ESCAPE FROM TAXATION the Philippine Economic Zone Authority (PEZA); or when

expenses of a related company with such privileges are

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