Ten Percent (10%) Surcharge for Late Payment of Income and Transfer Taxes

October 12, 1983 REVENUE MEMORANDUM CIRCULAR NO. 34-83 SUBJECT : Ten Percent (10%) Surcharge for Late Payment of Income and Transfer Taxes TO : All Internal Revenue Officers and Others Concerned 1. The Law For the information and guidance of all concerned, quoted hereunder are the pertinent provisions of Sections 51, 113 and 130 of the National Internal Revenue Code, as amended: "Sec. 51. PAYMENT AND ASSESSMENT OF INCOME TAX . . . . (3) Surcharge . If any amount of tax shown on the return is not paid in full on or before the date prescribed for its payment under paragraph (a) of this Section, or any amount of deficiency, and any interest assessed in connection therewith, is not paid in full within the period prescribed in the assessment notice and demand required under paragraph (b) of this Section, there shall be collected in addition to the interest prescribed herein and in paragraph (d) above and as part of the tax a surcharge of ten per centum of the amount of tax unpaid ." (Section 51(e)(3), NIRC, as amended by P.D. 1705). UNDERSCORING SUPPLIED "Sec. 113. ADDITIONS TO THE TAX IN CASE OF NONPAYMENT . . . . (c) Surcharge . If any amount of tax shown on the return is not paid in full on or before the date prescribed for its payment under paragraph (a) of this Section, or any amount of deficiency, or any interest assessed in connection therewith is not paid in full within the period prescribed in the assessment notice and demand required under paragraph (b) of this Section, there shall be collected in addition to the interest prescribed herein and in Sections 111 and 112 as part of the tax surcharge of ten per centum of the unpaid amount ." (Section 113(c), NIRC, as amended by P.D. Nos. 1705 and 1773) UNDERSCORING SUPPLIED "Sec. 130. ADDITIONS TO THE TAX IN CASE OF NONPAYMENT . . . . (c) Surcharge . If any amount of tax shown on the return by the donor is not paid in full on or before the date prescribed for its payment under paragraph (a) of this Section, or any amount of deficiency, or any interest assessed in connection therewith is not paid in full within the period prescribed in the assessment notice and demand required under paragraph (b) of this Section, there shall be collected in addition to the interest prescribed herein and in Sections 128 and 129 and as a part of the tax a surcharge of ten per centum of the unpaid amount ." (Section 130 (c), NIRC, as amended by P.D. No. 1773) EMPHASIS SUPPLIED 2. Conditions For Imposition of the Ten Percent Surcharge . 2.1 Under the abovequoted provisions of law, there are two (2) situations for which the ten percent surcharge shall be imposed, in addition to interests, for late payment of income tax (Section 51, NIRC), estate tax (Section 113, NIRC); and donor's gift tax (Section 130, NIRC): 2.1/1 Where the tax shown on the return filed by a taxpayer is not paid on or before the date prescribed for its payment; or 2.1/2 Where the deficiency tax assessment is not paid by a taxpayer within the period prescribed in the assessment notice and demand letter. 2.2 Extended payment . 2.2/1 If the Commissioner (or his duly authorized representative) has authorized the payment of the tax beyond the due date of payment, the ten percent (10%) surcharge shall not be imposed unless the taxpayer fails to pay the tax on or before the date/s prescribed within the extended period of payment. casia 2.2/2 If the Commissioner (or his duly authorized representative) authorized payment of the tax before the expiration of the due date in two (2) or more installments/amortizations, the ten percent (10%) surcharge shall be imposed only on every installment or amortization which is not paid by the taxpayer on or before the date/s prescribed within the period of extension granted and no such surcharge shall be imposed on amortizations not yet due per approved amortization schedule except when there is an acceleration clause. 2.2/3 If the taxpayer submits a request for extension after the expiration of the due date, the 10% surcharge shall be imposed even if the extension has been granted. 3. Basis of the Ten Percent (10%) Surcharge 3.1 Tax shown on the return . - In case the tax shown on the return filed by a taxpayer is not paid on or before the date prescribed for its payment, the ten percent (10%) surcharge shall be based on the amount of basic tax due per return filed. 3.2 Deficiency assessment .- In case the deficiency tax is not paid within the period prescribed in the assessment notice and demand letter, the ten percent (10%) surcharge shall be based on the amount of basic tax and deficiency interest included in the deficiency assessment . Other ad valorem penalties (i.e., the 25% surcharge for late filing of the return; 25% surcharge for filing the return with wrong venue; 50% surcharge for non-filing of the return due to willful intent or filing a false or fraudulent return), if any, included in the assessment notice shall not bear this ten percent delinquency surcharge. 4. Effectivity . 4.1 Income tax and Estate tax . Section 51(e)(3) Income Tax; and Section 113(c) Estate tax, of the National Internal Revenue Code, as amended by P.D. 1705, became effective on August 1, 1980 . 4.2 Donor's gift tax . Section 130(c) of the National Internal Revenue Code, as amended by P.D. 1773 (donor's gift tax) became effective on January 16, 1981 . 4.3 If a deficiency tax assessment had been issued before the said effectivity date, and the deficiency tax was not paid within the period prescribed in the assessment notice and demand which had expired also before the said effectivity date and, therefore, the taxpayer became delinquent before effectivity of P.D. 1705 and P.D. 1773, the five percent (5%) surcharge which was applicable before the amendment of Sections 51(e)(3), 113(c), and 130(c) shall be imposed regardless of whether the assessment remains unpaid on or after effectivity of these new laws. 4.4 However, if the period prescribed in the assessment notice and demand within which the deficiency tax assessment shall be paid had expired on or after effectivity of P.D. 1705 and P.D. 1773 and, therefore, the taxpayer became delinquent during effectivity of these new laws, ten percent (10%) surcharge shall be imposed. cd i 5. Illustrative Computations of Increments All Internal Revenue Officers concerned are enjoined to adhere strictly with the provisions of this Revenue Memorandum Circular in making or issuing tax assessments. To achieve uniformity in computing increments incident to late payment of income, estate and gift taxes, all revenue officers and others concerned shall be guided by the following computational formats: Case I Assume that an individual was qualified and opted to pay his income tax for tax year 1980 in two (2) equal installments under Section 51 (a) (2) of the Tax Code. Assume that he paid the 1st installment upon filing, as follows: 1980 Income tax due per return P6,000.00 Less: Creditable withholding taxes 2,000.00 Amount due P4,000.00 The 1st installment of his income tax shall be computed, as follows: Income tax due per return P6,000.00 1st installment thereof (50%) 3,000.00 Less: Creditable withholding tax/es 2,000.00 Amount payable to complete 1st installment P1,000.00 Assuming that the said individual failed to pay the 2nd installment (P3,000.00) on July 18, 1981 (last day to complete payment) and tendered payment only on July 18, 1982, the tax and increments incident to late payment shall be computed as follows: 1980 Income tax due per return P6,000.00 Less: 1st installment Creditable withholding taxes P2,000.00 C.R. No. dated 1,000.00 3,000.00 Balance (2nd installment) 3,000.00 Add: 10% surcharge 300.00 20% int. p.a. fr. 7-18-81 to 7-18-82 600.00 Compromise for late payment (suggested) 40.00 940.00 Total P3,940.00 ========= Case II Assume that the said individual did not file his 1980 income tax return on the due date ( April 15, 1981 ). However, on April 15, 1982 he voluntarily filed his 1980 income tax return and tendered payment but reason for delay in filing his return is not meritorious (for purposes of the 25% surcharge). Computations of the tax and increments incident to late filing and late payment shall be as follows: 1980 Income tax due per return P6,000.00 Less: Creditable withholding tax/es 2,000.00 Delinquency P4,000.00 Add: Delinquency increments 25% surcharge for late filing P1,000.00 10% surcharge for late payment 400.00 20% int. p.a. fr. 4-15-81 to 4-15-82 800.00 Compromise for late filing (suggested) 80.00 Compromise for late payment (suggested) 40.00 2,320.00 Total P6,320.00 ========= Case III Assume that the said individual did not file his 1980 income tax return on the due date (April 15, 1981). On July 18, 1982, he voluntarily filed his 1980 income tax return and tendered payment but reason for delay in filing his return is not meritorious (for purposes of the 25% surcharge). However, the amount of creditable withholding taxes withheld from his income is equal to 50% or more of his tax due per return (e.g., P4,000.00) In this case, he shall be only considered delinquent with respect to the second installment of his tax liability since the creditable taxes withheld from him were advance payments of his income taxes . 1980 Income Tax due per return P6,000.00 Less: Creditable withholding tax/es 4,000.00 Delinquency (2nd installment 2,000.00 Add: Delinquency increments 25% surcharge for late filing P 500.00 10% surcharge for late payment 200.00 20% int. p.a. fr. 7-18-81 to 7-18-82 400.00 Compromise for late filing (suggested) 80.00 Compromise for late payment 30.00 1,210.00 Total P3,210.00 ========= Case IV Assume that this 1980 income tax return of the said individual had been verified and tax audited. This tax audit (whether based on the return filed or based on his accounting record) resulted to a deficiency assessment . The assessment notice was issued on April 15, 1983. Deadline given for payment was on May 15, 1983. Details of the deficiency income tax assessment were as follows: 1980 Income Tax due per tax audit P10,000.00 Less: Income tax shown per return filed 6,000.00 Deficiency 4,000.00 Add: Deficiency increments 50% surcharge for filing fraudulent return 2,000.00 20% int. p.a. fr. 4-15-81 to 4-15-83 1,000.00 Suggested compromise penalty for violation of Bookkeeping Regulations 300.00 Total P 7,900.00 Assume, further, that said individual did not pay the deficiency assessment on or before the deadline set in the assessment and demand (May 15, 1983). Tender of payment was made only on October 15, 1983. Since the deficiency income tax was not paid within the period prescribed in the assessment notice and demand (i.e., from April 15, 1983), delinquency increments are further assessable against the taxpayer, as follows: cdt 1980 Total amount assessed on 4-15-83 P7,900.00 Less: Compromise penalty for violation of Bookkeeping Regulations 300.00 Deficiency 7,600.00 Add: Delinquency increments 10% surcharge for late payment on (on basic tax of P4,000.00 and deficiency interests of P1,600.00) P560.00 20% int. p.a. fr. 4-15-83 to 10-15-83 (on basic tax plus surcharge and interests - P7,600.00) 760.00 Compromise penalty for violation of Bookkeeping Regulations 300.00 Compromise penalty for late payment 50.00 Total P9,270.00 ========= Case V Assume that the said individual filed his 1980 income tax return on time and had paid the first installment of his income tax liability on April 15, 1981. Assume, further, that on the deadline for payment of the second and last installment of his income tax liability, he was clearly incapable financially to pay his liability. Before deadline, he requested for permission to amortize this tax liability in three (3) monthly installments. His request was granted. Computation of the amortizations follows: 1980 Tax due per return P6,000.00 Less: Creditable withholding tax/es 2,000.00 Amount due 4,000.00 Less: Amount paid on 4-15-81 to complete 1st installment (C.R. No.) 1,000.00 Second installment to be amortized 3,000.00 MONTHLY AMORTIZATIONS FOR THREE MONTHS (P3,000/3 mos.) P 9,000.00 Amortization Schedule Amount of tax due on 7-18-81 P3,000.00 Add: 20% int. p.a. fr. 7-18-81 to 8-18-81 49.99 Amount due on 8-18-81 3,049.99 1st Amortization on or before 8-18-81 1,049.99 Balance 2,000.00 Add: 20% int. p.a. fr. 8-18-81 to 9-18-81 33.33 Amount due on 9-18-81 2,033.33 2nd Amortization on or before 9-18-81 1,033.33 Balance 1,000.00 Add: 20% int. p.a. fr. 9-18-81 to 10-18-81 16.66 3rd and last amortization on or before 10-18-81 P1,016.66 Case VI Assume that the said taxpayer defaulted in paying the 2nd amortization due on or before September 18, 1981. He actually paid only on September 30, 1981. In this case, he was delinquent. The ten per cent (10%) surcharge applies but only in connection with such delinquent 2nd amortization . Computation of the tax and delinquency increments follows: 2nd Amortizations re-Extended Payments 2nd Amortizations re-Extended Payments 2nd Amortization due on or before 9-18-81 P1,033.33 Add: 10% surcharge (on basic tax of P1,000.00) 100.00 20% int. p.a. fr. 9-18-81 to 9-30-81 (on total of P1,033.33) 6.79 Compromise for late payment 20.00 Total P1,160.12 ========= Case VII Assume, further, that the taxpayer defaulted in paying the 2nd and 3rd monthly amortizations. Collection letter was sent to the taxpayer on December 18, 1981. Computation of the tax and delinquency increments follows: 1980 Tax due per return P 6,000.00 Less: Creditable withholding tax/es 2,000.00 Amount due 4,000.00 Less: Amount paid on 4-15-81 to complete 1st installment (C.R. No.) 1,000.00 2nd installment amortizable in three (3) months 3,000.00 Add: 20% int. p.a. fr. 7-18-81 to 8-18-81 49.99 Amount due on 8-18-81 3,049.99 Less: 1st amortization paid on 8-18-81 (C.R. No. ) 1,049.99 Balance 2,000.00 Add: 10% surcharge (on basic tax of P2,000.00) 200.00 20% int. p.a. fr. 8-18-81 to 12-18-81 133.33 Compromise for late payment 20.00 Total P2,353.33 ========= Case VIII Assume that the taxpayer had been assessed for 1980 deficiency income tax on April 15, 1983. Deadline for payment of this assessment per notice and demand was May 15, 1983. Details of the assessment were: Income tax due per tax audit P10,000.00 Less: Income tax shown per return filed 6,000.00 Deficiency 4,000.00 Add: Deficiency increments 50% surcharge for filing fraudulent return P2,000.00 20% int. p.a. fr. 4-15-81 to 4-15-83 1,600.00 Suggested compromise for violation of Bookkeeping Regulations 300.00 Total P7,900.00 ========= Assume, further, that upon a clear showing of financial incapacity, the taxpayer requested for permission to pay the assessment in four (4) monthly installments, starting May 15, 1983. His request for extended payment was granted. Computation of the monthly amortizations follows: 1980 Total amount assessed on 4-15-83 P7,900.00 Less: Suggested compromise for violation of Bookkeeping Regulations 300.00 Deficiency income tax to be amortized P7,600.00 MONTHLY AMORTIZATION FOR FOUR MONTHS (P7,400/4 MOS.) P1,900.00 Amortization Schedule Deficiency income tax assessment issued on 4-15-83 P 7,600.00 Add: 20% int. fr. 4-15-83 to 5-15-83 126.67 Amount due on 5-15-83 7,726.67 1st amortization on 5-15-83 (P1,900 plus interests of P126.67) 2,026.67 Balance on 5-15-83 5,700.00 Add 20% int. fr. 5-15-83 to 6-15-83 94.99 Amount due on 6-15-83 5,794.99 2nd amortization on 7-15-83 1,994.99 Balance on 6-15-83 3,800.00 Add: 20% int. fr. 6-15-83 to 7-15-83 63.33 Amount due on 7-15-83 3,863.33 3rd amortization on 7-15-83 1,963.33 Balance on 7-15-83 1,900.00 Add: 20% int. fr. 7-15-83 to 8-15-83 31.67 Suggested compromise for violation of Bookkeeping Regulations 300.00 4th and final amortization P2,231.67 Assume, even further, that the terms of the extended payments granted provided for an "acceleration clause" and that should the taxpayer defaults in any amortization, the remaining balance of the taxpayer's tax liability shall at once become due and demandable. Assume that the taxpayer defaulted in paying the 2ND amortization which should have been due on June 15, 1983 . acd In this case, the taxpayer shall be considered already delinquent, the ten percent (10%) surcharge shall be imposed and levied. Assuming that the collection letter for the unpaid balance was issued on July 15, 1983, computation of the delinquent tax liability of the taxpayer follows: 1980 Total amount assessed on 4-15-83 P 7,900.00 Less: Suggested compromise for violation of Bookkeeping Regulations 300.00 Deficiency income tax 7,600.00 Add: 20% int. fr. 4-15-83 to 5-15-83 126.67 Amount due on 4-15-83 7,726.67 Less: 1st amortization paid on 5-15-83 (C.R. No. ) dated 2,026.67 Unpaid balance 5,700.00 Add: Delinquency increments 10% surcharge (on 3/4 of basic tax of P4,000 and deficiency interests of P1,600 = P4,200 x 10%). 420.00 20% int. fr. 5-15-83 to 7-15-83 (on unpaid balance of P5,700.00) 189.99 Compromise for violation of Bookkeeping Regulations 300.00 Compromise for late payment 50.00 Total P6,539.99 ========= Note : The 10% surcharge is based on 3/4 of the basic tax of P4,000 and deficiency interests of P1,600 because the taxpayer's delinquent income tax liability represents 3/4 of the total deficiency income tax assessment. Assume that the ter ms of the extension does not provide for an acceleration clause. The taxpayer, however, did not pay on time the 3rd amortization due on 7-15-83. This amortization was paid only on July 30, 1983. In this case, the taxpayer is delinquent only with respect to this 3rd amortization. The 10% surcharge applies but only on this delinquent amortization. Computation of delinquency increments follows: 3rd Amortization 3rd amortization due on 7-15-83 P1,963.33 Add: 10% surcharge (on 1/4 of basic tax of P4,000 and deficiency interests of P1,600 = P1,400 x 10%) 140.00 20% int. fr. 7-15-83 to 7-30-83 16.14 Compromise for late payment 20.00 Total P 2,139.47 Note : The 10% surcharge is based on 1/4 of the basic tax and deficiency interests because the extended payments authorized four (4) equal monthly installments. 6. Suggested Compromise "Penalties" 6.1 A compromise is an agreement between two or more persons who to avoid a lawsuit amicably settle their differences in such terms as they can agree on. Technically, therefore, the amount of compromise which is included in the above illustrative examples may not be assessed and demanded considering that the same does not constitute a tax or deficiency tax. Since the nominal amounts suggested as compromise in extra-judicial settlement of the civil and/or criminal liability of a taxpayer for violations of certain provisions of the Tax Code or implementing regulations are not internal revenue taxes or civil ad valorem penalties, all letters of demand and assessment notices must categorically state 6.1/1 The particular provision of the Tax Code and/or Revenue Regulations violated by the taxpayer; 6.1/2 That the compromise is intended as an extra-judicial settlement of the taxpayer's civil and/or criminal liability for violation of certain provisions of the Tax Code; 6.1/3 That the compromise is being suggested, rather than demanded or assessed. 6.2 Amount of suggested compromise The amount/s of compromise penalty that shall be suggested for an extra-judicial settlement of a taxpayer's civil and/or criminal liability arising from violation of the pertinent provisions of the National Internal Revenue Code and/or its implementing regulations shall strictly conform with schedules of compromise penalties prescribed in all existing revenue issuances. 6.3 Cases tainted with fraud 6.3/1 The pertinent provisions of Section 295 of the National Internal Revenue Code, as amended by P.D. 1773, is quoted, as follows: ". . . All criminal violations may be compromised except : (a) those already filed in court, and (b) those involving fraud . . . . ." 6.3/2 In view thereof, no compromise penalty shall be suggested in all letters of demand and assessment notices, in connection with tax assessment/s tainted with fraud such as (i) cases involving deliberate under declaration or non-declaration of taxable amount; (ii) deliberate over declaration of deductions; and/or (iii) such other act/s which, per se , may be considered equivalent of fraud and committed with intent to evade payment of tax. 7. Repealing Clause All Revenue Issuances which are inconsistent herewith are hereby amended or repealed accordingly. cd 8. Enforcement and Publicity All Revenue Officers concerned are enjoined to enforce the provisions of this Revenue Memorandum Circular and give the same as wide publicity as possible. (SGD.) RUBEN B. ANCHETA Acting Commissioner