Since 2023, the Bureau of Internal Revenue (BIR) has intensified its efforts to weed out and file cases against alleged violators of the provisions of the National Internal Revenue Code of 1997, as amended, (Tax Code). In fact, through its Run After Fake Transactions (RAFT) program, the BIR has filed multiple civil and criminal cases against approximately 70 taxpayers for allegedly selling or buying and using fake/“ghost” receipts to substantiate the expenses and corresponding input Value-Added Tax (VAT) claimed for tax purposes. The BIR also filed administrative cases against Certified Public Accountants allegedly involved in these schemes, moving to have their licenses revoked by the Professional Regulation Commission.
Based on the BIR’s assessment, billions in taxes have been lost due to the proliferation of fraudulent receipts. Hence, chasing after the taxpayers who further propagate this practice is a key priority and driver in the BIR’s strategy to plug this tax leakage. While the BIR has not fully disclosed the details of its investigations on how it was able to detect when fake receipts were used and how it was able to trace the alleged violators, the BIR proposed several theories. Such theories include alleged collusion between business owners and accountants, and the existence of a syndicate that registers ghost companies whose sole business purpose is to sell original receipts so that their buyers can illegally reduce their tax liabilities.
Following these tax investigations and news about ghost receipts, I began to wonder about the possible ways for the BIR to detect such receipts. Section 248(B) of the Tax Code governs when the 50% surcharge may be imposed and lays down the test for prima facie evidence of a false or fraudulent return that merits the application of such a 50% surcharge on the deficiency tax assessed. The prima facie evidence test or the 30% threshold test provides that a substantial underdeclaration of taxable sales, receipts, or income, or a substantial overstatement of deductions constitutes prima facie evidence of a false or fraudulent return. Under this context, failure to report sales, receipts, or income in an amount exceeding 30% of that declared per return, and a claim of deductions in an amount exceeding 30% of actual deductions, renders the taxpayer liable for substantial underdeclaration of sales, receipts, or income or for overstatement of deductions.
Even though Section 248 only discusses the imposition of a 25% or 50% surcharge, the 30% threshold test in this Tax Code provision has also been applied by the BIR and the courts to evaluate whether a taxpayer’s case would fall under the exceptions to the general three-year prescriptive period to assess potential deficiency taxes as provided under Section 222(a) of the Tax Code.
In the case of McDonald’s Philippines Realty Corp. vs. Commissioner of Internal Revenue (G.R. No. 247737 dated Aug. 8, 2023), the Supreme Court (SC) considered the 30% threshold test as one of the factors to determine whether the BIR’s observance of the extraordinary 10-year assessment period is warranted. The SC also established in this case the requirements to properly invoke the 30% threshold test and its effect of shifting the burden to the taxpayer to refute the legal presumption that a false or fraudulent return was filed based on the alleged substantial underdeclaration of sales, receipts, or income or overstatement of expenses or other deductions.
As a brief backgrounder on the 30% threshold test, this statutory provision was actually formally introduced in the 1997 version of the Tax Code. Prior to this, the SC had to rely on jurisprudence and the particular circumstances of each taxpayer to determine whether there is substantial underdeclaration of sales, receipts, or income. With the inclusion of the 30% threshold test in the Tax Code, there is now a statutory measure for checking whether an underdeclaration or overstatement is substantial, resulting in an express presumption that a false or fraudulent return has been filed based on its face.
While the discussion on the 30% threshold test in the above SC case focused on whether there is substantial underdeclaration of sales, receipts, or income, there is another side of the coin to the 30% threshold test which deals with the overstatement of deductions. Relating this to the BIR’s RAFT program, the BIR may also use the 30% threshold test on a taxpayer’s expenses as a tool to detect whether there are indications of possible overstatement/over-claiming of deductible expenses and/or input VAT. Further, the BIR may leverage its current database containing the list of proven ghost receipts suppliers to check whether these sellers are also vendors of the taxpayers being investigated via a regular tax audit.
In the interest of fairness to all taxpayers and paying what is rightfully due as our collective contribution to nation-building, I support and welcome the RAFT program initiative of the BIR. I find it justified for the BIR to use all legal tools and means at its disposal to chase down those who intentionally impede the proper and full collection of taxes and those who intentionally cheat the system, including professionals who use their knowledge/expertise to aid or abet these violations. As taxpayers, on the other hand, we implore the BIR to exercise its powers with proper caution and within reason as provided under the law.
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.
Paolo John Dantes is a manager at the Tax Services department of Isla Lipana & Co., a Philippine member firm of the PwC network.
