Penalties for Failure to Pay Tax Philippines

By: Tax and Accounting Center Philippines

Philippines tax system is anchored on “voluntary compliance” where taxes are under “pay-as-you-file” where the taxpayers determines for himself what taxes to pay, when to pay taxes, where to pay taxes, how much to pay, and how to pay taxes in the Philippines. At the end of the day, if the taxpayer fails to pay the tax due, the tax authorities is not powerless to collect the rightful amount of tax.

Every failure to pay the tax carries a penalty – criminal liability and/or civil liability. Of course, you would not like it to go prison for violations of the tax rules and regulations in the Philippines. Meantime, let us take some civil penalties for failure to pay the tax in the Philippines.

1. Surcharge of 25% or 50% of basic tax

Under Section 248 of the Tax Code, there shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases:

1. Failure to TIMELY file any return and pay the tax due;or
2. Filing OUT-OF-DISTRICT RETURN or filing a return with an internal revenue officer other than those with whom the return is required to be filed; or
3. Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or
4. Failure to pay the full or part of the amount of tax shown on any return required to be filed, 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.

Surcharge is a one-time penalty applicable for each and every failure to pay the tax. Furthermore, under the following instances, the surcharge is 50% of the basic tax due:

1. In case of WILLFUL NEGLECT to TIMELY file the return, or
2. In case a FALSE OR FRAUDULENT return is willfully made

For the purpose, a substantial underdeclaration of taxable sales, receipts or income, or a substantial overstatement of deductions, shall constitute prima facie evidence of a false or fraudulent return. Failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding thirty percent (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration of sales, receipts or income or for overstatement of deductions, as mentioned herein.

2. Interest of 12%/ 20% per year of basic tax

Paying the tax less than what should have been paid in full is like securing a loan for which interest is being imposed based on the amount unpaid. A 20% per year interest before TRAIN law or RA No. 10963 and 12% therefrom and onwards is imposed upon an unpaid amount of tax from the time it should have been paid until the same is fully paid. Interest is imposed in the following instances:

1. Deficiency Interest based on any deficiency taxes during tax examinations, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof.

2. Interest on Extended Payment on failure to pay the tax on installment or any part of the tax on instances where installment payment is allowed from the time required to be paid until fully paid.

3. Delinquency Interest in case of failure to pay:

• The amount of the tax due on any return required to be filed, or
• The amount of the tax due for which no return is required, or
• A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax.

In short, if you fail to pay the tax in full, you will end up paying them with 20% interest counted from the time you are supposed to pay until full payment of the same. If you fail to pay in five years, then, you pay the tax twice as much as you should have paid (20% times 5 years is 100%)

3. Compromise penalties

As mentioned above, violations of the Tax Code of the Philippines carries a penal sanction – criminal liability upon conviction. The objective of the same could be to encourage compliance, but may not be mainly to put all violators in prison. We are all aware how the justice system works in the Philippines – speedy, public, impartial trial, and additionally, the related costs during the trial.

In general, a compromise penalty for failure to pay the tax in the Philippines could just be paid instead of a criminal case. Under  Revenue Memorandum Order (RMO) No. 7-2015 amending RMO No. 19-2007 (RMO 19-07), a compromise penalty penalty ranges from P200.00 to P50,000.00 for failure to file and/or pay the tax at the time or times required as follows:

• P1,000 for basic tax not more than P5,000;
• P3,000 for basic tax more than P5,000 but not more than P10,000
• P5,000 for basic tax more than P10,000 but not more than P20,000
• P10,000 for basic tax more than P20,000 but not more than P50,000
• P15,000 for basic tax more than P50,000 but not more than P100,000
• P20,000 for basic tax more than P100,000 but not more than P500,000
• P30,000 for basic tax more than P500,000 but not more than P1,000,000
• P40,000 for basic tax more than P1,000,000 but not more than P5,000,000
• P50,000 for basic tax more than P5,000,000

Based on the above scale of compromise penalties in the Philippines, the higher the basic tax that you failed to pay, the higher the compromise penalty.

Updates under Ease of Paying Taxes or RA No. 11976 

Under Republic Act No. 11976 or otherwise known as Ease of Paying Taxes Act in Philippines effective January 22, 2024 as implemented by Revenue Regulations No. 6-2024, reduced penalties apply to micro taxpayers (those with less than PhP3M sales for a taxable year) and small taxpayers (those with PhP3M to not more than PhP20M sales for a taxable year) as follows:

• 10% surcharge instead of 25% under Section 248 of the Tax Code, as amended, unless for willful neglect, or for false or fraudulent filing where 50% still applies;
• 6% interest instead of 12% under Section 249 of the Tax Code, as amended; and,
• PhP500 compromise penalty for each failure and up to PhP12,500 aggregate a year instead of PhP1,000 for each failure and up to PhP25,000 aggregate a year for failure to file return, statement or list, or keep any record, or supply any required information; and,
• 50% reduced penalty for violations under Sections 113 (Invoicing of VAT registered), 237 (Issuance of Invoices), and 238 (Printing of Invoices) of the Tax Code, as amended.

For the above, please note the proper classifications of taxpayers under Ease of Paying Taxes in Philippines implemented under Revenue Regulations No. 8-2024.

Summary

Failure to pay the tax is like buying a headache as it would cause taxpayer’s trouble in paying the above penalties for failure to pay the tax in the Philippines. In one failure to pay, you would be penalized with three penalties – one time surcharge of either 25% or 50% of the basic tax, 20%/ 12% annual interest, and one-time compromise penalty.

You may not want to be wasting your hard earned business income on penalties. As such, we highly recommend that you be keen to your tax compliance. Invest on your tax education and avoid the above penalties for failure to pay tax in the Philippines.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.