Tax Avoidance and Tax Evasion
stands for an amount of not less than
Tax avoidance / tax minimization
Tax avoidance is a scheme where the taxpayer
uses legally permissible alternative method of
assessing taxable property or income, in order
to avoid or reduce tax liability.
It is a tax saving device within the means
sanctioned by law. This method should be
used
by the taxpayer in good faith and at arm’s
length (CIR v. The Estate of Benigno Toda Jr.,
G.R.
No. 30554, February 28, 2004).
Tax evasion / tax dodging
Tax evasion is a scheme where the taxpayer
uses illegal or fraudulent means to defeat or
lessen payment of a tax.
It is a scheme used outside of those lawful
means and when availed of, it usually subjects
the taxpayer to further or additional civil or
criminal liabilities (CIR v. The Estate of
Benigno
Toda Jr. G.R. No. 30554, February 28, 2004).
Commissioner of Internal Revenue vs.
Estate of Benigno Toda Jr., et al.
G.R. No. 147188 September 14, 2004
483 SCRA 293
FACTS:
Cibeles Insurance Corporation (CIC)
authorized Benigno P. Toda, Jr.,
President and owner of 99.991% of its
issued and outstanding capital stock,
to sell a 16-storey commercial building
known as Cibeles Building and the two
parcels of land on which the building
P90 million.
Six months later, Toda purportedly
sold the property for P100 million to
Rafael A. Altonaga, who, in turn, sold
the same property on the same day to
Royal Match Inc. (RMI) for P200
million. These two transactions were
evidenced by Deeds of Absolute Sale
notarized on the same day by the
same notary public. For the sale of the
property to RMI, Altonaga paid capital
gains tax in the amount of P10 million.
When CIC filed for corporate annual
income tax return for the year 1989, it
declared its gain from the sale of real
property in the amount of
P75,728.021. After crediting
withholding taxes of P254,497.00, it
paid P26,341,2078 for its net taxable
income of P75,987,725.
On 12 July 1990, Toda sold his entire
shares of stocks in CIC to Le Hun T.
Choa for P12.5 million, as evidenced
by a Deed of Sale of Shares
of Stocks.Three and a half years later,
Toda died.
ISSUES:
1. Whether or not the tax planning
scheme adopted by CIC constitutes
tax evasion that would justify an
assessment of deficiency income tax.
2. Whether or not the Estate is liable
for the 1989 deficiency income tax of
Cibeles Insurance Corporation.
RULING:
Yes. Tax evasion is a scheme not
sanctioned by law and when it is
availed of, it subjects the taxpayer to
further or additional civil or criminal
liabilities. Tax evasion connotes the
integration of three factors:
(1) the end to be achieved, i.e., the
payment of less than that known by
the taxpayer to be legally due, or the
non-payment of tax when it is shown
that a tax is due;
(2) an accompanying state of mind
which is described as being “evil,” in
“bad faith,” “willfull,” or “deliberate and
not accidental”; and
(3) a course of action or failure of
action which is unlawful.
All these factors are present in the
instant case. It was proven that the
real buyer of the properties was RMI,
and not the intermediary Altonaga. The
scheme resorted to by CIC in making it
appear that there were two sales of the
subject properties, i.e., from CIC to
Altonaga, and then from Altonaga to
RMI, thereby reducing the tax from
35% to 5%, cannot be considered a
legitimate tax planning because it is
tainted with fraud.
allowing offsetting of a prescribed claim for
refund
against a tax liability arising from the same
transaction on which an overpayment is made
and
underpayment is due. The doctrine finds no
application to cases where the taxes involved
are
totally unrelated, and although it seems
equitable, it
is not allowed in our jurisdiction (CIR v. UST,
104
Phil 1062 (1958)).

Tax treaty Compensation and set-off

Tax treaty - The purpose is to reconcile the
national fiscal legislation of the contracting
parties in order to help the taxpayer avoid
simultaneous taxation in two different
jurisdictions (international double taxation).
Compensation or set-off shall take place when
two
persons, in their own right, are creditors and
debtors of each other (Article 1278, Civil
Code).

This is to encourage the free flow of goods

and

services and the movement of capital,

technology and persons between countries,

conditions deemed vital in creating robust and

dynamic economies.

Q: True or False. The doctrine of equitable

recoupment allows a taxpayer whose claim

for

refund has prescribed to offset tax liabilities

with his claim of overpayment.

A: True. The doctrine arose from common law