Tax violations and responsible corporate officers and employees
With great power comes great responsibility. In the corporate world, the management team, especially those holding executive positions, possesses immense responsibility under the law.
Government policy views the acts of certain corporate officers as equivalent to the acts of the corporation, such that when these corporate officers enter into certain undertakings, they also commit the corporation. Generally considered alter egos of the corporation, people holding such positions are, most of the time, liable in case of violations committed by the company. This principle applies when a corporation is criminally charged with an offense punishable with imprisonment, since a corporation, as an artificial being created by the fiction of law, cannot be arrested and imprisoned. As early as the 1930s, the Supreme Court has held that the responsible officer must personally bear the criminal liability because a corporation can act only through its officers and agents.
Specifically, in the case of criminal violations under Section 255 of the Tax Code committed by associations, partnerships, or corporations related to the failure to file a return, supply correct and accurate information, remit the tax withheld, and refund excess taxes withheld on compensation, the criminal penalty is to be imposed upon the responsible corporate officers, partners, or employees. These are the partner, president, general manager, branch manager, treasurer, officer-in-charge, and employees responsible for the tax violations of the enterprise.
Imposing the criminal penalty on a specific corporate position will clearly identify a person who is to be held liable. The challenge, however, is when the liability is not imposed on a specific position but on the person responsible for the violation due to the latter’s acts or omissions. How do we determine who among the corporate officers or employees is responsible for the tax violation?
To help determine whether a particular individual is liable for the violation, the following elements must be proven:
(a) A corporate taxpayer is required under the Tax Code to pay any tax, make a return, keep any record, or supply correct and accurate information;
(b) The corporate taxpayer failed to pay the required tax, make a return or keep the required record, supply the correct and accurate information, withhold or remit taxes withheld, or refund excess taxes withheld on compensation, at the time or time required by law or rules and regulations; and
(c) The accused, as the employee or officer, is responsible for the violation, and he/she willfully did the above acts.
Generally, proving the first two elements is easier than the third one. Determining whether an individual is a responsible officer who may be charged and convicted of failure to pay taxes and willfully did so is contentious, especially if the position held by the individual is not among those specifically identified by the Tax Code to be criminally liable.
In one criminal case, a Manila City Prosecutor charged an Executive Vice-President of a company for violating Section 255 in relation to Sections 253(d) and 256 of the Tax Code due to alleged willful neglect and refusal of the company to pay its tax liabilities despite the notices issued by the Bureau of Internal Revenue (BIR). The charge against the Executive Vice-President is mainly because she signed a letter to the BIR, asking for an extension to pay the company’s tax liabilities and signifying her intent as the corporate representative to settle through compromise. The issue is whether such an act is enough to make her criminally liable as a corporate officer. The Supreme Court held that such an act is not an indication of the individual’s significant role in the management of corporate affairs to be liable for the tax violation.
The Supreme Court explained that the individual’s position as Executive Vice-President does not automatically make her liable for the failure of the company to pay its tax liabilities. What the Tax Code requires is that the individual must have been the employee or officer responsible for the violation. The letter executed by the Executive Vice-President is not enough to find her guilty beyond reasonable doubt as it does not prove that she actively participated in or has failed to prevent the company’s violations of the law.
The Supreme Court noted that the BIR, as the prosecution, failed to present evidence that the Executive Vice-President’s duties and responsibilities contributed to the company’s failure to pay its tax liabilities through active participation; neither was there evidence that she yielded the power to prevent such violation. Absent such proof, the Court cannot convict the Executive Vice-President for violating the Tax Code.
This Supreme Court case might give some comfort to other corporate officers (other than the partner, president, general manager, branch manager, treasurer and officer-in-charge) that when they exercise their functions, proof beyond reasonable doubt that they actively participated in or failed to prevent the company’s tax violations is necessary before they can become criminally liable for such violations. Nevertheless, getting charged with a criminal violation is no small thing. I can only begin to imagine the weight of the responsibility that high-ranking corporate employees and officers bear every time they exercise their functions and the pressure and anxiety they experience whenever an action is questioned by no less than the taxing authority.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. or Cabrera & Company. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Maria Ysidra May Y. Kintanar-Lopez is a senior manager at the Tax Services Department of Isla Lipana & Co. and a senior legal advisor of Cabrera & Company, member firms of the PwC network.
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