In this digital age where disclosure has taken over discretion, and collection and sharing of data is so much more convenient, should we contemporaneously limit the definition of privacy? Should an individual’s right to privacy be overridden by the state’s interest in collecting taxes? Should our assets and income no longer remain secret from our taxing authorities?
The certainty of taxes is too daunting. Almost every inflow of asset, whether as hard-earned income or gratuitously received, is subject to at least one type of tax. Hence, it has been the interest of all governments to compel taxpayers to disclose their sources of assets. And it has been the interest of taxpayers to keep secret their assets. Between two interests, the Philippines has favored secrecy over tax collection.
In the deliberations of Bank Secrecy Law, enacted in 1955, the Congress recognized that “[m]any people do not deposit their money in banks or invest in bonds for fear that the tax collection agencies of our Government might make inquiries or investigations about their bonds and deposits for purposes of taxation... While it is true that many tax evaders will evade liability for tax evasion if this bill is approved, it is believed that the benefits that will accrue to our economy in enacting this bill to law will counter-balance immeasurable the losses of the Government from such tax evasion.”
The Bank Secrecy Law prohibits involuntary disclosure of bank deposits, i.e., these deposits “may not be examined, inquired or looked into” by the government. Hence, disclosure made by the depositor, of course, is not prohibited. Can the taxpayers, nonetheless, becompelled to make disclosures?
The Department of Finance (DoF) and the Bureau of Internal Revenue (BIR) seem to be uncertain. The BIR has suspended, on a yearly basis, the implementation of the compulsory disclosure of certain income and asset information.
In 2011, the DoF, upon recommendation of the BIR, promulgated Revenue Regulations (RR) No. 2-2011, which required, for the first time, the disclosure of (a) income already subject to final withholding tax (FWT), and (b) those excluded from gross income, referred to as “Supplemental Information.”
Interest from bank deposits is income subject to FWT. Such FWT is reported and paid by the payor-banks. Assets received gratuitously,via donation or succession, are excluded from gross income. The donor’s or estate tax on these gratuitous transfers is reported and paid by the grantor. Hence, these inflows of assets are supposed to have been previously reported. Nonetheless, under RR 2-2014, these items have to be disclosed by the recipient in his own income tax return, under the pain of perjury. Further, income exempt under a tax treaty, even if excluded from gross income, is likewise a required disclosure under RR 2-2014.
The required disclosures under RR 2-2014 seem to be in line with the Republic of the Philippines-United States Tax Treaty (RP-US Tax Treaty), and the Agreement between the Government of the United States of America and the Government of the Republic of the Philippines to Improve International Tax Compliance and to Implement Foreign Account Tax Compliance Act.
Under the RP-US Tax Treaty, the Philippines and the US shall exchange information as is necessary, provided that the information is of a class that can be obtained under the laws and administrative practices of each government with respect to its own taxes. With the requirement of disclosing all sources of assets under RR2-2014, the US government will have access to information on US taxable events.
Under the RP-US Tax Treaty, as well, information on bank accounts may be exchanged, on a per request basis, with reference to particular tax cases. This type of exchange of information is implemented via Republic Act No. 10021. Under said law, the BIR may inquire into bank deposit accounts, notwithstanding the Bank Secrecy and other related laws, if the information is required by the US government pursuant to a specific tax case.
The Agreement (which was signed in 2015 by the Secretary of Finance, on behalf of the Philippines), on the other hand, compels qualified Philippine financial institutions to disclose information to the Philippine government on financial accounts maintained by US residents in the Philippines. Qualified US financial institutions are likewise required to report financial accounts maintained by Philippine residents to the US government. The Philippine and US governments are then required to exchange information.
The Agreement cites as basis Article 26 of the RP-US Tax Treaty on Exchange of Information, and yet it goes above and beyond what are provided therein. As discussed, the information for disclosure under the RP-US Tax Treaty are limited to (a) those that are collected as a matter of routine, and (b) those that are collected by specific request. The RP-US Tax Treaty does not require blanket compulsion to financial institutions to make disclosures on accounts maintained with them by covered individuals.
It seems then that the legal status of the Agreement is doubtful. It is not a mere executive agreement because it does not merely carry-out the RP-US Tax Treaty. Moreover, it is an indirect derogation of the Philippines’ policy on bank secrecy.
As such, it is, in substance, a treaty and should comply with the applicable formal requirements, i.e., concurrence by the Senate. The Agreement, then, cannot be considered as valid and binding by mere expediency of a signature by the Secretary of Finance.
What then now?
The definition of privacy, the state’s interest in collection of taxes, and the secrecy of financial accounts are political questions to be answered by the legislative department, either through domestic laws or by concurrence in treaties. These matters cannot be decided by the executive branch, through administrative issuances and/or executive agreements.
Should we comply with the disclosure requirements under RR 2-2014 and the Agreement? There are good legal reasons not to.
This requirement of additional disclosure in RR 2-2011, and its successor RR 2-2014, however, has been suspended every year by the BIR. For the income tax filing for taxable year 2014, the implementation of the required disclosure has also been deferred.
(The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion).
Karen Andrea D. Torres is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).
830-8000
kdtorres@accralaw.com.
In the deliberations of Bank Secrecy Law, enacted in 1955, the Congress recognized that “[m]any people do not deposit their money in banks or invest in bonds for fear that the tax collection agencies of our Government might make inquiries or investigations about their bonds and deposits for purposes of taxation... While it is true that many tax evaders will evade liability for tax evasion if this bill is approved, it is believed that the benefits that will accrue to our economy in enacting this bill to law will counter-balance immeasurable the losses of the Government from such tax evasion.”
The Bank Secrecy Law prohibits involuntary disclosure of bank deposits, i.e., these deposits “may not be examined, inquired or looked into” by the government. Hence, disclosure made by the depositor, of course, is not prohibited. Can the taxpayers, nonetheless, becompelled to make disclosures?
The Department of Finance (DoF) and the Bureau of Internal Revenue (BIR) seem to be uncertain. The BIR has suspended, on a yearly basis, the implementation of the compulsory disclosure of certain income and asset information.
In 2011, the DoF, upon recommendation of the BIR, promulgated Revenue Regulations (RR) No. 2-2011, which required, for the first time, the disclosure of (a) income already subject to final withholding tax (FWT), and (b) those excluded from gross income, referred to as “Supplemental Information.”
Interest from bank deposits is income subject to FWT. Such FWT is reported and paid by the payor-banks. Assets received gratuitously,via donation or succession, are excluded from gross income. The donor’s or estate tax on these gratuitous transfers is reported and paid by the grantor. Hence, these inflows of assets are supposed to have been previously reported. Nonetheless, under RR 2-2014, these items have to be disclosed by the recipient in his own income tax return, under the pain of perjury. Further, income exempt under a tax treaty, even if excluded from gross income, is likewise a required disclosure under RR 2-2014.
The required disclosures under RR 2-2014 seem to be in line with the Republic of the Philippines-United States Tax Treaty (RP-US Tax Treaty), and the Agreement between the Government of the United States of America and the Government of the Republic of the Philippines to Improve International Tax Compliance and to Implement Foreign Account Tax Compliance Act.
Under the RP-US Tax Treaty, the Philippines and the US shall exchange information as is necessary, provided that the information is of a class that can be obtained under the laws and administrative practices of each government with respect to its own taxes. With the requirement of disclosing all sources of assets under RR2-2014, the US government will have access to information on US taxable events.
Under the RP-US Tax Treaty, as well, information on bank accounts may be exchanged, on a per request basis, with reference to particular tax cases. This type of exchange of information is implemented via Republic Act No. 10021. Under said law, the BIR may inquire into bank deposit accounts, notwithstanding the Bank Secrecy and other related laws, if the information is required by the US government pursuant to a specific tax case.
The Agreement (which was signed in 2015 by the Secretary of Finance, on behalf of the Philippines), on the other hand, compels qualified Philippine financial institutions to disclose information to the Philippine government on financial accounts maintained by US residents in the Philippines. Qualified US financial institutions are likewise required to report financial accounts maintained by Philippine residents to the US government. The Philippine and US governments are then required to exchange information.
The Agreement cites as basis Article 26 of the RP-US Tax Treaty on Exchange of Information, and yet it goes above and beyond what are provided therein. As discussed, the information for disclosure under the RP-US Tax Treaty are limited to (a) those that are collected as a matter of routine, and (b) those that are collected by specific request. The RP-US Tax Treaty does not require blanket compulsion to financial institutions to make disclosures on accounts maintained with them by covered individuals.
It seems then that the legal status of the Agreement is doubtful. It is not a mere executive agreement because it does not merely carry-out the RP-US Tax Treaty. Moreover, it is an indirect derogation of the Philippines’ policy on bank secrecy.
As such, it is, in substance, a treaty and should comply with the applicable formal requirements, i.e., concurrence by the Senate. The Agreement, then, cannot be considered as valid and binding by mere expediency of a signature by the Secretary of Finance.
What then now?
The definition of privacy, the state’s interest in collection of taxes, and the secrecy of financial accounts are political questions to be answered by the legislative department, either through domestic laws or by concurrence in treaties. These matters cannot be decided by the executive branch, through administrative issuances and/or executive agreements.
Should we comply with the disclosure requirements under RR 2-2014 and the Agreement? There are good legal reasons not to.
This requirement of additional disclosure in RR 2-2011, and its successor RR 2-2014, however, has been suspended every year by the BIR. For the income tax filing for taxable year 2014, the implementation of the required disclosure has also been deferred.
(The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion).
Karen Andrea D. Torres is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).
830-8000
kdtorres@accralaw.com.
source: Businessworld
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