Perhaps, a time is also needed to reflect. For acts done in the past, a tax
compliance review of past transactions could be thought of to be a prudent
course of action. Meanwhile, for plans in the future, a cautious tax study may
have to be considered. The objective is straightforward to recoil from the
distressing
consequences
of
unlawful
avoidance
of
tax.
Indeed, a taxpayer also needs time to reflect. For in times of reflection, what
is being pondered about is what is just and what is not.