Know Your Rights!

So I have been dealing with the BIR lately over some tax matters. Most of them are kind, decent people whom you can negotiate with. However some try to scare you into giving up more than you should because you may not now better.

The issue was about a company’s tax liability. It has been pending for quite some time so the companies accounts have been frozen. Of course this is a problem as the company no longer has money to pay for day to day operations. Negotiations were proceeding smoothly until a certain agent decided to play bad cop and threaten that the BIR will freeze all accounts, not only the corporate one.

Can they do that? Under our laws, and the laws of virtually every country in the world the corporate entity is separate from the personal entity. So the debts of one do not become the debts of the other. However there is a legal principle which can override this law. Under the doctrine of “piercing the veil of corporate fiction” the courts can decide that the company is just a front or just made to shield something else from liability. If the courts decide this then they can order that personal assets be taken to pay for corporate debt.

First off, notice that a court must decide it. Which means that you can give evidence that the corporation is legitimate. The most important thing to get from this is that it will not immediately happen. You will have time to withdraw some assets and place it elsewhere. The second thing to understand is that the courts are very reluctant to do this. Think about it. Every country recognizes corporate entities. If our supreme court routinely employs this doctrine, what would be the incentive for corporations to start here? There are plenty of other places to choose from. Why not just set-up shop in a country whose supreme court is friendlier to corporations? They also know that this kind of doctrine discourages the formation of small and medium industries. Put our self in the shoes of someone who wants to start a business. Would you risk starting a businesses if it meant losing your start-up capital? Would you take the same risk if it meant losing your house and everything you own? For these industries the entire point of a corporation is to limit liability.

Well you know that the courts will not lightly grant this doctrine. Now what? Well you take steps to make sure that there can be no excuse for this to be granted. The most obvious is to keep your personal and corporate accounts separate. Make sure that the proper accounts are used to pay the proper bills. Next make sure that you are paid. Remember you may own the company but you are also an employee, probably in the general manager position. You should have an adequate salary for that. Third , follow all the rules set up for corporations. There should be an existent board of directors, meetings to decide the direction of the company, and minutes for those meetings. Lastly make sure that your company has adequate capitalization. It should have enough money in the bank to run its day to day, pay its employees, and other things of that nature.

So what do you do with this new knowledge? Do you stomp into the BIR and declare that you will pay no taxes due to this? Well, no. The best step is to negotiate the amount with them. Unless truly huge sums of money are involved it would not be practical to argue the amount that you are being charged. They want your business to survive too, if for no other reason than to pay them again next year. Use this information to prevent yourself from being intimidated. If you are doing things properly your only liability is your corporate assets. Nothing else.

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