BDB Law’s “Tax Law for Business” appears in the opinion section of Business Mirror every

Thursday.

Deficiency interest vs. delinquency interest

TO ensure taxpayer’s strict compliance with the prescribed due dates for the payment of
internal revenue taxes, the National Internal Revenue Code (NIRC) of 1997, as amended,
authorizes the commissioner to impose a penalty interest, among other penalties, on any
unpaid amount of tax. Section 249 clearly provides for the imposition of interest at the rate of
20 percent per annum, or such higher rate as may be prescribed by rules and regulations.

Following the mandate of Section 249(A), the interest penalty that may be imposed on any
unpaid tax is only up to a maximum rate of 20 percent, absent any rules and regulations that
require imposition of higher interest rate. Of late, however, the Court of Tax Appeals en banc
in its decision in CTA EB Case 821 came up with a situation where there is a possibility of
imposing a 40-percent interest even in the absence of any rules and regulations authorizing
the same.

In ruling how the 20-percent penalty interest is applied, the court made a distinction between
a deficiency interest and a delinquency interest as provided in the Tax Code. According to
the tax court, the 20-percent deficiency interest is to be computed from the date prescribed
for the payment of deficiency tax until its full payment. The 20-percent delinquency interest,
on the other hand, is to be computed from the due date prescribed under the Assessment
Notice until its full payment.

Applying the decision of the tax court, the imposition of the 20-percent delinquency interest
creates a scenario where a 40-percent interest is imposed as the imposition of the 20-
percent deficiency interest can actually be imposed simultaneously with the imposition of the
20-percent delinquency interest.

To illustrate for clarity, assume for instance that a taxpayer is assessed of a deficiency
income tax for year 2009. Assume further that the taxpayer is assessed of the said
deficiency income tax on year 2011 and the taxpayer pays the same on year 2012. Applying
the ruling of the court in this case, the 20-percent deficiency interest should be computed
from April of 2010 (considering that the income tax for year 2009 is due on April 15 of 2010)
up to year 2012, which is the date of payment. On the other hand, the 20-percent

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delinquency interest should now be imposed from year 2011 until the payment of the tax on
year 2012. It is in this scenario that a 40-percent penalty interest is now being imposed as
the 20-percent deficiency interest and the 20-percent delinquency interest are now
simultaneously imposed from the date of assessment on year 2011 up to the payment of the
tax on year 2012.

It appears to me that the imposition of the 40-percent interest is not in accordance with the
clear mandate of Section 249(A) of the Tax Code. The Tax Code clearly provides that
absent any rules and regulations, the penalty interest to be imposed on any unpaid amount
of tax should only be up to a maximum rate of 20 percent. Section 249(B), which imposes a
deficiency interest, makes reference to Section 249(A) of the code. Section 249(C), which
imposes delinquency interest, likewise makes reference Section 249(A) of the same code.
Hence, the rate of interest provided in Section 249(A), which is 20 percent, should be
applied for both deficiency and delinquency interest.

However, the Court of Tax Appeals has decided otherwise. No matter how harsh the
decision or ruling it might be, taxpayers have no recourse but to adhere with the decision of
the court once it becomes final, unless the decision is reversed or modified by the highest
court. This should serve as a lesson to all taxpayers that the best recourse to dodge any
imposition of delinquency interest penalty on unpaid taxes is to avoid being delinquent.

****

The author is a junior associate of Du-Baladad and Associates Law Offices, a member-firm
of World Tax Services Alliance.

The article is for general information only and is not intended, nor should be construed as a
substitute for tax, legal or financial advice on any specific matter. Applicability of this article
to any actual or particular tax or legal issue should be supported therefore by a professional
study or advice. If you have any comments or questions concerning the article, you may e-
mail the author at rodel.unciano@bdblaw.com.ph or call 403-2001 local 140.

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