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Favorable developments in deficiency and delinquency interest

Taxpayers may have finally been given two rays of hope by the Court of Tax Appeals when it comes to the applicability of deficiency and delinquency interest in tax assessments.

Taxpayers under assessment are often faced with two types of interest under the Tax Code. The first, deficiency interest, is imposed on any deficiency tax due from the date prescribed for its payment until the full payment thereof. The second, delinquency interest, is imposed on the deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the BIR. Interest rates for both are at 20%.

A cursory reading would give the impression that both forms of interest may simultaneously run. In fact, the simultaneous applicability of both types was affirmed by the Supreme Court as early as the year 2000. The latest decision affirming the interpretation was promulgated in 2013 where the Supreme Court ruled that tax laws must be strictly interpreted, hence, the only interpretation is that both types of interest may concurrently run.

Notably in the 2015 case of Liquigaz Philippines, Inc. v. CIR, Court of Tax Appeals En Banc introduced a novel ruling that may change the course of an otherwise steady flight.

In that case, the Court En Banc ruled that the imposition of deficiency interest under the Tax Code extends only up to the time when the taxpayer is required to pay the assessed tax after being informed thereof; and that the imposition of the delinquency interest shall commence from the time when the concerned taxpayer failed to pay the assessed tax within the time allowed as stated in the formal letter of demand.

In essence, the decision converted what was once a duet into a relay race. As the Court of Tax Appeals interpreted the provisions, deficiency interest stops when delinquency interest begins. It might be an innocuous change at first but a shift in interpretation can potentially save taxpayers hundreds of millions of pesos given the amount involved in tax assessments.

Another novel ruling introduced by the same decision is the limited applicability of deficiency interest on deficiency income tax, deficiency estate tax, and deficiency donor’s tax. The Court noted that an examination of the Tax Code shows that there are only three instances where it defines the term “deficiency”, and this relates only and respectively to three types of internal revenue taxes, namely, income tax, estate tax, and donor’s tax, pursuant to Sections 56 (8), 93 and 104. For this reason, no deficiency interest can be imposed on deficiency Expanded Withholding Tax, Value Added Tax and Withholding Tax on Compensation.

While there is still a pending Motion for Reconsideration on the decision of the Court of Tax Appeals En Banc, taxpayers can hope that the case reaches the Supreme Court and a ruling affirming the decision be promulgated. It is about time our Courts revisit an age-old doctrine that has been imposing an unnecessary burden on taxpayers

Jantzen Joe C. Chua is a tax associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.