Last 22 February 2018, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 12-2018, seeking to clarify the nature and extent of the Commissioner of Internal Revenue’s (CIR) power to obtain information vis-à-vis the attorney-client and accountant-client privileges.

It must be recalled that lawyers are ethically and legally bound to maintain the secrets and confidences of their clients. Thus, Canon 21 of the Code of Professional Responsibility states that a lawyer shall preserve the confidences and secrets of his client even after the attorney-client relation is terminated. The lawyer is not to reveal said confidences and secrets except as required by law, or when authorized by the client after being acquainted of the consequences of the disclosure, or when necessary for the collection of his fees or defending himself, his employees or associates or by judicial action. Canon 15.02 further states that lawyers are bound by the rule on privileged communication in respect of matters disclosed to them by prospective clients.

Similarly, accountants are legally and ethically bound to confidentiality through Section 29 of Republic Act (RA) No. 9298. The said law regulates the practice of accountancy in the Philippines, and relevantly states that all working papers, schedules and memoranda made by a certified public accountant (CPA) and his staff in the course of an examination, except reports submitted by a CPA to a client, shall be treated as confidential and privileged. Said documents shall remain the property of the CPA in the absence of a written agreement to the contrary, unless such documents are required to be produced through a subpoena issued by any court, tribunal, or government regulatory or administrative body.

Meanwhile, the grant upon the CIR of the power to obtain information is embodied in Section 5 of the Tax Code. Pertinently, said Section states that in ascertaining the correctness of any return, or in making a return when none has been made, or in determining or collecting the liability of any person for taxes, or evaluating tax compliance of taxpayers, the Commissioner is authorized to obtain on a regular basis any information from any person other than the person whose internal revenue tax liability is subject to audit or investigation. When this power is dovetailed with the above discussed mandates of professional secrecy, a conundrum involving delineation will necessarily arise. That is, where does the power of the BIR to obtain information begin and end?

The RMC attempts to provide a response by saying that the power of the Commissioner to obtain information under Section 5 of the Tax Code serves as an exception to both the attorney-client and accountant-client privilege. Thus, the privileged communication of attorney-client and accountant-client cannot be used to defeat the very purpose and objective of the Commissioner's power to obtain information.

In issuing the circular, the BIR relied on the following bases: a) Rule 21.01 of the Lawyer’s Code of Professional Responsibility, which provides that a lawyer shall not reveal the confidence or secrets of his client except, among others, when required by law; b) The case of William Ong Genato v. Atty. Essex L. Silapan (A.C. No. 4078), where the Supreme Court stressed that the privilege against disclosure of confidential communication or information does not extend to those made in contemplation of a crime or perpetration of fraud. Notably, the attempt to evade or defeat tax is a criminal offense defined and punishable under Section 254 of the NIRC, as amended; c) Section 29 of RA 9298, which states that the accountant-client privilege does not apply if the production of documents is through a subpoena issued by any court, tribunal, or government regulatory or administrative body; d) Section 140.1 of the Code of Ethics of Professional Accountants, which provides that professional accountants shall refrain from disclosing outside the firm or employing organization confidential information acquired as a result of professional and business relationships unless there is a legal right or duty to disclose; and e) taxes are the lifeblood of our nation so its collection should be actively pursued without unnecessary impediment.

To be fair, ensuring due compliance with taxation rules is a laudable purpose. After all, taxes are the lifeblood of the government and its prompt collection is necessary to ensure the orderly existence of any state. Nevertheless, the lifeblood doctrine is not without limitations. It should not operate to disregard rules promulgated on the basis of sound public policy.

In this connection, it must be noted that the attorney-client and accountant-client privileges were put in place to encourage clients to make full disclosure to attorneys and accountants in matters affecting clients’ rights or obligations. Where a client is not assured of only the highest level of confidentiality, there exists a high risk of suppressing unfavorable facts – thus, any advice provided will be based on incomplete or false information, and reporting by the accountant or trial by the lawyer will be improper, if not altogether useless. The ultimate evil that confidentiality seeks to prevent is the travesty of justice that may arise from suppression of material evidence. Thus, it has been declared in a long line of cases that the strict personal and fiduciary relationship between clients and attorneys is based on the legitimate interest of ensuring the sound administration of justice.

For such purpose, the Code of Ethics for professional accountants require prior consultation with legal counsel and/or the professional regulatory body before the disclosure of confidential information. Lawyers, on the other hand, cannot be examined as to matters learned in confidence through any communication made by the client to him, or his advice given thereon in the course of, or with a view to, professional employment, without the consent of the client and his employer, concerning any fact, the knowledge of which has been acquired in such capacity. This, in the rules of evidence, is what is called the attorney-client privilege. Under this rule, lawyers who are subpoenaed to testify as witnesses cannot testify on privileged information. However, they can be examined on unprivileged communication.

Relevantly, it has been ruled in the case of People of the Philippines v. Honorable Sandiganbayan (G.R. Nos. 115439-41) that the existence of an unlawful purpose prevents the privilege from attaching. In as much as lawyers and accountants have trust and fiduciary duties to their clients, they are also bound by loyalty to the profession of which they are members. Thus, while lawyers and accountants may render assistance and defense to clients who have already committed crimes or frauds (thus communication relevant to the same is privileged), these professionals may not render any assistance or advice for purposes of perpetrating such crime or fraud. Thus, communication in contemplation of a crime or fraud is not covered by the privilege, because it is not within their professional duties to abet the commission of crimes.

Considering that there exists no legal prohibition for lawyers and accountants to disclose matters in contemplation of crimes or frauds, there seems to be no need for the BIR to set aside the attorney-client and accountant-client privileges for purposes of obtaining information. After all, said privileges will not even attach when communications are made for unlawful purposes. What the RMC may want to further clarify is whether the attorney-client and accountant-client privileges will still attach when the communication covers crimes or frauds already committed. After all, crimes and frauds already committed per the case of Regala v. Sandiganbayan (G.R. No. 105938), are still covered by the attorney-client privilege.

 

Betzy C. Nuevo is a Supervisor from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.