Let's Talk Tax

Register, file or prison

“I love the Philippines, I Pay My Taxes Right. It’s easy as RFP.” This was the tax campaign theme of the Bureau of Internal Revenue (BIR) launched in 2014. According to the BIR, the concept of love for the country was carried in the RFP campaign. RFP stands for Register, File and Pay which captures the basic steps that a taxpayer should follow to be able to comply with his obligation of “paying right taxes” for nation building. Failure to comply may result in significant financial consequences on the taxpayer, with imprisonment as a worst case.

In a recent promulgation of the Court of Tax Appeals (CTA), the Court finds an accused taxpayer of violating Section 255 of the National Internal Revenue Code of 1997 (NIRC), as amended, and was sentenced to suffer imprisonment.

Section 255 of the NIRC provides for the imposition of civil and criminal liability for failure to file returns and other violations.

Interestingly, the case stemmed from an anonymous letter complaining about the accused’s failure to issue an official receipt, which turned out to have been sent to the BIR by the accused’s client. Consequently, the BIR conducted an investigation which revealed that the accused did not file income tax returns (ITR) for tax years 2001 to 2003.

The accused countered that he registered his business only in May 2002. Hence, he did not file any ITRs prior to the said date. To prove this, he presented a witness who confirmed that the design and construction of the business establishment of the accused commenced sometime in March and April 2004 and finished in May 2004, making it impossible for the accused to have conducted business or practiced his profession at an earlier date.

Further, the accused claimed that when his business advertised in the newspapers in 2000 and 2001, it was not yet in operation and the advertisements were only for marketing purposes. In other words, registration with the BIR in 2001 was not necessary since he did not earn any income for that year.

The Court, however, did not agree with the accused.

The Court denied the claim of the accused on having no legal obligation to file an ITR for taxable year 2001 because of lack of income. The evidence revealed that he had been practicing as a doctor offering medical services in various clinics. Moreover, the size of the advertising campaigns in 2000 and 2001 negated the contention that operations had not started in 2001.

The Court further explained that even assuming in gratia argumenti that no income was generated from his business in 2001, the accused still had the obligation to file an ITR. The NIRC explicitly requires every person engaged in trade or business or is in the exercise of his profession to file an ITR and declare income obtained from whatever source, regardless of whether the income flowed during the taxable period.

Generation of income is not a condition to the filing of an ITR. The obligation to file an ITR is not dependent on the regeneration of income during the taxable year. In fact, a taxpayer who registered but has not operated during the taxable year, or worse, incurs losses is still mandated to file an ITR, according to the Court.

Further, the Court said that the NIRC requires registration “on or before the commencement of business.” It is the commencement of business or the engagement in the practice of profession that subjects the taxpayer to the requirement of registration and subsequent filing of an ITR. Once the business is registered, a corresponding duty to file an ITR exists.

The accused’ non-filing of the ITR and non-payment of the tax was willful as ruled by the Court. The accused was given several opportunities to submit his accounting records and other business documents to refute the BIR findings but failed to take such action, which was taken to signify an intent to defraud the government.

A reading of the case illustrates for taxpayers the three basic tax obligations -- register,file and pay.

Section 236 of the NIRC requires every person subject to any internal revenue tax to register once with the appropriate Revenue District Officer as implemented in Revenue Regulations (RR) No. 007-2012, which provides consolidated regulations on registration of business.

Section 51 of the NIRC specifies the individuals who are required to file an ITR: (a) every Filipino citizen residing in the Philippines; (b) every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines; (c) every alien residing in the Philippines, on income derived from sources within the Philippines; and (d) every non-resident alien engaged in trade or business (NRAETB) or in exercise of professional in the Philippines.

Based on the existing regulations, however, the following individuals are not required to file an annual ITR, among others: (1) employees receiving purely compensation income (regardless of amount) from a single employer in the Philippines during the taxable year and the amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer; (2) NRAETBs whose sole income was subjected to final withholding tax; and aliens employed by regional operating headquarters, regional or area headquarters, offshore banking units and petroleum foreign service contractors/sub-contractors.

The filing and payment of the annual ITR for individual taxpayers is on or before April 15 of each year. I wish that all taxpayers successfully file their annual ITR and pay the corresponding tax on or before that date to avoid potential civil and criminal liability. As April 15 is fast approaching, we should all RFP -- Ready to File and Pay.

Nikkolai F. Canceran is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.