Choose the correct answer. Tax Avoidance ‒ (1%)
(A) 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.
(B) is a tax saving device within the means sanctioned by law.
(C) is employed by a corporation, the organization of which is prompted more on the mitigation of tax liabilities than for legitimate business purpose.
(D) is any form of tax deduction scheme, regardless if the same is legal or not.
Suggested answer only. Not an official answer and not legal advice.
(B) Tax avoidance is a tax saving device within the means sanctioned by law. Under CIR v. Estate of Benigno P. Toda, Jr. and Yutivo Sons Hardware Co. v. CTA, tax avoidance (or tax
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Quick check
What distinguishes legal tax avoidance from illegal tax evasion?
Tax avoidance utilizes legally permissible means to minimize taxes whereas tax evasion relies on illegal or fraudulent acts.
Under Philippine tax jurisprudence, how is tax avoidance legally characterized?
Tax avoidance is a lawful tax minimization scheme authorized under existing tax laws.
Which element is essential for a transaction to be classified as illegal tax evasion?
Tax evasion requires an unlawful scheme executed in bad faith or with fraudulent intent.
Under the Toda doctrine, when does a tax minimization scheme cross the line into illegal tax evasion?
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What is the legal consequence when a taxpayer successfully engages in legitimate tax avoidance?
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Learn more about these topics
1. Legitimate Tax Avoidance
Tax avoidance, also known as tax minimization, is the legal exploitation by a taxpayer of alternative tax rates or methods sanctioned by law to reduce tax liability. When practiced in good faith and at arm's length, tax avoidance relies exclusively on legitimate, lawful means provided by tax statutes. Taxpayers have the legal right to decrease the amount of what otherwise would be their taxes, or altogether avoid them, by means which the law permits.
2. Distinction From Evasion
Unlike tax avoidance, tax evasion connotes fraud, bad faith, and the use of unlawful or illegal schemes to minimize or defeat tax liabilities. Tax evasion involves three essential elements: an end to be achieved, an accompanying state of mind described as evil or in bad faith, and a course of action that is unlawful. While tax avoidance is legally permissible and carries no civil or criminal penalties, tax evasion subjects the taxpayer to severe civil surcharges and criminal prosecution.
3. The Toda Doctrine
In Commissioner of Internal Revenue versus Estate of Benigno P. Toda, Jr., the Supreme Court established that transactions structured solely through dummy conduits without any legitimate business purpose constitute tax evasion rather than tax avoidance. When a corporate structure or sale transaction is resorted to primarily to evade higher corporate tax rates without economic substance, the BIR may pierce the corporate veil and tax the transaction based on its true commercial reality.