Penalties for a One Million Peso Tax Discrepancy in a Non-VAT Company: A Comprehensive Overview (Philippine Context)

Disclaimer: This article provides general information based on the National Internal Revenue Code (NIRC), relevant regulations of the Bureau of Internal Revenue (BIR), and other applicable laws in the Philippines. It is not a substitute for legal advice. Persons or entities facing actual or potential tax issues should seek assistance from a qualified Philippine lawyer or tax professional.

1. Introduction

In the Philippines, the tax system imposes stringent requirements on businesses, whether they are registered as Value-Added Tax (VAT) taxpayers or non-VAT taxpayers (typically subject to percentage tax instead of VAT). For non-VAT companies, a tax discrepancy arises when there is a mismatch between the taxes that should have been paid and the amount that was actually paid or declared. A discrepancy of ₱1 million in taxes is significant and may lead to substantial administrative penalties, interest, surcharges, and, in severe cases, criminal liability.

This article explores the principal tax rules and possible consequences that apply when a non-VAT entity in the Philippines is found to have a ₱1 million tax discrepancy.

2. Non-VAT vs. VAT Registration Threshold

Under the Philippine tax regime:

VAT-registered businesses generally pay 12% VAT on the sale of goods or services.
Non-VAT businesses typically pay a 3% percentage tax (although this percentage may change depending on subsequent laws or amendments).

Currently, a business is required to register as VAT-registered if its annual gross sales or receipts exceed ₱3 million. If a non-VAT entity surpasses—or is likely to surpass—this threshold yet does not switch to VAT registration, it may incur additional penalties for failure to register as a VAT taxpayer.

A business that remains non-VAT but has a large discrepancy in reported sales or income might also be flagged by the BIR. If the unreported gross receipts push the entity’s total receipts beyond ₱3 million, the business could face both the penalty for deficiency percentage tax and the penalty for failing to register for VAT.

3. Nature of a ₱1 Million Tax Discrepancy

A tax discrepancy of ₱1 million can refer to:

Underreported gross sales or income leading to an underpayment of the corresponding percentage tax or income tax.
Erroneous deductions that significantly reduce taxable income.
Failure to withhold the correct amount of tax on compensation or on payments subject to expanded withholding tax.

A discrepancy is often discovered through:

Tax audits initiated by the BIR (e.g., Letter of Authority, Tax Verification Notice).
Third-party information matching (BIR cross-checking data from other government agencies, such as the Securities and Exchange Commission or banks).

Regardless of how the discrepancy is discovered, once the BIR determines that a non-VAT taxpayer underpaid or misdeclared taxes by ₱1 million, the taxpayer may be assessed deficiency taxes together with penalties.

4. Administrative Penalties Under the Tax Code

4.1 Deficiency Tax Assessment

If the BIR concludes that a taxpayer has underpaid taxes, the difference is termed the deficiency tax. For instance, if a non-VAT company should have paid ₱1 million more in taxes (income tax, percentage tax, or withholding tax), the BIR will issue a formal assessment notice (Preliminary Assessment Notice followed by a Formal Assessment Notice).

4.2 Surcharge (Section 248, NIRC)

On top of the basic deficiency tax, the BIR may impose a surcharge:

25% Surcharge applies in cases such as:
- Late filing of a required return.
- Failure to pay the tax due on time.
- Failure to pay the deficiency tax within the time prescribed in the notice.
50% Surcharge can apply if:
- There is willful neglect to file a return on time.
- A false or fraudulent return is filed with intent to evade taxes.

The determination of which surcharge applies often depends on the BIR’s finding of fraud, bad faith, or willful intent. If fraud is proven, the 50% surcharge is far more likely.

4.3 Interest (Section 249, NIRC)

Apart from surcharges, annual interest of 12% (as adjusted under the TRAIN Law, though historically it was 20%) applies to the deficiency tax from the date prescribed for payment until the amount is fully paid. This interest compounds daily, significantly increasing the total amount due over time.

4.4 Compromise Penalty

The BIR may propose a compromise penalty in lieu of criminal prosecution if the taxpayer’s violations are not deemed willfully fraudulent. Compromise penalties are typically based on schedules published by the BIR, which consider the taxpayer’s gross annual sales, nature of the violation, and other factors.

While the compromise penalty does not erase all other liabilities (the deficiency tax, surcharge, and interest), it may reduce potential criminal exposure. However, the BIR has the discretion to accept or reject a taxpayer’s offer to compromise.

5. Criminal Liability Under the Tax Code

5.1 Willful Attempt to Evade Taxes (Section 254, NIRC)

If the BIR or Department of Justice (DOJ) finds substantial evidence of intentional underreporting or fraudulent tax returns, criminal charges may be filed under Section 254 of the NIRC (Willful Attempt to Evade or Defeat Tax). Elements typically include:

Tax is legally due.
The taxpayer’s willful act or omission resulted in the non-payment of tax.
There is an intent to evade or defeat the tax.

A proven attempt to evade may result in:

Fine of ₱30,000 to ₱100,000 (these amounts may be amended by law).
Imprisonment of 2 to 4 years.
Or both fine and imprisonment.

5.2 Failure to File Return, Supply Correct Information, Pay Tax, or Withhold (Section 255, NIRC)

If the discrepancy stems from failing to file required returns, supply correct and accurate information, or pay taxes on time, criminal penalties could also arise under Section 255, with possible fines and imprisonment, depending on severity and intent.

5.3 Fraudulent Returns

Filing a fraudulent return with an intent to evade (e.g., by deliberately hiding sales or income) can result in more severe criminal charges. The BIR can treat such cases as tax evasion and pursue imprisonment, in addition to imposing civil and administrative penalties.

6. Other Considerations

6.1 Tax Amnesty Programs

Occasionally, the government enacts tax amnesty programs that allow taxpayers to settle prior liabilities under more favorable terms. If a taxpayer discovers a discrepancy (or is undergoing assessment) that predates the effectivity of a tax amnesty law, they may consider availing of the program—provided that the law’s conditions are met. These programs typically offer reduced tax due, lower or waived penalties, and immunity from related criminal prosecution.

6.2 Corporate Officers’ Personal Liability

Corporate officers (e.g., president, treasurer, CFO) who participated in or authorized the filing of fraudulent returns may also be held personally liable. If criminal charges are filed, these officers can face fines and imprisonment individually.

6.3 Rights and Remedies of the Taxpayer

When a taxpayer receives a deficiency assessment from the BIR, they have legal rights and remedies, including:

The right to protest the assessment (administrative protest before the BIR).
The right to appeal unfavorable decisions by the BIR to the Court of Tax Appeals (CTA).
The right to request a compromise if financial hardship or doubt as to the assessment’s legality exists.

It is crucial to observe the strict deadlines for filing protests and appeals. Failing to file on time typically renders the assessment final, executory, and demandable.

7. Practical Steps for Addressing a ₱1 Million Discrepancy

Gather Evidence and Documents
Compile all relevant financial records, invoices, official receipts, bank statements, and bookkeeping records to verify figures.
Consult a Tax Professional
An accountant or tax lawyer can help assess the potential liability, evaluate the accuracy of the BIR’s assessment, and develop a legal strategy.
Respond Promptly to BIR Notices
Observing deadlines (e.g., responding to Preliminary Assessment Notices) is critical. Delaying or ignoring these notices may waive some defenses.
Evaluate Options for Settlement or Protest
Depending on the facts, a taxpayer may opt to:
- Pay the deficiency tax plus penalties promptly to avoid additional interest.
- File a protest if there are legal or factual grounds against the assessment.
- Explore compromise settlement if meeting the criteria under BIR regulations.
Maintain Proper Books of Accounts
Keep all business documents in an organized manner and ensure timely filing and payment to minimize the risk of large discrepancies in the future.

8. Conclusion

A discrepancy of ₱1 million is a serious matter for a non-VAT company in the Philippines. Such a shortfall can expose the business—and potentially its officers—to substantial administrative penalties, surcharges, interest, compromise penalties, and, in extreme cases, criminal prosecution.

The best defense is always compliance: accurate bookkeeping, timely filing of returns, proper declaration of income, and the prompt payment of taxes. In situations where a discrepancy has already been identified, the taxpayer’s timely action, proper documentation, and consultation with tax professionals and legal counsel are crucial. By understanding the rules and remedies in the Philippine tax system, businesses can mitigate risks and fulfill their obligations under the law.