Imposition of concurrent Interests: Basis and effects

In all assessments by the Bureau of Internal Revenue (BIR), the total amount of taxes a taxpayer has to pay grows exponentially as the tax investigation continues to be unsettled. These deficiencies usually involve large amounts which anybody, even those who are not privy to the tax investigation, speculate on the validity of the large deficiencies involved in an investigation. Needless to mention, many people wonder how the BIR came up with a billion-peso worth assessment against our Pinoy pride, Manny “Pacman” Pacquiao.

The unimaginable amount of deficiency taxes involved in some BIR investigations could be attributed to the increment of the unpaid basic tax the taxpayer is being assessed of. This increment is commonly known as the penalty interest.

Generally, an interest at the rate of 20 percent per annum (assuming there is no element of fraud) is imposed on the unpaid taxes. But the imposition of this interest retroacts from the time the taxpayer was supposed to pay the tax until the actual payment thereof. But assessments usually come out two years after the taxpayer filed its return. This is because the BIR has three years within which to assess any deficiency taxes (again assuming there is no element of fraud). Thus, if an assessment is issued two years after the taxpayer filed its return, an automatic 40 percent (20 percent x 2) interest will be imposed on the basic deficiency tax. This is one reason why deficiency taxes involve a considerable amount. The interest imposed in this case is called deficiency interest.

Just recently, however, the BIR, presumably in its commitment to collect more taxes or maybe to encourage the correct reporting of taxes on the part of the taxpayers, has imposed in some of its tax investigations a different kind of interest called delinquency interest. This delinquency interest was imposed by the BIR in said investigations concurrently with the deficiency interest. Meaning, aside from the 20-percent annual deficiency interest, the BIR simultaneously imposed another 20 percent representing the delinquency interest.

As expected, the taxpayers involved questioned the BIR on the legality of the imposition of these two kinds of interests (penalty interests).

Basis

The imposition of the deficiency and delinquency interests is governed by Section 249 of the National Internal Revenue Code, as amended. In sum, the deficiency interest is imposed on the unpaid tax from the prescribed time for payment until the deficiency is fully paid. On the other hand, delinquency interest is imposed on the failure to pay (i) the amount of tax due on any return required to be filed, (ii) the amount of tax due for which no return is required, or (iii) deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the commissioner of Internal Revenue (CIR). To date, there are no implementing rules on the imposition of delinquency interest.

However, the Court of Tax Appeals (CTA) En Banc Case No. 853, dated Aug. 22, 2013 is instructive as to when these interests legally accrue. In deficiency interest, it is on any deficiency tax assessed “from the date prescribed for its payment until the full payment thereof” while the assessment of the delinquency interest is imposed upon failure to pay a deficiency tax, or any surcharge or interest thereon reckoned from “the due date appearing in the notice and demand of the CIR until the amount is fully paid. The CTA further said that the deficiency interest is imposed for the shortage of taxes paid, while delinquency interest is imposed for the delay in payment of taxes. ‘

Applying the above, the tax court in this case upheld the BIR in imposing concurrently these two kinds of interests.

Effects

With the legal basis of the imposition of these penalty interests, the taxpayers and tax practitioners should anticipate the application of these penalty interests in the upcoming assessments that the BIR will issue. Especially so that the computation of these penalty interests already forms part of the governing rules on assessment as provided in Revenue Regulations (RR) No. 18-2013, dated Nov. 28, 2013, amending certain provisions of RR No. 12-99, dated Sept. 6, 1999. Thus, a 40-percent penalty interest could be expected.

For the sake of thoroughness, suppose for instance a taxpayer is being assessed a deficiency income tax for year 2009 and the taxpayer was informed by the BIR of said deficiency in year 2011. However, the taxpayer made its payment only in year 2012.The 20-percent deficiency interest will be computed from April 15, 2010 (as the income tax for year 2009 should have been paid on April 15, 2010) up to actual date the same is paid (in this case in year 2012).

The 20-percent delinquency interest, on the other hand, will be imposed from year 2011 up to year 2012. As discussed, this kind of interest accrues from the time the taxpayer failed to pay the deficiency taxes (inclusive of penalties). In this case, the reckoning period will be on year 2011 as it is only in that year when the taxpayer was apprised of his deficiency.

The above sample computation is based on the sample given by the BIR in RR No. 18-2013.

Moving forward

It seems that there could be no other way to attack the concurrent imposition of these penalty interests except to contest the underlying tax liability if the taxpayer feels that it has a strong case against the BIR and that the assessment was done arbitrarily. But the decision whether to pay or not will always be on the taxpayer. The bottom line is that taxpayers should always be prepared for every tax scrutiny of the BIR to avoid the situation where its choice will lean towards the voluntary payment of the deficiency taxes just to avoid the ballooning penalty interests.

Nonetheless, it is worth mentioning that deficiency interest paid by taxpayers may be fully deductible from their gross income as provided in Section 4 (c) of RR No. 13-00, dated Nov. 20, 2000. However, as to whether the delinquency interest is deductible as well is quite unclear for now given the conservative position the BIR has taken on tax matters. Thus, to receive tax assessments from the BIR may be perceived to be not only a regrettable but also a luckless experience, like that of Manny Pacquiao.

Rey T. Llesol is a supervisor from the tax group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

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

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected].

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