The Bureau of Internal Revenue (BIR) has recently issued Revenue Regulations (RR) No. 6-2018, revoking RR No. 12-2013, relative to the deductibility of certain expenses. These expenses particularly pertain to ordinary and necessary trade, business or professional expenses.
Under the National Internal Revenue Code (NIRC), as amended, taxpayers are allowed deductions from gross income, one of which are ordinary and necessary expenses paid during the taxable year which are directly attributable to the development, management, operation, and conduct of a trade, business or profession.
In this regard, the BIR has come up with the following requisites for deductibility of expenses:
• the expense must be ordinary and necessary;
• it must have been paid or incurred during the taxable year;
• it must have been paid or incurred during the conduct of the trade or business of the taxpayer; and
• it must be supported by sufficient evidence, such as official receipts, or other adequate records.
Moreover, the BIR has provided for an additional requirement which is that the withholding tax on the payments must have been withheld and remitted to the BIR. Commonly referred to as “creditable withholding tax” (CWT), these taxes are applied on certain income payments, like the ordinary and necessary business expenses discussed above, and is creditable against the income tax due of the payee for the taxable year the income was earned. Through the years, the BIR has issued regulations which list down the particular payee and the corresponding CWT to be applied on the income payments. A familiar example of these income payments would be the 5 percent CWT on gross rental payment made by lessees to their lessors for the continued use or possession of real property.
Given the following, assuming a taxpayer is under an audit investigation conducted by the BIR, what would be the effect if he failed to withhold on his P15,000 a month rental expense payments for a commercial space used in business? What would happen here is that the BIR would disallow the rental expense for failure of the taxpayer to withhold on the same. As you know, a disallowed expense would have an effect of increasing the taxpayer’s gross income subject to tax, resulting ultimately in a deficiency income tax assessment. In addition, the BIR will likewise issue a deficiency CWT assessment, which would be the 5 percent on the gross rental payments for the taxable year, plus surcharge and interest.
Now, looking at the above illustration closely, if the taxpayer decides to settle the CWT assessment and pay the CWT due, plus surcharge and interest, will this have an effect of cancelling the corresponding income tax assessment, considering that all the requisites for deductibility (save for the fact of non-withholding) have been complied with? Stated differently, would the BIR now allow the rental expenses considering that the appropriate CWT has been paid?
Under RR 12-2013, the taxpayer will still have to contend with a deficiency income tax assessment, and pay the deficiency income taxes, even if the corresponding CWT has been paid during the BIR audit investigation. The resulting application of RR 12-2013 has caused the regulation to be regarded as one of the more controversial regulations signed by then Commissioner Kim Henares, as it unduly punishes taxpayers who wish to voluntarily settle their tax liabilities. Since the issuance of 12-2013, civic groups, including the Tax Management Association of the Philippines (TMAP) have tirelessly lobbied for its amendment or revocation.
Now, under the administration of Commissioner Caesar R. Dulay, the BIR has issued RR No. 6-2018, effectively revoking RR No. 12-2013. With the advent of 6-2018, any expense payments shall be allowed as a deduction from taxpayer’s gross income if it is shown that the deficiency CWT, including interest and surcharges, if applicable, have been paid during the audit investigation or reinvestigation/reconsideration. Thus, any income tax assessment arising from the non-withholding of the expense should be cancelled and withdrawn by the BIR.
The revocation of RR No. 12-2013 represents a welcome development on how the BIR can be more receptive to the specific needs of its taxpayers. We look forward to more BIR issuances that focuses on making the payment of taxes more efficient and less burdensome for the taxpayer.
Atty. Maria Louella “Peaches” Aranas is a seasoned tax lawyer and Managing Partner at LMA Law office.