“From black to white: enforcing tax compliance” by Fidela T. Isip-Reyes (January 10, 2011)

SUITS THE C-SUITE By Fidela T. Isip-Reyes
Business World (01/10/2011)

During the G20 meeting of Foreign Ministers and Central Bank Governors in 2009, the Organisation for Economic Co-operation and Development (OECD) published a “black list” of tax havens that failed to comply with internationally agreed tax standards. The Philippines was on this list and while no penalties were imposed at that time, the threat of sanctions hung heavily.

The Philippine Government took this as a wake-up call. Although the implementation of the OECD’s required standards were incompatible with present Philippine laws on banks’ and tax information secrecy, the Government nevertheless resolved to take the necessary measures to get off the black list. Having given its commitment, the Philippines was removed from the black list and moved to the “gray list,” a list of territories which had committed to follow internationally accepted tax standards.

To fulfill its commitment and to get off the gray list and move on to the “white list,” Congress passed Republic Act (RA) No. 10021, or the “Exchange of Information on Tax Matters Act of 2009.” RA No. 10021 declared the policy of the State “to promote and pursue a tax environment that contributes in sustaining a favorable international investment climate and instills confidence in the adequacy and capacity of the country’s tax administration to comply with its commitments under existing international conventions or agreements on tax matters. Pursuant to this declared policy, the government shall comply with or commit to the internationally agreed tax standard required for the exchange of tax information with its tax treaty partners to help combat international tax evasion and avoidance and to help address tax concerns that affect international trade and investment. The government shall likewise adopt measures and procedures to enhance cooperation with other countries in the efficient collection of taxes, consistent with the international understanding to ensure the payment of taxes due the respective taxing jurisdictions of the treaty partners.”

To implement this avowed policy, and notwithstanding contrary provisions of other general and special laws, RA No. 10021 allows the Bureau of Internal Revenue (BIR) to exchange information with its tax treaty partners in accordance with internationally agreed tax standards, and gives the Commissioner the power to inquire into the bank deposits and other related information held by financial institutions of a taxpayer who is the subject of a request for information, and to provide the requesting foreign tax authority with information held by banks and other financial institutions, as long as the foreign tax authority first establishes the relevance of the information requested by providing the following information:

• Identity of person under examination or investigation;

• Statement of the information being sought and the form in which the said foreign tax authority prefers to receive it;

• Tax purposes for which the information is being sought;

• Grounds for believing that the information sought is held in the Philippines or is in the possession or control of a person within Philippine jurisdiction;

• Name and address of person believed to have the information;

• Statement that the request is in conformity with the law and administrative practices of the foreign tax authority; and

• Statement that the foreign tax authority has exhausted all means available in its own territory to obtain the information.

As an added requirement, Revenue Regulations (RR) No. 10-2010, the implementing rules of RA No. 10021, requires a statement that the requesting foreign tax authority is allowed under its domestic laws to exchange or furnish the information subject of the request.

Within 60 days from receipt of such request, the Commissioner shall notify the taxpayer in writing that a foreign tax authority is requesting for exchange of information held by financial institutions. For this purpose, RR No. 20-2010 defines the term “Financial Institutions” as referring to both private and government financial institutions, including but not limited to banks, nonbank financial intermediaries performing quasi-banking functions, and other nonbank financial intermediaries, including financing companies.

Moreover, RR No. 10-2010 states that all requests for information pursuant to an international convention or agreement on tax matters shall be coursed through the BIR’s International Tax Affairs Division (ITAD). Under no circumstances shall a revenue official or employee communicate directly with the foreign tax authority on matters pertaining to the request without prior approval of the Commissioner.

After the ITAD evaluates a request, the Commissioner will inform the financial institution in writing of the request for exchange of information. The financial institution will have 15 days to supply to the BIR the information requested. An extension may be requested but should not be more than 30 days from the receipt of the original notice. Any officer, owner, agent, manager, director or officer-in-charge of any bank or financial institution who willfully refuses to supply the required information shall be punished by a fine of not less than P50,000 but not more than P100,000, or suffer imprisonment of not less than two years but not more than five years, or both.

Similarly, any BIR officer or employee who divulges information obtained from banks and financial institutions, which was acquired by him in the discharge of his official duties, to any person other than the requesting foreign tax authority shall be punished by a fine of not less than P50,000 but not more than P100,000, or suffer imprisonment of not less than two years but not more than five years, or both.

While the information so obtained will be provided to the requesting foreign tax authority, such information may also be used by the BIR for tax assessment, verification, audit and enforcement purposes.

The passage of RA No. 10021 was a crucial step for the Philippines and one that led the OECD to finally move the country to the “white list,” a list of jurisdictions that have substantially implemented internationally agreed tax standards.

With this achievement, our Government has demonstrated its commitment to transparency and ability to meet international standards which hopefully will be instrumental in attracting more foreign investments; restoring confidence, growth and jobs; strengthening the Philippine financial system; and building an inclusive and sustainable recovery for all.

With the global emphasis on transparency and exchange of information standards, tax-efficient structuring for inbound and outbound investments and transactions should focus equally on the tax leakages and savings but more importantly on tax compliance.

(Fidela T. Isip-Reyes is a Tax Partner of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.