In the Philippine taxation system, the duty of a taxpayer to report income and sales is absolute, regardless of whether those transactions are ultimately subject to tax. A common misconception among business owners and professionals is that "tax-exempt" means "non-reportable." Under the National Internal Revenue Code (NIRC) and various Bureau of Internal Revenue (BIR) regulations, the failure to declare exempt sales in the appropriate tax returns—primarily BIR Forms 2550Q (Value-Added Tax) or 2551Q (Percentage Tax)—constitutes a compliance violation that carries significant financial and legal consequences.
The Legal Requirement for Disclosure
The BIR operates on a system of full disclosure. Even if a sale is classified as VAT-exempt under Section 109 of the Tax Code (e.g., sale of basic agricultural products, medical services, or educational services), it must still be reflected in the "Exempt Sales/Receipts" column of the relevant return.
This transparency allows the BIR to:
- Reconcile Data: Match the seller’s declared exempt sales with the buyer's reported purchases.
- Verify Status: Ensure the taxpayer actually qualifies for the exemption they are claiming.
- Monitor Thresholds: Track if the total gross sales exceed the VAT threshold (), requiring a change in tax registration.
Civil Penalties and Surcharges
When a taxpayer fails to declare exempt sales, they are generally cited for "failure to obey a listing or reporting requirement" or for filing an "incorrect" return.
- Surcharges: Under Section 248 of the NIRC, a 25% surcharge is imposed on the "amount due." While an exempt sale technically results in zero tax due for that specific line item, the BIR often views the omission as a "false or fraudulent return" if it results in the underpayment of other taxes or misrepresentation of the business's scale. If fraud is proven, the surcharge jumps to 50%.
- Interest: Statutory interest (currently 12% per annum under the TRAIN Law) is charged on any deficiency tax that arises because of the undeclared sales (e.g., if the BIR determines those sales were actually taxable).
- Compromise Penalties: This is the most common penalty for non-declaration of exempt items. Based on Revenue Memorandum Order (RMO) No. 7-2015, the BIR uses a schedule of compromise penalties for "failure to make/file/keep" required records or reports. These range from P1,000 to P50,000 per return, depending on the gross sales/receipts of the taxpayer.
Criminal Liability
Under the "Tax Reform for Acceleration and Inclusion" (TRAIN) Law and the original NIRC, the following criminal charges can be pursued:
- Section 255 (Failure to File/Supply Correct Information): Any person required to supply correct and accurate information who willfully fails to do so can, upon conviction, be punished by a fine of not less than P10,000 and suffer imprisonment of not less than one year but not more than ten years.
- Section 247: For corporations, the penalty is imposed on the officers (President, Treasurer, or Accountant) responsible for the omission.
Impact on Input Tax Credits
For VAT-registered taxpayers, the failure to declare exempt sales creates a "mixed transaction" complication. VAT-registered entities must allocate their input taxes between taxable and exempt sales.
The Risk: If you hide exempt sales and claim 100% of your input VAT against your taxable sales, you are effectively over-claiming input tax. Once the BIR discovers the undeclared exempt sales during an audit, they will disallow a portion of your input VAT, leading to a deficiency VAT assessment plus surcharges and interest.
The "Presumption of Fraud"
Under Section 248(B) of the Tax Code, a "substantial under-declaration" (failing to report more than 30% of actual sales/receipts) constitutes prima facie evidence of a false or fraudulent return. Even if the sales were exempt, the omission of such a large volume of transactions triggers an investigation into the taxpayer’s entire accounting system, often leading to more rigorous audits and "Oplan Kandado" proceedings (temporary closure of the establishment).
Summary of Penalties Table
| Penalty Type | Basis / Authority | Estimated Cost/Impact |
|---|---|---|
| Compromise Penalty | RMO No. 7-2015 | P1,000 to P50,000 per violation |
| Civil Surcharge | Section 248, NIRC | 25% to 50% of any resulting deficiency |
| Deficiency Interest | TRAIN Law | 12% per annum |
| Disallowance | Section 110, NIRC | Reduction of creditable Input VAT |
| Criminal Fine | Section 255, NIRC | P10,000 minimum + potential jail time |
In conclusion, exempt sales are not "invisible" sales. Proper compliance requires their diligent entry in BIR Forms to maintain a clean tax record and avoid the heavy hand of the BIR's enforcement division.