Tax evasion and tax evasion are the two most common ways for taxpayers to avoid paying taxes or paying reduced taxes. Tax evasion is the use of tax saving devices by means sanctioned by law and when the taxpayer acts in good faith and at arm’s length. Tax evasion, on the other hand, involves schemes outside of these legal means which, when used by taxpayers, typically subjects them to civil or criminal liability in addition to penalties and interest on tax debts. unpaid. In the case of Commissioner of Internal Revenue (CIR) v. Hongkong Shanghai Banking Corporation Limited – Philippine Branch (GR No. 227121, December 9, 2020), the Supreme Court ruled that the taxpayer’s transactions were part of a legitimate tax. avoidance pattern. In this case, to achieve efficiency, the taxpayer entered into two transactions: the transfer of his sales assets, other IT assets and business agreements in exchange for shares in a company; and the subsequent sale or disposal of shares in that premium company. The first transaction qualified as a tax-free exchange under Section 40 (C) (2) of the National Internal Revenue Code, under which the relinquishing taxpayer received shares and took control of the beneficiary company.
Two days after the incorporation of the company that received the assets and issued shares of shares to the taxpayer in exchange for the fair market value of the assets received, the taxpayer made an agreement for the sale or transfer of the shares received under the swap. Less than two months later, the sale and transfer of the shares was concluded. As the second transaction is taxable, the taxpayer paid the documentary stamp duties and the capital gains tax on the shares. The CIR insisted that the second transaction involved an alleged sale of “goodwill”, a business asset, and imposed an income tax on the taxpayer’s deficit. The CIR’s position was that the capital gain realized by the taxpayer on the sale should be subject to corporation tax (then 35%) and not to capital gains tax on the sale of actions. The Supreme Court was not convinced. It found that the taxpayer had simply used tax saving devices within the limits of the means sanctioned by the law. More importantly, the court recognized that the methodology was adopted by the taxpayer not only to reduce taxes but also for a legitimate business purpose, i.e. restructuring of the company to achieve more efficiency. and economies of scale. Therefore, what was used to minimize taxes was a tax evasion scheme. The Supreme Court therefore concluded that there was no tax evasion.
Tax evasion, for its part, is “a ploy used outside of these legal means”. It evokes fraud through the use of pretexts and prohibited devices to reduce or defeat taxes. Fraud, in the general sense, “is deemed to include anything calculated to deceive, including all acts, omissions and concealments involving a breach of a legal or fair obligation, a trust or a legitimately rested trust, resulting in damage to another, or by which an undue and unreasonable advantage is derived from another. “(Yutivo Sons Hardware Co. v. Court of Tax Appeals, GR No. L-13203, Jan. 28, 1961, 110 Phil. 751-776. ) In the landmark case CIR v. Estate of Toda, Jr. (GR No. 147188, September 14, 2004, 481 Phil 626-645), the Supreme Court found that there was tax evasion when the corporate taxpayer transferred money real property to an individual who on the same day transferred the same property to the purchasing company at a much higher price.
The Supreme Court ruled that the intermediate sale to the individual should reduce the amount of tax payable, especially since transferring him to the end buyer would subject the income to capital gains tax individuals less than 5% and not the 35 -percentage of corporate tax for which the initial ceding company would have been liable. The court noted that the sole purpose of the intermediate individual buyer to acquire and transfer title to the properties in question on the same day was to create a tax shelter.
The said person never controlled the property and did not enjoy the normal advantages and charges of the property.
Thus, the sale to him was only a tax ploy, a sham, and without commercial object or economic substance. Undoubtedly, the execution of the two sales was calculated to mislead the BIR with a view to reducing the resulting income tax. In summary, in the Toda case, the Supreme Court found that the sale to and from the individual intermediary was motivated more by the mitigation of tax obligations than by legitimate business purposes.
It was therefore a tax evasion. It is clear that in the HSBC and Toda cases the Supreme Court applied the “business purpose test”. By virtue of this, the CIR can ignore the tax advantages of certain transactions motivated solely by tax evasion or for non-commercial purposes.
Transactions must have a purpose other than the simple avoidance of taxes; otherwise, they can be invalidated for tax evasion, as happened in the Toda case.
Euney Marie J. Mata-Perez is a CPA lawyer and managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, mergers and acquisitions and tax lawyer, and has been ranked among the top 100 lawyers in the Philippines by the Asia Business Law Journal. This article is for general information only and does not replace professional advice when the facts and circumstances warrant. If you have any questions or comments, you can email the author at [email protected] or visit the MTF website at www.mtfcounsel.com.