The tax amnesty and its bittersweet Valentine plot twist

After almost two years, Republic Act No. 11213, or the Tax Amnesty Act, was finally signed by the President on Feb. 14. As Package 1B of the Comprehensive Tax Reform Program, the tax amnesty is meant to complement Republic Act No. 10963 or the TRAIN Law. With the changes brought about by the TRAIN Law, the tax amnesty was supposed to give taxpayers a chance to settle their outstanding tax liabilities and wipe their slates clean.

This tax amnesty’s sweet beginnings can be traced back to Jan. 24, 2017 when House Bill No. 4814, which proposed an estate tax amnesty, was filed with the House of Representatives’ Committee on Ways and Means. A series of technical working group meetings and committee hearings, in which our firm actively participated, then started early in 2018 to deliberate on several general tax amnesty bills. There was even one version of the bill which included an amnesty on real property tax and customs duty and tariff.

After marathon meetings and hearings, the House Committee came up with a version which had three parts: estate tax amnesty (ETA), general tax amnesty (GTA), and tax amnesty on delinquencies (TAD). This version also proposed to lift the Bank Secrecy Law and Foreign Currency Deposit Act of the Philippines to authorize the Commissioner of Internal Revenue to inquire into and receive information on bank accounts and other related data held by financial institutions. The same unnumbered bill likewise included a provision for an exchange of information (EOI) with foreign tax authorities.

Supporting the intention of the government to cooperate in the global initiative on EOI, our firm suggested that the lifting of the Bank Secrecy Law and EOI be limited only to taxpayers who wish to avail of the tax amnesty. Otherwise, the provisions may be misplaced and considered as rider provisions.

On Nov. 20, 2018, House Bill No. 8554 was approved by the committee on third and final reading. At this point, the bill still covered the three tax amnesties enumerated above but no longer included provisions on the lifting of the Bank Secrecy Law and EOI. Instead, the bill contained the following provisions:

1. Immunities and privileges for both ETA and GTA shall apply unless the declared value or net undeclared estate or the total assets, whichever is applicable, is proved to be understated by 30% or more; and

2. Proof of understatement of the total assets for GTA can be established by the Bureau of Internal Revenue (BIR) through proceedings initiated by a third party which shall be completed within one year from the filing of the GTA return.

However, when the version approved by the Bicameral Conference Committee came out, these alternative safeguards related to 30% understatement and contestability period were no longer included.

In the approved Tax Amnesty Act, the ETA and TAD were retained. The ETA shall cover the estate of decedents who died on or before Dec. 31, 2017 and grants an amnesty in exchange for payment of estate tax at the rate of 6% of the decedent’s total net estate at the time of death, or 6% of the decedent’s undeclared estate if an estate tax return was previously filed with the BIR. A minimum estate amnesty tax of P5,000 shall be paid if the allowable deductions at the time of death exceed the value of the gross estate.

`On the other hand, the TAD can be availed of in the following cases by paying an amnesty tax at the corresponding rates based on the basic tax assessed: (a) 40% for delinquencies and assessments that have become final and executory; (b) 50% for tax cases with a final and executory judgment by the courts; (c) 60% for pending cases for tax evasion and other criminal offenses under the Tax Code, with or without assessments duly issued; and (d) 100% for withholding tax agents who withheld taxes but failed to remit the same to the BIR. The TAD shall cover all national internal revenue taxes for taxable year 2017 and prior years.

Although speculation about a veto of the entire GTA circulated after the transmission of the tax amnesty bill to the Office of the President, the plot twist of this story still came as a surprise, a bittersweet surprise for a supposedly sweet Valentine’s week, when the following provisions were vetoed:

1. The entire Title III on the grant of a General Tax Amnesty, and related sections;

2. Section 6 on one-time declaration and settlement of estate taxes on properties subject of multiple unsettled estates; and

3. Section 7 on the conclusive presumption of correctness of the ETA returns.

Aside from this plot twist, the legislators may have misplaced a crucial comma in Section 17(a) of the TAD provisions which states that “Delinquencies and assessments, which have become final and executory, including delinquent tax account, where the application for compromise has been requested on the basis of: (1) doubtful validity of the assessment; or (2) financial incapacity of the taxpayer, but the same was denied by the Regional Evaluation Board or the National Evaluation Board, as the case may be, on or before the Implementing Rules and Regulations take effect.” With the comma after the phrase “including delinquent tax account,” the provision could be interpreted so that delinquencies and assessments that will only be covered by the TAD are those cases where an application for compromise settlement has been filed but subsequently denied. While this is not the intention of the legislators as discussed during the committee hearings, the implementing rules and regulations (IRR) should clarify this apparent oversight to align the law with the intentions of Congress.

On a related note, in the interest of fairness, taxpayers who wish to avail of the TAD but who already applied for compromise settlement and paid the applicable minimum compromise rates as required under the rules, should be allowed to credit the compromise settlement paid from their tax amnesty due.

The chapter of this tax amnesty story that came out during Valentine’s may not be the one that we expected, as the tax amnesty version that was passed into law does not seem to be the perfect match for the TRAIN Law. This might make it challenging to rebuild trust between the government and the people which was one of the goals of the tax amnesty. The good news is, the story is not over yet. A sequel appears to be forthcoming as the President has called for the passing of a GTA which includes lifting the bank secrecy for fraud cases and automatic EOI.

We are never precluded from writing a sequel, which hopefully will come soon and at a time that will still match and complement the TRAIN Law.

In the meantime, more untold parts of this story will be shared in our upcoming seminar entitled Year-end Tax Compliance and Tax Amnesty Act on March 7, between 1 p.m. and 6 p.m. at the Dusit Thani, Manila. We hope to see you there so we can talk more about this tax amnesty story.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.