BIR Ruling

October 2, 1968 MEMORANDUM for The Revenue Operations Head (Assessment) This refers to your request for clarification on the following points relative to estate and inheritance taxes: (1) How to apply payments made on account of internal revenue taxes. Whether or not payments on account of taxes should first be applied on the interest for delinquency before the same is applied on the principal, i.e., on the basis tax or tax proper, interest on deficiency and the 25% or 50% surcharge; and (2) The base of the 5% surcharge for delinquency. Whether the 5% surcharge for delinquency should be computed based on the basic tax or tax proper, plus the 25% or 50% surcharge as prescribed in Section 102 of the Tax Code and the interest on deficiency as prescribed in Section 100 of the Tax Code or only on the basic tax or tax proper excluding said 25% or 50% surcharge, the interest on deficiency and compromise penalty. As to the question of how to apply payments of taxes, it has been the observed that in case of income tax it has been the practice of the Income Tax Division to apply payments first on the interest for delinquency and then on the basic tax or tax proper, etc. However, in the case of estate and inheritance taxes, the Income Tax Division has a different procedure in applying payments the reverse procedure, i.e., the payment is applied first on the basic tax or tax proper including the interest on deficiency and the 25% or 50% surcharge and then on the interest for delinquency. It appears that no reason has been given to justify the use of different procedures in the application of payments of internal revenue taxes. The Tax Code has no provision on the application of payments of internal revenue taxes. However, Article 1253 of the Civil Code of the Philippines provides that "If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered." Article 18 of the Civil Code of the Philippines provides that the deficiency in special in special laws shall be supplied by the provisions of the Civil Code. In the case of Santiago Sambrano vs. Court of Tax Appeals, et al. (G.R. No. L-8652, March 30, 1957, 53 O.G. (15) p. 4839, 4846), it was held that "Although taxes already due have not, strictly speaking, the same concept as debts, they are, however obligations that may be considered as such ." This was reiterated in the case of the Commissioner of Internal Revenue vs. Consuelo L. Vda. de Prieto (G.R. No. L-13912, Sept. 30, 1960). On the basis of the foregoing, this Department believes that Article 1253 of the Civil Code governs the application of payments of internal revenue taxes. Consequently, payments of internal revenue taxes, whether income tax or transfer taxes, or for that matter any internal revenue tax, shall first be applied on the interest for delinquency and then on the basic tax or tax proper including the interest on deficiency and the 25% or 50% surcharge. As regards the base of the 5% surcharge, for income tax purposes, it will be noted that under subparagraph (3) of paragraph (e) of Section 51 of the Tax Code, as amended, the 5% surcharge is due and collectible on the " tax unpaid ". However, for estate and inheritance tax purposes, under paragraph (c) of Section 101 of the Tax Code, as amended, the 5% surcharge is due and collectible on the " unpaid amount ". In the cases of the Collector of Internal Revenue vs. Pedro B. Bautista, et al. Pedro B. Bautista, et al. vs. Collector of Internal Revenue (G.R. Nos. L-12250 & L-12259, May 27, 1959), it was held that the term "tax unpaid" in Section 51 (e) of the Tax Code (before it was amended by Republic Act No. 2343) refers to the tax proper only and does not include the 50% surcharge prescribed in Section 72 of the Tax Code and that "Although, pursuant to section 72, said 50% surcharge 'shall be collected at the same time and in the same manner and as part of the Tax', the likeness to the tax therein mentioned refers exclusively to the 'time' and 'manner' meaning the method of collection, not to the amount to be collected, which is not procedural, but substantive in character". The 25% surcharge for failure to file the income tax on time is also prescribed in the same Section 72 of the Tax Code. Similar provisions on the 25% and 50% surcharge are found in Section 102 of the Tax Code in connection with transfer taxes. On the basis of the provisions of subparagraph (3) of paragraph (e) of Section 51 of the Tax Code, as amended by Republic Act No. 2343, and the decision of the Supreme Court in the cases of Pedro B. Bautista (supra), for income tax purposes, the 5% surcharge is due and collectible based on the basic tax or tax proper only (excluding the 25% or 50% surcharge and the interest on deficiency). However, on the basis of the provisions of paragraph (c) of Section 101 of the Tax Code, as amended, which imposes the 5% surcharge on the " unpaid amount " (not merely on the " tax unpaid "), it is believed that, for transfer tax purposes, the 5% surcharge is due and collectible based on the basic tax or tax proper, plus the 25% or 50% surcharge prescribed in Section 102 of the Tax Code and the interest on deficiency as prescribed in Section 100 of the Tax Code. It will be noted from the provisions of said Section 100 that the interest on deficiency is assessed at the same time as the deficiency tax; that it is included in the notice and demand; and that it is collected as part of the tax. However, the compromise penalty should not be included in the base of the 5% surcharge for transfer taxes purposes as the payment thereof is merely suggested and that the Commissioner of Internal Revenue has no authority to require the payment thereof unless the taxpayer agrees thereto. The said compromise penalty is for the criminal liability of the taxpayer for violation of the provisions of the Tax Code. The docket of the estate and inheritance tax case of Marcosa Rivera is attached hereto with the request that the Litigation Division be furnished with an updated computation of the estate and inheritance taxes in said case. It is requested that said updated computation be furnished the Litigation Division not later than October 4, 1968 as the same will be used in connection with a hearing in court on October 5, 1968. (SGD.) PRISCILLA R. GONZALES Assistant Revenue Operations Head (Legal)