Overlapping of interest on deficiency taxes

THE imposition of interest always follows the imposition of deficiency taxes. This is based on the premise that unpaid taxes are liabilities of the taxpayer to the government, for which the former should pay interest for the use of the fund that should rightfully belong to the latter.

And as it had always been, taxpayers were required to pay only one 20-percent interest on deficiency taxes of whatever kind. Things had changed beginning in 2012, when the two types of taxes mentioned in Section 249 of the Tax Code were distinguished and imposed separately.

In CTA EB Case 821, July 18, 2012, the Court held that based on Section 249 of the Tax Code, there are two types of interests that are to be imposed—the deficiency interest and the delinquency interest, and that these are imposed at the same time. In that case, the taxpayer effectively acknowledged the imposition of these two types of interest, but argued that these cannot cover the same period or overlap each other. According to the taxpayer, the deficiency interest shall be computed from date prescribed for the payment of the tax until the last day indicated for payment in the assessment notice. Thereafter, if the deficiency tax is not yet paid, the deficiency interest shall not be imposed. But the delinquency interest shall start to run. In such case, there should be no overlapping of both types of interest. 

The Court, however, disagreed with the perspective of the taxpayer and held that the deficiency interest should be computed from the date prescribed for the payment of the deficiency tax until full payment thereof. On the other hand, delinquency interest is to be computed from the due date prescribed in the assessment notice until the full payment thereof. In other words, the deficiency interest and the delinquency interest run simultaneously from the date required for the payment of the deficiency tax in the assessment notice until the deficiency tax is paid. All in all, the imposable interests are as follows: (1) 20-percent deficiency interest computed from the date the tax should have been paid based on existing rules until the date required for payment as provided in the assessment notice, and (2) the 20-percent deficiency interest and 20-percent delinquency both computed from the date prescribed for payment in the assessment notice until the payment the deficiency tax.

It should be noted that the presiding justice at that time dissented and held that the imposition of at least a 40-percent interest per annum is grossly excessive and unjust, one that partakes the nature of an imposition that is penal, rather than compensatory. He believed that the proper computation should be that the 20-percent deficiency interest runs from the date prescribed for the payment of the unpaid deficiency tax until only the date prescribed by the assessment notice. After which, only the delinquency interest (on the deficiency tax, deficiency interest and surcharge) shall be imposed which will run until the full payment of total amount due.

From that time, the decision had been applied in a number of cases subsequently decided by the Court. Recently, however, in CTA EB Case 1117, September 21, 2015, the same Court ruled that the imposition of interest extends only up to the time when the taxpayer is required to pay the assessed tax after being informed thereof, and the imposition of the delinquency interest should be computed from the time when the taxpayer failed to pay the assessed tax within the time allowed, as stated in the formal letter of demand (assessment notice) until full payment. In other words, the deficiency interest is computed only up to the date prescribed for payment in the assessment notice. If not yet paid, the delinquency interest starts to run, which shall then be imposed on the total of the basic deficiency tax,
deficiency interest and surcharge. There is no overlapping of deficiency interest and delinquency interest.

Another interesting point to note in this recent decision is that, aside from ruling on how the deficiency and delinquency interests should be computed, the Court also noted that based on the provisions of the Tax Code, there are only three instances, where the term “deficiency” had been defined, and these relate only to three types of internal revenue taxes, namely, income tax, estate tax and donor’s tax. Thus, the deficiency interest should apply only to deficiency income tax, deficiency estate tax and deficiency donor’s tax. No deficiency interest should be imposed on other deficiency taxes.

While this decision is not yet final, it is interesting to monitor how this will finally be settled. As it is, this is a welcome development. Indeed, there are enough reasons for taxpayers to celebrate during these Christmas holidays. Merry Christmas everyone.

The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of World Tax Services (WTS) Alliance.

The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported, therefore, by a professional study or advice.  If you have any comment or question concerning the article, you may e-mail the author at ronald.cubero@bdblaw.com.ph or call 403-2001 local 350.

source:  Business Mirror