Tax Reform 2017: Relaxing the Bank Secrecy law in cases of tax evasion

Does the current Bank Secrecy law serve as a citadel for investors or depositors against possible abuse of power by the government, or does it provide a shield for tax evaders? Balancing of interests is a continuing challenge for the State, and with the advent of the tax reforms of the Duterte administration and with the introduction of House Bill 4774, the need to balance these interests once again arises.

The bill seeks to amend section 6 of the National Internal Revenue Code to increase the authority of the Commissioner of Internal Revenue (CIR) to inquire and receive taxpayer information held by financial institutions by including the following:

a. A specific taxpayer or taxpayers, upon an obligation to exchange tax information to a foreign tax authority, whether on request, automatic or spontaneous;

b. Any taxpayer against whom a criminal case is initiated for

1. tax evasion offenses; and,
2. failure to file return, supply correct and accurate information, pay tax, withhold and remit tax, and refund excess taxes withheld on compensation offenses.

The bill covers both peso and foreign currency bank accounts, thus taxpayer information can be obtained by the CIR even without the taxpayer’s consent. The CIR can obtain the account number, account name, the type of account, the amount of deposits, the transaction history and all other related information in the possession of banks and other financial institution, even in cases of dollar and euro bank accounts.

We can very well understand the seriousness of tax evasion -- tax evasion is currently a universal concern. There are international agreements between the Heads of States and International Organizations around the world to develop a standard policy to combat tax evaders. Tax evasion is the willful attempt in any manner to evade or defeat any tax imposed or the payment thereof, connoting 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 in “bad faith,” “willful,” or “deliberate and not accidental”; and (3) a course of action or failure of action which is unlawful.

However, do cases of failure to file returns or failure to supply accurate information without the evil intent of evasion equally warrant a relaxation of the bank secrecy law? Given the numerous BIR compliance requirements and oftentimes unclear rules, it is not uncommon for taxpayers to commit such acts or omissions. Are these acts or omissions sufficient basis to invade the privacy of the taxpayer’s information in the hands of the financial institution? Or will these result to a showcase of flexing the government muscle?

In the light of the proposed tax reform to relax the bank secrecy law in cases of tax evasion and fraud, it is interesting to know how much can the government recover by exploiting the power to inquire into bank deposits. How will the relaxation of bank secrecy for fraud cases affect the rate of collection of taxes? Based on BIR’s report last 2016, the estimated tax liability arising from tax evasion is 76,006 Billion pesos. It could be more this year. The latest amendment in the Commissioner’s power to examine bank deposits based on a request from a foreign tax authority yielded more than $1 million through just two cases as a result of Exchange of Information (EoI) with other countries. An ADB forum reported that, in 2013 Australia was able to recover A$459 million as a result of over 400 EoI requests-an average of over A$1 million per request.

Other than the revenue it can generate, the possible chilling effect that the added authority may bring to taxpayers may be submitted as more of a threatening device than as a revenue collection measure, considering that the BIR can garnish bank accounts without prior examination or inquiry of the taxpayer’s bank accounts or details. The propensity to evade taxes has been directly linked to the probability or improbability of being caught.

Another point of consideration is whether the added authority to the BIR can be optimized, taking into account the inadequacy of BIR’s manpower. The increasing numbers of employees leaving the BIR could pose a question of whether the Bureau has enough manpower to use the said authority in the venture of tax collection.

Probably the biggest concern is how the bill will affect taxpayers. Can the BIR engage in a fishing expedition to examine bank accounts indiscriminately? Will it drive the investors away? Will it prejudice every taxpayer’s security and right to privacy? The cornerstone of our Bank Secrecy law is to protect depositors and investors, to eventually entice more investors into the Philippines, and encourage more bank deposits.

Under the bill, the Commissioner can only obtain a taxpayer’s information from banks and other financial institutions once there is a criminal case initiated. Does “initiation of criminal case” refer to actual cases filed in court or does it refer to the institution of criminal action? Congress must clarify the exact stage when the BIR can exercise such authority. If the BIR can exercise such authority at the institution of the criminal action, then the mere filing of a criminal complaint with the public prosecutor of the Department of Justice is sufficient to exercise such authority. However, if it refers to actual cases filed in court, then a resolution finding probable cause is necessary to exercise such authority. Probable cause has been defined as the existence of such facts and circumstances as would excite the belief in a reasonable mind, acting on the facts within the knowledge of the prosecutor, that the person charged was guilty of the crime for which he was prosecuted. So not every taxpayer can be subjected to an examination, but tax evaders and potential tax evaders may be affected since bank secrecy cannot protect them from questions and inquiries relative to their bank deposits.

With all these considerations, Congress must carefully study the repercussions of the tax reform.

Gerald P. Mesina is an associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.

As published in Business World, dated 21 February 2017