Tax Articles

Pay as you File

By Atty. Irwin C. Nidea Jr.

Tax compliance is an important part of a company’s day to day operations. There are many filing dates to monitor. VAT, documentary stamp tax, excise tax, withholding tax, quarterly and annual income tax for example, have different filing deadlines. A company does not merely file a tax return but is also supposed to determine and compute the correct amount of tax to be paid, have it approved by management, and coordinate with the bank for the release of money to the Bureau of Internal Revenue (BIR). What if a company timely files a tax return but fails to pay on time? What is the penalty? What is the remedy of a taxpayer when this happens?

Untimely filing and payment of tax is subject to interest and surcharge. A taxpayer filing a tax return may pay the tax due either manually or electronically following the "pay-as-you-file" principle. The CTA ruled that the filing of the return ahead of the payment of the tax due is still in accordance with the "pay-as-you-file" principle, and no penalties shall be imposed for taxpayers who filed earlier and paid later but on or before the due date of the applicable tax. According to the CTA, it follows, therefore, that if the applicable tax is paid after the due date, the corresponding penalties shall be imposed.

Some argue that under the Tax Code, a surcharge may be imposed only on failure to file a return and pay the tax. In other words, a taxpayer should have failed to both file a return and pay the tax before surcharge may be imposed. According to the CTA, it is a distorted maneuver, and it is an illogical interpretation of the "pay-as-you-file" principle, resulting in absurdity. The CTA also noted that said principle is very simple: taxpayers' timely filing of return must also be accompanied by a timely payment of the tax due; otherwise, they shall be meted civil penalties.

Should a Letter of Authority (LOA), Preliminary Assessment Notice (PAN) and Final Assessment Notice (FAN) be issued first before these civil penalties may be imposed? The CTA Division in one case affirmed that these notices must be issued before civil penalties may be imposed due to late payment. But the CTA En Banc in a recent case, reversed this ruling.

It is well settled that that the assessment for all internal revenue taxes, resulting from the audit investigation/ examination undertaken on taxpayers' books counts and other accounting records, would be void if it did not rise from a valid LOA that empowers and authorizes the revenue officers to proceed with the audit or investigation. According to the CTA En Banc, in late payment of tax, there was neither a showing that deficiency taxes per se were being assessed and collected from the taxpayer, nor was there any proof that a tax audit/investigation on taxpayer's books was made to be able to arrive at the amount of late payment penalties. Hence, no violation of due process occurred considering that only civil penalties for late payment were assessed and collected from the taxpayer, which was determined from the fact of taxpayer's late payment as shown in the BIR's electronic system, and not through taxpayer's books of accounts.

On the other hand, according to the CTA En Banc, a PAN is issued to the taxpayer informing him of the findings of the revenue officer if, after review and evaluation of taxpayer's records, there is sufficient basis to assess the taxpayer for any deficiency taxes. Since taxpayer's books were not reviewed nor evaluated for any tax deficiency, a PAN is likewise not required. If late payment arises from a self-assessed tax, which is assessed or computed by the taxpayer, the Supreme Court explained that "no further assessment by the government is required to create the tax liability." Hence, a self-assessed tax falls due without need of any prior assessment by the BIR, and non-payment of a self-assessed tax on the date prescribed by law results in penalties even in the absence of any assessment by the BIR.

The BIR may then activate its enforcement powers. The penalties can now be collected by the BIR by garnishing the company’s bank accounts or worse by levying the company’s real properties. Again LOA, PAN nor FAN need not be issued according to the CTA En Banc because it is a self-assessed tax.

The taxpayer’s remedy is to request for abatement of tax. But this is not a remedy available to all. The taxpayer must prove that the request for abatement is meritorious and not merely because of whim or neglect.

A day of late payment can cost a company millions of pesos in penalty. Worse, these penalties become automatically due and demandable. Taxpayers must be aware of this harsh reality, and they must undertake practical measures to avoid being in this predicament.