Civil Penalties: Compromise Penalty under the National Internal Revenue Code (NIRC), as amended by the TRAIN Law and the Ease of Paying Taxes Act

1. Overview of Compromise Penalties

A compromise penalty under Philippine tax law is a monetary penalty imposed by the Bureau of Internal Revenue (BIR) on taxpayers who commit tax violations or deficiencies. This penalty is negotiated between the taxpayer and the BIR to settle minor infractions and avoid litigation. Compromise penalties do not constitute criminal penalties; rather, they are administrative in nature, meant to address and rectify non-compliance without the need for formal court proceedings. The applicable sections of the National Internal Revenue Code of 1997 (NIRC), as amended by Republic Act No. 10963 (TRAIN Law), and Republic Act No. 11976 (Ease of Paying Taxes Act) govern these penalties.

2. Legal Basis and Authority

Section 204(A) of the NIRC (Compromise Settlements)

The BIR Commissioner has the authority to enter into compromise agreements for the payment of taxes, penalties, or interest under certain conditions as prescribed by law. Section 204(A) of the NIRC grants the Commissioner this authority, and it is implemented through the issuance of revenue regulations that outline the grounds, procedures, and rates for compromise penalties.

The TRAIN Law (R.A. No. 10963) and the Ease of Paying Taxes Act (R.A. No. 11976) have not altered this section's provisions substantially but have emphasized the need for greater ease in compliance and fairness in tax administration, indirectly affecting the application of compromise penalties.

3. Guidelines and Requirements for Compromise Penalties

Compromise penalties may be applied for both civil and criminal violations under the NIRC, and are especially common for minor tax infractions. Notably:

Compromise penalties are not automatically imposed and must be accepted by the taxpayer.
They are only applicable where:
- The taxpayer is willing to settle.
- The BIR agrees to the settlement amount, which should fall within prescribed minimum and maximum compromise rates.
- The tax deficiency or violation is minor, involving non-fraudulent acts or errors in compliance.

Notable Revenue Regulations (RR) and Memorandum Orders

The BIR has released Revenue Memorandum Orders (RMOs) and Revenue Regulations (RRs) detailing the compromise penalty amounts for specific violations. These include the tax rate or percentage based on the assessed deficiency and the type of violation.

For instance:

RMO No. 19-2007 prescribes the rates of compromise penalties for various offenses, such as late filing, underpayment, failure to issue receipts, or improper maintenance of books of accounts.
RMO No. 7-2015 outlines additional modifications in the compromise penalty matrix to align with current economic standards and facilitate compliance.

4. Grounds for Compromise Penalties

Under Section 204(A) and relevant BIR issuances, compromise penalties may be applied on two main grounds:

Doubtful Validity of the Assessment: If the taxpayer contests the validity of the BIR’s tax assessment and has reasonable grounds, a compromise penalty may be negotiated.
Financial Incapacity of the Taxpayer: If the taxpayer demonstrates financial inability to pay the tax deficiency in full, the Commissioner may accept a partial settlement in the form of a compromise.

5. Computation and Amount of Compromise Penalties

The amount of compromise penalty is generally computed based on tables prescribed by the BIR in RMOs and RRs. These tables specify penalties based on the type and severity of the violation, which may vary between minor errors, non-compliance with administrative requirements, and more serious infractions.

Typical Penalty Amounts

Minor Violations: These may involve fixed penalty amounts (e.g., PHP 1,000 - PHP 5,000) for first offenses, such as non-filing or late filing of returns without tax due.
Severe Non-Compliance: Penalties increase with the gravity of the violation, reaching PHP 50,000 or more, depending on the nature of the non-compliance or tax deficiency involved.

For instance, failure to withhold taxes properly may lead to a compromise penalty ranging between 25% to 50% of the tax deficiency depending on circumstances and the willingness of both parties to settle.

6. Payment Process and Effect of Compromise Penalty

Upon agreement to a compromise penalty:

Payment: The taxpayer remits the agreed amount to the BIR, typically using official forms and following prescribed procedures.
Legal Finality: Once paid, the compromise penalty settlement generally results in the case’s closure, and the BIR typically cannot pursue further legal action regarding the settled matter.
Receipt and Certification: The BIR issues a certification that the penalty has been paid, closing the case administratively.

7. Limits on the Commissioner’s Authority

While the Commissioner has discretionary authority, this is limited by specific guidelines:

Cap on Penalty Reductions: The BIR Commissioner may not unilaterally impose compromise penalties below the minimum rates set in the tax regulations without the Department of Finance's approval.
Judicial Review: If the taxpayer disagrees with the compromise penalty or believes it to be excessive, they may appeal to the Court of Tax Appeals (CTA) for review.

8. Notable Recent Changes (Ease of Paying Taxes Act, R.A. No. 11976)

The Ease of Paying Taxes Act, enacted as R.A. No. 11976, introduced changes to streamline tax compliance. While it does not directly amend the provisions on compromise penalties, it promotes easier compliance processes, which indirectly encourages voluntary compliance, reducing the likelihood of incurring compromise penalties. Key highlights include:

Simplified Compliance for Small Businesses: Simplified returns and reduced documentary requirements.
Enhanced BIR Services: Improved access to taxpayer support and digital filing, which may help minimize minor infractions due to oversight or complexity.

The impact of this Act on compromise penalties is indirect; however, by making compliance easier, it reduces the number of unintentional infractions that might otherwise be subject to compromise penalties.

9. Practical Considerations and Taxpayer Rights

Negotiation: Taxpayers have the right to negotiate the terms of a compromise penalty, and legal representation is advised to ensure fairness.
Documentation: Proper documentation and receipts should be retained as proof of compliance, as these may be essential if questions arise in future tax audits.
Limitations and Expiry: Taxpayers should be aware of any limitations on the settlement's terms, as further infractions may reopen previously settled issues.

Conclusion

Compromise penalties under the NIRC, as amended by the TRAIN Law and Ease of Paying Taxes Act, provide a structured means for taxpayers to settle minor tax infractions administratively, thus avoiding costly and time-consuming litigation. Both the BIR and the taxpayer benefit from this approach, as it promotes efficiency and compliance while allowing the BIR to focus its resources on more severe tax violations. Taxpayers must understand the specific criteria, computation, and payment process to ensure compliance and avoid further penalties.