Clarifying the cost of filing an amended tax return

On Dec. 19, 2017, President Rodrigo R. Duterte signed into law Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Act. In a speech made after the signing, the President said the TRAIN Act “is the administration’s biggest Christmas gift to the Filipino people, as 99% of the taxpayers will benefit from the simpler, fairer and more effective tax system.”

One of the things that the TRAIN law sought to simplify and update is the imposition of interest on unpaid tax liabilities. Prior to the TRAIN Act, the interest penalty rate was at 20% per annum on any amount of unpaid tax. Now, Section 249 of the National Internal Revenue Code (NIRC), as amended by the TRAIN Act, provides that the interest rate to be assessed and collected on any unpaid amount of tax shall be “double the legal interest rate for loans or forbearance of any money in the absence of an express stipulation as set by the Bangko Sentral ng Pilipinas.” The legal interest rate for loans in the absence of any stipulation as set by the Monetary Board in Circular No. 799, Series of 2013, is 6% per annum. Thus, beginning Jan. 1, 2018 (the effectivity date of the TRAIN Act), the interest penalty for any unpaid amount of tax was 12% per annum calculated from the date prescribed for tax payment until the amount is fully paid.

During the first quarter of 2018, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 21-2018, circularizing Memorandum No. 016-2018 dated March 15, 2018, regarding the imposition of surcharge, interest and compromise penalty for filing an amended tax return. Such an issuance required immediate attention, due to the inconsistent impositions of surcharges and interest by some Revenue District Offices (RDOs). Some RDOs imposed the surcharge and interest following the TRAIN Act, while other RDOs did not. Furthermore, there was an incident involving a taxpayer’s e-mail sent to the Presidential Complaint Center on May 26, 2017 which also contributed to the release of Memorandum Order No. 016-2018. The e-mail raised the issue of inconsistent penalties for filing amended tax returns, which eventually reached the Office of the Deputy Commissioner—Operations Group.

In Memorandum No. 016-2018 dated March 15, 2018, the BIR clarified that in an amendment of return where any additional tax is due, 20% interest and 25% penalty shall be imposed on the additional tax to be paid per amended return. The RMC, although not directly being discussed, does attempt to address the inconsistent impositions of surcharges and penalties by RDOs with respect to the amendment of returns where no additional tax is due. RMC No. 21-2018 also indicates that ONLY the amendment of returns with additional tax being due shall warrant the imposition of surcharges and penalties.

However, this issuance further confused taxpayers as to the proper interest penalty rate to be imposed.

To settle the policy on amended tax returns, the BIR further issued RMC No. 54-2018 on June 21, 2018, stating with finality that beginning Jan. 1, 2018, the interest penalty rate shall be 12% per annum until a new interest rate shall be prescribed by the BSP. Thus, in an amendment of return where an additional tax shall be due, 25% penalty and 12% interest shall be imposed on the additional tax to be paid.

Additionally, the BIR reiterated that compromise penalties per Revenue Memorandum Order (RMO) No. 7-2015 are only amounts suggested by the BIR in the settlement of criminal liability for violations committed by taxpayers and the imposition of the same is consensual in nature. Thus, compromise penalties may not be unilaterally imposed on the taxpayer. In the event that the taxpayer is not amenable to pay the compromise penalty, the violation shall be referred to the appropriate office for criminal action.

Given the strict mandate to RDOs to impose the 25% surcharge, 12% interest, and compromise penalty on amendment of returns where additional tax is due, taxpayers must be even more cautious and vigilant in computing their tax liabilities. It is now even more vital to ensure that all information required by law is accurate and correct before filing a return given the expensive repercussions of non-compliance.

Despite finally settling the issue on the proper interest penalty rate on amended returns where additional tax shall be due, we note that the BIR has yet to clarify whether the 12% interest penalty rate will apply to deficiency taxes that will be assessed within the effectivity period of the TRAIN Act, but covering taxable years prior to 2018.

Certainly the applications and nuances of the TRAIN Act will still require much work and clarification from the BIR. However, taxpayers remain hopeful that the amendments to the Tax Code will bring the much anticipated tax reform that Government has promised.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views

of SGV & Co.