Waiver of Surcharge and Interest on the Basis of Good Faith
By: Elaine Anne Bernardino on October 14, 2021
Our National Internal Revenue Code (“Tax Code”) mandates that interest and a 25-percent surcharge (50 percent in case of bad faith) are due when a taxpayer is late in the payment of taxes. However, there have been instances where interest and surcharge were not imposed.
In several cases, the Supreme Court (SC) held that good faith and an honest belief that one was not subject to tax on the basis of previous interpretations by government agencies tasked to implement tax law was sufficient justification to relieve a taxpayer from the imposition of interest and surcharge for late payment.
“Good faith” lies in an honest belief in the validity of one’s right and implies honesty of intention. While it has no statutory definition, it encompasses the absence of malice, absence of design to defraud or to seek an unconscionable advantage (Ochoa vs. Apeta, G.R. No. 146259, September 13, 2007).
In the case of Michel J. Lhuillier Pawnshop Inc. vs. Commissioner of Internal Revenue (CIR) (G.R. No. 166786, September 11, 2006), the taxpayer’s mistaken understanding of the applicable Bureau of Internal Revenue (BIR) rulings justified the waiver of interest and surcharges. In this case, the BIR issued three conflicting rulings within a span of one year, which gave rise to confusion in the taxpayer’s understanding of those rulings.
In CIR vs. St. Luke’s Medical Center (G.R. Nos. 195909 & 195960, September 26, 2012), meanwhile, St. Luke’s was not held liable for surcharge and interest because it relied on a letter by the BIR Deputy Commissioner who opined that St. Lukes was “a corporation for purely charitable and social welfare purposes” and thus exempt from income tax.
These SC pronouncements have been adopted by the Court of Tax Appeals (CTA) in several cases. In the recent case of San Miguel Energy Corp. (SMEC) vs. CIR (CTA Case No. 9221, February 24, 2020), the CTA, in waiving the surcharges and interest due, found that SMEC did not only rely on BIR Ruling DA (C-035)127-08 but also on the decisions of the Court of Appeals (CA) and the CTA. Therefore, while BIR rulings are not conclusive in the interpretation of tax laws, the interpretation of the BIR on a tax statute is still given great respect by the courts. While only SC decisions establish jurisprudence or doctrines in this jurisdiction, decisions of subordinate courts such as the CA and the CTA have a persuasive effect and may serve as judicial guides.
Interest and surcharge were also not imposed when the assessment was deemed highly controversial and the taxpayer had reason not to pay the tax. In Cagayan Electric Power & Light Co., Inc. v. CIR (G.R. No. L-60126, September 25, 1985), the taxpayer’s exemption under its franchise — deleted by the then Tax Code — was restored when the franchise was amended to increase the area coverage. The SC ruled that since the assessment was “highly controversial”, the petitioner should not be liable for surcharge and interest.
However, there are cases where the courts held that the”good faith” defense was insufficient to justify an exemption from payment of surcharge.
In the case of Banco de Oro v. CIR (CTA Case No. 6390, July 1, 2004), the CTA held that alleged good faith based on the advice of counsel was not sufficient to justify an exemption. In this case, the CTA said the surcharge was mandatory as compensation to the State for the payment delay.
In addition, in City of Iloilo vs. Smart Communications, Inc. (Smart) (G.R. No. 167260. February 27, 2009), the SC held that Smart’s reliance on Bureau of Local Government and Finance (BLGF) conclusions that it should be considered exempt from the franchise tax that a local government may impose under Section 137 of the Local Government Code was insufficient to justify good faith. The SC held that the BLGF, unlike the BIR, was not tasked to implement tax laws — its function was merely to provide consultative services and technical assistance to local governments and the general public on local taxation, real property assessment, and other related matters.
However, in Bangko Sentral ng Pilipinas vs. CIR (CTA Case No. 7788, February 24, 2010), the CTA upheld the waiver of surcharge and interest based on a provision in a Department of Environment and Natural Resources (DENR) administrative order. Although the DENR is not a body that “implements” the tax laws, it is the body tasked to implement Republic Act 7076, the law which set out the tax regime applicable to small-scale miners.
Based on the foregoing, taxpayers may not be liable to pay interest and surcharge if they, in good faith, rely on previous rulings or issuances of the BIR, the courts, and government agencies tasked to implement the tax laws, or if the assessment is deemed controversial. Unless these grounds are clearly shown and proven, taxpayers will not be able to avoid the payment of interest and surcharge on the basis of good faith.
Ellaine Anne L. Bernardino is a junior associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at firstname.lastname@example.org or visit MTF website at www.mtfcounsel.com.