“Looking into the lifestyles of the rich and famous” by Anthony A. Dy (April 5, 2010)

Business World (04/05/2010)

Society and lifestyle sections of newspapers and magazines are awash with features and pictures of the rich and famous.

Media has traditionally covered celebrities and personalities because there is an appetite for news about them among their audience and readers. Faced with a 2010 collection target of P830 billion, the Bureau of Internal Revenue (BIR) has now joined the ranks of their avid readers.

With this collection goal in mind, the BIR issued Revenue Memorandum Order No. 19-2010 last March 9 that introduces the Taxpayer’s Lifestyle Check System (TLCS).

Interestingly, the RMO begins by citing that “there are several individual taxpayers with substantial investments and assets and/or conspicuous lifestyles” but have relatively small income reported for tax purposes, implying that there may already be specific personalities on the BIR’s radar screen.

But make no mistake. The BIR admits that it has had difficulty in examining taxpayers’ tax compliance due to lack of direct evidence of income, or that their books and other records are inadequate, inaccurate or are not available at all.

The RMO, therefore, establishes certain presumptions. Under the TLCS, any taxpayer, especially one who, knowingly or unknowingly, publicly displays a lavish lifestyle, may become subject to investigation.

Property registered under the name of a taxpayer’s child, regardless of age, or relative shall be considered as those of the taxpayer when (1) the property is not proven to have been acquired under any of the means allowed under the Civil Code and the tax thereon has not been properly paid, and/or (2) the child or relative has no independent means sufficient for the acquisition of the properties.

The TLCS was initially adopted by the Philippine Center for Investigative Journalism (PCIJ) during the term of former President Joseph Ejercito Estrada. Primarily, the check was done on government officials based on laws such as Republic Act 6713 (Code of Conduct and Ethical Standards for Public Officials) and Republic Act 1379 (Law on Forfeiture of Properties Unlawfully Acquired by Public Officers). The Department of Finance also had its version of the TLCS through its Revenue Integrity Protection Service (RIPS) under Executive Order No. 259.

Under the TLCS, the BIR’s National Investigation Division (NID) has primary authority (i.e., other BIR offices may be authorized by the BIR Commissioner) to access records of appropriate government and private entities (e.g., Land Transportation Office, Bureau of Immigration, Maritime Industry Authority, Register of Deeds, the Manila Electric Co., airline and shipping companies, resorts, real estate companies, credit card companies) to verify the value of the assets and/or conspicuous spending of a taxpayer.

The information thus obtained will then be compared with the taxpayer’s data stored in the BIR’s Integrated Tax System.

If it appears that the lifestyle spending of the taxpayer is greater than declared income, a Letter of Authority (LoA) will be issued by the BIR for the conduct of a formal tax audit investigation on the taxpayer.

At present, the BIR’s Enforcement Service is establishing links with various agencies and private entities for information gathering purposes. The TLCS Electronic Data Warehouse is being developed.

However, there is still need to establish clear-cut guidelines to avoid misinterpretations or possible privacy right issues. On the surface, RMO 19-2010 raises some implementation questions and issues, such as:

• How is a particular taxpayer selected for TLCS verification? Are there selection criteria or is complete discretion given to the BIR?
• What will be the covered period for the documents and information to be requested for verification? Will the three-year period of limitation under the Tax Code apply?
• What types of documents and extent of information can be requested by the NID from the government and private agencies concerned?

In the meantime, taxpayers need not worry. If and when a formal investigation is conducted, taxpayers may contest the findings by submitting evidence to the contrary.

Taxpayers may also find ample protection against potential abuses under the TLCS. Section 270 of the Tax Code penalizes a BIR officer for unlawful divulgence of information gathered during a tax audit investigation.

Action for damages under the Civil Code, if warranted by the circumstances, may also be instituted against any erring BIR personnel who violates any individual’s privacy rights.

Ultimately, the TCLS must be able to strike a balance between the BIR’s mandate of ensuring proper tax compliance and the taxpayer’s right to privacy and protection against unreasonable assessments.

Revenue-raising efforts can be aggressive but cautious, bold but unbiased.

Anthony A. Dy is a Tax director 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.