Unlocking the bank account of the living and the dead

(First of two parts)

Bank accounts should be kept secret – especially from relatives. Or maybe that’s one way of saying that one has the right to keep a bank account peaceably – confidentially, that is. Truth be told though, in the Philippines, the Bureau of Internal Revenue people are like relatives, but I mean that in the sense that you can also keep your bank accounts secret from them.

Our bank secrecy laws remain to be one of the toughest in the world, such that you don’t need to run to another country to hide profits from taxation. Pardon this judgmental language on a Sunday but speaking matter-of-factly, and surer than the dog as man’s best friend, secrecy of bank deposits is the tax evader’s best friend.

We go back to the stirring speech of then Rep. Jose P. Laurel that brought bank secrecy to life way back in 1955. It was meant to protect people who placed money in the bank from harassment by tax authorities. Moreover, it was understood that “it is true that many tax evaders will evade liability for tax evasion if this bill is approved.” That, however, was considered an acceptable trade-off to discourage “hoarding” and to “inject into the bloodstream of our anemic economy the capital which we need for greater agricultural and industrial production.”

We will not argue the necessities of postwar years or pretend we know better today than them, because we don’t. But a few questions should be asked: 1. If the law was meant to address a special need at that time, why was the law allowed to last forever instead of having a sunset provision? 2. If it was true that people then were being harassed even if they were not tax evaders, why was illegal harassment from a government agency not directly addressed and punished instead? 3. Why did the legislators coddle tax evaders instead of coming up with a one-time tax amnesty program, followed by serious enforcement of tax laws?

Yes, it molded a negative culture of getting away with it. But tax fraud was also institutionally allowed. Tax evasion as a consequence of bank secrecy is something we can live with, according to the privilege speech. During the deliberations in the Ways and Means Committee, no less than then senator Ferdinand E. Marcos clarified through his questions that the government cannot inquire whether a taxpayer has a deposit or how much that deposit is for purposes of tax examination.

Thus it is only when the government is done with its tax examination (without aid of bank account information) that the government can garnish whatever bank account the taxpayer has – that is, if the taxpayer does not beat the taxman to it by removing his money from the account before it is garnished.

There are estimates of tax collection efficiency and tax collection gaps but truth be told, we have no clear idea on the magnitude of how much is not paid from non-declaration and if we are to be fair, from corruption as well. The result is a large gap that needs to be filled in by new tax measures that seek to collect from those who do not, or cannot, hide. How? By increasing everyone’s cost of living with new taxes – while institutionally allowed tax fraud thrives through secrecy of bank deposits.

It’s like a joke we make but the joke is on us. The vast majority of us will not be affected by repealing the bank secrecy law if the law is made right and purposeful. But many may be crying foul to something that protects criminality more than innocence. The Bank Secrecy Law should be repealed, but: 1. Bank accounts of those earning purely compensation income should remain in secrecy as all taxes on those amounts have been withheld anyway; 2. Those required to file financial statements may be accessed, but only when there is prima facie evidence of fraud, and even add to that a requirement for a court-secured subpoena (at least the bank account information can be used as evidence for fraud); and 3. Make it easier to file a complaint against any government official who would use his authority to harass.

Once tax fraud is no longer institutionally allowed, we can begin to talk about a fair tax amnesty program to give everyone a clean slate, with compulsion for compliance going forward.

I know – many among us cringe at this advocacy of repealing the bank secrecy law. Maybe there’s the stigma of distrust that the government will not abuse its power. But all their bank accounts will be non-confidential too, and maybe honesty can be somehow compelled. Maybe it’s time to join the most successful economies in the world. Maybe it’s time to build the stepping stones to transparency and level playing fields that bring investments, build trust, and build a better country.

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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He also chairs the Tax Committee of the Management Association of the Philippines (MAP). Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.