Waiving the surcharge for timely filers
At last, the tax filing season is over for most companies reporting on a calendar year basis. For some who are still hustling to finalize their balances for statutory reporting purposes, a recent Revenue Memorandum Circular (RMC) issued by the Bureau of Internal Revenue (BIR) provides some much-needed respite.
SALIENT FEATURES OF RMCRMC No. 42-2022 allows taxpayers to file an amended annual income tax return (AITR) on or before May 16 without the imposition of penalties. This gives ample time for taxpayers to finalize their balances and correct the AITRs filed last week for the April 18 deadline. To be clear, the RMC did not extend the deadline for filing the AITR but only allowed taxpayers to amend the return without penalties.
However, what if the taxpayer filed an AITR on 18 April 2022 but filed an amended AITR after the 16 May 2022 deadline? Will this warrant the imposition of penalties? Unlike the 12% interest penalty, which can be minimal if the late filing is only for a few days, the 25% surcharge could be costly since it is a fixed rate imposed on the additional tax due. Moreover, the 25% surcharge is not a deductible expense for income tax purposes, unlike the interest penalty.
Rightly, the BIR recently clarified this concern by issuing RMC 43-2022. This new RMC amended the previous guidelines (RMCs 46-99 and 54-2018) regarding the imposition of the 25% surcharge on deficiency taxes.
As a background, RMC 54-2018 provided that the 25% surcharge is to be imposed when an additional tax is due per amended return. On the other hand, RMC 46-99 provided that no surcharge will be imposed on a deficiency tax assessment resulting from a tax audit.
Based on these issuances, it would appear that taxpayers are unduly penalized for voluntarily amending their tax returns to pay the correct tax due but unintentionally rewarded if the deficiency tax is paid during a tax audit. Thus, some taxpayers opt not to amend their tax returns and instead wait for a BIR tax audit to avoid the surcharge.
Thus, RMC 43-2022 aims to reconcile this conflict by not imposing the 25% surcharge on an amended tax return if the taxpayer filed the initial tax return on or before the prescribed due date for its filing. On the other hand, the 25% surcharge is to be imposed on a tax deficiency found during a tax audit if the audited tax return was filed beyond the due date. The same case also applies to other taxes (e.g., VAT, withholding taxes).
SCENARIOS FOR APPLYING THE RMCTo better appreciate the RMC, here are some scenarios where the 25% surcharge may or may not apply.
Scenario 1: A taxpayer filed an AITR on April 18 and subsequently filed an amended return on June 1. No surcharge will be imposed despite filing beyond the May 16 prescriptive period to file an amended return without penalties. Only the 12% interest (counted from May 17 until June 1) and compromise penalty will be imposed if any additional income tax is due.
Scenario 2: The 2021 AITR was filed on 1 June 2022 and the taxpayer subsequently received a Letter of Authority from the BIR to conduct a tax investigation covering the taxable year 2021 resulting in a deficiency income tax. In this case, the 25% surcharge will be imposed since the assessed tax return was filed beyond the April 18 deadline.
OTHER SCENARIOSThe two foregoing scenarios are clearly covered in the RMC. But what about other possible scenarios?
Scenario 3: Similar to scenario 2, deficiency income tax will be paid during an audit but the taxpayer timely filed a 2021 AITR.
Assuming the taxpayer received the Final Assessment Notice (FAN) requiring the payment of the deficiency income tax on or before Jan. 31, 2024, the taxpayer must settle the deficiency income tax on or before the prescribed deadline stated in the FAN. Otherwise, the 25% surcharge and 12% delinquency interest (counted from Feb. 1, 2024 until settlement) will be imposed on the total deficiency income tax due (inclusive of the 12% interest counted from May 17, 2022 until Jan. 31, 2024) despite filing the AITR on time. This is anchored on Section 248(A)(3) of the Tax Code, which imposes a 25% surcharge for failure to pay the deficiency tax within the time prescribed in the notice of assessment.
Scenario 4: If a taxpayer filed the AITR beyond the deadline and subsequently filed an amended return, will the surcharge apply on both returns and on the deficiency income tax during a tax audit? Taking the provision of the RMC as is, it seems that this is the case for now. However, by doing so, it would counter the intention of the RMC — to give the taxpayers a chance to voluntarily correct their tax declarations without incurring a hefty penalty.
I believe a fair approach for both taxpayers and the BIR is to impose the surcharge only on the late filing of the return and during a tax audit if the belatedly filed return was found to have a deficiency tax reported; but not on the amended return in all cases (whether the original return was timely filed or otherwise). Hopefully, the BIR will clarify this matter in another issuance.
eFPS FILERS APPLYING THE RMCFrom experience, it usually takes time for the BIR to update the electronic filing and payment system (eFPS), which is probably due to the pandemic and lack of manpower. While the BIR has yet to update the eFPS to remove the auto-computation of the 25% surcharge, eFPS taxpayers should still be able to take advantage of this new no-surcharge rule by manually removing or disregarding the surcharge in the final amount to be paid. Perhaps, the BIR can also include in a clarificatory issuance an express provision allowing e-filers to pay the additional tax due on their amended tax returns disregarding the automatically-computed surcharge.
While this is a welcome development for all taxpayers, prudence is still key in preparing tax returns. A thorough review of the tax returns prior to their filing is still best practice, to prevent unnecessary amendments. Also, any amendment should be carefully considered since it will also extend the three-year statute of limitations counted from the filing of the amended return.
While some may say better late than never, in most cases (such as in avoiding a surcharge), it is best to be right on time.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Adriel Joshua Zaki Sim is a senior associate at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network.
