Introduction

Corporate Tax evasion and its impact on the Economy

Feisty VirginJovi RomeroRoselyn SalazarAndrei SantosJay-Anne SubalaRamir Ruedas2A14

IntroductionTax evasion has been a pressing issue with the BIR recently. A lot of cases were filed against popular individuals and corporations that caught the attention of the people and the media. Although tax evasion is presumably as old as the history of taxation, the recent cases filed gave an alarming awareness to everyone. With the prevalence of tax evasion in an economy, it deprives its country of national funds needed for its development that could lead to a serious problem or crisis. Our stand is that corporate tax evasion is a major factor in the impediment of economic growth. This research aims to raise awareness on responsibility of every taxpayer especially the corporation as to how these taxes contribute to economic growth. The paper is organized as follows; in the opening part we discuss the definition of terms and the conceptual difference between tax evasion and tax avoidance. In the body, we explored the tax system implemented in our country, the importance of taxes and ethical issues arising from tax evasion. Also, the factors that affect the evasion of taxes, how they evade taxes, and the evidences that supports the thesis statement are further discussed. On the last part, we are going to reiterate our thesis statement and propose a possible solution and also the implications of the prevalence of tax evasion if not resolved in the future. We are limiting this research to corporate tax evasion and its effect on the economy only.Taxation is the imposition of a mandatory levy on the citizens and businesses of a country by their government. In almost every country, the government derives a majority of its revenues for financing public services from taxation. Just as death and taxes are certainties in this world, so are ways and means to minimize if not eliminating altogether one's tax liabilities. Thus, attempts by a taxpayer to effectively lower his tax liability may take in many forms and to what extent the taxpayer could do. There are two known ways on how to do it, tax avoidance and tax evasion. According to Kay, tax avoidance arises over ambiguities over the definition of a tax base but the facts of transaction are admitted but they have been arranged in such a way that the resulting tax treatment differs from that intended by the relevant legislation. On the other hand, tax evasion is concerned with concealing or misrepresenting the nature of a transaction and is illegal from the viewpoint of the tax code (1980). This just simply means that tax avoidance is manipulating the loopholes in the tax code to ones advantage with the primary goal of lowering the expected tax liability while tax evasion an illegal practice where a person, organization or corporation intentionally avoids paying his/her true tax liability. In relation to taxation, economic growthis the increase in the market value of the goods and services produced by aneconomy over time. Manasan (1981-1995) discussed as such, evasion and avoidance are interdependent activities. Significant and well-known tax avoidance could induce increased evasion. On the part of the individual taxpayer, evasion can substitute for avoidance when increasing the cost of tax avoidance may increase tax evasion. But the impacts on the economy of both are the same: loss of government revenue, increase in taxpayer's after-tax income, and perverse effects on the equity and efficiency goals of the tax system.

BodyTHE PHILIPPINE TAX SYSTEMTaxation is the imposition of financial charges or other levies, upon a taxpayer by a state that failure to pay is punishable by law (Gonzales, 2011). It is a rule by which a government makes extractions or collection for revenue in order to support their existence and carry out their legal objectives. It is the most common and strongest power of a government. Taxes are the blood and life of a government, without it, a government cannot meet its objectives.The main purpose of taxation is to accumulate funds for the functioning of the government machineries (Gonzales, 2011). No government in the world can run its administrative office without funds and it has no system incorporated in itself to generate profit for its functioning. The governments ability to serve the people depends upon the taxes that are collected from the people. Taxes are a requisite in the government operation and without it, the government will be useless. Everyone who is a resident or non-resident receiving income from sources within or outside the Philippines should pay taxes. This includes domestic and foreign corporations.Four Rs of Taxation Revenue taxes that raise money to spend on armies, roads, schools, hospitals, and other indirect government functions Redistribution refers to the transferring of wealth from the richer sections of society to the poorer sections Repricing taxes levied to address externalities Representation No taxation without representationPHILIPPINE TAX LAWSThe Philippine taxation system covers national and local taxes. National taxes refer to national revenue taxes imposed and collected by the national government through the Bureau of Internal Revenue (BIR) and local taxes refer to those imposed and collected by the local government (www.bir.gov.ph).The laws on Philippine Taxation are contained within the National Internal Revenue Code. This code underwent substantial revision with passages of the Tax Reform Act of 1997. This law took effect on January 1, 1998. The chief executive of the Bureau of Internal Revenue is the commissioner who has exclusive and original authority to interpret the provisions of the code and other tax laws. The commissioner also has the power to decide disputed assessments, grant refunds, modify payment of any internal revenue tax, and cancel a tax liability. Taxpayers can appeal decisions by the Commissioner directly to the Court of Tax Appeals (www.bir.gov.ph).National Tax LawThe 1987 Philippine Constitution sets limitations on the exercise of the power to tax. The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation (Article VI, Section 28, paragraph 1).All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government (Article VI, Section 29, paragraph 3).The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restriction as it may impose, tariff rates, import and export quotas, tonnage and warfare dues, and other duties or imposts within the framework of the national development program of the Government (Article VI, Section 28, paragraph 2). The President shall have the power to veto any particular item or items in an appropriation, revenue or tariff bill, but the veto shall not affect the item or items to which he does not object (Article VI, Section 27, second paragraph).The Supreme Court shall have the power to review, revise, reverse, modify or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in x xx all cases involving the legality of any tax, impost, assessment, or toll or any penalty imposed in relation thereto(Article VIII, Section 5, paragraph).Local Government Tax LawLocal government taxation in the Philippines is based on the constitutional grant of the power to tax to the local governments. Local taxes may be imposed, as the Constitution grants, to each local government unit, the power to create its own sources of revenues and to levy taxes, fees, and charges which shall accrue to the local governments (Article X, Section 5). With respect to national taxes, local Government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them (Article X, Section 6).Tax Exemptions in the PhilippinesAs mentioned above, everyone who is a resident or non-resident receiving income from sources within or outside the Philippines should pay taxes. However, their some exemptions in paying taxes. According to the Philippine Constitution, the following are exempted from taxes:1. Charitable institutions, churches, convents, mosques, non-profit cemeteries, lands and buildings and improvements1. All income, revenues, assets of non-stock and non-profit educational institutions used actually, directly and exclusively for educational purposes1. Non-stock and non-profit educational institution and government educational institution1. Non-stock corporations and organizations operated exclusively for religious, charitable, scientific, athletic or cultural purposes1. Minimum wage earner1. Non-resident citizen of the Philippines1. Prizes and winnings from a charity horse race sweepstakes from the Philippine Charity Sweepstakes Office1. SSS and GSIS Benefits1. Annual taxable income of Senior Citizens or those at least 60 years old who have income of not more than P60,000 per year1. Donations to the Philippine government for scientific, engineering and technological research, invention and development1. Other donation exemptionsFactors that affect the evasion of taxes:Tax evasion occurs because of two factors: psychological elements and administrative and legal aspects. Psychological elements affect the evasion of taxes because some people may doubt the leaders of their country regarding the use of taxes in the economic development of the country. Evasion is more likely among those who feel that they pay an unfairly high level of taxes (Witte and Woodbury, 1985). Some people, commonly in corporations, think that they pay higher taxes than that of others and as a result, they tend to make ways on how to lessen their taxes. On the other hand, administrative and legal aspects include dishonest tax reporting or accounting fraud, manipulation of records, and corruption. Common practices of tax evasion include: under-reporting of income, over-statement of expenses, use of fictitious receipts, the keeping of double sets of books, false or fictitious entries in books, fictitious transactions in the name of dummies, non-recording of sales, and others. Dishonest tax reporting is mainly done by accountants by hiding the true status of the firm to the tax authorities. They simplify records so that the firm will pay less taxes and being able to generate more profit. Tax evasion commonly arises when a person overstates the expenses (false receipts) or counts in ineligible expenses. As a result, less income will be recorded but in reality, they gained more profit and spent less for their expenses than what is indicated in their financial statements. Corruption is also a major contributor to tax evasion. Based on the Latin American experience, Herschel believes that knowledge of widespread corruption of senior policymakers in a country may signal the mismanagement of public funds and hence induce resistance to comply with tax laws. People tend to make ways not to pay their taxes because they believe that their money will not be used properly by their government in making their country better.

From the above table are the corporate tax rates of Philippines, Korea, and Sudan from the years 2009-2014. We chose to compare Korea and Sudan to the Philippines because they are just some of the most corrupt countries in the world. Koreas major issues can be traced back to a number of natural disasters and the collapse of the Soviet Union while Sudan has been wrapped thoroughly in the grasp of war for many years. The table shows that Philippines had a constant 30% corporate tax rate from 2009-2014. Korea had 24.2% corporate tax rate from the given years except in the year 2011 in which they had 22%. Lastly, Sudan had 15% from 2009-2010 but has increased to 35% for 2011-2014. This implies that the high corporate tax rates of Sudan and Korea are understandable because of their economic situations. Taxes and the EconomyThe Tax effort for the year 2013 contributed to the increase to 13.58% of the Gross Domestic Product of the Philippines from the 13.3% of the previous year. Hence, the tax evasion cases for the year 2012 accumulated to almost P12 Billion. Out of the 128 cases filed by the Bureau of Internal Revenue, 72 cases were identified as tax evasion cases of different corporations. There were 9 out of 10 corporations which violated the same law, Sec 27 and 28 of the Tax Reform Act of 1997. Republic Act 8424 Sec 27 discusses the rate of income tax of domestic corporations which is 35% imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines. On the other hand, Sec 28 tackles the rate of income tax of foreign corporations a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to 35% of the taxable income derived in the preceding taxable year from all sources within the Philippines. In economics, taxes are often considered economically inefficient, which suggests tax evasion may potentially have a positive impact on an economy. The theory is that since taxes operate by increasing the prices of things, overall consumption decreases as taxes increase, and therefore, economic activity falls. But come to think of it, those taxes are attributed to projects for the common good such as roads, utilities and other infrastructure, so the government collects taxes in order to provide these public goods. The basic laws of economics might suggest that in the absence of the government, private companies would exist to provide these public goods and could do so more efficiently, as they would not be hindered by taxes and government bureaucracy. But we all know that for a country to run, it needs its government. Thus for the government to function, it needs funds from the taxes of the citizens and businesses.

The budget allocated for 2013 amounted to more than P1979.6 Trillion and yet we lost almost P12 Billion because of these corporate tax evasion cases which could have been a big help for the development of the different sectors of our country. One example of this is the improvement of the Economic Sector consisting of the Industry, Service and Agriculture Sector which composes those big corporations that contribute to the economic growth, quantified as GDP, and employment of the country. The budget for Economic Services makes up 25.5% which is P511.1 Billion of the national budget for the year making it the second highest sectoral allocation and Public Services being the first.

The industry and services (I& S) sectors continue to be the growth drivers of the Philippine economy. However, this growth needs to be sustained and made more inclusive. A globally competitive sector is one that is able to tap the global market and, therefore, grow faster. An innovative sector, on the other hand, implies the creation of new products, which can mean additional markets and perhaps new production processes that will allow the sector to link better with the primary sectors, namely agriculture and fisheries. Underlying all these are the strategies to expand markets, part of which is the expansion of the domestic market resulting from population and income growths. The bigger part, however, will be the penetration into foreign markets, including tourism. To promote global competitiveness and innovation in the Industry and Service sectors, the government will continue to improve the business climate, promote an environment that increases productivity and innovative capacity, enforce regulations that enhance consumer welfare and expand market access. The National Budget is an instrument of national development, reflective of national objectives, strategies and plans. It must cover all the needs and expenses of the different sectors of the government. Whenever the National Budget could not sustain these, the government decides to borrow funds from different countries or other financial institutions which is to be paid in due time with a large sum of interest. Thus hindering economic growth. If debt will exceed the countrys repayment ability with some probability in the future, expected debt service is likely to be an increasing function of the countrys output level. Thus some of the returns from investing in the domestic economy are effectively taxed away by existing foreign creditors and investment by domestic and new foreign investor is discouraged. According to Metwally and Tamaschke (1994) as cited by Karagol, this decreases the domestic countrys ability to grow its economy and raises it dependence on foreign debt.The top 5 most controversial cases of Corporate Tax Evasion for the year 2012 with their corresponding liabilities were Gammon Metal Products Inc. (1693.5M), JDBec Inc. (1465.1 M), Abante Industries (1278.5 M), China State Engineering Corp. (712.7M) and All P Drugstore and General Merchandise (516.9 M). According to the report, the top 10 developing countries with the highest illicit financial outflows were China ($2.74 trillion), Mexico ($476 billion), Malaysia ($285), Saudi Arabia ($210 billion), Russia ($152 billion), Philippines ($138 billion), Nigeria ($129 billion), India ($123 billion), Indonesia ($109 billion ) and the United Arab Emirates ($105 billion). The same report also said that of these illicit cash flows, 60%-65% was for tax avoidance and 30%-35% from criminal activities. Illicit cash flows from corruption, bribery and theft among government officials accounted for 3%-5%. The most depressing news for us is that the Philippines ranked 6th in the list of developing countries in terms of illicit cash flows. We can only dream of the positive effect on our economy and on the number of jobs that would have been created if the Philippine elite had decided to keep and invest the $135 billion here instead of stashing them abroad.Tax evasion take away money that could be invested in productive resources needed to diversify the economy and address urgent social problems. Tax evaded money is not spent on productive investments that can have a multiplier effect on an economy and benefit the significant majority of a population, rather than just a select few. The government must spend resources attempting to recoup taxes it is owed, which is wasteful to society. If no one underpaid taxes, more money could be attributed toward beneficial programs instead of being spent on collecting it. Also compare a corporation that pay its tax liability correctly to the one that evade taxes, it creates an artificial advantage for the company evading taxes. This could lead to companies with lessbusinesspractices outlasting those with more efficient practices, which would be detrimental to the economy because those companies that evade taxes outlasted which means lower national funds and the companies closed would result to unemployment.

Ethics Three major views have evolved over the last 500 years regarding tax evasion. One view takes the position that tax evasion is always or almost unethical, either because there is a duty to God to pay taxes, or because there is a duty to some community or to society. Another view is that there is never or almost never a duty to give anything to a corrupt government. The third view is that there is some ethical obligation to support the government of the country where you live but that duty is less than absolute. The reasons for considering tax evasion as ethical are corruption of the government and the affordability and fairness of the tax system. Morales (1998) discussed the viewpoint of Mexican workers. Most of these studies found that taxpayers do not have ethical problem with evading taxes because their governments are corrupt and they feel that they have no ethical duty to pay taxes to a corrupt government. He concluded that Mexican workers duty to his family is sometimes more important than his duty to the state. Genicot (1927) states that partial evasion is justified on the grounds that the government does not have the right to the full amount and that it would be unfair to impose heavier taxes on conscientious men while wicked men usually pay less. On the other hand, tax evasion is considered as unethical because of social responsibility and moral duty to other tax payers. It is the social responsibility of every individual in the country to pay taxes for the benefit of their countrymen. Some Christian groups also take this view that individuals are morally bound to obey the laws of the country in which they live. The moral duties to other tax payers are also considered as one of the reason why it is unethical to evade tax. All countrymen must be equal and they should fulfil their responsibilities the same way as the other does. Importance of paying taxesTaxes are the charges that the government imposes on citizens and corporate businesses. The charges collected by the government are used to fund different government projects that would in the end benefit the citizens of the country as a whole. It also plays a key role in building up institutions, markets and democracy through making the state accountable to its taxpayers. Paying taxes plays an important role for the benefit of the society and businesses by providing funds for the projects of the government and unexpected events like recession and turmoil. The society is the main beneficiary of paying taxes. Taxes are used to fund projects related to health care systems, education systems, and public transports which is very essential for the everyday living of the citizens. Also, the money collected can also be used to give unemployment benefits, pensions, and other matters that can benefit the society as a whole. Without tax, the government would not be able to fund the essential projects and services that people need. People in the society can also be more responsible citizen by imposing taxes on liquor, cigarettes and gambling ,specifically the Sin Tax law , so that they may not purchase these items immediately because of its higher cost . Taxes also promote economic growth by generating the revenue needed to finance governments economic development policies and create a framework for development of private sector activities.Businesses are also a major beneficiary of taxes. The government funds the money back into the economy as long term loans and/or funding. They serve as a creditor for business who needs capital for the growth of the business. Taxes is also essential during recession because the government increase their spending which includes spending in construction, education, communication networks, massive power-generation, and other major infrastructure projects.

ConclusionThe result of the study is that corporate tax evasion filed has a greater number than that of the personal tax evasion cases. This just simply means, a decrease in the national budget that could have been put into a lot of projects that benefits the common good such as infrastructures, roads, education and especially economic sector. This research also found out the underlying cause of tax evaders is that the government is known to be corrupt, but in reality, the economic sector is the 2nd with the highest budget allocation in our country which means these corporate tax evaders benefit a lot from the taxes put into public service. Corporate tax evasion also leads to budget deficit which result to foreign debts that hinder the countrys economic growth.As practitioners, addressing these crucial issues head on be it corruption, tax evasion or a bloated public sectoris our responsibility.Just imagine that the failure of government to curb smuggling and tax evasion could be something more than depriving the national treasury with funds for the countrys development needs. It could be a serious security threat and may end democracy as we know it. We proposed probable solutions to the issue of corporate tax evasion. First, is the revision of the tax code that could address to the issue of the loopholes on the law and a much stricter penalty on those people who attempt to evade their taxes. In line with this, proper and stricter implementation of the tax code should be maintained. Also, the system should be free from corruption. Government has a special responsibility to make proper rules and promote good governance. Increased transparency could also contribute to encourage citizens and businesses to pay their taxes correctly. Let them know the budget allocation percentage and the evident projects that their money spent on taxes were used for. Fair taxes not necessarily lower tax rates should be implemented in our country. This could lessen the number of tax evaders and could also entice investors to come in our country. Private enterprise drives growth, reduces poverty and creates jobs and prosperity for people around the world. Fair taxes, and open trade are vital drivers of this.

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