Trust, but verify, tax returns

Tax evaders cannot have their cake and eat it, too.

This, in a nutshell, appears to be the reason behind President Duterte’s veto of the Tax Amnesty Act of 2019 provision granting a general tax amnesty on national internal revenue taxes collected by the Bureau of Internal Revenue and value-added and excise taxes collected by the Bureau of Customs because it does not allow the government to examine bank accounts for tax purposes.

The President’s action is consistent with the purposes for which the government declares a tax amnesty.

Although the amnesty’s principal objective is to raise additional revenues, it also aims to give errant taxpayers the opportunity to become law abiding citizens again. Meaning, after they’ve “atoned” for their failure to comply with the tax laws by paying a one-time amnesty tax and, as a result, are relieved from any criminal and civil liabilities they may have incurred, they are expected to promptly pay all future taxes.

In applying for amnesty, the taxpayers concerned are obliged to truthfully disclose all information relevant to their unpaid tax obligations so the amnesty tax payable can be correctly computed and paid.

Accordingly, they should act in good faith and be guided by a sincere desire to make up for their omissions.

That’s the ideal situation. But the reality on the ground is, not all amnesty applicants will follow those norms. There will be taxpayers who will deliberately game the system to get more than what they deserve from the amnesty.

Although amnesty applicants are entitled to some element of trust, their filings cannot be taken completely at their face value.  When money is involved, the common sense policy that should be observed is “trust, but verify.”

Business documents, such as contracts and receipts, can be easily manufactured or forged. It would take a lot of time and effort to verify their authenticity, something the BIR may be hard-pressed to do because of its limited resources and personnel.

If the BIR wants to check the veracity of an applicant’s statements about, for example, revenues, operating expenses and income, one of the most effective ways to do that is to check its bank transactions.

Except for petty cash disbursement purposes, rare is the business that keeps its money in its premises. Prudence requires that its funds be deposited in banks for two reasons, i.e., security purposes and, where applicable, to earn interest.

With banking rules strictly enforced by banks, the Bangko Sentral ng Pilipinas and the Anti-Money Laundering Council, it is reasonable to assume that records of banking transactions are, by and large, accurate and trustworthy.

Through the bank entries, the BIR can verify an applicant’s statements about the business or financial activities subject of the application. The record of deposits and withdrawals would give a fairly accurate picture of the financial condition of the bank account holders.

In a manner of speaking, the bank entries would either be proof of honesty or a “smoking gun.”

Beyond tax amnesty applications, lifting bank secrecy rules for tax collection purposes would be a strong deterrent against tax evasion.

If a taxpayer knows his bank accounts can be examined by the BIR to determine the veracity of his tax filings, he would be less inclined to fudge his tax returns.

According to former Sen. Serge Osmeña III, the move to lift the restriction on bank secrecy has not moved forward because “the lower House does not seem to want it because it hides their assets.”

The same kind of opposition was shown when the Anti-Money Laundering Act was being deliberated in Congress some years ago. They relented only when the foreign-based Financial Action Task Force put the squeeze on foreign exchange transactions to and from the Philippines.

We probably need something similar for the lawmakers to agree to the lifting of bank secrecy rules that only the Philippines and Lebanon still adhere to.