Corporate veil not an absolute shield

ALTHOUGH a corporation is not a person, the legal fiction of treating it as an artificial person was created to determine the legality of business proceedings.

As a rule, a corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owner or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa.

The veil of corporate fiction, however, may sometimes be abused to avoid liability for taxes.

As a result, tax authorities have in several occasions pierced the veil of corporate fiction in order to hold directors, officers, and employees personally liable.

In taxation, piercing the veil of corporate fiction means that stockholders or officers of a corporation can be held directly liable for corporate tax liabilities and vice versa when the corporation is formed or used for illegitimate purposes, particularly, as a shield to perpetuate fraud, defeat public convenience, justify wrong, evade a just and valid obligation or defend a crime.

In the recent case of People of the Philippines vs. Wong Yan Tak, Geralyn Bobier, and Pic N’ Pac Mart, Inc., CTA Criminal Case No. 0-909, Jan. 8, 2013, the Court of Tax Appeals (CTA) ordered the company’s president as its responsible officer to pay for the civil liability of the company arising from its tax assessment.

Upon appeal, however, the CTA reversed its decision considering that no allegation was made that the corporation was used to perpetrate fraud.

Thus, only in circumstances when the corporation was used merely as an adjunct, business conduit or alter ego of another corporation or by its officers or stockholders, or the corporation was used to perpetrate fraud in violation of the tax laws can the doctrine of "piercing the corporate veil" be applied and the fiction of the corporation’s separate and distinct personality is disregarded.

The same rule applies in case of penal liability. In People of the Philippines vs. Katherine M. Lim, and Edelyn Coronacion, CTA Criminal Case No. 0-113, Dec. 12, 2011, the Court discussed the element of willfulness to make the responsible officers accountable.

If a taxpayer is a corporation, Section 256 of the Tax Code imposes the penal liability upon the corporate taxpayer’s responsible officers enumerated in Section 253 (d). The crime of failure to pay tax under Section 255 is defined by the element of "willfulness" of not paying the tax. The offender is aware or knows the existence of obligation to pay a tax liability voluntarily and intentionally failed to pay it. The court further explained that a corporate taxpayer incurs no criminal liability for the same is personal upon its officers taking into consideration that a crime cannot be imputed to a corporation, being a mere artificial being without a mind, therefore the criminal intent as an essential ingredient of a crime would be missing.

However, as clarified in the case of Ching vs. Secretary of Justice, GR No. 164317 dated Feb. 6, 2006, a corporation cannot be arrested and imprisoned, hence, cannot be penalized for a crime punishable by imprisonment. Nevertheless, a corporation may be charged and prosecuted for a crime if the penalty is a fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty may be fined. When a criminal statute designates an act of a corporation a crime and prescribes punishment, it creates a criminal offense which, otherwise, would not exist and such can be committed only by the corporation. But when a penal statute does not expressly apply to corporations, it does not create an offense for which a corporation may be punished. On the other hand, if the State, by statute, defines a crime that may be committed by a corporation but prescribes the penalty to be suffered by the officers, directors, or employees of such corporation or other persons responsible for the offense, only such individuals will suffer such penalty.

The principle applies to those corporate agents who themselves commit the crime and to those, who, by virtue of their managerial positions could be deemed responsible for its commission, if by virtue of their relationship to the corporation, they had the power to prevent the act. Whether such officers or employees are benefited by their delictual acts is not a touchstone of their criminal liability.

It has been held in a number of cases that personal liability of a corporate director, trustee, or officer may validly attach when:

1. He assents to the (a) patently unlawful acts of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally liable and solidarily liable with the corporation; or

4. He is made, by specific provision of law, to personally answer for his corporate action.

The foregoing tax cases should serve as a caveat to stockholders, directors, officers, employees of corporations that although the corporation has distinct and separate juridical personality, the court may pierce the corporate veil and hold them liable together with the corporation for any tax deficiency.

Businessworld - March 11, 2013

(The author is a senior associate with Punongbayan & Araullo’s (P&A) Tax Advisory and Compliance Division. P&A is the Philippine member of Grant Thornton International Ltd. For comments please e-mail Cha.Mandap@ph.gt.com.)