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Interest on Tax Deficiency under TRAIN Law


By: Ivan Marx Olarte, CPA

Penalties are imposed by the Bureau of Internal Revenue (BIR) for non-compliance or incorrect compliance with the tax laws and regulations in the Philippines. In line with the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the BIR issued the Revenue Regulations (RR) No. 21-2018 which provides for the implementation of the provision of the TRAIN law amending the imposition of deficiency and delinquency interest on unpaid taxes.

Under the TRAIN Law, the interest rate for deficiency and delinquency taxes shall be equal to twice the effective legal rate set by the Bangko Sentral ng Pilipinas (BSP) for loans and similar forbearance of money in absence of any express agreement. Currently, the enacted legal interest rate is 6%. Any change in the legal interest rate imposed by BSP will prompt the Commissioner of Internal Revenue (CIR) to issue a Circular regarding such change.

Unpaid tax due shall be subjected to a deficiency interest of 12% which runs from the date the tax is due up to the earlier date between (1) actual date of payment and (2) date of notice and demand by the CIR or any of his authorized representative for the payment of the assessed deficiency tax.

Assessed deficiency tax due, including the deficiency interest and surcharge, shall be subjected to a delinquency interest rate of 12% from the date of demand by the Commissioner or any of his authorized representative for payment until the actual date of payment.

One noteworthy change brought about by this RR is the non-simultaneous imposition of the delinquency and deficiency interest on the amount assessed by the BIR. Simply put, upon effectivity of the TRAIN Law, deficiency and delinquency interest shall never be computed on the same

 

To illustrate how interest is computed under the TRAIN Law versus the old law, consider the scenario below taken from the RR 21-2018:

“BIR assessed a Company for a deficiency income tax of Php1,000,000.00 exclusive of interest and surcharge for the taxable year 2018. The Commissioner issued a notice and demanded payment for the said deficiency tax on June 30, 2020. The Company paid the tax due on February 10, 2021.”

 

The interest shall be computed as follows:

TRAIN Law

(From RR 21-2018)

Prior to TRAIN Law
Basic Tax Due – Income Tax 1,000,000.00 1,000,000.00
Deficiency interest (1) 145,315.07 242,191.78
25% Surcharge 250,000.00 395,315.07 250,000.00 492,191.78
Total Amount Due, June 30, 2020 1,395,315.07 1,492,191.78
Delinquency interest (2) 103,215.09 183,968.85
Deficiency interest (3) 123,287.67
Total Amount Due, February 10,2021 1,498,530.16 1,799,448.30

Note:
(1) Deficiency interest under the TRAIN Law shall be computed from April 16, 2019 to June 30, 2020, or 442 days based on the basic tax due – income tax, or Php1,000,000.00 at 12%. Prior to TRAIN Law, the deficiency interest rate is 20%

(2) Delinquency interest under the TRAIN Law shall be computed from June 30, 2020 to February 10, 2021, or 225 days based on the amount due as of June 30, 2020, or Php1,395,315.07 at 12%. Prior to TRAIN Law, the delinquency interest rate is 20%.

(3) Deficiency interest under the TRAIN Law shall not be imposed simultaneously with the delinquency interest. Prior to TRAIN Law, deficiency and delinquency interest are imposed simultaneously. Deficiency interest imposed simultaneously with the delinquency interest is computed from June 30, 2020 to February 10, 2021, or 225 days based on the basic tax due – income tax, or Php1,000,000.00

 

The RR also provides for a transitory provision regarding interest from deficiency taxes due prior to, and paid during the effectivity of, the TRAIN Law. The deficiency interest shall be computed simultaneously with the delinquency interest only from the date of demand for payment by the Commissioner until December 31, 2017 using the old rate. However, if the deficiency tax is paid on 2018, the payment shall include only the delinquency interest from January 1, 2018 until the date of actual payment.

To illustrate, if the CIR issued a demand on June 30, 2017 for payment of a deficiency income tax of Php1,000,000.00 related to taxable year 2015, the deficiency interest will be computed at 20% from April 15, 2016 until June 30, 2017 based on the basic income tax due. If the assessed deficiency income tax is paid February 10, 2018, delinquency tax of 20% shall be computed from June 30, 2017 to December 31, 2017 based on the assessed tax due which includes penalties. Also, a 20% deficiency interest shall be computed from June 30, 2017 to December 31, 2017 applied on the basic income tax due. From January 1, 2018 to February 10, 2018, only the delinquency interest will be imposed at 12% based on the assessed tax due.

 

To summarize:

  Based on RR 21-2018
Basic Tax Due – Income Tax 1,000,000.00
Deficiency interest (1) 241,643.84
25% Surcharge 250,000.00 491,643.84
Total Amount Due, June 30, 2017 1,491,643.84
Deficiency interest from June 30, 2017 to December 31, 2017 (2) 100,821.92
Delinquency interest from June 30, 2017 to December 31, 2017 (3) 150,390.39
Delinquency interest from December 31, 2017 to February 10, 2018 (4) 20,106.54
Total Amount Due, February 10, 2018 1,762,962.69

(1) Deficiency interest is computed from April 16, 2016 to June 30, 2017, or 441 days based on the basic tax due – income tax, or Php1,000,000.00 at 20%.

(2) Deficiency interest is computed from June 30, 2017 to December 31, 2017, or 184 days based on the basic tax due – income tax, or Php1,000,000.00 at 20%. It is charged simultaneously with the delinquency interest in accordance with the old law. However, beginning January 1, 2018, it is longer simultaneously imposed with the delinquency income tax

(3)  Delinquency interest is computed from June 30, 2017 to December 31, 2017, or 184 days based on the total amount due as of June 30, 2017 at 20%, charged simultaneously with the deficiency interest. However, beginning January 1, 2018, only delinquency interest will be charged, at a rate of 12%.

(3)  Delinquency interest is computed from January 1, 2018 to February 10, 2018, or 41 days based on the total amount due as of June 30, 2017 at a rate of 12%.

No one among us will want to pay penalties. In light of this, we recommend that the correct taxes should be declared and paid to avoid such inconveniences in the future. Correct tax compliance and proper tax planning results to greater savings compared to improper attempts of reducing tax liabilities. It is always better to comply now than pay additional later due to incorrect compliance.


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. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.


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