Penalty for making amends

On April 2, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. 21-2018 (Circular) regarding the imposition of surcharge, interest, and compromise penalty for filing of an amended tax return. The circular was issued to resolve the issues on surcharge, interest and compromise penalty in amended return.

Specifically, the circular clarified that where an additional tax is due per amended tax return, 20 percent interest and 25 percent surcharge shall be imposed based on the additional tax to be paid per amended tax return.

The basis of the 25 percent surcharge on the additional tax due per amended return, according to the circular, is Section 248 of the Tax Code. Said Section imposes civil penalty equivalent to 25 percent of the amount due in cases of (1) Failure to file any return and pay the tax due thereon as required under the provisions of the Tax Code or rules and regulations, on the date prescribed. And (2) Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of the Tax Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment.

The first case is straightforward. If the taxpayer fails to timely file the tax return, then the 25 percent surcharge based on the tax due will be slapped.

In the second case, the 25 percent surcharge will be slapped if the taxpayer fails or underpays the tax shown in the filed return.

Do these cases cover amended tax returns? It does not appear so.

Note that the first case involves failure to file the return (and pay the tax due thereon) on time. It is respectfully submitted that this case applies only to “original” returns, and not to amended tax returns (i.e. tax returns amending the original tax return filed). Under this case, the 25 percent surcharge will apply only if the original return is not filed on time.

The second case (i.e. failure to pay the full or part of the amount of tax shown on the return) presupposes that a return was filed, except that the tax due (as shown in the said return) was not paid in full within the date prescribed for payment. Clearly this case does not cover returns amending previously filed returns.

With this new interpretation of the BIR imposing 25 percent surcharge on the tax due arising from amendment of tax returns, it will not be a surprise if taxpayers, instead of voluntarily paying their deficiency taxes by correcting their tax returns via amendment, would rather wait for a tax audit to be completed and pay the deficiency tax upon assessment. The interpretation, in effect, discourage honesty. Voluntarily paying deficiency taxes will turn out to be a costly exercise where aside from the 20 percent interest penalty, taxpayers will now also be liable for the 25 percent surcharge. Considering the ancient rule of statutory construction, that penal statutes should be strictly construed against the government and in favor of the taxpayers, it is thus with fervent plea that the revenue authorities revisit the circular.

Abby M. Guzman is an associate from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

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