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Limited imposition of deficiency interest

As the New Year sets in, tax investigations which were suspended by virtue of RMC 75-2015 will also resume. Fortunately before 2015 ended, the Court of Tax Appeals (CTA) promulgated a decision which may give hope to taxpayers under investigation.

On Dec. 9, 2015, the First Division of the CTA promulgated its amended decision in CTA Case No. 8439 entitled “Ace/Saatchi & Saatchi Advertising, Inc. vs. CIR,” which deviates from the established practice on the imposition of deficiency interest on all taxes found deficient by the BIR or the Court.

In a long line of decisions, the CTA has always sustained BIR’s assessment of deficiency interest on all types of taxes. In the aforementioned amended decision, however, the CTA canceled the taxpayer’s assessment for deficiency interest on deficiency final withholding tax (FWT), withholding tax on compensation (WTC), expanded withholding tax and value-added tax (VAT).

The Court interpreted Sec. 249 B to mean that deficiency interest of 20% should only be imposed on deficiency taxes as defined under the Tax Code. Interestingly, as found by the CTA, deficiency tax was defined only in three tax types, i.e. income tax (Section 56), estate tax (Section 93), and donors tax (Section 104). In conclusion, the CTA categorically stated that deficiency interest under Section 249 B of the National Internal Revenue Code (NIRC) as amended, applies only to income tax, estate tax and donors tax.

Consequently, according to the CTA, creditable withholding taxes, final withholding tax, VAT, DST, Excise Tax and Percentage Tax, provided under the Tax Code should not be subject to deficiency interest.

Aren’t the FWT and CWT also considered income taxes? It must be noted that the Sections imposing the FWT and CWT are also under the Tax Code title on income tax and, thus, may also be included in the income taxes which must be subject to deficiency interest. However, it has also been explained many times that the withholding tax is not really tax on the withholding agent but is just a manner of advanced collection of the tax from the income earner. Note that FWT and CWT are tax due on the part of the income earner and not the taxpayer remitter. Hence, the CTA’s interpretation of Section 249 B may also mean that it should apply only to taxes which are due from the taxpayers themselves.

On the other hand, I believe that this interpretation of Section 249 B of the Tax Code is in a way more equitable for the taxpayer. In many cases, the taxes on the income payments subject to the deficiency tax assessments have already been paid by the income earner upon payment of their quarterly or annual income tax despite failure of the withholding agent to withhold the tax. Hence, it is but proper that interest should not anymore be imposed on the withholding agent. The collection of deficiency withholding tax, in such cases, allows the BIR to collect the tax twice, from the income earner and from the withholding agent.

The interpretation is also fair if we relate it to RR 12-2013, which disallows claims for deductions of expenses which are not subject to withholding tax even if the withholding tax due was already paid. Applying the foregoing interpretation of the Court, the taxpayer will no longer be required to pay interest on the withholding tax due, but the taxpayer will still be subject to deficiency interest on income tax when the disallowed expense is added back to its gross income for the year.

It must also be mentioned that the issue on scope of the imposition of deficiency interest is not new as the CTA en banc has already passed upon this issue in CTA EB Case No. 745, dated Sept. 4, 2012, “Takenaka Corporation Philippine Branch vs. CIR” which provides that deficiency interest under Section 249 B of the Tax Code applies to all internal revenue taxes imposed by the NIRC as amended. The CTA en banc decision was based on the Supreme Court (SC) decision in Paper Industries Corporation of the Philippines vs. Court of Appeals (GR No. 106949-50 dated Dec. 1, 1995), where it was ruled that deficiency interest may only be imposed on tax specifically covered by the NIRC. However please note that the SC Decision involves provisions of the 1977 Tax Code and any mention of the 1997 Tax Code was just made in passing.

While the CTA decision is a welcome development, we expect that the BIR will not adopt this case doctrine immediately as this is an unfavorable decision on the part of the BIR and it is not yet considered jurisprudence. But since the decision was issued by the CTA division, the legal battle will still take a long way to the CTA en banc and eventually to the SC before we will have settled jurisprudence on what taxes are subject to deficiency interest.

That this will ultimately be settled jurisprudence depends on whether the decision is appealed by the BIR. In the past, where there is a risk that the SC will rule in favor of the taxpayer, the BIR has opted not to contest the case, thereby preventing the CTA interpretation from becoming jurisprudence. That way, the CTA decision remains binding only between the BIR and the taxpayer.

There are many other provisions in the Tax Code that we would probably want challenged. I personally hope that more taxpayers are willing to bring them up before the courts.

Jennylyn V. Reyes is a senior associate of the Tax Advisory and Compliance division of Punongbayan & Araullo.