Deficiency interest not applicable to VAT, expanded and withholding tax on compensation – CTA

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We are sharing with you an article written by Wendy C. Go with regards to a Court of Tax Appeals (CTA) decision ruling that deficiency interest is not applicable to value-added tax (VAT), expanded withholding tax and withholding tax on compensation, published in Business World Online on December 9, 2015. This decision certainly arouses your curiosity (as this may be contrary to what we know) and we’ll definitely standby to check whether or not the supreme court will uphold this decision. Here’s the article. —

In 2013, when the Supreme Court rendered a decision imposing 20% delinquency interest on a taxpayer that was under audit by the Bureau of Internal Revenue (BIR), the act of computing for penalty interest on taxes certainly became more interesting, to say the least.

In September, the CTA sitting en banc issued a decision that will make things even more interesting. If the Supreme Court decision didn’t pique your interest two years ago, this one certainly will.

The imposition of interest on unpaid taxes is governed by Section 249 of the National Internal Revenue Code of 1997 (Tax Code). Such interest may fall under two categories: deficiency interest and delinquency interest.

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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.

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.


Disclaimer: Opinions expressed in this article are that of the author and information provided are for general conceptual guidance for public information and are not substitute for expert advice. Contact support@philcpa.org for more information and if you want to avail professional services. Find us on Facebook!



Orlando Calundan is a CPA who has exposures in FS audit of entities in various industries such as real estate, food/restaurants, manufacturing, service organizations and BPOs, automotive, holding/investment companies and more. He also has exposure on internal audit engagements.

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