Guidelines for Allowance of Deductions for Certain Income Payments Under Section 30 (1) of the Tax Code

November 14, 1983 REVENUE MEMORANDUM ORDER NO. 38-83 SUBJECT : Guidelines for Allowance of Deductions for Certain Income Payments Under Section 30 (1) of the Tax Code TO : All Internal Revenue Officers Concerned 1. Background 1.1 Section 30 (1) of the National Internal Revenue Code, as amended by Batas Pambansa Blg. 135, provides: "(1) Additional requirement for deductibility of certain payments . - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income for which depreciation or amortization may be allowed under this section and Section 29, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this section, Sections 54 and 93 of this Code." acd 1.2 The abovequoted provisions of the Tax Code is frequently cited by Revenue Examiners in their reports of investigation to justify disallowances of certain expense and other itemized deductions for which the taxpayer is obliged to make a withholding under Sections 54 and 93 of the Code and implementing regulations. Since the amounts otherwise deductible are substantial, some taxpayers have vigorously protested the literal application of the said provision in the audit and investigation of their income tax liabilities. 1.3 In order to minimize audit controversies and to achieve uniformity in implementing the aforequoted provision of Section 30(1), this Revenue Memorandum Order is hereby issued to prescribe guidelines that shall be observed by revenue officers for allowing or disallowing items of deductions referred to in the said Section. 2. The Rationale of Section 30(1) 2.1 PD 1351 which became effective April 17, 1978 added Section 30(1) to the Code (originally as paragraph (m) of Section 30) as an additional requirement for deductibility of itemized deductions representing income payments which are subject to withholding. Batas Pambansa Blg. 125 which was approved September 7, 1979 expanded the scope of the items of deductions subject to the requirement by including amounts taken into account in computing gross income for which depreciation or amortization may be allowed. The obvious purpose of this provision is to compel compliance with the requirements of Sections 54 and 93. 2.2 Considering that the existing ad valorem (surcharges and interests), as well as the specific penalties (fine and imprisonment), are adequate to compel taxpayers/withholding agents to comply with the requirements of the withholding tax law and regulations, outright disallowance of deductions representing income payment for mere failure to withhold and remit will in effect, in case of corporations, be tantamount to the imposition of additional 25% or 35% "surcharge" (equivalent to the normal corporate tax rates). 2.3 In order to minimize the onerous effect of literal application of Section 30(1), allowance or disallowance of a deduction falling under the said paragraph of Section 30 shall be determined in accordance with the following guidelines. 3. Guidelines For Applying Section 30(1) . 3.1 An amount claimed as deduction on which a tax is supposed to have been withheld under Sections 54 and 93 shall be allowed if in the course of his audit and/or investigation, the examiner discovers that: 3.1/1 No withholding of creditable or final tax was made but the payee reported the income and the withholding agent/taxpayer pays during the original audit and investigation the surcharges, interest and penalties incident to the failure to withhold the tax. 3.1/2 No withholding of creditable or final tax was made and the recipient-payee failed to report the income on due date thereof, but the withholding agent pays during the original audit and investigation the amount supposed to have been withheld, inclusive of surcharges, interest and penalties incident to his failure to withhold. 3.1/3 The withholding agent erroneously underwithheld the tax but pays during the original audit and investigation the difference in the amount supposed to have been withheld, inclusive of surcharges, interest and penalties incident to such error. 3.2 Items of deductions disallowed due to non-compliance with Section 30 (1), the deficiency income tax assessment for which had been issued before the effectivity of this Revenue Memorandum Order may be allowed upon payment not later than May 15, 1984 of the withholding tax required and supposed to have been withheld and/or surcharges, interest and penalties. However, no refund or credit arising from such re-allowance of a previously disallowed deduction shall be granted. cd 4. Effectivity This Revenue Memorandum Order shall take effect immediately. RUBEN B. ANCHETA Acting Commissioner