Company officers liable for non-payment of taxes

Last May 2022, taxpayers enjoyed a reprieve thanks to Revenue Memorandum Circular (RMC) No. 77-2022, which suspended all field operations by the Bureau of Internal Revenue (BIR). The circular also suspended the issuance of new Letters of Audit to taxpayers.

This suspension was lifted on Nov 21, 2022 when the BIR issued RMC No. 148-2022, allowing the tax collection agency to resume the conduct of audits and the issuance of new Letters of Audits and Mission Orders.

So just as the year was ending, many businesses received their “love letters” from the BIR in the form of Letters of Authority to conduct a tax audit on their company. During the audit process, the company is required to submit documents and records to the BIR. There will be letters and replies by the company to the BIR which must be signed by a company officer.

Many company officers are apprehensive and reluctant to be the company signatory to the letters to the BIR, as they may be identified as being responsible for any tax violation of the company.

So the question right now is, would a company signatory to the correspondence and letter to the BIR during the audit process make this person liable for tax violations later identified by the BIR or responsible for the payment of the tax? Does it matter that this person holds a position in the top management of the company, such as executive vice-president ?

This was the very issue resolved by the Supreme Court in the case of Genoveva S. Suarez v. People of the Philippines and the Bureau of Internal Revenue (G.R. No. 253429, October 6, 2021) where the Supreme Court reversed the criminal conviction of and acquitted Genoveva Suarez, the executive vice-president of 21st Century Entertainment, Inc. (21st Century), for the non-payment of the tax obligations of the company.

The conviction of Ms. Suarez was handed down by the Regional Trial Court and affirmed by the Court of Tax Appeals (CTA) which convicted her of the crime of violation of Section 255, in relation to Sections 253(d) and 256 of the Tax Code.

In this case, after audit, the BIR issued a Final Assessment Notice and Final Letter of Demand to 21st Century demanding payment for deficiency income tax, improperly accumulated earnings tax, minimum corporate income tax, expanded withholding tax, value added tax and compromise penalty in the amount of P747,964.49.

The BIR proceeded with collection despite a protest filed by the company as the company failed to submit the supporting documents to refute the assessment within time.

A final notice was sent by the BIR and, in a bid to prevent the seizure of 21st Century’s properties Ms. Suarez sent a letter to the BIR requesting additional time to secure the services of an external accountant to assist the company in organizing its records so that it could provide the evidence to support its financial statements and income tax returns. In the letter, Ms. Suarez also expressed her willingness to settle the company’s tax liabilities, through compromise.

Despite this, the BIR still proceeded with the filing of a criminal and collection case against Genoveva Suarez for the company’s tax liabilities.

On June 2, 2016, the Regional Trial Court of Manila rendered its Decision finding petitioner guilty beyond reasonable doubt and criminally liable for violation of Section 255 in relation to Sections 253( d) and 256 of the Tax Code. The Court also ordered Ms. Suarez to pay the tax liabilities of 21st Century. The trial court also ordered Ms. Suarez to pay for the tax liability of the company.

On appeal the CTA affirmed the criminal conviction of Ms. Suarez but removed the order of the trial court for Ms. Suarez to personally pay for the tax liability of the company. Instead, the CTA ordered the company, 21st Century, to pay for its tax liability.

The Supreme Court reversed the criminal conviction of Genoveva Suarez and acquitted her of the crime charged and set aside the decision of the CTA.

In reversing the conviction of Genoveva Suarez, the Supreme Court explained that even if she was the executive vice-president of the company which had been found by the BIR to owe deficiency taxes, she could not be liable under Section 255 in relation to Sections 253 (d) and 256 of the Tax Code.

The Tax Code (Republic Act No. 8242, as amended) in Section 253 (d) expressly enumerates the corporate officers who may be held liable for violations and, they are the:

1.  Partner
2. President
3. General manager
4. Branch manager
5. Treasurer
6.  Officer-in-charge
7. The employees responsible for the violation.

In the Suarez case, the Supreme Court stated that an executive vice-president is not one of the corporate officers enumerated under the Tax Code.

The Supreme Court was not convinced that Ms. Suarez was an employee of the corporation responsible for the violation of the Tax Code, which was the basis for conviction by both the trial court and the CTA.

A corporation is an artificial being created by fiction of law such that, by the corporation’s nature as an abstract being, it cannot be arrested and imprisoned. Hence, it cannot be penalized for a crime punishable by imprisonment. As early as 1930 in the case of People v. Tan Boon Kong, the Court already held that for crimes committed by a corporation, it is the responsible officers that would personally bear the criminal liability. This is because a corporation can act only through its officers and agents.

The petitioner’s position as executive vice-president of 21st Century does not automatically and conclusively make her liable for the failure of the company to pay its tax liabilities. In the words of Section 253 of the NIRC, petitioner must have been the employee or officer responsible for the violation.

Ms. Suarez’s letter to the BIR asking for an extension of time to pay the tax liabilities of 21st Century, and signifying her intent to settle the tax liabilities of the company through compromise, is not enough to pronounce her guilt. The Supreme Court found that a single letter does not prove that petitioner has actively participated in, or has failed to prevent the violation by 21st Century of the provisions of the NIRC.

Importantly, the BIR did not introduce any evidence that would show that Ms. Suarez’s duties and responsibilities as executive vice-president of 21st Century allowed her to participate in the company’s failure to pay its tax liabilities.

Finally, in the matter of the offer of compromise, Ms. Suarez’s act of sending the Offer of Compromise prior to the filing of the criminal complaint was not made in the context of a criminal proceeding, and therefore, cannot be considered as an implied admission of guilt.

As long as they are guided by the ruling of the Supreme Court, company officers who are designated to sign letters to the BIR and represent the company may breathe a sigh of relief this coming new year !

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, a Professor at the MLQU School of Law, and an Arbitrator of the Construction Industry Arbitration Commission of the Philippines. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)