It’s easy to disregard your tax obligations when you’d rather focus on running your business or earning more from your freelance gigs. Not to mention that it’s hard to part away with your hard-earned money, and you aren’t sure whether the government will put it to good use if you pay taxes.
Filing and paying taxes in the Philippines can be really daunting and stressful. But that’s nothing if you compare it to the troubles you might encounter if you don’t pay your taxes. Tax evasion penalties are something you wouldn’t want to deal with.
If you're a taxpayer, it's important to be aware of the consequences of tax evasion. You must avoid taxation woes that may hurt your finances. In this article, we'll take a look at what tax evasion is, its consequences, the penalties for tax evasion, and how you can avoid it.
What is Tax Evasion?
Tax evasion happens when a person intentionally avoids paying any tax under the Tax Code of the Philippines. This can be done through various means, such as not reporting income, claiming false deductions, or hiding assets and income.
Because tax evasion is a criminal offense, tax evaders are subject to serious penalties and criminal charges. In the Philippines, tax evasion is punishable by a penalty of up to ₱10 million or imprisonment, depending on the offense.
The government has been cracking down on tax evaders in recent years, with new laws and regulations making it easier to prosecute offenders. While some people view tax evasion as a victimless crime, the reality is that it costs the government billions of pesos in revenue each year and robs taxpayers of much-needed funds for public services.
Tax Evasion Examples in the Philippines
According to the BIR, the following forms of tax evasion are considered criminal liabilities under the Tax Code:
- Failure to pay taxes
- Non-filing of appropriate tax returns
- Over-declaring expenses/deductions
- Under-declaring income
- Hiding or transferring income
- Claiming personal expenses as business expenses (for tax shield)
- Failure to remit withholding taxes
- Having more than one book of accounts
- Failure to register with the BIR
- Fake entries in financial books and records
- Using fake accountable forms
Even if you’re exempted from paying taxes, you’re still required to file an income tax return (ITR). Otherwise, this is considered tax evasion.
Tax Evasion vs Tax Avoidance: What's the Difference?
They don’t mean the same thing. Tax evasion uses illegal or fraudulent methods to reduce or avoid taxes (see the list of tax evasion examples above), while tax avoidance uses lawful means to minimize tax payments by taking advantage of loopholes and deductions. While tax avoidance is legal, it’s often frowned upon by the government and taxpayers who feel it unfairly benefits the wealthy.
Among the familiar examples of tax avoidance in the Philippines are the de minimis benefits that employers use to lower withholding taxes and increase the take-home pay of their employees.
In addition, under-declaring income is also another form of tax avoidance, which means the taxpayer only declares only a portion of income to avoid paying higher taxes. Other companies use donations as they can be claimed as deductions, especially if they’re identified as such under the National Internal Revenue Code (NIRC).
While both tax evasion and tax avoidance lead to reduced taxes, the former can land a person in jail because of its criminal nature.
Tax Evasion Penalties in the Philippines
Evading taxes is avoiding your responsibility as a citizen of this country. By principle, we all know that taxes are used to improve the lives of Filipinos—from building schools, roads, and other infrastructure to providing health care services to less-privileged communities.
In short, failure to pay taxes somehow deprives Filipinos of the government services they’re supposed to enjoy. This is why the government imposes heavy penalties to tax evaders.
Let’s go through each tax evasion penalty that may apply if you fail to pay your taxes.
1. Exorbitant Fine and Imprisonment
“Will I be jailed for not paying my taxes?”
Tax evaders will have to pay fines of not less than ₱500,000 but not more than ₱10 million if proven guilty, and imprisonment of not less than six years but not more than ten years in cases where there’s an attempt to evade or defeat tax.
The grounds for these fines and imprisonment are printing the following:
- Receipts, sales, or commercial invoices without authority from BIR
- Double or multiple sets of receipts and invoices
- Receipts and invoices without numbers, business names, and other identifying information of the business
2. Surcharge of 25% or 50% of the Tax Due
This tax evasion penalty is a one-time fee for every instance of non-payment of tax. The Tax Code imposes a 25% penalty to those who fail to file and/or pay the tax due on time (within the April 15 deadline), as well as those who file their ITR with the wrong revenue district office (RDO).
A higher surcharge of 50% of the tax due applies to cases in which there’s a deliberate failure to file the tax return or willful falsification of tax returns.
3. Annual Interest of 20% on Unpaid Tax
If you fail to pay your tax in full, you’ll be penalized with a 20% interest per year on the unpaid tax amount from the time it’s supposed to be paid until it’s completely paid.
So let’s say you don’t pay your tax in full for five years. You’ll end up paying twice as much as the original tax amount (multiply 20% by five years, and you’ll get 100%).
4. Penalty of 1/10 of 1% of Annual Net Income or ₱10,000 Whichever is Higher
If the taxpayer fails to transmit sales data, a penalty of 1/10 of 1% is imposed or ₱10,000, whichever is higher. This is based on the annual net income as shown on the audited financial statements for the second year preceding the taxable year.
However, if the failure to report sales is due to force majeure or other uncontrollable events by the taxpayer, the penalty shall not apply.
5. Compromise Penalties of up to ₱50,000
Rather than file tax evasion cases or criminal charges, the BIR may instead impose a compromise penalty to violators who fail to pay their taxes.
Compromise penalties for unsettled tax payments range from ₱200 to ₱50,000, depending on the amount of unpaid tax. The higher the unpaid tax amount is, the higher the compromise fee that the violator has to pay to the government.
6. Temporary Business Closure
The BIR also runs after tax-delinquent businesses under its Oplan Kandado program. The government’s revenue collection agency has the authority to suspend or close down a business establishment until it pays the right taxes.
Grounds for temporary closure of business under Oplan Kandado include the following:
- Failure to issue receipts or invoices
- Failure to file a value-added tax (VAT) return
- Under-declaring taxable sales by 30% or more
- Failure to register a business with the BIR
How to Avoid Tax Evasion in the Philippines
The consequences of tax evasion in the Philippines are severe. They can adversely affect your finances and cause so much anxiety. What can you do—within the bounds of law—to avoid the risk? Taxation experts and lawyers recommend taxpayers to take the following steps:
Be Knowledgeable About the Tax Laws in the Philippines
There are a few ways that you can become knowledgeable about the tax laws in the Philippines. First, you can read the tax code itself. This can be a bit daunting, but it’s important to have a basic understanding of the law before you begin to file your taxes.
You can also reach out to the Bureau of Internal Revenue (BIR) for help. The BIR provides a lot of resources on its website, including how-to guides and publications that can help you understand the process of tax filing and other responsibilities that taxpayers should take note of.
Consider Hiring a Tax Specialist or Consultant
Even if you're pretty confident in your abilities to do your own taxes, there may be some instances where it makes sense to hire a tax specialist or consultant.
For example, if you've recently started your own business, gotten married, or had a baby, then you may want to consider hiring someone who can help ensure that you're taking advantage of all the deductions and credits that you're entitled to.
The same goes for when you suffer a major financial setback. In these cases, it's worth spending the money to get professional help in order to ensure that you don't end up missing, underpaying, or even overpaying your taxes.
Work with a Bookkeeper or Accountant to Take Care of Your Books
As a professional, business owner, or self-employed individual, one of your most important responsibilities is keeping track of your finances. This can be a complex and time-consuming task. But it's essential for ensuring the success of your business.
One way to simplify the process is to work with a bookkeeper or accountant. They can handle all of the details of bookkeeping, including maintaining financial records, preparing reports, and filing taxes. This can free up your time so that you can focus on other aspects of running your business.
In addition, a bookkeeper or accountant can provide valuable insights into your financial situation and offer advice on how to improve your bottom line. If you're not sure where to start, ask around for recommendations or search for businesses in the Philippines that offer online accounting services.
Closely Monitor all Receipts and Transactions
As a financially responsible adult, it’s important to keep track of all of your receipts and transactions. This is especially true if you’re self-employed or have multiple sources of income. While it may seem like a tedious task, closely monitoring your receipts and transactions can save you a lot of money come tax time.
There are different rates for different types of income, and deductions can vary depending on your circumstances. By keeping track of your receipts and transactions, you can be sure that you’re taking advantage of all the deductions and exemptions that you’re entitled to.
This will help to reduce your tax liability and give you peace of mind come tax season. Ensure that each sale has a receipt and that all the receipts or invoices match the declared gross revenue.
What Happens If I Don't Pay Taxes in the Philippines?
The government relies on taxes to fund public services and infrastructure, so it’s essential that everyone does their part. Failure to pay taxes can lead to severe penalties, including imprisonment.
If you don't pay your taxes, you may also be subject to audits, fines, and interest charges. You can also be blacklisted from receiving government benefits or from taking out loans.
So make sure you’re up-to-date with your taxes. If you're not sure how to file or what you owe, seek professional help. Don't take the risk of falling behind on your taxes―it's not worth it.
How Do I Prove Tax Evasion?
Proving tax evasion can be a difficult task. The first step is to obtain evidence that the individual or business has failed to pay taxes.
This may include documents showing the income and expenses of the business, as well as bank records and other financial statements. Once you have obtained this evidence, you’ll need to file a complaint with the BIR..
The complaint should include all the evidence that you’ve collected. And then the tax authorities will investigate the case and decide whether or not to take action against the individual or business.
If they find that tax evasion has occurred, they may impose penalties, including jail time and fines.
How Much is the Reward of Tax Evaders Informants?
Once you’ve proven there’s tax evasion and BIR has found the reported party guilty, you’ll receive a sum equivalent to 10% of the revenues, surcharges, or fees, which may be ₱1 million in cash rewards per case reported, whichever is lower.
If you’re caught evading taxes, you could face steep penalties. But there are ways to avoid tax evasion altogether. By understanding what it is and how to avoid it, you can rest assured that you’re doing everything possible to stay on the right side of the law.
So, don’t take taxes lightly. To avoid tax evasion penalties, be sure to pay the right taxes on time. You can pay BIR online. Let’s do our share in helping our fellow Filipinos receive the kind of services they’re entitled to through the taxes we pay.