Bank secrecy, the BIR and the Tax Amnesty Law

The concept of being secretive is quite ironic. Before something is considered a “secret,” someone must not only conceal something, but another must also know or be wary of the concealment. In fact, some experts would say that the more people desiring that secrets be divulged gives more power to those who know them.

So I ask: Is it really best if things are kept secret? Recent updates in Philippine tax laws seem to say otherwise.

Recently, the President vetoed the provisions of the general tax amnesty. The veto might be a consequence of him being cautious of what taxpayers may be hiding. He cited the lack of power to verify the applicant-taxpayer’s bank account which may facilitate false declarations of assets or net worth. This is in part due to the Bank Secrecy Law or Republic Act No. 1405, as amended.

Bank secrecy is one of the main features of banking. More recently, it has also been proven a double-edged sword; a feature of the law disallowing the exchange of information was exploited as a tool for money laundering involving millions of dollars in 2016. Apart from the Philippines, Lebanon and Switzerland are reported to have similar features in their banking laws.

Under the Bank Secrecy Law, bank deposits of whatever nature including investments in government bonds are considered absolutely confidential. This law prohibits the government and its agencies, including the BIR, to look into bank accounts. Of course, the law admits instances where inquiry into bank deposits is allowed, e.g., when there is written permission of the depositor, impeachment cases, upon order of a competent court where the money deposited is the subject of litigation, and cases involving the Anti-Money Laundering Act, among others. The Supreme Court has noted that some exceptions are provided for in other special laws.

The National Internal Revenue Code (Tax Code) provides some of those additional exceptions.

In Section 5 of the Tax Code, as amended, the law grants broad authority to the Commissioner of Internal Revenue (CIR) to examine any record or book or obtain any information from any person to ascertain the correctness of a tax return and ultimately to determine the liability of a certain taxpayer. Much discretion and leeway are assumed by the Bureau in its assessment and collection powers. However, this overarching authority bends down to the absolute confidentiality of bank deposits. The same provision would then restrict this power to say that the same shall not be construed as giving the BIR the power to investigate bank deposits.

The Tax Code only allows a limited power to the CIR to inquire into these bank deposit accounts. His authority is granted only in three instances: (1) to be able to determine the gross estate of a decedent; (2) in acceding to compromise of a taxpayer’s liabilities due to financial inability to pay the tax assessed; and (3) when information is requested by a foreign tax authority pursuant to an international agreement entered into by the Philippines.

As regards the inquiry due to compromise, this may only happen when the financial position of the taxpayer shows a clear inability to pay the assessed tax. Given that the act of compromise by the BIR is discretionary, and its approval based on existing facts and circumstances, it is necessary to provide a waiver of the account holder’s rights under the bank secrecy law. The inquiry is to determine whether the taxpayer is, indeed, incapable to pay. Thus, a waiver should be included in the formal application to the BIR for compromise.

It may be deduced that the application to avail of the general tax amnesty is akin to a compromise agreement. Both would permit the taxpayer to pay a smaller amount of tax than the tax assessed and would require a claim for availment before the BIR. The main difference would be that lawmakers viewed it best not to touch on the Bank Secrecy law in availing of the general tax amnesty; unlike in an application for a compromise agreement, it is expressly provided that a waiver of bank confidentiality is needed.

In essence, the BIR does not have the power to ascertain the contents of a taxpayer’s bank account outside these exceptions in the Tax Code. If the general tax amnesty provisions went ahead as approved (that is, without requiring the waiver of bank secrecy), the BIR would be constrained to go to court and request an order just to access bank account information and ascertain the true net worth of the amnesty applicant. Tax administration-wise, this would be excessively time-consuming and would take more effort.

This, perhaps, is the difficulty predicted by the President should the vetoed provisions be signed into law. Due to the rigidness of the confidentiality of bank accounts in our laws, the availment of the tax amnesty may as well be given lazily by just trusting the records on hand such as the taxpayer’s Statement of Assets, Liabilities and Net Worth (SALN). This opens up the BIR to the possibility that tax fraud and tax evasion cases would slip right through its fingers.

The President now urges Congress to pass another tax amnesty bill covering the vetoed general tax amnesty provisions. But this time, he requests the inclusion of the waiver of bank secrecy before a taxpayer may benefit from these provisions. If the general tax amnesty goes ahead someday, the taxpayers should be open to this particular requirement if their self-assessment proves beneficial for them to avail of the amnesty. At least only in this instance, disclosing secrets may be best.

Philip Conrad D. Vales is an associate with the Tax Advisory and Compliance Division of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.

As published in BusinessWorld, dated on 26 February 2019