The Grueling Tax Penalties in the Philippines and More

In order to encourage taxpayers in the Philippines to file and pay their taxes on or before the due date, the BIR and DOF impose penalties for late filing of any tax declarations. Basically, the tax penalty here is composed of interest (20% per annum), surcharge (outright 25% if there’s no fraud) and compromise (based on the BIR’s schedule of compromise).

Those grueling penalties surely are intimidating Filipino taxpayers and discouraging them to file and pay their taxes late. But are those penalties reasonable or are they too much for a punishment, especially for small taxpayers? I don’t know for sure. But to have an idea, let’s try to check the tax penalties imposed by other countries.

I tried to make some research on the tax penalties imposed by our neighboring countries, namely Singapore and Malaysia. I did not include the US and UK because of monetary differences and since these countries may charged minimum penalties in fixed USD or UK Pound amount, which may be incomparable to the Philippine Peso and the cost of living here in our country. So let’s take a look at our neighbors Singapore and Malaysia.

Tax penalties in Singapore

The Inland Revenue Authority of Singapore (IRAS) acknowledged in their website that “most taxpayers in Singapore pay their taxes on time responsibly”, although there are some who fail to do so each year. Based on what I’ve heard from my friends who are accountants in Singapore, the taxpayers there are assessed by the IRAS each year. Taxpayers then received the Notice of Assessment (NOA) which indicate the tax they have to pay.

Taxpayers have one month from the date of the Notice of Assessment (NOA) to pay the tax. When payment is not received by the due date, a 5% penalty and subsequently a 1% additional penalty can be imposed on the unpaid tax. The 1% additional penalty may be imposed 60 days after the 5% Demand Note if the tax is still not paid. The 1% penalty is imposed for each month that the tax remains unpaid. The total additional penalty will not exceed 12%.

Tax penalties in Malaysia

I don’t know much about the taxation system in Malaysia, but the Inland Revenue Board (IRB) of Malaysia imposes penalty for late submission of Income Tax Return Forms (ITRF) as follows:

Submission deadline after the prescribed period:
– up to 12 months = 20% penalty rate
– more than 12 months to 24 months = 25% penalty rate
– more than 24 months to 36 months = 30% penalty rate
– more than 36 months or 3 years = 35% penalty rate

Take note that the amount of penalty imposed would not exceed three (3) times or treble the amount of tax payable.

Let’s try an example

Let us say, Mr. Santos failed to file and pay his annual income tax on the due date or on the prescribed date of filing and payment. His income tax payable is P20,000. Now he has to pay penalties. Let us say he will be able to file and pay his ITR after 6 months. In this case, the amount of penalties he will be paying (assuming there’s no fraud or willful act to evade tax) will be as follows:

A. Using tax penalty rate in the Philippines:
Amount of tax payable: P20,000
Penalties:
Surcharge (25%) = P5,000
Interest (20% per year/10% for 6 months) = 2,000
Compromise (based on compromise schedule) = 4,000
Total Penalties: P11,000
Total tax payable: P31,000

B. Using tax penalty rate in Singapore:
Amount of tax payable: P20,000
Penalties:
Penalty (5%) = P1,000
Additional penalty (1% per month for 3 months): P600*
Total penalties: P1,600
Total tax payable: P21,600

* The Additional 1% penalty per month started 60 days after the taxpayer received the Demand Note. Let’s assume he has to pay additional 1% for 3 months.

C. Using tax penalty rate in Malaysia:
Amount of tax payable: P20,000
Penalty (up to 12 months: 20%) = P4,000
Total penalties: P4,000
Total tax payable: P24,000

Based on the computations above, the penalties using the different rates of the three countries above are as follows:

Philippines: P11,000
Singapore: P1,600
Malaysia: P4,000

Can you see the big difference?

How about if the taxpayer will be able to pay after 3 years?

If that is the case, the computation of tax penalties will be as follows:

A. Using tax penalty rate in the Philippines:
Amount of tax payable: P20,000
Penalties:
Surcharge (25%) = P5,000
Interest (20% per year for 3 years) = 12,000
Compromise (based on compromise table) = 4,000
Total Penalties: P21,000
Total tax payable: P41,000

B. Using tax penalty rate in Singapore:
Amount of tax payable: P20,000
Penalties:
Penalty (5%) = P1,000
Additional penalty (1% per month for 33 months): P6,600 but the total additional penalty should not exceed 12%, thus the additional penalty only amounts to P2,400
Total penalties: 3,400
Total tax payable: P23,400

C. Using tax penalty rate in Malaysia:
Amount of tax payable: P20,000
Penalty (more than 24 months to 36 months = 30%) = P6,000
Total penalties: P6,000
Total tax payable: P26,000

Again, based on the computations above, the penalties using the different rates of the three countries above are as follows:

Philippines: P21,000
Singapore: P3,400
Malaysia: P6,000

Again, can you spot the big difference?

What is worse than the penalty rate

You have seen how trembling and intimidating the tax penalty rate here in the Philippines compared to the penalties imposed by Singapore and Malaysia. But this horrible tax system in the Philippines doesn’t end here. I wonder how small business owners and taxpayers survive in our country.

Consider these things. Singapore and Malaysia have better tax system that makes their taxpayers file and pay their income tax conveniently, and they have lower penalty rate. On the other hand, the Philippines has higher penalty rates for late filing and payment of tax declarations, considering that our tax system is complicated and taxpayers have to queue for hours just to file and pay their taxes. On top of that, taxpayers in the Philippines, specifically business owners and professionals have to pay several types of taxes monthly, quarterly and annually, which all of them are subject to our cruel tax penalty rates.

Through the penalties imposed by our government, the BIR might increase its tax collections. However, I’m not sure if they can actually increase the collection of actual tax dues of Filipino taxpayers. I think they can only increase their collection of penalties from the poor taxpayers who are having difficult time to comply with all the no-so-easy requirements of the BIR. With these very high rates of penalty, complicated tax system, and the fact that corruption in the country is prominent, there will be more Filipinos who will not even attempt to register their names and businesses in the BIR’s database.

I’m calling the lawmakers

I know that the BIR is only doing their job, implementing our tax code and other existing laws. Fixing our tax system should start from our lawmakers. What are they doing now? Tax is the lifeblood of our country. Our leaders should at least try to study international taxation, and check why Singapore, Malaysia and other countries with effective tax systems are generating internal revenue well.

I believe they must be required with continuing professional education just like what is required to other professionals in the Philippines. Remember that lawmaking is one of the most important professions in the world. Therefore, our legislators, congressmen and senators must be continuously educated with the right and updated knowledge to help them enact important laws that will raise our national revenue, protect them in the treasury fund, take care of the taxpayers, support businesses, and develop our country and all our citizens.

What can you say? Please share your thoughts on the comments below.

Disclaimer: This article is for general information use only and doesn’t constitute professional advice. Moreover, new and subsequent laws and tax rules may render whole or part of this article obsolete. If you see any errors, please contact us to correct them.