Tax Avoidance and the Legal Profession

College of Law

I.

University of San Agustin

Introduction

Legal Ethics is probably the most diverse branch of law for it defies a
codification of a given rules. Even with the creation of the Code of Professional
Responsibility in the Philippine legal system, there are still a lot of flip-flop
decisions on administrative complaints against lawyers for violation of the Code.
Undeniably, the reason behind this malleable branch of law is that ethics and
morality can never be encapsulated by any laws or statutes since it is usually
the dictates of societal acceptance which defines it.

The most ethical dilemmas faced by practicing lawyers involve conflicts

between a lawyers duty to the welfare of his client vis--vis his duty to the
government. The problem is especially pronounced in the practice of tax where
various rules of ethics collide with the tax laws.

Taxation as one of the inherent powers of the State is the power to impose and
levy taxes and charges on individuals, goods, services, and others to support
the operation of the government. The National Internal Revenue Code of 1997
serves as the primary guideline to the computation, rates, and tax remedies
available to the government and the taxpayers for the proper disposition and
classification of taxes.

1 | Page

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

However, even with the implementation of the Code, there are still machineries
that tax advisers are crafting in order to avoid paying taxes and mostly,
taxpayers deliberately evade taxes by reducing tax liability. In fact, in 2011, 90%
of tax evasion rate are among doctors, lawyers, accountants, engineers,
architects and entertainers, among others.

Internationally, these issues are not new. Even with laws being passed in order
to assist in levying taxes for the government to generate income, there are
places they call as tax havens where a state, country, or territory on a national
level, taxes are levied at a very low rate or not at all. These countries tolerate
personal income tax evasion of top earners and strategies of multinational
corporations for tax avoidance.

Tax avoidance per se is not illegal in the Philippines. This is true with the
absence of an express law prohibiting tax planning schemes to avoid tax
liabilities that hamper the BIR, the governments aiding authority in-charge of
levying taxes, to collect and be able to achieve the governments target for
every fiscal year. What is prohibited is the deliberate intent to defraud the BIR
by the taxpayers for failure to declare proper income returns.
The same inference is given to the word evade and avoid since both have the
same purpose, that is. What may set them apart is the manner of escaping tax
liability. The deliberation of such manner is given to Court of Tax Appeals and to

2 | Page

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

the Supreme Court to resolve the disparity between the two terms. And more
often than not, there are inconsistencies to the treatment of the subject matter.

This paper aims to discuss and deliberate the issue of tax avoidance and
lawyers as tax practitioners who has both a duty to protect a clients welfare and
a duty to the tax system. It presents conflict on the part of lawyers especially to
the ones who are tax practitioners in contrast with practitioners in the
government.

3 | Page

Tax Avoidance and the Legal Profession

College of Law

II.

University of San Agustin

Background

History of Tax Avoidance

Tax Avoidance emerged in the early 1860s but no exact terminology was used
to describe such reduction of taxes without violating any law. It was only by
1916s that the words avoidance/evasion emerged in the USA in the case of
Bullen v Wisconsin. The act of the donor in making a person of another state as
trustee to avoid payment of tax inheritance was acted upon by the courts. They
held that the donors state could constitutionally impose therein a tax
inheritance. On the part of United Kingdom, some writers felt the need to
distinguish evasion from avoidance only by 1950s. However, evasion was
often misused in the country until the case of Craven v White regarded such
usage as erroneous.
Stakeholders of Tax Avoidance

Tax Justice Network, an advocacy group consisting of coalition of researchers

on tax avoidance, provided in a report, a decent summary of the main players
who promote what they call tax injustice. They are as follows:

4 | Page

Tax Avoidance and the Legal Profession

College of Law

Accountants

Lawyers

Banks

Transnational corporations

University of San Agustin

Tax haven governments

Tax avoiders and tax evader

Big businesses and corporations use tax avoidance to legally minimize the

taxes that they are paying. Some global brands that use this technique in order
to pursue their businesss goals with as little tax liability as possible are Apple,
Amazon, Starbucks, Google, and General Electronics.

Internationally, individuals avoid taxes on their income: interest, dividends,

and capital gains. They avoid reporting income earned abroad and because the
interest that they are paying to foreign recipients is not being taxed; they can
avoid taxes on U.S. source income by channelling funds to foreign countries
jurisdiction.

Tax Avoidance in the Philippines

In the Philippines, businesses use tax avoidance in the depreciation

method in claiming deductible expenses to lessen the income tax, or a person

avoid enjoying some privilege or engaging in some activities where he can
acquire incidental taxation. This act will lower his tax bracket for a taxable year.
The Philippine Supreme Court first ruled on a local tax-planning scheme that
businesses practice in the 1960s. Case in point is Yutivo vs. CTA where Yutivo
5 | Page

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

sold imported cars and trucks to Southern Motors, which in turn, sold them to
the public in the Visayas and Mindanao. Yutivo, as an importer, paid sales tax
prescribed on the basis of its selling price to Southern Motors, and since such
sales tax is collected only once on original sales, Southern Motors paid no sales
tax on its sales to the public. In this case, the Supreme Court upheld the right of
a taxpayer to avoid taxes by means which the law permits.

The Bureau of Internal Revenue has consistently frowned upon the idea of

tax planning schemes. While the Philippine Tax Code does not specifically ban
tax avoidance, the BIR has expressed this adverse attitude by releasing
different issuances in order to plug the loopholes existing in the present Tax
Code and stop the practice of tax avoidance in the Philippines.

Tax evasion is clearly made illegal by our laws. The legality of tax

avoidance, however, is a gray area. There seems to be no categorical

prohibition on tax avoidance under Philippine laws. To avoid confusion to these
issues, there should be a clear and definite law regarding transactions deemed
as tax avoidance and prohibiting the same so that taxpayers as well as the BIR
can protect their respective interest so as not to leave for interpretation of the
BIR

6 | Page

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

III.

Existing jurisprudence

Constitution
Section 24 Article VI of the 1987 Philippine Constitution provides that
the power to enact revenue or tariff bills lies exclusively with Congress,
while Article VIII thereof provides that the power to interpret laws and
settle controversies lies with the Supreme Court as the highest judicial
body in the Philippines. The power to implement tax laws is vested in
the BIR, acting under the supervision and control of the Department of
Finance, pursuant to Section 2 Title I of Republic Act No. 8424. Having
established the role of each branch of the government in the
enactment, implementation and interpretation of tax laws, this paper

7 | Page

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

shall now assess the attitude of each branch of the government

towards tax avoidance practices in the Philippines.

The Legislative Department (Congress)

Section 40 of the 1997 NIRC A specific anti-avoidance provision adopted

by Congress is contained in Section 40 of the 1997 National Internal Revenue

Code (NIRC), which states:
SEC. 40. Determination of amount and recognition of gain or loss. xxx

(C ) Exchange of Property.
(1) General Rule. Except as herein provided, upon the sale or exchange of

property, the entire amount of the gain or loss, as the case may be, shall be
recognized. (2) Exception. No gain or loss shall be recognized if in pursuance
of a plan of merger or consolidation
(a) A corporation, which is a party to a merger or consolidation, exchanges property
solely for stock in a corporation, which is a party to the merger or consolidation;
or;
(b) A shareholder exchanges stock in a corporation, which is a party to the merger
or consolidation, solely for the stock of another corporation also a party to the
merger or consolidation; or
(c) A security holder of a corporation, which is a party to the merger or
consolidation, exchanges his securities in such corporation, solely for stock or
securities in another corporation, a party to the merger or consolidation. No gain
or loss shall also be recognized if property is transferred to a corporation by a
person in exchange for stock or unit of participation in such corporation of which
as a result of such exchange, said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation; Provided, That

8 | Page

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

stocks issued for services shall not be considered as issued in return for
property.

1.

Section 50 of the 1997 Tax Code Another important provision of the Tax
Code which aims to deter tax avoidance schemes can be found in Section

50 of the 1997 NIRC:

SEC. 50. Allocation of income and deductions. - In the case of two or
more organizations, trades, or businesses (whether or not incorporated
and whether or not organized in the Philippines) owned or controlled
directly or indirectly by the same interests, the Commissioner is authorized
to distribute, apportion, or allocate gross income or deductions between or
among such organization, trade, or business, if he determines that such
distribution, apportionment, or allocation is necessary in order to prevent
evasion of taxes or clearly to reflect the income of any such organization,

trade or business.
2. Other amendments to the Tax Code
SEC. 29. Imposition of improperly accumulated earnings tax. a. In general
- In addition to other taxes imposed by this Title, there is hereby imposed
for each taxable year on the improperly accumulated taxable income of
each corporation described in Subsection B hereof, an improperly
accumulated earnings tax equal to ten percent (10%) of the improperly
accumulated taxable income.

Tax Avoidance and the Legislative Department Based on the foregoing,

the following observations can be made with regard to the attitude of the
Legislature towards tax avoidance:

9 | Page

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

Section 40 of the 1997 NIRC is the sole anti-avoidance provision adopted

under Philippine tax laws which contains the requirement of "bona fide
purpose and not solely for purposes of escaping the burden of taxation."
This

requirement

is

expressly imposed

on

tax-free

mergers

or

consolidations. Outside of merger or consolidation, it can be inferred that a

tax planning scheme should not be invalidated for the sole reason that the
requirement of "bona fide purpose and not solely for the purpose of

escaping the burden of taxation" was not complied with.

What Congress has explicitly declared illegal is tax evasion. As for tax
avoidance, Congress has introduced certain specific anti avoidance
provisions in the 1997 Tax Code. Apart from those specifically identified, it
would seem that Congress intended to respect other types of tax

avoidance practices.
c. The attitude of Congress towards tax avoidance can be characterized
as reactionary. Although Congress has not explicitly declared an antiavoidance policy, from the various amendments introduced into the Tax
Code, it can be observed that Congress is trying to deter tax avoidance by

plugging the loopholes in the Tax Code.

d. Some of the measures adopted by Congress are effective in deterring
tax avoidance schemes (i.e. Sections 29 and 34 of the 1997 NIRC), while
others are not (i.e. Section 50 of the 1997 NIRC). In general, an antiavoidance provision serves as an effective deterrent if it clearly provides
for factual conditions which will trigger the applicability of the provision,
and if it specifically provides for the proper manner of computing the
amount of imputed taxes.

10 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

The Judiciary (Supreme Court)

1. Piercing the veil of corporate fiction
Yutivo v. CTA37

The Philippine Supreme Court first ruled on a local tax-planning scheme in

the 1960s in the case of Yutivo vs. CTA. In this case, Yutivo sold imported
cars and trucks to Southern Motors, which in turn, sold them to the public
in the Visayas and Mindanao. Yutivo, as an importer, paid sales tax
prescribed on the basis of its selling price to Southern Motors, and since
such sales tax is collected only once on original sales, Southern Motors
paid no sales tax on its sales to the public.
It can be noted from the case of Yutivo that, because of the lack of anti-

avoidance schemes in Philippine tax laws, the Supreme Court had to

apply corporate law principles as legal basis in requiring Yutivo to pay the
proper amount of taxes. Conversely, if Yutivo elected a separate set of
directors and officers for Southern Motors, and maintained a semblance of
independence of operations from that of Southern Motors, perhaps the
Supreme Court would have ruled otherwise.
Liddell and Co. v. CIR

In the subsequent case of Liddell and Co. v. CIR, whose facts are
substantially similar to that of Yutivo, the Supreme Court also pierced the
veil of corporation fiction in computing the proper amount of tax due.
Liddell and Co. was engaged in the business of importing and selling cars
and trucks at retail. A majority of its stocks was owned by Frank Liddell.
Subsequently, Liddell Motors, Inc. was organized, with the wife of Frank

11 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

Liddell, Irene Liddell, owning a majority of its stocks. Liddell and Co. then
sold its vehicles to Liddell Motors, which in turn, sold them to the public
with a steep mark-up. Since then, Liddell and Co. paid sales taxes on the
basis of its sales to Liddell Motors, Inc., considering said sales as original
sales.
Kuenzle and Streiff, Inc. v. CIR

In Kuenzle and Streiff, Inc. v. CIR, petitioner claimed as deductible

expense the bonuses which it paid to its officers. The Commissioner
disallowed the deduction on the ground that they were not ordinary, or
necessary, or reasonable expenses within the purview of Section 30(a)(1)
of the NIRC. The Court found that the bonuses were not reasonable
because petitioner had suffered net losses during those years. C.M.
Hoskins and Co. v. CIR

In C.M. Hoskins and Co. v. CIR, the Supreme Court reiterated the
doctrine in Kuenzle, when it disallowed as a deductible item supervision
fees paid to a controlling stockholder, and ruled instead that the fees
should be treated as a distribution of earnings and profits of the taxpayer.
Tax Avoidance and the Judiciary
Based on the foregoing cases, the attitude of the Judiciary towards tax

avoidance transactions can be summarized as follows:

Absent specific anti-avoidance provision, Courts are constrained to rely on

corporate law principles (such as piercing the veil of corporation fiction) in
order to deter abusive tax planning schemes.

12 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

The test of reasonableness was adopted by the Court in order to put a

deterrent on the practice of some taxpayers in claiming excessive
deductible expenses. The reasonableness requirement for deductible

expenses can be traced to the Tax Code.

The doctrine laid down by the Court in CIR v. CA, which was decided in
1999, seems to run counter to the doctrine laid down in Ungab v. Cusi.
The new doctrine has the effect of further compounding the difficulty of the

BIR in winning tax avoidance cases in court.

As far as the courts are concerned, not all types of tax avoidance
transactions are illegal in character. This can be clearly gathered from the
decision of the Supreme Court in the case of Marubeni.

The Executive Department (BIR)

The BIR, being the agency tasked with the implementation of Philippine
tax laws, has consistently adopted an adverse attitude towards tax
planning schemes. Although the Philippine Tax Code does not explicitly
ban tax avoidance, the BIR has released various issuances whose
objective is to stop tax avoidance practices as well as to plug the
loopholes existing in the present Tax Code. This can be illustrated in the
discussion below.
1. Revenue Audit Memorandum Order (RAMO) No. 1-86 RAMO 1-86
provides that sales purportedly consummated abroad by the home office
shall be treated as sales constructively consummated in the Philippines
and made by the branch office, hence, income there from shall be
considered income from sources within the Philippines. To determine the
constructive sales of the branch in the Philippines, the BIR personnel are

13 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

instructed to check from the records of the Bureau of Customs all

shipments coming from the branch's home office during the taxable year.
2. RAMO 1-9856 The BIR has also issued RAMO 1-98 which provides for the
audit guidelines and procedures in the examination of interrelated group of
companies.
3. RR No. 4-200357 In 2003, the BIR issued RR No. 4-2003 to plug vehicle
tax loopholes. The regulation amended RR No. 14-97. The Commissioner
earlier said that the amendment was done because of the loopholes seen
in the previous revenue regulation58. The new regulation provided for
guidelines by which the number of seats of an automobile is to be
measured. The movement to plug the loophole was in reaction to the
excise tax exemption claimed by Honda Philippines when it manufactured
a ten-seater vehicle, which under existing regulations, is tax exempt.
4. RR No. 7-200359 Another example is RR No. 7-2003, which the BIR has
issued to deter the practice of taxpayers in converting ordinary income to
capital gains or vice-versa, in an effort to lower tax due.
5. Tax Avoidance and the BIR Based on the foregoing, it can be gathered
that the BIR has been constantly trying to stop tax avoidance schemes
through the issuance of revenue regulations, revenue audit memorandum
orders, and other administrative pronouncements. The validity of these
issuances would have been unquestionable if they were issued to
effectively enforce the provisions of the Tax Code,64 or if they merely
amended a previous regulation validly issued by it, as in the case of RR
No. 4-2003. The problem arises when the BIR takes an extreme position in
dealing with tax avoidance that is difficult to trace to any specific provision

14 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

of the Tax Code or runs counter to the doctrines laid down by the Court.
While some of these administrative issuances are arguably invalid, suffice
is to say that the BIR is left with no choice but to take an anti-avoidance
stand in order to provide for the necessary funding for the government.

IV.

Body

15 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

It is no wonder why there are many schemes that is devised in order to

avoid tax liabilities. The Philippines currently has the second highest personal
and highest corporate income tax systems among its ASEAN-6 peers. (Please
see table below) Philippines has been struggling with fiscal deficit for some
years now and one way to fix that is to impose hefty taxes on its citizenry and
corporates. Thus we've seen tax rates increased to their current levels. There
are a lot of calls for tax reform having the highest tax rate in ASEAN-6 is not a
problem in itself, as different countries would have their different fiscal policies
and developmental goals. Philippine Constitution mandates that we should have
a uniform, equitable taxation, and that Congress should evolve a progressive
taxation system.

16 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

Tax Evasion vs. Tax Avoidance

Tax avoidance and tax evasion are the two most common ways used by

taxpayers in escaping from taxation. Tax avoidance is the tax saving device
within the means sanctioned by law. This method should be used by the
taxpayer in good faith and at arms length. Tax evasion, on the other hand, 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 vs
Estate of Benigdo Toda G.R. No. 147188. September 14, 2004)

Assume for instance that Corporation "A" is engaged in real estate

business. It owns a parcel of land which it would like to transfer to buyer "B". An
outright sale of the land from corporation "A" to buyer "B" will result to an
income tax liability on the part of corporation "A" at the rate of thirty percent
(30%) of taxable income.

However, if corporation "A" creates a subsidiary by transferring the parcel

of land to subsidiary "C" in exchange for the shares of stocks of subsidiary C,

the transfer is not subject to any tax liabilities. Corporation "A" can subsequently
transfer the shares of stocks of subsidiary "C" to buyer "B". Stock transfers are
subject to a maximum tax rate of only ten percent (10%) based on net capital
gain.3 As can be seen from this illustration, by creating a subsidiary and selling
the shares of stocks, corporation "A" was able to achieve its purpose of

17 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

transferring a parcel of land to buyer "B", but at a reduced tax rate of ten
percent (10%) instead of thirty percent (30%). This is an example of tax
avoidance, whereby a taxpayer lawfully arranges its affairs to minimize taxes by
utilizing the loopholes in the tax law.

Impact of Tax Avoidance to Society

Studies show that the costs of tax avoidance have a disproportionately

large effect on developing economies, and one often-cited Global Financial

Integrity estimate puts the price at close to 100 billion dollars per year in lost
revenue. Another report, compiled by Christian Aid in 2008, entitled Death and
Taxes: The True Toll of Tax Dodging, puts the same figure at 16 billion dollars,
and adds that illegal, trade-related tax evasion will likely be responsible for the
death of 5.6 million children through 2000 to 2015.

Here the social and economic costs for developing economies are

exasperated by two principle factors: the first, that tax revenue accounts for a
greater share of state income than in advanced economies; and secondly, that
affected governments generally lack the legislative and administrative resources
to tackle the issue head on. In a 2007 speech, Raymond Baker, Founder and
President of the Global Financial Integrity Programme, called tax avoidance the
ugliest chapter in global economic affairs since slavery, and eight years later,
the problem is still one of the worst affecting low-income economies. It makes
little sense then, that at the G20 leaders summit in November, these same
18 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

nations were allowed little in the way of influence when arriving at a global
strategy.

Multinational companies are in particular well-placed to exploit tax havens

and hide true profits thereby avoiding tax. Poor countries barely have resources
to address these many have smaller budgets than the multinationals they are
trying to deal with.

Yet, companies and influential individuals also pour lots of money into

shaping a global system that they will hope to benefit from. If the right balance
cant be achieved, not only will attempts to avoid taxation and other measures
undermine capitalism (which they claim they support) they will also undermine
democracy (for even responsible governments may find it hard to meet the
needs of their population).

Corporate Tax Avoidance Machinery

Corporations engage in international tax planning to reduce their overall

tax burden. Such strategies operate within the legal setup. This is a fruitful field
of research with persuasive theoretical formulation and empirical evidence.
Major techniques for tax avoidance within an international setup, to cite a few,
include: - Transfer pricing: That is, intra-group transactions are priced differently
from similar transactions with independent enterprises. Haufler and Schjelderup
(2000), for instance, provide a theoretical model. Examples of empirical studies
19 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

on employing transfer pricing for tax purposes are Clausing (2003) and
Swenson (2001). - The location of patents and intangible assets: This can be
considered as a specific application of transfer pricing. Dischinger and Riedel
(2011) provide empirical evidence. - The use of conduit holding companies to
exploit a signed treaty between two countries and avoid withholding taxation:
Mintz and Weichenrieder (2010) cover in detail the topic of ownership chains
and corporate taxation. - Adjusting the financial structure using inter- and intracompany borrowing (debt equity ratio). In a high tax environment, firms rely
more heavily on loan financing so as to deduct the interest payments from the
tax bill. Borrowing from a member of the group that is located in a low-tax
country has the additional advantage of paying less tax on the earnings of the
low-tax affiliate. Several studies consider this issue; for instance, Feld,
Heckemeyer, and Overesch (2011), Desai, Foley, and Hines (2004), Huizinga,
Laeven, and Nicodeme (2008), and Mintz and Weichenrieder (2010).

Tax as a Social Responsibility

Tax avoidance, while legitimate, can be seen as aggressive when it

involves using financial instruments and arrangements not intended as, or

anticipated by, governments as a vehicle for tax advantage. For example, the
use of overseas tax havens. Avoiding tax and bending the rules of the tax
system is not illegal unlike tax evasion; It is operating within the letters that
define its legality but perhaps not through the spirit of the law.

20 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

Paying a fair amount of tax in the countries where they operate is seen as

the socially responsible thing for companies to do: providing the funds for public
services such as healthcare, education and infrastructure. These are public
services which companies benefit from either directly or indirectly. Tax
avoidance has been branded by some as an immoral and unethical practice
that undermines the very integrity of the tax system. The public expects
corporations to pay their fair share of tax which does not necessarily mean as
what the law require or allows but is based on public policy.

Our society needs taxation to function; to pay for healthcare and public

services. This comes into the realm of social responsibility in which taxpayers
are accountable for. Social responsibility concerns how corporate tax
contributions give back to the communities that host businesses whether
domestic or simply a locale in a greater multinational.

The Philippine tax system continues to issue memoranda and circulars in

support to its drive in discouraging tax avoidance since this practice greatly
affects the collection of revenue by the BIR resulting to a deficit in the
governments annual target.

Ethical Problem of Lawyers as Tax Advisers

CANON 1 - A LAWYER SHALL UPHOLD THE CONSTITUTION, OBEY

THE LAWS OF THE LAND AND PROMOTE RESPECT FOR LAW OF AND
LEGAL PROCESSES.

CANON 4 - A LAWYER SHALL PARTICIPATE IN THE DEVELOPMENT

OF THE LEGAL SYSTEM BY INITIATING OR SUPPORTING EFFORTS IN
21 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

LAW REFORM AND IN THE IMPROVEMENT OF THE ADMINISTRATION OF

JUSTICE.

CANON 15 - A LAWYER SHALL OBSERVE CANDOR, FAIRNESS AND

LOYALTY IN ALL HIS DEALINGS AND TRANSACTIONS WITH HIS CLIENTS.

CANON 17 - A LAWYER OWES FIDELITY TO THE CAUSE OF HIS

CLIENT AND HE SHALL BE MINDFUL OF THE TRUST AND CONFIDENCE
REPOSED IN HIM.

The above stated provisions in the Code of Professional responsibility

states a definite responsibility of the lawyers particularly those who engages in

government services to be agents of the government in promoting the best
interest of the public and at the same time his duty as a private practitioner to
protect the interest of his client.

Lawyers as tax advisers are therefore confronted with an ethical issue of

whether upholding the tax law or the interest of his client. Tax avoidance is a
frequent ethical issue for lawyers largely because of the conservative
expectations of the majority of their clients to the lawyers role as an enforcer
of the tax law. On the other hand, other view of a lawyers role is aligned to that
of an exploiter of the tax law. The greater level of collective technical expertise
and research capacity and test the boundaries of accepted tax law in a bid to
minimise taxes. While remaining legal, tax avoidance draws its ethical line
regarding how to interpret the law and arrange its affairs, is subject to a good
deal of discretion.

22 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

It is already provided in the Code that lawyers are duty-bound to uphold

the Constitution and to respect the law and legal process. With these tax
planning schemes avoiding tax liability, it defeats the purpose of the Philippine
tax system since these laws were created precisely to prevent taxpayers from
devising means to escape from liability and require them to file a return which is
fair and appropriate.

23 | P a g e

Tax Avoidance and the Legal Profession

College of Law

V.

University of San Agustin

Conclusions

Tax avoidance while it is legal it doesnt always mean it is moral. While It is

true that tax avoidance, when properly executed by the lawyer would greatly
help an individual or a corporation in paying less obligations to the government,
which is technically legal for that matter, but the adverse effects that it brings to
the legal profession as well as to the society as a whole is concerning. A
successful tax avoidance scheme would generally result in less payment of tax,
which in turn affects the economy and the government functionality, as the
government heavily depends on the life blood theory. When one considers the
various roles of the government and the various duties tax lawyers ostensibly
owe to society, the government, the legal profession in general, as well as the
client in particular, essentially when all of these aspects collide and there would
rise a general issue that what would the lawyer prioritize is generally up to the
lawyer himself whether or not he would uphold his duties to the best interest of
his client or adhere to the needs of society. While tax lawyers face many of the
professional responsibility problems other lawyers do, such as conflicts of
interest and handling confidential information, there are several distinctive
situations that pose ethical problems for tax lawyers.

First are those situations in which a tax lawyer provides advice to a client in a
manner expected to protect the client from certain penalties, even if the advice

turns out to be wrong.

Second are situations involving mistakes, such as discovering that a prior years
tax return is incorrect or catching the BIR making a mistake in the clients favor.

24 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

Finally are situations that involve how private tax lawyers interact with lawyers
and other employees at the BIR. As we all know some lawyers use their
connections to gain a favorable decision for their clients, in that case would
such act of the lawyer constitute a way of meeting the clients best interest or is
it a moral wrong, violative of a lawyers Code of professional responsibility?

Instead, as a private citizen and a member of society, the lawyer has the

same duty that is imposed upon every person: to obey and uphold the law. As a
professional, the lawyer has a duty to behave as a moral, upstanding person,
adhering to the rules of professional responsibility while representing the client
to the best of his/her ability. And so as a member of the legal profession, the
lawyer has a duty to act in the best interests of the profession as a whole.' If the
lawyer adheres to these duties, there should be no separate duty owed either to
the tax system or to society.

Tax lawyering has more consequences than that of benefits, Regulating

Tax Lawyering through Malpractice Standards Lawyers are increasingly being

sued by unhappy former clients and, in some cases, persons who may not have
been clients or who, at least, the lawyer did not consider to be a client. Most
commonly those suits are premised on the lawyers negligence or violation of
fiduciary duties to the client (or non-client third parties) or contractual duties
between the lawyer and client. Strategies to avoid these suits, or lawyering with
an eye on a successful defense strategy in the event of such a suit, can
consume the mental and emotional energy of lawyers on a regular basis.
Limiting liability, especially for the acts of those with whom one works, is an on-

25 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

going concern of lawyers. Many lawyers carry malpractice insurance, which

means that complying with the terms of the policy becomes important. Worrying
about malpractice suits and the consequent strategies for reducing risk may do
far more to regulate lawyering than fear of discipline by the IBP and, for tax
lawyers, the BIR.

Finally the Best practices for Tax advisors should provide clients with the

highest quality representation concerning tax issues by adhering to best

practices in providing advice and in preparing or assisting in the preparation of a
submission to the Bureau of Internal Revenue . In addition to compliance with
the standards of practice provided in the lawyers Code of Professional
Responsibility, best practices include the following:

(1) Communicating clearly with the client regarding the terms of the

engagement. For example, the advisor should determine the client's expected
purpose for and use of the advice and should have a clear understanding with
the client regarding the form and scope of the advice or assistance to be
rendered.

(2) Establishing the facts, determining which facts are relevant, evaluating

the reasonableness of any assumptions or representations, relating the

applicable law (including potentially applicable judicial doctrines) to the relevant
facts, and arriving at a conclusion supported by the law and the facts.

(3) Advising the client regarding the import of the conclusions reached,

including, for example, whether a taxpayer may avoid accuracy-related

26 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

penalties under the Internal Revenue Code if a taxpayer acts in reliance on the
advice.

(4) Acting fairly and with integrity in practice before the BIR.

Tax advisors with responsibility for overseeing a firm's practice of providing

advice concerning tax issues or of preparing or assisting in the preparation of

submissions to the BIR should take reasonable steps to ensure that the firm's
procedures for all members, associates, and employees are consistent with the
best practices set forth in the CPR.

27 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

VI.

REFERENCES

Ethical and Socially Responsible Behaviour of Tax Advisers: The Case of Moral
Beliefs; Arturs Praulins and Valda Bratka
Ethics of Tax Lawyering; Michael Hatfield
The Legality of the Assault on Tax Avoidance Practices in the Philippines; Evelyn
Kho-Sy
Ethical Issues Facing Tax Professionals: A Comparative Agents and Tax
Practitioners in Australia; Rex Marshall, Malcolm Smith and Robert Armstrong
http://www.rappler.com/business/211-governance/107617-philippines-highestincome-tax-asean
http://www.philstar.com:8080/business/627686/simplify-tax-system-efficiency
240 U.S. 625
(1988) 62 TC 1 at 197
US Tax Evasion Cases: Apple, GE Among American Companies Holding $2.1
Trillion In Offshore Accounts. (2015). Retrieved March 20, 2016, from
http://www.ibtimes.com/us-tax-evasion-cases-apple-ge-among-americancompanies-holding-21-trillion-offshore-2129580
BBC News http://www.bbc.com/news/magazine-20560359
http://www.huffingtonpost.com/news/google-tax-avoidance/
Google Tax Avoidance Huffington Post. (n.d.). Retrieved March 20, 2016, from
http://www.huffingtonpost.com/news/google-tax-avoidance/International Business
Times. http://www.ibtimes.com/us-tax-evasion-cases-apple-ge-among-americancompanies-holding-21-trillion-offshore-2129580 (aPPLE GE)
Gravelle, J. G. (n.d.). Tax Havens: International Tax Avoidance and Evasion.
Retrieved March 20, 2016, from https://www.fas.org/sgp/crs/misc/R40623.pdf1
SCRA 160 (1961)

28 | P a g e

Tax Avoidance and the Legal Profession

College of Law

University of San Agustin

http://www.globalissues.org/article/54/tax-avoidance-and-havens-underminingdemocracy#Whataretheimpactsoftaxhavensonpoorcountries

29 | P a g e