An interest on interests

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MA. CHRISTINE GUINTO

Relationships, whether business or personal, require effort and a bit of compromise from both sides in order to flourish. Same goes true with the relationship between government and the people. This is why in keeping its end of the bargain, the government is willing to give up the interest it could earn from deficient and delinquent taxes, in exchange for the prospect of earning greater revenue from taxpayers in the form of improved tax compliance.

Under the old tax provision, there was an imposed rate of 20 percent interest on deficiency taxes, which begins to run from the date prescribed for payment until full payment is made. On top of this, another 20 percent delinquency interest per annum may be levied, which arises upon failure to pay: a) the amount of tax due on any return required to be filed; b) the amount of tax due for which no return is required; or c) failure to pay a deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the commissioner. Considering the two types of interest due, the taxpayer who pays deficiency taxes beyond the due date could be burdened with a massive 40 percent interest, which increases until full payment.

The government, through the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963), addressed this situation by amending section 249 of the Tax Code, citing the rate of twice the legal interest rate for loans set by the Bangko Sentral ng Pilipinas (BSP) as its new basis for computing interest on deficiency and delinquency taxes. Since the current legal interest is 6 percent, pursuant to BSP Circular No. 799, series of 2013, the interest applicable was reduced to 12 percent per annum. The TRAIN Law also prohibited simultaneous imposition of the deficiency and delinquency interest prescribed under subsections (B) and (C) of the same section.

As the country transitions to the TRAIN Law, issues have been raised regarding the prescribed guidelines on the computation of the interest on deficiency and delinquency taxes that accrued before this new law took effect but are being settled upon the law’s effectivity.


Recently, the BIR released Revenue Memorandum Circular (RMC) 21-2018, which circularizes Memorandum 016-2018 dated 15 March 2018, discussing the imposition of surcharge, interest and compromise penalty for the filing of an amended tax return. The RMC aimed to emphasize that apart from the interest on deficiency tax due, the taxpayer is still liable to pay the 25 percent surcharge and the corresponding compromise penalties. However, the said RMC used in its discussion the old provision of the tax law, which still indicates 20 percent as the rate of interest on deficiency taxes. This created confusion: which interest rate – 12 percent or 20 percent – will be applicable to deficiency taxes that accrued before but are settled upon the effectivity of the TRAIN Law?

This dilemma was addressed in the recent case of Moog Controls Corporation vs Commissioner of Internal Revenue (CTA Case 9077, Feb. 22, 2018), where the foreign branch office was assessed by the Bureau of Internal Revenue (BIR) for deficiency income tax plus a 25 percent surcharge, and deficiency and delinquency interests both at 20 percent. Accordingly, the taxpayer contested such assessment and asserted that the imposition of two types of interest, i.e., deficiency and delinquency, is no longer applicable under the new provisions of the TRAIN Law effective Jan. 1, 2018. The BIR, however, argued that the TRAIN Law should have no retroactive effect in the application of said interests to the assessment.

The Court of Tax Appeals (CTA) held that the provisions of the TRAIN Law apply partially in this case since the end date of the charging of interest will only be determined upon full payment thereof, and the full payment will only be possible after petitioner is apprised by the CTA of its tax liabilities, which is in 2018. The CTA further stated that there should be application of the provisions of Section 249 under the Tax Code on the interest charged from the date of payment up to the time prior to the effectivity of the TRAIN Law, i.e., Jan. 1, 2018. From then on, the provisions of the TRAIN Law on the interest charged from Jan. 1, 2018 up to the full or complete payment of the unpaid amount should be applied.

The CTA also clarified that there is no retroactive application of the provisions of the TRAIN Law since retroactivity under Article 22 of the Revised Penal Code applies only to penal laws and interest charged is compensatory in nature. Thus, the double imposition of interest (deficiency and delinquency) under the Tax Code of 1997 will still apply for the period between the date prescribed for tax payment until the last day prior to its amendment.

In summary, the CTA ruled as follows:
1. The imposition of 20 percent interest shall be made until Dec. 31, 2017.

2. Since 6 percent is the current legal interest rate pursuant to BSP Circular 799, series of 2013, 12 percent interest shall be levied on any unpaid amount of tax from Jan. 1, 2018 until deficiency tax is fully paid.

3. Non-imposition of deficiency and delinquency interests is effective from Jan. 1, 2018 as it cannot be given retroactive application considering that interest is compensatory rather than penal in nature as ruled in a Supreme Court case.

The above decisions elucidated the BIR’s standpoint on the proper treatment of interest on deficiency and delinquent taxes caught between the old tax provision and the TRAIN Law. These also made apparent the BIR’s more relaxed approach to going after erring taxpayers. The question is: Will the BIR’s less stringent rules improve tax collection, or will it give taxpayers more reason not to comply? Our nation can only hope for the best.

Ma. Christine Ysabelle Guinto is a senior with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

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