AT A GLANCE:

There are two common ways by which taxpayers may escape taxation: tax avoidance and tax evasion. Whereas tax avoidance is a tax saving device within the means sanctioned by law, tax evasion entails a scheme used outside of lawful means.

In Commissioner of Internal Revenue (CIR) v. Estate of Toda, Jr. G.R. No. 147188, September 14, 2004, the Supreme Court stated that tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation.

A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits. This is called tax avoidance. It is the use of legal means to reduce tax liability. However, this method should be used by the taxpayer in good faith and at arms-length. (CIR v. The Hongkong Shanghai Banking Corporation Limited, G.R. No. 227121, December 09, 2020)

What is tax avoidance?

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. (G.R. No. 147188, September 14, 2004)

What is tax evasion?

In the same case, the Supreme Court distinguished tax evasion from tax avoidance:

“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.”

Similarly, in Fr. Christian B. Buenafe, et al v. COMELEC, G.R. No. 260374, June 28, 2022, the Court cited Black’s law dictionary defines tax evasion as:

“The willful attempt to defeat or circumvent the tax law in order to illegally reduce one’s tax liability.“

In CIR v. The Hongkong Shanghai Banking Corporation Limited, the Supreme Court explained that tax evasion connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes.

What Are the Elements of Tax Evasion? 

The Court also explained tax evasion in the same case of Commissioner of Internal Revenue v. Toda, wherein tax evasion connotes the integration of three factors: 

1. The end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; 
2. An accompanying state of mind which is described as being “evil,” in “bad faith,” “willfull,”or “deliberate and not accidental”; and 
3. A course of action or failure of action which is unlawful.

In other words, the payment of lesser taxes does not necessarily constitute tax evasion. The taxpayer’s resort to minimize taxes must be in the context of fraud, which must be proven by clear and convincing evidence and cannot be based on mere speculation (CIR v. The Hongkong Shanghai Banking Corporation Limited)

Tax Avoidance vs. Tax Evasion

The distinction between the two lies principally in the legality of the means employed.

Tax avoidance involves a taxpayer’s use of a tax-saving device within the means sanctioned by law, undertaken in good faith and at arm’s length. Tax evasion, in contrast, involves a scheme outside lawful means, accompanied by the requisite state of mind and an unlawful act or omission. (CIR v. Estate of Toda, Jr.)

Read also: Assessment for deficiency taxes: Is it a pre-requisite for collection of the taxpayer-accused’s civil liability for unpaid taxes?

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 09175772207/ 09778050020.

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