ESCAPE FROM TAXATION
expenses of a related company with such privileges are
a. Tax Shifting
- the transfer of the burden of a tax by the original payer or
the one on whom the tax was assessed or imposed to
someone else. What is transferred is not the payment of
the tax but the burden of the tax.
- All indirect taxes may be shifted; direct taxes cannot be
shifted.
- Exemplified by INDIRECT TAXES: Value-Added Tax,
Percentage Tax, and Excise Tax
Kinds of Shifting
1. Forward shifting- when burden of tax is transferred from
a factor of production through the factors of distribution until it
finally settles on the ultimate purchaser or consumer. Example: VAT,
percentage tax
2. Backward shifting – when the burden is transferred
from consumer through factors of distribution to the factors of
production; Example: Consumer or purchaser may shift tax imposed
on him to retailer by purchasing only after the price is reduced, and
from the latter to the wholesaler, and finally to the manufacturer or
producer.
3. Onward shifting- when the tax is shifted 2 or more times
either forward or backward.
b. Tax Capitalization or Amortization
- the reduction in the price of the taxed object equal to the
capitalized value of the future taxes which the purchaser
expects to be called upon to pay.
- An example is the reduction made by the seller on the
price of the Real Estate, in anticipation of the future tax to
be shouldered by the future buyer.
c. Tax Transformation
- the manufacturer or producer upon whom the tax has
been imposed, fearing the loss of his market if he should
add the tax to the price, pays the tax and endeavors to
recoup himself by improving his process of production
thereby turning out his units at a lower cost.
- The producer absorbs the payment of tax to reduce prices
to maintain market share. Additional tax expense can be
recovered by the producer by improving the process of
production. The tax is transformed into a gain through the
medium of production
d. Transfer Pricing
- Transfer pricing is generally defined as the pricing of cross-
border, intrafirm transactions between related parties or
associated enterprises. Typically, a transfer price occurs
between a taxpayer of a country with high income taxes
and a related or associated enterprise of a country with
low income taxes. In the Philippines, “intra-firm / inter-
related” transactions account for a substantial portion of
the transfer of goods and services, however, the revenue
collection from related-party groups continue to go on a
downtrend.
- The TP Regs apply to both domestic and cross-border
transactions of associated enterprises. The regulations
recognize that, while transfer pricing typically occurs in
cross-border transactions, it can also occur in domestic
transactions with the goal of lowering tax obligations. This
happens when income is shifted in favor of a related
company enjoying special tax privileges such as the fiscal
incentives granted by the Board of Investments (BOI) and
the Philippine Economic Zone Authority (PEZA); or when
shifted to a related company subject to regular income
taxes.
- For example, Company A, a BOI-registered entity enjoying
income tax holiday, sells its products at a high price to its
local affiliate, Company B, which is subject to the 30%
regular income tax. Company A, while reporting a higher
income, is exempt from income tax while Company B, in
claiming the expense, will be reporting a lower income
subject to 30% income tax, resulting in an overall lower tax
and higher profit for the group.
- Transfer pricing in domestic transactions may also occur
when expenses of a related company enjoying tax
incentives or privileges are shifted to a related company
subject to regular income taxes.
- For example, Company C, a PEZA-registered entity subject
to the 5% Gross Income Tax (GIT), and Company D, a
company subject to normal income tax, are associated
enterprises. Both incurred common administrative
expenses, but since these expenses are non-deductible to
Company C, Company D takes a bigger share of the
common administrative expenses, and claims the same as
deduction from its gross income. This results in a lower tax
for Company D and an overall higher profit for the group.
e. Resorting to Tax Haven
- A tax haven is defined as a country or place with very low
"effective" rates of taxation for foreign investors
- These tax havens are sprouting all over our nation, and
they’re providing shelter to big businesses that are
enjoying huge tax incentives and other privileges that are
denied ordinary Philippine enterprises.
- The tax havens are growing courtesy of business process
outsourcing (BPO) companies (usually call centers) and
online gambling firms. And there’s an emerging trend of
granting tax haven privileges even to shopping centers,
beach resorts, casinos and hospitals.
- The Philippine Economic Zone Authority (Peza) has been
issuing permits allowing the following: the classification of
buildings as “information technology centers” where BPOs
are sheltered; the declaration of beach resorts, shopping
centers and casinos as “tourism economic zones,” and the
certification of hospitals as “medical tourism centers.” On
the other hand, the Philippine Amusement and Gaming
Corp. (Pagcor) has been issuing licenses to Philippine
offshore gaming operators, which operate internet
gambling businesses.
- While ordinary businesses are subject to corporate income
tax rates as high as 30 percent, Peza- and Pagcor-
accredited enterprises are merely taxed at 5 percent of
their gross income. This special tax rate is perpetually
enjoyed by these privileged companies.
f. Tax Deferral
- Deferred tax asset or liability is calculated as the tax rate
multiplied by the temporary difference — i.e., the
difference between the accounting base of an asset or
liability (amount reflected in the accounting balance sheet)
and the tax base (amount reflected in a notional tax
balance sheet).
g. Tax Shelter
- Individuals and corporations can reduce their final tax
liabilities by allocating some portion of their incomes to
tax shelters.
- A tax shelter is entirely different from a tax haven because
the latter exists outside the country and its legality can, at
times, be questionable. The tax shelter, on the other hand,
is entirely legal and keeps all monies within an individual’s
home country.

h. Doctrine of Equitable Recoupment

- a claim for refund barred by prescription may be allowed
to offset unsettled tax liabilities. The doctrine finds no
application in this jurisdiction.
- is a legal principle that grants a right to a creditor to
recover debt. The debt diminishes to the extent s/he holds
the debtor’s property in violation of the debtor’s legal
rights.

- Equitable recoupment doctrine allows a taxpayer to set off

previously overpaid taxes due, even though the taxpayer is
time-barred from claiming refund on the previous taxes.
This doctrine also allows the government to set off those
taxes that has not been collected from a taxpayer against
the current claim for a refund, although the government is
time-barred from collecting the previous taxes.

i. Tax Avoidance
- The exploitation by the taxpayer of legally permissible
alternative tax rates or methods of assessing taxable
property or income in order to avoid or reduce tax liability.
It is politely called “tax minimization” and is not punishable
by law.
- Example: A person refrains from engaging in some activity
or enjoying some privilege in order to avoid the incidental
taxation or to lower his tax bracket for a taxable year.
- A scheme wherein taxpayer uses LEGALLY PERMISSIBLE
means to reduce or totally escape payment of taxes.
- Also called “TAX MINIMIZATION” and valid if used by the
taxpayer in GOOD FAITH

j. Tax Dodging / Tax Evasion

- A scheme wherein taxpayer uses UNLAWFUL means to
defeat or lessen the payment of tax
- Taxpayer is subject to civil and/or criminal liabilities
- is the use by the taxpayer of illegal or fraudulent means to
defeat or lessen the payment of a tax. It is also known as
“tax dodging.” It is punishable by law.

- Example: Deliberate failure to report a taxable income or

property; deliberate reduction of income that has been
received.

Elements of Tax Evasion

(a) The end to be achieved. Example: the payment of less than
that known by the taxpayer to be legally due, or in paying no tax
when such is due.
(b) An accompanying state of mind described as being “evil,” “in
bad faith,” “willful” or “deliberate and not accidental.”
(c) A course of action (or failure of action) which is unlawful.