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Tuesday, February 7, 2012

SALN and ITR

Map Insights
SALN and ITR
By Dick Du-Baladad

The Statement of Assets, Liabilities and Net Worth (SALN) and the Income Tax Return (ITR) appear to be the most powerful weapons of the Aquino administration in weeding out suspected grafters in government. Politicians and bureaucrats are being charged for tax evasion using the SALN as basis. The Chief Justice, on the other hand, is being charged for non-disclosure of assets in his SALN using his ITR as basis to pin him down.

How does the SALN relate to the ITR? The SALN contains the total net worth of a person as of a given date. It is a person’s total asset worth as of a certain date. To determine the increase or decrease in net worth in a given period or length of time, data on beginning and ending net worth must be available. Likewise, the method of valuation when making comparison should be consistent. One cannot determinean increase or decrease in net worth by using an acquisition cost for the beginning net worth and a fair market value for ending net worth.

The ITR, on the other hand, contains information on the income received by a person as of a certain period of time (usually one year). The income is what the ITR reflects. The net worth, which is the total of all income earned overtime (minus expenses) less liabilities, is what the SALN contains. The net worth, therefore, is an accumulation of income or wealth that accrues to a person over time.

Under our tax system, the general rule is that all income accruing to a person should be taxed. Thus, the tax system has been designed in such a way that all possible sources of wealth flowing or accruing to a person is traceable, and that is why, the records of the Bureau of Internal Revenue (BIR) should be a good indicator of one’s income provided the income has been declared and the proper taxes paid, of course. There are incomes that are exempt from taxes but nonetheless the rules require that information of such income be reported to the BIR as well. So, if the BIR has a complete and clean database, it must be able to capture all sources of income of a person -- whether taxable or non-taxable.

While we always talk of ITR, we should note that the ITR is not the only tax return that reflects the source of wealth of a person. While the ITR is required to reflect all sources of business income, compensation and other incidental income including windfall profits, these are not the only sources of income. There are other modes of acquiring wealth and these are reflected in other forms of tax returnsand taxed differently.

When one receives a donation, the donor pays a donors tax and this is reflected in a donor’s tax return. When one inherits a property, aninheritance tax is required to be paid and this is reflected in an estate tax return. When one sells a property and receives the increase in the appreciation value of the property, a capital gains tax is paid and this is reported in a capital gains tax return. Likewise, when a passive income, such as interests and dividends, is received, and a final tax has been paid on it, a final withholding tax return declaration reflecting the amount of income received by a person is being filed with the BIR. That is how comprehensive our tax laws are in tracing the sources of income.

In the case of donation or inheritance or sale of a property, the basis for tax purposes is always the fair market value (FMV, or zonal value if available) at the time of the transaction. It is the FMV of the property at the time of donation, or at the time of death of the decedent, or at the time of sale or exchange or transfer. When a property is declared and taxed at its FMV, the appreciation value of the property is already considered realized and therefore the valuation of the property is stepped-up to its FMV. For instance, a property acquired by a decedent for P1,000 does not continue to be valued atP1,000 when passed on to the heir. The acquisition cost to the heir is the FMV at the time of death of the decedent.

In short, the increase in net worth does not only come from business income or from compensation which is what the ITR only reflects. One increases its net worth through donation or inheritance or when he realizes the appreciation value of his property by disposing it. The ITR alone does not suffice. Other tax returns should as well be checked.

In comparing the SALN and the ITR, there has to be a determination first which between the two reflects the truth; otherwise, we are comparing two documents that are both untruthful and we may be lost in the process. If the ITR is correct, then the case may be a violation of the SALN, such as non-disclosure of asset. On the other hand, if the SALN is correct, the charge may be a case of tax evasion or a violation of the Tax Code.

(The article reflects the personal opinion of the author and it does not reflect the official stand of the Management Association of the Philippines. The author is the managing partner of the Du-Baladad and Associates [BDB Law] and chairman of the MAP Tax Committee. Feedback at map@globelines.com.ph. For previous articles, please visitmap.org.ph).

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