TAX EVASION VS.

TAX AVOIDANCE

Taxes emanates from necessity. You pay taxes; the government in return gives you protection
and security. Taxes are the lifeblood of the government. It is the price of progress and
civilization. A government or state cannot survive without revenue from taxes. It cannot
perform its duties and responsibilities to its subjects.

Taxes are imposed through Taxation. The power to Tax is inherent in all sovereign states. It
doesn’t need a constitutional provision in order to impose and collect taxes to all its territorial
subjects. The constitution itself just only limits taxation to avoid abuse of taxing power. The
power to tax is the power to destroy (Marshall Dictum) but taxation power is also the power to
build (Holmes Doctrine). Taxation is also a Police Power of the state. It destroys through its
police powers by discouraging certain acts (e.g. import duties, tariffs, fees, penalties, and fines)
and enterprises inimical to public welfare.

Can we cheat this certain thing in life to lessen the burden of taxes?

There are two ways of cheating taxes: Tax Evasion and Tax Avoidance.

The Question: what is the best way, Evasion or Avoidance?

 Tax Evasion

Defined as an illegal practice where a person, organization or corporation intentionally avoids

paying his true tax liability. Those caught evading taxes are generally subject to criminal charges
and substantial penalties.1 That is to say that Evasion is a crime.

In the Philippines, the NIRC states that, the government through its administrative bodies, the
BIR can assess taxes of fraudulent tax returns of up to 10 years from the date such fraud was
discovered. In lay man’s term, if you’re going to use this method then pray that the BIR will not
discover it’s a fraudulent return. Moreover crime is imprescriptible, so evasion will always be a
crime until it is discovered and the BIR can assess the proper taxes.

What are the consequences of doing tax evasion?

1. 50% penalty for intentional misstatement.

2. 20% annual interest.
3. Other penalties as imposed in R.A. 8424 (NIRC)
4. Criminal penalty of not less than P10,000 and imprisonment of not less than one (1)
year but not more than 10 years.

So basically, don’t use tax evasion unless you are willing to gamble.
 Tax Avoidance

Defined as the use of legal methods to modify an individual's financial situation to lower the
amount of income tax owed. This is generally accomplished by claiming the permissible
deductions and credits. This practice differs from tax evasion, which uses illegal methods, such
as under reporting income to avoid paying taxes. 2

It is using ones knowledge of the tax code in finding loopholes to lessen the payment of taxes. It
is not illegal but others question if it is ethical. So what are some of the ways to avoid paying
large amount of taxes? You can either decrease your income or increase your deductions.

First, track all itemized deductions. These are expenses which are for tax purposes are
deductible. Keeping records of all expenses together with supporting documents enhanced
your claims for deductions. Moreover, the NIRC gives you the choice to choose between
Optional Standard Deduction (OSD) and the Itemized Deduction. From here, you choose
whichever gives you more benefit.
Second, disseminate income. By disseminating income you are also spreading the burden of
paying taxes (E.g. the use of Irrevocable Trust). In irrevocable trust, you are simply transferring
all the rights and rewards of an asset to a grantor including ownership. You might just simply
create an irrevocable trust to all your heirs, children or to whoever you like. And by this, the Tax
Code recognizes that the income the trust accrues belongs to the grantor. In the NIRC, the
grantor and the grantee will be entitled to their own personal deductions (that will be
equivalent to two personal deductions) unlike without irrevocable trust there will be only one
personal deduction (revocable trust).

Third, employing and giving discounts to Senior Citizens and PWDs. Yes, employing Senior
Citizens to your business gives you an additional deduction of an equivalent of 15% of their
salaries and wages while employing Persons with Disabilities entitles you to an additional
deduction of an equivalent of 25% of their salaries and wages. Also, giving discounts equivalent
to 20% of their purchases less VAT can be claimed as additional deduction.

Fourth, make donations. He who gives shall be rewarded. Donations to entities specifically
identified in the NIRC can be claimed as deductions subject to ceiling as long as they are backed
with supporting documents. Also, donation to government agencies and instrumentalities that
are very essential in giving the needs of the people are deductible.

There are many ways to lessen taxes, but for now I’ll leave it up to here.
What do you think is better?

Source:

Philippine Taxation: Evasion or Avoidance?

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