The Bureau of Internal Revenue will appeal a recent court decision that temporarily stopped the agency from implementing a policy aimed at curbing banks’ alleged dodging of tax liabilities by shifting deductible expenses between various business units.
Revenue Commissioner Kim Jacinto-Henares told the Inquirer that the tax authorities are prepared to go all the way to the Supreme Court to stop banks from abusing the supposed tax loopholes.
“As we do not issue anything that … is illegal, we will appeal this to the highest court possible,” she told the Inquirer. “We will exhaust all remedies.”
Earlier this week, several Philippine banks, as well as local branches of foreign institutions, asked the Makati Regional Trial Court to issue a temporary restraining order to prevent the BIR and the Department of Finance from taking action.
The dispute involved BIR’s Revenue Regulation No. 4-2011, which mandates banks and other finance institutions to follow a rule on the allocation of expenses among their business units. The rule disallows banks and other financial institutions from deducting certain expenses incurred in the ordinary course of their business—which they were previously entitled to deduct—in connection with their main operations.
The BIR issued the order to prevent what it believes to be banks’ abusive practice of shifting expenses incurred by their tax-free foreign currency deposit units (FCDUs) onto the books of their parent firms, thereby increasing the tax-deductible expenses of the entire financial institution.
Under the BIR’s scheme, the allocation of costs and expenses between the regular parent bank and their FCDUs will be prorated according to each unit’s gross income contribution.
However, the petitioners said that the BIR’s policy violates existing tax laws, which give taxpayers the freedom to choose the accounting method in computing taxable income.
Lawyer Francis Lim of the Accra Law Office represented the consortium of banks in the case.
“The court also found basis to protect the applicants from irreparable injury if RR 4-2011 will be implemented. If not restrained, tax deficiency assessments based on RR 4-2011 will damage the reputation of the banks and erode the public’s trust and confidence,“ Lim said.
The TRO is valid for 20 days.
“We are glad that the court agreed with our position that there is something grievously wrong with Revenue Regulation 4-2011,” Lim said. “This is the essence of checks and balances under our democratic system of government. The legislature and executive branches of the government have the prerogative to promulgate laws and regulations but the judicial branch may check them if they go overboard. This is what happened in this case. The Executive Branch issued RR 4-2014, but since the regulation offends the Constitution … to the prejudice of private parties, they went to the judicial branch for protective relief.”
The banks which make up the consortium that moved against the BIR policy were Asia United Bank; BDO Unibank Inc.; Bank of America; Bank of Commerce; BDO Private Bank Inc.; Citibank N.A.; China Banking Corp.; Chinatrust (Phils.) Commercial Bank Corp.; Deutsche Bank AG; East West Banking Corp.; ING Bank N.V.; Philippine Bank of Communications; Philippine National Bank; Philippine Veterans Bank; PNB Savings Bank; Rizal Commercial Banking Corp.; Security Bank Corp.; Standard Chartered Bank; and United Coconut Planters Bank.