Last week a Philstar.com headline announced BANK EXECS AIDING TAX EVADERS LIABLE. The article did not announce a major news event, but it drew attention to the fact that authorities at the Philippine Bureau of Internal Revenue (BIR) have the ability to prosecute bankers who work with tax evaders, including those who pay some of their taxes but dodge others by keeping multiple sets of financial records.
The National Internal Revenue Code (NIRC) prohibits multiple bookkeeping in which firms and individuals keep one set of accurate records for personal bookkeeping and one falsified set to hide profits from tax authorities. What makes the news is that Justice Secretary Leila de Lima asserted that according to Section 253 of the NIRC, any bank or financial officer who willfully does business with someone keeping multiple sets of records to evade taxes is liable in the same manner as the principle.
Additionally, Republic Act 8791 proscribes financial officers from extending loans to borrowers that use different financial records in their loan applications from those submitted to the BIR. While Secretary de Lima did not want to address hypothetical situations in which the BIR could apply either law, Finance Secretary Cesar Purisima specifically inquired whether banks or lending firms could be charged for tax evasion when extending loans to borrowers who use separate records to claim they are in more favorable financial conditions than they actually are.
What troubles me is: why does it matter if one law applies to a practice that another law so clearly proscribes? If businesses and financial institutions operate legally, fairly, and transparently they will commit neither infraction. Good governance in the private sector requires accountability. Can businesses and banks refuse to commit either infraction as the law requires?
Two days after its publication, Philstar.com’s article had generated 43 comments, most of which expressed skepticism and general dissatisfaction with lawmakers and the Philippine financial system. Some doubted that government authorities could ever reform the current system, as “juan41” did:
“there goes the usual empty threat again. it would be more believable if the concerned authorities will cease to advertise and just do their work. as usual, we mistook lip service as real accomplishment. another issue, another threat and this one will die a natural death”.
Others also blamed lawmakers, but had more sympathy for bankers, like “mister_yoso”:
“The area of money laundering is a current reform point for our financial system which is why we need stronger anti-money laundering laws. but the problem is that our own politicians do not want stronger AML laws and they still want to hide behind our outdated bank secrecy laws – which btw penalize bank officers if they disclose any account information even if there already is some suspect activity in these. So really a lot of bankers are caught between a rock and a hard place.”
These two comments reflect the lack of confidence citizens often have in the ability of authorities to reform the financial sector’s activities with the business community. This undermines trust in democracy and the ability of economic growth to benefit all levels of society.
An interesting development, however, has arisen in partnership between state authorities and the business community itself: The Institute for Corporate Directors (ICD), the Securities and Exchange Commission (SEC), and the Philippine Stock Exchange (PSE), have worked together to establish a corporate governance scorecard for publicly-listed companies and all locally organized universal and commercial banks. The goal of this scorecard is to raise the standard of corporate governance practices in Philippine banks and companies. While principles of corporate governance typically include measures to protect shareholder rights and establish transparent relations between owners and managers, this scorecard includes several items that relate to both the NIRC and Republic Act 8791.
For example, item 34 asks, “Does the company explicitly mention its broader obligations to society and/or the community?” Not only should this question speak to Corporate Social Responsibility (CSR) programs, but it should also relate to a company’s obligation to pay due tax like other law abiding citizens.
Item 36.2 asks “Is it easy to identify beneficial ownership?” This question makes it clear that profits and ownership should be easily identifiable and transparent – companies should not keep separate sets of books for tax purposes. Item 35 addresses that issue point-blank: “Does the company disclose pending legal and tax proceedings, tax assessment notices and voluntary assessment program availments that it considers to be potentially material to its business?” Finally, Item 43 asks companies if they perform annual audits using SEC accredited auditors.
Furthermore, within the 2009 Scorecard for Banks, item 35.3 asks if a bank assesses and monitors the corporate governance practices of its corporate borrowers as part of its credit granting. Therefore, banks working to improve their governance will not only examine their own operations, but they will also investigate the operations of their borrowers. What is even more remarkable about the scorecard for banks is that the Monetary Board mandated that all locally organized universal and commercial banks complete the Performance Scorecard.
The ICD scorecards intend to “raise standards of corporate governance practices not only by ensuring compliance to minimum regulatory requirements but also by encouraging the adoption of recognized best practices in corporate governance.” That means adhering to the core values of corporate governance – fairness, transparency, responsibility, and accountability. Interestingly enough, these are the same core values of democracy, and the same values to which all law-abiding companies should adhere.
So, can corporations apply principles of transparency and accountability to areas other than their relationships with between owners and managers, as corporate governance typically directs? Or is it enough for companies to abide by the laws of their country (and just accept that they will have to keep one set of accurate financial records for all purposes, no matter which regulation applies!) Given the growing corporate governance movement and the outrage of the Filipino people, I think it will take a little bit of both. The first step in each path, however, is for lawmakers, companies, and individuals in the private sector to accept the spirit, not just the exact letter, of the law.
Published Date: October 27, 2010