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ii. Tax Avoidance and Tax Evasion

b. Distinguish: tax avoidance and tax evasion

Tax avoidance – also called tax minimization, is a tax saving device that is legally permissible

The Court held that tax avoidance is the use of a tax saving device within the means sanctioned by law. Any tax avoidance scheme should be used by the taxpayer in good faith and at arm’s length (CIR v. Estate of Benigno P. Toda, G.R. No. 147188, 14 September 2004)1

When a merger or reincorporation is undertaken for a bona fide purpose and not solely for the purpose of escaping the burden of taxation, it is not evasion. The questioned merger involved a pooling of resources aimed at the continuation and expansion of business and so came under the intendment of the NIRC exempting from the capital gains tax exchanges of property effected under lawful corporate combinations. (Commissioner v. Rufino, G.R. No. L-33665-68)2

Tax evasion – connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes; must be willful and intentional

It connotes the integration of three factors:

  • 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;
  • Accompanying state of mind which is described as being "evil," in "bad faith," "willful," or "deliberate and not accidental"; and
  • Course of action or failure of action, which is unlawful. (Toda, Jr. v. CA, G.R. No. 78583)3.
TAX EVASION TAX AVOIDANCE
Other Name Tax Dodging Tax Minimization
Means Use Illegal means Use legal means
Penalty Punishable by law Not punishable by law
Object To escape payment of taxes To minimize payment of taxes

Willful Blindness Doctrine

Reliance on an accountant does not automatically excuse a taxpayer. For criminal liability under Section 255 of the NIRC, the prosecution must still establish a willful failure to comply with the taxpayer’s duty.

An act is willful if it is “voluntary, conscious and intentional.” Bad motive or intent to defraud need not be shown. The only thing that needs to be shown is that the taxpayer is aware of his/her obligation to file annual income tax returns but “she nevertheless, voluntarily, knowingly and intentionally failed to file the required returns.” (People v. Kintanar, CTA E.B. No. 006)4

However, in the case of People v. Judy Ann Santos, CTA Case No. 0125, affirmed by the SC in 2013, the CTA Division acquitted Santos although the BIR asserted the same arguments it made in the Kintanar case. Santos was charged with failure to supply correct and accurate information in her ITR. She claimed that by virtue of trust, respect and confidence, she entrusted her finances to her manager since she was a child. Here, the CTA Division found that willful failure to supply correct and accurate information had not been established and that Santos was merely negligent. Unlike Santos, who did not know any better, Kintanar was an experienced businesswoman who ought to have known and understood all the matters concerning her business, including knowledge and awareness of her tax obligations concerning her business and should have ensured the correct filing of her returns.

People v. Kintanar People v. Santos
Tax evasion connotes the integration of the three factors.
All elements are present Lacks the element of willfulness
“Willful" in tax crimes means voluntary, intentional violation of a known legal duty, and bad faith or bad purpose need not be shown The element of willful failure to supply correct and accurate information must be fully established as a positive act or state of mind. It cannot be presumed nor attributed to mere inadvertent or negligent acts.
Involves non-filing of Income Tax Return. The elements of a violation of Section 255 of the NIRC6 for failure to make or file a return are:
  1. The accused is a person required to make or file a return;
  2. The accused failed to make or file the return at the time required by law;
  3. The failure to make or file the return was willful.
 Involves failure to supply correct and accurate information. Mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion.The elements of a violation of Section 255 of the NIRC for failure to supply correct and accurate information are:
  1. That a person is required to supply correct and accurate information;
  2. That there is failure to supply correct and accurate information at the time or times required by law or rules and regulations; and
  3. That such failure to supply correct and accurate information is done willfully.

Authorities

  • CIR v. Estate of Benigno P. Toda, G.R. No. 147188, 14 September 2004
  • Commissioner v. Rufino, G.R. No. L-33665-68
  • NIRC, Sec. 255
  • People v. Judy Ann Santos, CTA Case No. 012
  • People v. Kintanar, CTA E.B. No. 006
  • Toda, Jr. v. CA, G.R. No. 78583