Withholding Tax Requirement Repeal Issues
By: Atty. Euney Marie J. Mata-Perez on June 27,2024
Republic Act No. 11976, the Ease of Paying Taxes Act (“EOPTA”), repealed Section 34(K) of the National Internal Revenue Code (“Tax Code”) which provides that expenses or income payments are allowed as deductions from gross income “only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue.” The immediate effect of this amendment is the elimination of the long-standing requirement that, for expenses or income payments to be deductible for tax purposes, the tax required to be withheld on the amount paid or payable should have been paid to the BIR.
Prior to the aforesaid amendment, Revenue Regulations (RR) No. 2-1998, specifically, Section 2.58.2 thereof, provides that a taxpayer or withholding agent is allowed to deduct certain expenses or income payments from gross income despite the failure to withhold tax thereon at the time of the payment, on the condition that the withholding agent or taxpayer pays the withholding tax, along with any interest or applicable surcharges, even at the time of audit or investigation or reinvestigation or reconsideration. Thus, it has been the standing rule, even prior to the EOPTA, that expenses or income payments subject to withholding tax can be allowed as income tax deductions, even if no withholding tax was made, provided that the withholding agent pays the tax, including surcharges thereon, at the time of the audit or investigation or reinvestigation or reconsideration.
Pursuant to EOPTA’s repeal of the withholding requirement on an expense or income payment subject to withholding tax before it can be deductible from gross income, RR No. 4-2024 was issued to repeal certain provisions of RR 2-1998, particularly Section 2.58.5 thereof, which sets out the foregoing rule.
In addition, however, the BIR released Revenue Memorandum Circular (RMC) No. 60-2024 dated April 23, 2024 which further clarified the amendments introduced by the EOPTA. It provides that moving forward, for taxable years after January 1, 2024, “[e]xpenses or income payments subject to withholding tax shall be allowed as deductions from gross income for purposes of computing taxable income even if no tax was withheld, provided the [other] requirements for deductibility have been met.”
However, for ongoing audits covering taxable periods prior to January 1, 2024, RMC 60-2024 provides that expenses are allowed as deductions from gross income by the Revenue Officers (RO) only if the corresponding tax required to be withheld have been paid, whether prior to audit or submission of the audit report to the Reviewing Office, as follows:
“1. On all ongoing audit covering taxable period prior to January 1, 2024 – expenses subject to Withholding Tax shall be allowed as deductions from gross income by the Revenue Officer (RO) only if the corresponding tax required to be withheld has been paid, whether prior to audit or submission of the audit report to the Reviewing Office.
2. In a scenario where taxpayer failed to withhold the tax required to be withheld on expenses subject to Withholding Tax and the taxpayer did not pay the same prior to submission of the audit report to the reviewing office, the RO has to recommend for the issuance of an assessment notice both on Income Tax and Withholding Tax. This is in line with the provisions of RR No. 6-2018.
3. On audit cases which are already submitted to the Reviewing Office
a. Paid Case – same application stated under item 1 hereof;
b. Assessed Case – apply the requirement of deductibility under the then Section 34 (K) of the Tax Code, thus, assessment on both Income Tax and Withholding Tax shall be issued.”
Admittedly, for periods prior to January 1, 2024 (prior to the effectivity of EOPTA), the additional requirement of proper withholding for income tax deductibility prescribed under the old Section 34(K) of the Tax Code is still applicable. However, RMC No. 60-2024 seems to further restrict the period within which the taxpayer can settle the withholding tax, i.e., that it should be paid before the submission of the RO’s audit report to the reviewing officer. This restriction or requirement is new and was not even in the old provisions of RR No. 2-1998. As discussed above, the rule then was that the expense is allowed as an income deduction provided the required withholding tax is paid or settled, even if such settlement is made during audit or investigation, and even during reconsideration or reinvestigation.
The use of the word “reconsideration or reinvestigation” presupposes that even if the taxpayer pays the required withholding tax after audit is completed, and there is a request for reconsideration or reinvestigation by the taxpayer, which can be done as part of its protest to the BIR’s preliminary findings, the income tax deduction shall still be allowed. However, with the amendments introduced by RMC No. 60-2024 as discussed above, it appears that the taxpayer’s flexibility to settle the required withholding tax even after the submission of the audit report and during reinvestigation or reconsideration has now been removed.
It should also be noted that RR No. 6-2018, which is referred to in RMC No. 60-2024, did not restrict the period within which the taxpayer can settle the withholding tax. It merely stated that the deduction is allowed provided the required withholding taxes are paid at the time of audit or investigation or reinvestigation or reconsideration.
On the basis of the foregoing, we believe that the above-described new restriction prescribed by RMC No. 60-2024 has no basis, and thus, should be reviewed by the BIR.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal and is the Chair of the Tax Committee of the Management Association of the Philippines. She acknowledges the contribution of Ms. Rio Krisel G. Bautista this article. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com