10/7/2019 BusinessWorld | Taxpayers’ interest piqued

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October 07, 2019 | MANILA, PHILIPPINES

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In 2013, when the Supreme Court rendered a decision Otherwise Palace provides relief to NDC on 2015 dividends
imposing 20% delinquency interest on a taxpayer that was Wendy C. Go
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The imposition of interest on unpaid taxes is governed by Section 249 of the National Internal Confidence in economy slips among Asian CEOs
Revenue Code of 1997 (Tax Code). Such interest may fall under two categories: deficiency - YPO
interest and delinquency interest.

To distinguish one from the other, the 20% deficiency interest per annum is imposed on the
unpaid basic tax due from the time the taxpayer is required to pay the tax until the full
payment is actually made. On the other hand, the 20% delinquency interest (in the context of
a tax assessment) is imposed on the delay in payment of taxes, surcharge and deficiency
interest due as provided in a final assessment notice (FAN). It shall be computed from the
due date appearing in the FAN until full payment of the amounts due.

Thus, in case of an assessment, aside from the 20% deficiency interest, the BIR may
calculate another 20% delinquency interest in case the taxpayer fails to pay the deficiency
tax assessed within the time set forth in the FAN. So, in effect, the total interest which may
be imposed on the basic tax due is 40% (i.e., 20% deficiency interest plus another 20%
delinquency interest).

As mentioned earlier, the imposition of the 20% delinquency interest on the delayed payment
of taxes as assessed in a FAN was been confirmed by a 2013 Supreme Court case. It is
intended to discourage delay and hasten tax payments utilized for the maintenance of
Government and its multifarious activities. It is not penal, but compensatory in nature,
imposed for the concomitant use of the funds by the taxpayer beyond the date when he is
supposed to have paid them to the Government.

With regard to the application of deficiency interest, recently, the CTA en banc held that
under Section 249 of the Tax Code, deficiency interest shall only apply to deficiencies
assessed on income tax, estate tax, and donor’s tax -- not on value-added tax (“VAT”),
expanded withholding tax and withholding tax on compensation.

In arriving at the ruling, the CTA en banc referred to Section 249 (B) of the Tax Code, which
imposes a 20% deficiency interest on any deficiency tax, as defined in the Tax Code. The
court noted that the term “deficiency” had been defined in only three instances in the Tax
Code, specifically in Sections 56 (B), 93 and 104, which relate only to three types of taxes,
namely: income tax, estate tax and donor’s tax.

The CTA en banc also clarified the mode of computing deficiency interest vis-a-vis
delinquency interest. Deficiency interest extends only up to the time when the taxpayer is
required to pay the assessed tax after being informed of it, i.e., up to the due date indicated
in a FAN. On the other hand, the delinquency interest shall accrue from the time the taxpayer
fails to pay the assessed tax within the time allowed as stated in the FAN. In other words, the
starting point of the delinquency interest period starts where the deficiency interest period
ends.

To illustrate, let us assume that the BIR conducted an investigation of the taxpayers’ books
and internal revenue taxes for the calendar year 2013. Upon investigation, the BIR then
issued a FAN assessing the taxpayer deficiency income tax amounting to P100,000 and
deficiency VAT of P50,000 and requiring payment not later than July 31, 2015. The taxpayer
thereafter fully paid the tax due on Nov. 30, 2015.

Based on the earlier mentioned CTA en banc decision, the imposition of the 20% deficiency
interest on the basic deficiency income tax of P100,000 shall be calculated from April 16,
2014 until July 31, 2015. The P100,000, 25% surcharge, plus the amount of deficiency
interest calculated, shall then form the tax base when determining the delinquency interest
due, from Aug. 1, 2015 until Nov. 30, 2015.

With regard to the deficiency VAT of P50,000, the delinquency interest shall be calculated
from Aug. 1, 2015 until Nov. 30, 2015. The tax base shall be the basic unpaid tax and the
25% surcharge. Again, following the 2015 ruling of the CTA en banc, deficiency interest shall
not apply to VAT deficiency.

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10/7/2019 BusinessWorld | Taxpayers’ interest piqued

This interpretation of the CTA en banc is favorable to taxpayers because it avoids a situation
where 40% penalty interest applies at any point in time. Moreover, it could possibly result to
lower tax liabilities at least as far as unpaid or belated paid VAT and withholding taxes are
concerned.

While this case certainly makes it appear that Christmas has come early this year, please note
that this CTA en banc case is still pending finality as it is still being appealed by the BIR. If it
is elevated for review, the Supreme Court may uphold the findings and conclusions of the
CTA, being a highly specialized court created for purposes of reviewing tax cases, unless
circumstances clearly show that an error or grave abuse of power was committed. Should the
CTA decision be sustained with finality, this would be good news for the taxpayers. Until then,
developments like this certainly makes tax practice more interesting.

The views or opinions presented in this article are solely those of the author and do not
necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising
from the article.

Wendy C. Go is an assistant manager at the Tax Services Department of Isla Lipana & Co.,
the Philippine member firm of the PwC network.

(02) 845-2728

wendy.c.go@ph.pwc.com

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