A taxpayer’s dilemma: Whether to withhold taxes on all income payments

Dated 12 July 2013, the Bureau of Internal Revenue (“BIR”) issued Revenue Regulations (“RR”) No. 12-2013 amending Section 2.58.5 of RR No. 2-98 relative to the requirements for deductibility of certain income payments. This emphasizes the provision of Section 34 (K) of the Tax Code, as amended, that the deductibility of an expense for income tax purposes will be disallowed if applicable withholding tax from said income payment was not remitted to the BIR.

Prior to RR No. 12-2013, a taxpayer is allowed to claim as deductible expense where no withholding of tax was made if the taxpayer/withholding agent pays the tax including the interest and penalties incident to the failure to withhold the tax at the time of the audit investigation.  Specifically, the following provisions of Section 2.58.5 of RR No. 2-98, as amended, were deleted:  (a) the payee reported the income and pays the tax due thereon and the withholding agent pays the tax including the interest incident to the failure to withhold the tax, and surcharges, if applicable, at the time of the audit investigation or reinvestigation/reconsideration; (b) the recipient/payee failed to report the income on the due date thereof, but the withholding agent/taxpayer pays the tax, including the interest incident to the failure to withhold the tax, and surcharges if applicable, at the time of the audit/investigation or reinvestigation; (c) the withholding agent erroneously under withheld the tax but pays the difference between the correct amount of tax withheld, including the interest, incident to such error, and surcharges, if applicable, at the time of the audit/investigation or reinvestigation/reconsideration; and (d) items or deduction representing return of capital such as those pertaining to purchases of raw materials forming part of finished product or purchases of goods for resale, shall be allowed as deductions upon the withholding agent’s payment of the basic withholding tax and penalties incident to the non-withholding or underwithholding.

The foregoing instances allowing deductibility was replaced by a provision which states that “no deduction will also be allowed notwithstanding payments of withholding tax at the time of the audit investigation or reinvestigation/reconsideration in cases where no withholding of tax was made in accordance with Sections 57 and 58 of the Code.”

The effect of this amendment during a BIR tax audit is that related expense of a taxpayer can be disallowed if the taxpayer will not be able to establish that the applicable withholding tax was imposed and remitted to the BIR. I believe that the impact is that every time there is a deficiency withholding tax finding, the related business expense may be disallowed and revenue examiners will compute the corresponding deficiency income tax even if properly substantiated.

Should RR No. 12-2013 be applied prospectively to tax audits covering fiscal year starting after 28 July 2013 considering that Section 4 of subject RR provides that the provisions of the regulations shall take effect after fifteen (15) days following publication? Mindful of the zeal of revenue officers to raise revenue for the government, it is expected that this RR may be applied to all ongoing tax audits. Thus, there is a pressing concern to clarify the application of RR No. 12-2013.  

In the plain words of Section 246 of the Tax Code, as amended, the pertinent provision clearly states that any revocation, modification or reversal of any of the rules and regulations promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers.

Phillip M. Torres is a Supervisor from the Tax Group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected]