Statutory basis and related law links
- The civil penalty computation is anchored on Section 248 and Section 249 of the National Internal Revenue Code (NIRC), as amended by Republic Act No. 8424.
- The circular’s surcharge and interest rules are implemented for tax years governed by effectivity starting January 1, 1998 under Republic Act No. 8424.
- The installment/interest computation guidance is supported by Section 249(D) of the Tax Code and the principle under Article 1253 of the Civil Code on payment of interest preceding principal.
- The criminal liability compromise is anchored on Section 204 of the Tax Code of 1997, which authorizes compromise for covered criminal violations.
- The suggested compromise penalty schedule must follow Revenue Memorandum Order No. 1-90.
Policy, purpose, and uniform implementation
- The circular establishes a uniform implementation method for computing applicable surcharge and deficiency or delinquency interest under the amended Sections 248 and 249.
- The circular provides illustrative cases to standardize computation for taxpayers and internal revenue officers.
- Strict enforcement is expressly required for the circular’s rules.
When surcharge and interest apply
- Section 1 recognizes that Section 248(A) imposes a penalty equivalent to twenty-five percent (25%) of the amount due in specific delinquency or failure-to-comply situations.
- Under Section 248(A), the 25% surcharge is imposed in the following instances:
- Failure to file any return and pay the tax due thereon on the date prescribed; or
- Filing a return with an internal revenue officer other than the officer with whom the return is required to be filed, unless otherwise authorized by the Commissioner; or
- Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessments; or
- Failure to pay the full or part of the tax shown on any return required to be filed, or the full amount of tax due for which no return is required, on or before the date prescribed for its payment.
- The 25% surcharge rule is applied with a key limitation for deficiency computation: 25% surcharge is imposed only when the tax due shown on the return filed is not paid on or before the prescribed payment date, or when a deficiency tax assessment is not paid on before the prescribed payment date shown in the notice and demand; no 25% surcharge is imposed when computing the deficiency tax assessment.
- Civil penalties consist of surcharge plus interest, with interest imposed based on the applicable 20% interest per annum in the illustrative computations in the circular’s cases.
Uniform computation procedure
- Computation and assessment of the applicable surcharge and interest for deficiency and delinquency internal revenue taxes must conform to the illustrative cases in the circular for transactions effective January 1, 1998.
- In late filing and late payment situations, the computation follows a structure that adds:
- the 25% surcharge, and
- 20% interest per annum computed from the due date of the tax to the date of payment.
- Only one 25% surcharge is imposed for the combined situation of late filing of the return and late payment of the tax.
- For delinquent deficiency tax where the assessment is already final and collectible, the taxpayer is treated as late in payment if payment is not made by the deadline in the notice and demand, and civil penalties for late payment are computed accordingly.
Illustrative case rules (computation mechanics)
- Late filing and late payment (Scenario 1):
- When a taxpayer files voluntarily after the prescribed due date without notice from the BIR, the taxpayer is liable for 25% surcharge plus 20% interest per annum from the due date to the payment date.
- Only one 25% surcharge applies for both late filing and late payment.
- Wrong venue filing without prior authorization (Scenario 2):
- When the return is filed and paid through an internal revenue officer other than the required officer without prior authorization by the Commissioner, the taxpayer is liable for 25% surcharge, computed on the tax due per return, and pays the difference plus penalties where only part of the assessed tax was actually paid.
- Willful neglect with notification (Scenario 3):
- When the taxpayer fails to file and, after being notified by the BIR, files and pays only after notification, the illustrative computation uses 50% surcharge for “willful neglect” to file and late payment, plus 20% interest per annum from the original due date to the payment date.
- Deficiency tax after pre-audit or investigation (Scenario 4):
- When deficiency arises from correction of erroneous computation after pre-audit and the taxpayer paid less than the correct assessed amount, the example shows 20% interest per annum on the deficiency from the due date to the date period culminating in payment deadline.
- When deficiency arises after investigation and formal assessment is issued after failure to protest a preliminary assessment, the example shows deficiency plus 20% interest per annum from the due date to the date period before or up to the payment deadline.
- When a corporation’s return is found false or fraudulent, the example imposes 50% surcharge on the deficiency plus 20% interest per annum from the due date to the date period in the computation.
- Late payment of assessed deficiency (Scenario 5):
- If a deficiency assessment has become final and collectible and remains unpaid beyond the payment deadline stated in the notice and demand, then 25% surcharge for late payment is added to the total deficiency tax assessed, plus 20% interest per annum from the day after the deadline to the actual payment date.
- Authorized installment/extended payment (Scenario 6, Illustration No. 1):
- If extension/permit to pay in installments is duly approved pursuant to Section 53 of the Tax Code, then no 25% surcharge is imposed because the payment deadline has been extended.
- 20% interest per annum is imposed under Section 249(D), computed on the unpaid amount using a diminishing balance approach consistent with Article 1253 (interest must be covered before principal is deemed paid).
- If the request for extension is filed on or before the deadline, the surcharge remains not imposed; if the request is made after the deadline, 25% surcharge applies even if delinquency payment is later allowed through partial amortization.
- Partial payment without prior extension permit (Scenario 6, Illustration No. 2):
- When the taxpayer makes partial payment without prior BIR authority for an extended payment period, the computation uses 25% surcharge plus 20% interest per annum up to the demanded payment date, then subtracts the partial payment to arrive at the remaining balance.
- If the remaining balance is not paid by the demanded date, subsequent penalties proceed such that no further 25% surcharge for late payment is imposed in the illustration; only 20% interest per annum applies from the demanded due date until fully paid.
- If payment is made on partial-payment basis after demand, interest is computed on the diminishing balance.
Suggested compromise penalty for criminal liability
- Section 204 of the Tax Code of 1997 authorizes compromise of criminal violations except (a) those already filed in court or (b) those involving fraud.
- A compromise of a taxpayer’s criminal liability through extra-judicial settlement is consensual and cannot be imposed or collected without the taxpayer’s agreement and conformity.
- The BIR may only suggest compromise settlement of criminal liability; a compromise cannot be forced on the taxpayer without consent.
- The suggested compromise penalty and its amount must conform to the schedule of compromise penalty provided under Revenue Memorandum Order No. 1-90.
Effectivity and enforcement
- The circular’s provisions take effect January 1, 1998, consistent with Section 8 of Republic Act No. 8424.
- Strict enforcement of the circular’s computation and compromise guidance is expressly enjoined.