Corporate Tax evasion and its impact on the Economy

Feisty Virgin
Jovi Romero
Roselyn Salazar
Andrei Santos
Jay-Anne Subala
Ramir Ruedas
2A14

Introduction
Tax evasion has been a pressing issue with the BIR recently. A lot of
cases were filed against popular individuals and corporations that
caught the attention of the people and the media. Although tax
evasion is presumably as old as the history of taxation, the recent
cases filed gave an alarming awareness to everyone. With the
prevalence of tax evasion in an economy, it deprives its country of
national funds needed for its development that could lead to a serious
problem or crisis. Our stand is that corporate tax evasion is a major
factor in the impediment of economic growth. This research aims to
raise awareness on responsibility of every taxpayer especially the
corporation as to how these taxes contribute to economic growth. The
paper is organized as follows; in the opening part we discuss the
definition of terms and the conceptual difference between tax evasion
and tax avoidance. In the body, we explored the tax system
implemented in our country, the importance of taxes and ethical issues
arising from tax evasion. Also, the factors that affect the evasion of
taxes, how they evade taxes, and the evidences that supports the
thesis statement are further discussed. On the last part, we are going
to reiterate our thesis statement and propose a possible solution and
also the implications of the prevalence of tax evasion if not resolved in
the future. We are limiting this research to corporate tax evasion and
its effect on the economy only.

Taxation is the imposition of a mandatory levy on the citizens and

businesses of a country by their government. In almost every country,
the government derives a majority of its revenues for financing public
services from taxation. Just as death and taxes are certainties in this
world, so are ways and means to minimize if not eliminating altogether
one's tax liabilities. Thus, attempts by a taxpayer to effectively lower
his tax liability may take in many forms and to what extent the
taxpayer could do. There are two known ways on how to do it, tax
avoidance and tax evasion. According to Kay, tax avoidance arises over
ambiguities over the definition of a tax base but the facts of
transaction are admitted but they have been arranged in such a way
that the resulting tax treatment differs from that intended by the
relevant legislation. On the other hand, tax evasion is concerned with
concealing or misrepresenting the nature of a transaction and is illegal
from the viewpoint of the tax code (1980). This just simply means that
tax avoidance is manipulating the loopholes in the tax code to ones
advantage with the primary goal of lowering the expected tax liability
while tax evasion an illegal practice where a person, organization or
corporation intentionally avoids paying his/her true tax liability. In
relation to taxation, economic growth is the increase in the market
value of the goods and services produced by an economy over time.
Manasan (1981-1995) discussed as such, evasion and avoidance are
interdependent activities. Significant and well-known tax avoidance

could induce increased evasion. On the part of the individual taxpayer,

evasion can substitute for avoidance when increasing the cost of tax
avoidance may increase tax evasion. But the impacts on the economy
of both are the same: loss of government revenue, increase in
taxpayer's after-tax income, and perverse effects on the equity and
efficiency goals of the tax system.

Body
THE PHILIPPINE TAX SYSTEM
Taxation is the imposition of financial charges or other levies, upon
a taxpayer by a state that failure to pay is punishable by law
(Gonzales, 2011). It is a rule by which a government makes extractions
or collection for revenue in order to support their existence and carry
out their legal objectives. It is the most common and strongest power
of a government. Taxes are the blood and life of a government, without
it, a government cannot meet its objectives.
The main purpose of taxation is to accumulate funds for the
functioning of the government machineries (Gonzales, 2011). No
government in the world can run its administrative office without funds
and it has no system incorporated in itself to generate profit for its

functioning. The governments ability to serve the people depends

upon the taxes that are collected from the people. Taxes are a requisite
in the government operation and without it, the government will be
useless. Everyone who is a resident or non-resident receiving income
from sources within or outside the Philippines should pay taxes. This
includes domestic and foreign corporations.
Four Rs of Taxation

Revenue taxes that raise money to spend on armies, roads,

schools, hospitals, and other indirect government functions

Redistribution refers to the transferring of wealth from the

richer sections of society to the poorer sections

Repricing taxes levied to address externalities

Representation No taxation without representation

PHILIPPINE TAX LAWS

The Philippine taxation system covers national and local taxes.
National taxes refer to national revenue taxes imposed and collected
by the national government through the Bureau of Internal Revenue
(BIR) and local taxes refer to those imposed and collected by the local
government (www.bir.gov.ph).

The laws on Philippine Taxation are contained within the National

Internal Revenue Code. This code underwent substantial revision with
passages of the Tax Reform Act of 1997. This law took effect on January
1, 1998. The chief executive of the Bureau of Internal Revenue is the
commissioner who has exclusive and original authority to interpret the
provisions of the code and other tax laws. The commissioner also has
the power to decide disputed assessments, grant refunds, modify
payment of any internal revenue tax, and cancel a tax liability.
Taxpayers can appeal decisions by the Commissioner directly to the
Court of Tax Appeals (www.bir.gov.ph).
National Tax Law
The 1987 Philippine Constitution sets limitations on the
exercise of the power to tax. The rule of taxation shall be
uniform and equitable.

The Congress shall evolve a

progressive system of taxation (Article VI, Section 28,

paragraph 1).
All money collected on any tax levied for a special
purpose shall be treated as a special fund and paid out for
such purpose only. If the purpose for which a special fund
was created has been fulfilled or abandoned, the balance,
if any, shall be transferred to the general funds of the
Government (Article VI, Section 29, paragraph 3).

The Congress may, by law, authorize the President to fix

within specified limits, and subject to such limitations and
restriction as it may impose, tariff rates, import and export
quotas, tonnage and warfare dues, and other duties or
imposts within the framework of the national development
program of the Government (Article VI, Section 28,
paragraph 2).
The President shall have the power to veto any particular
item or items in an appropriation, revenue or tariff bill, but
the veto shall not affect the item or items to which he does
not object (Article VI, Section 27, second paragraph).
The Supreme Court shall have the power to review, revise,
reverse, modify or affirm on appeal or certiorari, as the law
or the Rules of Court may provide, final judgments and
orders of lower courts in x xx all cases involving the
legality of any tax, impost, assessment, or toll or any
penalty imposed in relation thereto (Article VIII, Section 5,
paragraph).
Local Government Tax Law
Local government taxation in the Philippines is based on
the constitutional grant of the power to tax to the local

governments.

Local

taxes

may be imposed,

as the

Constitution grants, to each local government unit, the

power to create its own sources of revenues and to levy
taxes, fees, and charges which shall accrue to the local
governments (Article X, Section 5). With respect to national
taxes, local Government units shall have a just share, as
determined by law, in the national taxes which shall be
automatically released to them (Article X, Section 6).
Tax Exemptions in the Philippines
As mentioned above, everyone who is a resident or non-resident
receiving income from sources within or outside the Philippines should
pay taxes. However, their some exemptions in paying taxes. According
to the Philippine Constitution, the following are exempted from taxes:

Charitable institutions, churches, convents, mosques, non-profit

cemeteries, lands and buildings and improvements

All

income,

revenues,

assets

of

non-stock

and

non-profit

educational institutions used actually, directly and exclusively for

educational purposes

Non-stock and non-profit educational institution and government

educational institution

Non-stock corporations and organizations operated exclusively for

religious, charitable, scientific, athletic or cultural purposes

Minimum wage earner

Non-resident citizen of the Philippines

Prizes and winnings from a charity horse race sweepstakes from the
Philippine Charity Sweepstakes Office

SSS and GSIS Benefits

Annual taxable income of Senior Citizens or those at least 60 years old

who have income of not more than P60,000 per year

Donations to the Philippine government for scientific, engineering and

technological research, invention and development

Other donation exemptions

Factors that affect the evasion of taxes:

Tax evasion occurs because of two factors: psychological elements
and administrative and legal aspects. Psychological elements affect the
evasion of taxes because some people may doubt the leaders of their
country regarding the use of taxes in the economic development of the
country. Evasion is more likely among those who feel that they pay an

unfairly high level of taxes (Witte and Woodbury, 1985). Some people,
commonly in corporations, think that they pay higher taxes than that
of others and as a result, they tend to make ways on how to lessen
their taxes.
On the other hand, administrative and legal aspects include
dishonest tax reporting or accounting fraud, manipulation of records,
and corruption. Common practices of tax evasion include: underreporting of income, over-statement of expenses, use of fictitious
receipts, the keeping of double sets of books, false or fictitious entries
in books, fictitious transactions in the name of dummies, non-recording
of sales, and others. Dishonest tax reporting is mainly done by
accountants by hiding the true status of the firm to the tax authorities.
They simplify records so that the firm will pay less taxes and being able
to generate more profit. Tax evasion commonly arises when a person
overstates the expenses (false receipts) or counts in ineligible
expenses. As a result, less income will be recorded but in reality, they
gained more profit and spent less for their expenses than what is
indicated in their financial statements.
Corruption is also a major contributor to tax evasion. Based on the
Latin American experience, Herschel believes that knowledge of
widespread corruption of senior policymakers in a country may signal
the mismanagement of public funds and hence induce resistance to

comply with tax laws. People tend to make ways not to pay their taxes
because they believe that their money will not be used properly by
their government in making their country better.

From the above table are the corporate tax rates of Philippines,
Korea, and Sudan from the years 2009-2014. We chose to compare
Korea and Sudan to the Philippines because they are just some of the
most corrupt countries in the world. Koreas major issues can be traced
back to a number of natural disasters and the collapse of the Soviet
Union while Sudan has been wrapped thoroughly in the grasp of war
for many years. The table shows that Philippines had a constant 30%
corporate tax rate from 2009-2014. Korea had 24.2% corporate tax
rate from the given years except in the year 2011 in which they had
22%. Lastly, Sudan had 15% from 2009-2010 but has increased to 35%
for 2011-2014. This implies that the high corporate tax rates of Sudan
and Korea are understandable because of their economic situations.

Taxes and the Economy

The Tax effort for the year 2013 contributed to the increase to
13.58% of the Gross Domestic Product of the Philippines from the
13.3% of the previous year. Hence, the tax evasion cases for the year
2012 accumulated to almost P12 Billion. Out of the 128 cases filed by
the Bureau of Internal Revenue, 72 cases were identified as tax
evasion cases of different corporations.

There were 9 out of 10

corporations which violated the same law, Sec 27 and 28 of the Tax
Reform Act of 1997. Republic Act 8424 Sec 27 discusses the rate of
income tax of domestic corporations which is 35% imposed upon the
taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation taxable under
this Title as a corporation, organized in, or existing under the laws of
the Philippines. On the other hand, Sec 28 tackles the rate of income
tax of foreign corporations a corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be subject to an income tax
equivalent to 35% of the taxable income derived in the preceding
taxable year from all sources within the Philippines.
In economics, taxes are often considered economically inefficient,
which suggests tax evasion may potentially have a positive impact
on an economy. The theory is that since taxes operate by increasing

the prices of things, overall consumption decreases as taxes

increase, and therefore, economic activity falls. But come to think of
it, those taxes are attributed to projects for the common good such
as roads, utilities and other infrastructure, so the government
collects taxes in order to provide these public goods. The basic laws
of economics might suggest that in the absence of the government,
private companies would exist to provide these public goods and
could do so more efficiently, as they would not be hindered by taxes
and government bureaucracy. But we all know that for a country to
run, it needs its government. Thus for the government to function, it
needs funds from the taxes of the citizens and businesses.

The budget allocated for 2013 amounted to more than P1979.6

Trillion and yet we lost almost P12 Billion because of these corporate
tax evasion cases which could have been a big help for the
development of the different sectors of our country. One example of
this is the improvement of the Economic Sector consisting of the
Industry, Service and Agriculture Sector which composes those big
corporations that contribute to the economic growth, quantified as
GDP, and employment of the country. The budget for Economic
Services makes up 25.5% which is P511.1 Billion of the national
budget for the year making it the second highest sectoral allocation
and Public Services being the first.

The industry and services (I& S) sectors continue to be the

growth drivers of the Philippine economy. However, this growth
needs to be sustained and made more inclusive. A globally
competitive sector is one that is able to tap the global market and,
therefore, grow faster. An innovative sector, on the other hand,
implies the creation of new products, which can mean additional
markets and perhaps new production processes that will allow the
sector to link better with the primary sectors, namely agriculture
and fisheries. Underlying all these are the strategies to expand
markets, part of which is the expansion of the domestic market
resulting from population and income growths.

The bigger part,

however, will be the penetration into foreign markets, including

tourism. To promote global competitiveness and innovation in the
Industry and Service sectors, the government will continue to
improve the business climate, promote an environment that
increases productivity and innovative capacity, enforce regulations
that enhance consumer welfare and expand market access.
The National Budget is an instrument of national development,
reflective of national objectives, strategies and plans. It must cover
all the needs and expenses of the different sectors of the
government. Whenever the National Budget could not sustain

these, the government decides to borrow funds from different

countries or other financial institutions which is to be paid in due
time with a large sum of interest. Thus hindering economic growth.
If debt will exceed the countrys repayment ability with some
probability in the future, expected debt service is likely to be an
increasing function of the countrys output level. Thus some of the
returns from investing in the domestic economy are effectively
taxed away by existing foreign creditors and investment by
domestic and new foreign investor is discouraged. According to
Metwally and Tamaschke (1994) as cited by Karagol, this decreases
the domestic countrys ability to grow its economy and raises it
dependence on foreign debt.
The top 5 most controversial cases of Corporate Tax Evasion for the
year 2012 with their corresponding liabilities were Gammon Metal
Products Inc. (1693.5M), JDBec Inc. (1465.1 M), Abante Industries
(1278.5 M), China State Engineering Corp. (712.7M) and All P
Drugstore and General Merchandise (516.9 M).

According to the

report, the top 10 developing countries with the highest illicit financial
outflows were China ($2.74 trillion), Mexico ($476 billion), Malaysia
($285), Saudi Arabia ($210 billion), Russia ($152 billion), Philippines
($138 billion), Nigeria ($129 billion), India ($123 billion), Indonesia
($109 billion ) and the United Arab Emirates ($105 billion). The same
report also said that of these illicit cash flows, 60%-65% was for tax

avoidance and 30%-35% from criminal activities. Illicit cash flows from
corruption, bribery and theft among government officials accounted for
3%-5%. The most depressing news for us is that the Philippines ranked
6th in the list of developing countries in terms of illicit cash flows. We
can only dream of the positive effect on our economy and on the
number of jobs that would have been created if the Philippine elite had
decided to keep and invest the $135 billion here instead of stashing
them abroad.
Tax evasion take away money that could be invested in productive
resources needed to diversify the economy and address urgent social
problems. Tax evaded money is not spent on productive investments
that can have a multiplier effect on an economy and benefit the
significant majority of a population, rather than just a select few. The
government must spend resources attempting to recoup taxes it is
owed, which is wasteful to society. If no one underpaid taxes, more
money could be attributed toward beneficial programs instead of being
spent on collecting it. Also compare a corporation that pay its tax
liability correctly to the one that evade taxes, it creates an artificial
advantage for the company evading taxes. This could lead to
companies with less business practices outlasting those with more
efficient practices, which would be detrimental to the economy
because those companies that evade taxes outlasted which means
lower national funds and the companies closed would result to

unemployment.

Tax Evasion Cases Filed by BIR

Corporation
Personal

Ethics
Three major views have evolved over the last 500 years regarding
tax evasion. One view takes the position that tax evasion is always or
almost unethical, either because there is a duty to God to pay taxes, or
because there is a duty to some community or to society. Another view
is that there is never or almost never a duty to give anything to a
corrupt government. The third view is that there is some ethical
obligation to support the government of the country where you live but
that duty is less than absolute.

The reasons for considering tax evasion as ethical are corruption of

the government and the affordability and fairness of the tax system.
Morales (1998) discussed the viewpoint of Mexican workers. Most of
these studies found that taxpayers do not have ethical problem with
evading taxes because their governments are corrupt and they feel
that they have no ethical duty to pay taxes to a corrupt government.
He concluded that Mexican workers duty to his family is sometimes
more important than his duty to the state. Genicot (1927) states that
partial evasion is justified on the grounds that the government does
not have the right to the full amount and that it would be unfair to
impose heavier taxes on conscientious men while wicked men usually
pay less.
On the other hand, tax evasion is considered as unethical because
of social responsibility and moral duty to other tax payers. It is the
social responsibility of every individual in the country to pay taxes for
the benefit of their countrymen. Some Christian groups also take this
view that individuals are morally bound to obey the laws of the country
in which they live. The moral duties to other tax payers are also
considered as one of the reason why it is unethical to evade tax. All
countrymen must be equal and they should fulfil their responsibilities
the same way as the other does.
Importance of paying taxes

Taxes are the charges that the government imposes on citizens and
corporate businesses. The charges collected by the government are
used to fund different government projects that would in the end
benefit the citizens of the country as a whole. It also plays a key role in
building up institutions, markets and democracy through making the
state accountable to its taxpayers. Paying taxes plays an important
role for the benefit of the society and businesses by providing funds for
the projects of the government and unexpected events like recession
and turmoil.
The society is the main beneficiary of paying taxes. Taxes are used
to fund projects related to health care systems, education systems,
and public transports which is very essential for the everyday living of
the citizens. Also, the money collected can also be used to give
unemployment benefits, pensions, and other matters that can benefit
the society as a whole. Without tax, the government would not be able
to fund the essential projects and services that people need. People in
the society can also be more responsible citizen by imposing taxes on
liquor, cigarettes and gambling ,specifically the Sin Tax law , so that
they may not purchase these items immediately because of its higher
cost . Taxes also promote economic growth by generating the revenue
needed to finance governments economic development policies and
create a framework for development of private sector activities.

Businesses are also a major beneficiary of taxes. The government

funds the money back into the economy as long term loans and/or
funding. They serve as a creditor for business who needs capital for the
growth of the business. Taxes is also essential during recession
because the government increase their spending which includes
spending in construction, education, communication networks, massive
power-generation, and other major infrastructure projects.

Conclusion
The result of the study is that corporate tax evasion filed has a
greater number than that of the personal tax evasion cases. This just
simply means, a decrease in the national budget that could have been
put into a lot of projects that benefits the common good such as
infrastructures, roads, education and especially economic sector. This
research also found out the underlying cause of tax evaders is that the
government is known to be corrupt, but in reality, the economic sector
is the 2nd with the highest budget allocation in our country which
means these corporate tax evaders benefit a lot from the taxes put
into public service. Corporate tax evasion also leads to budget deficit
which result to foreign debts that hinder the countrys economic
growth.
As practitioners, addressing these crucial issues head on be it

corruption,

tax

evasion

or

bloated

public

sectoris

our

responsibility. Just imagine that the failure of government to curb

smuggling and tax evasion could be something more than depriving
the national treasury with funds for the countrys development needs.
It could be a serious security threat and may end democracy as we
know it. We proposed probable solutions to the issue of corporate tax
evasion. First, is the revision of the tax code that could address to the
issue of the loopholes on the law and a much stricter penalty on those
people who attempt to evade their taxes. In line with this, proper and
stricter implementation of the tax code should be maintained. Also, the
system should be free from corruption. Government has a special
responsibility to make proper rules and promote good governance.
Increased transparency could also contribute to encourage citizens and
businesses to pay their taxes correctly. Let them know the budget
allocation percentage and the evident projects that their money spent
on taxes were used for. Fair taxes not necessarily lower tax rates
should be implemented in our country. This could lessen the number of
tax evaders and could also entice investors to come in our country.
Private enterprise drives growth, reduces poverty and creates jobs and
prosperity for people around the world. Fair taxes, and open trade are
vital drivers of this.

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