Reinstated rules on deductibility of expenses, a welcome development

The Bureau of Internal Revenue (BIR) issued early this year Revenue Regulations (RR) No. 6-2018 to revoke RR No. 12-2013 and to reinstate the provisions of RR No. 14-2002, as amended, allowing, in certain cases, the deduction of an expense where no withholding of tax was made.

It may be recalled that RR No. 12-2013, issued last July 12, 2013, was not gladly received because of its provision that an expense shall not be allowed as a deduction for income tax purposes notwithstanding payment of deficiency withholding tax at the time of the audit/investigation, or reinvestigation/reconsideration.

Indeed, the issuance of RR No.12-2013 took many taxpayers aback because of the onerous penalty it carries. Note that in case of a tax audit or investigation, the taxpayer who failed to withhold tax, on its income payment may be meted with a tax assessment for deficiency income tax (equivalent to 30 percent of the income payment not subjected to withholding tax), and deficiency withholding tax, plus interest and surcharges.

Come RR No. 6-2018 and the old rule has been revived. RR No. 6-2018 provides that expenses incurred in a given taxable year which were not subjected to withholding, may be allowed as deduction, if the deficiency withholding tax is paid to the BIR at the time of the tax audit/investigation or reinvestigation/reconsideration. This means taxpayers who failed to withhold need not suffer a deficiency income tax assessment. It is because upon payment of the deficiency withholding tax, the otherwise disallowed expense will already be deductible for income tax purposes.

Does RR No. 6-2018 apply to all on-going tax audit or assessments? It appears so.

It is worthy to note that Section 246 of the 1997 Tax Code, as amended (“Tax Code”) clearly allows retroactive application of regulations if the revocation, modification, or reversal will be not be prejudicial to the taxpayers. There is no doubt the retroactive application of RR No. 6-2018 is beneficial to the taxpayers because the RR actually allows the deductibility of an expense for income tax purposes, provided the deficiency withholding tax is paid.

Moreover, in a number of cases decided by the Supreme Court, it was held that administrative rules and regulations which are interpretative of a statute, and not declarative of certain rights and corresponding obligations, are given retroactive effect as of date of the effectivity of the statute.

With reference to a 2011 Supreme Court (SC) case, the provisions of RR No. 4-99 were nonetheless given retroactive application, although the subject transaction took place four years before its effectivity. As a general rule, RRs have no retroactive effect. However, the SC ruled that if the revocation is due to the fact the regulation is erroneous or contrary to law, the revocation shall have retroactive operation as to affect past transactions, because a wrong construction of the law cannot give rise to a vested right that can be invoked by a taxpayer.

Considering, therefore, that RR No. 6-2018 is an issuance interpretative of Section 34 (K) of the 1997 Tax Code, as amended, the RR should likewise be deemed effective as of the date of effectivity of the Tax Code, or beginning Jan. 1, 1998.

Likewise, a plain reading of RR 6-2018 shows that the deficiency withholding tax and applicable penalties may be paid at the time of audit/investigation or reinvestigation/reconsideration.

A tax audit/investigation begins with the issuance of a Letter of Authority (LOA) to a taxpayer. The tax audit generally ends with the issuance of the Formal Letter of Demand and Final Assessment Notice (FLD/FAN) to the taxpayer.

On the other hand, the reinvestigation/reconsideration generally starts with the filing of the protest of the taxpayer and ends when the assessment becomes final and executory at BIR level.

Thus, RR No. 6-2018 should apply to all on-going tax audit/investigations, regardless of the date of issuance of the LOA; and all tax assessments which are still under reinvestigation/reconsideration at the BIR level. In all the foregoing cases, the assessment for deficiency income tax (due to the disallowance of an expense relative to non-withholding) should be removed or cancelled, if the taxpayer pays the deficiency withholding tax due and the corresponding penalties.

As RR No. 6-2018 may pose an adverse effect on tax collection which is currently pegged at Php2.03 trillion, it will not be a surprise if there will be BIR examiners who will take a different view on the matter. Nonetheless, it would be another welcome development if the BIR comes up with a circular to clarify the application of RR No. 6-2018 on ongoing assessments in order to establish a uniform rule and avoid conflicting interpretations among the BIR examiners and taxpayers alike.

Hanna Karen V. Almario is an assistant manager from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

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