The TRAIN or Tax Reform for Acceleration and Inclusion Law (Republic Act No. 10963) provided some relief to us, taxpayers.

TRAIN amended Section 249¹ of our Tax Code to prohibit expressly the simultaneous or overlap in the imposition of the 20% deficiency interest and 20% delinquency interest, and to clarify the periods within which both interests shall run.

Section 249 of our Tax Code, as amended, now states that deficiency interest shall run from the tax statutory deadline or the date prescribed for its payment until the full payment thereof or the issuance by the Commissioner of Internal Revenue (CIR) of a final notice of demand, whichever comes earlier. Before, the rule was it was to continue to run until full payment of the tax despite of any issuance of a formal notice of demand in the interim. This resulted to an overlap with delinquency interest which runs from the time indicated in the CIR’s formal demand until full payment.

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¹The old Section 249 of the Tax Code provides:

SECTION 249. Interest. —

“(A)In General. — There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid.
“(B)Deficiency Interest. — Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof.
“(C)Delinquency Interest. — In case of failure to pay:
“(1)The amount of the tax due on any return required to be filed, or   
“(2)The amount of the tax due for which no return is required, or   
“(3)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.

Aside from clarifying the periods within which both interests run, TRAIN introduced a proviso stating that in no case shall both deficiency and delinquency interests run simultaneously.

Paragraphs A, B and C of Section 249, as amended, now reads:

SECTION 249. Interest. —

“(A) In General. — There shall be assessed and collected on any unpaid amount of tax, interest at the rate of double the legal interest rate for loans or forbearance of money in the absence of an express stipulation set by the Bangko Sentral ng Piliinas, from the date prescribed for payment until the amount is fully paid, provided that in no case shall the deficiency and the delinquency interest prescribed under Section (B) and (C) hereof be imposed simultaneously.
“(B) Deficiency Interest. — Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof, or upon the issuance of notice and demand by the Commissioner whichever comes earlier.
“(C) Delinquency Interest. — In case of failure to pay:
“(1) The amount of the tax due on any return required to be filed, or
(2) The amount of the tax due for which no return is required, or
(3) 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.

As mentioned in my earlier article, there should be proper distinction between a deficiency tax and a delinquency tax. Deficiency tax is the amount short of the full tax due and should be paid to the government. Delinquency, on the other hand, is defined as the failure of the taxpayer to pay the tax due as demanded by the CIR, usually indicated in the assessment notice or letter of demand.

With the amendment, we should now be brought back to the calculation adopted by the BIR prior to November 2013, where the BIR imposed both interests one after the other and not simultaneously. This rule was illustrated in Revenue Regulations (RR) No. 12-99.² However, RR No. 18-2013 passed in November 2013 amended certain sections of RR No. 12-99 and changed the illustrations to show that deficiency interest continues to run even after formal demand. This resulted in the overlap. Unfortunately, the overlap calculation was affirmed by our courts in several cases. ³

The foregoing amendment is not just fair, but it is also consistent with the principle that interest is compensatory and not punitive in nature. Interest is compensation to the state for the delay in the payment of tax. It is the charge for the use by the taxpayer of funds that rightfully should have been in the government coffers and utilized for the ends thereof. It should therefore not be punitive in nature.

Another amendment introduced by the TRAIN though is to replace the 20% interest with a rate double the legal interest for loans or forbearance of money in the absence of an express stipulation as set by the Bangko Sentral ng Pilipinas.

#TRAIN #deficiencyanddelinquencyinterests #legalinterest #punitive #compensatory 

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² Then the implementing regulations governing the “Rules on Assessment of National Internal Revenue Taxes, Civil Penalties and Interest and the Extra-Judicial Settlement of a Taxpayer’s Criminal Violation of the Code Through Payment of a Suggested Compromise Penalty”.
³ Takenaka Corp. Philippine Branch v. Commissioner of Internal Revenue, CTA EB Case No. 745 (September 4, 2012); Liquigaz Philippines Corporation vs. Commissioner of Internal Revenue, CTA EB Case Nos. 1117 and 1119 (September 21, 2015).
⁴ Underscoring supplied

Since the current legal interest is 6%, the interest applicable is then the reduced rate of 12%.