In the Philippine taxation system, the Bureau of Internal Revenue (BIR) operates under a "pay-as-you-file" principle. For corporations and individuals engaged in business or practice of profession, this necessitates the filing of Quarterly Income Tax Returns (BIR Form 1701Q for individuals; 1702Q for corporations). When a taxpayer fails to meet the statutory deadlines, they are subject to "Additions to Tax" under Title X of the National Internal Revenue Code (NIRC), as amended.
Chief among these additions—and often the most confusing for taxpayers—is the Compromise Penalty.
1. The Legal Basis: Civil Penalties vs. Compromise
When a tax return is filed late, three distinct types of additions are generally imposed:
- Surcharge: A 25% penalty on the tax due (50% in cases of willful neglect or fraud).
- Interest: Generally 12% per annum on the unpaid amount until fully paid (as per the TRAIN Law).
- Compromise Penalty: A payment made by the taxpayer to avoid criminal prosecution for violations of the Tax Code.
While surcharges and interest are mandatory civil penalties, the compromise penalty is technically a consensual settlement. Under Section 204 of the NIRC, the Commissioner of Internal Revenue may compromise the payment of any internal revenue tax. In the context of late filing, it is paid in lieu of the criminal liability associated with failing to obey BIR regulations.
2. The Schedule of Penalties (RR 7-2015)
The BIR does not arbitrarily set compromise amounts for late filing. These are governed by Revenue Memorandum Order (RMO) No. 7-2015, which updated the "Revised Schedule of Compromise Penalties."
The penalty is graduated based on the amount of tax unpaid. If a return is filed late, the compromise penalty generally follows this structure:
| Tax Due (PHP) | Compromise Penalty (PHP) |
|---|---|
| 0.00 (No Tax Due / Nil) | 1,000 |
| Over 0.00 but not over 5,000 | 2,000 |
| Over 5,000 but not over 10,000 | 3,000 |
| Over 10,000 but not over 20,000 | 5,000 |
| Over 20,000 but not over 50,000 | 10,000 |
| Over 50,000 but not over 100,000 | 15,000 |
| Over 100,000 but not over 500,000 | 20,000 |
| Over 500,000 but not over 1,000,000 | 30,000 |
Note: For returns with tax due exceeding PHP 5 million, the compromise penalty can reach up to PHP 50,000, which is the maximum cap for a single violation of "Failure to File/Pay."
3. The "No Tax Due" Scenario
A common misconception is that if a business incurred a loss or has zero tax liability for the quarter, no penalty applies for late filing. This is incorrect.
The BIR requires the timely submission of the return regardless of the financial outcome. Even if the tax due is zero ("Nil"), the compromise penalty for late filing is fixed at PHP 1,000 per return. Failure to pay this during the "second opportunity" (upon audit or notice) can lead to the BIR filing a criminal case for "Failure to Make/File Return" under Section 255 of the NIRC.
4. Voluntary vs. Involuntary Payment
- Voluntary Compliance: If a taxpayer realizes they missed the deadline and files "out of time" before receiving a notice from the BIR, they calculate the surcharge and interest themselves and include the compromise penalty based on the RMO 7-2015 table.
- Involuntary/Assessment: If the BIR discovers the late filing through its computerized matching system or an audit, they will issue a Notice of Discrepancy (NOD) or a Preliminary Assessment Notice (PAN). At this stage, the taxpayer may still offer to pay the compromise penalty to settle the violation.
5. Can Compromise Penalties be Waived?
Compromise penalties are rarely waived because they are considered a substitute for criminal prosecution. However, under Revenue Regulations (RR) No. 4-2019 (Tax Amnesty on Delinquencies) or specific circulars during national emergencies (like the COVID-19 pandemic), the BIR has, in the past, extended deadlines or provided relief.
Outside of such specific issuances, the only way to contest a compromise penalty is to prove that the filing was actually on time (e.g., providing a stamped "Received" copy or an eFPS/EBIRForms acknowledgment receipt) or that the taxpayer is not required to file that specific return.
6. Practical Implications for Taxpayers
- Cumulative Nature: Quarterly Income Tax is separate from the Annual Income Tax. If you file all three quarters late, you will face three separate compromise penalties.
- Open Cases: Late filings that remain unpaid create "Open Cases" in the BIR’s Internal Revenue Integrated System (IRIS). These will prevent the taxpayer from obtaining a Tax Clearance, which is essential for business permit renewals and government biddings.
- The "Consent" Requirement: Because a compromise is a contract, the BIR cannot strictly force a taxpayer to pay it; they can only suggest it. However, if the taxpayer refuses to pay the compromise penalty, the BIR's legal recourse is to pursue the criminal charge in court. Almost all taxpayers choose to pay the penalty rather than face litigation.