No love with­held with RR No. 6-2018

Business World - - THE ECONOMY - MAR­ION D. CASTAÑEDA MAR­ION D. CASTAÑEDA is a man­ager be­long­ing to the tax ser­vices depart­ment of Isla Li­pana & Co., the Philip­pine mem­ber firm of the PwC net­work. (02) 845-2728 lo­cal 3273 mar­ion.d.cas­taneda@ph.pwc.com

Love is a con­cept we do not usu­ally as­so­ciate with tax­a­tion. In fact, one could say that the two are quite the op­po­site: while love en­tails giv­ing, tax in­volves tak­ing.

Nonethe­less, tax­pay­ers must have felt the love when they heard about Rev­enue Reg­u­la­tions (RR) No. 6-2018 in Jan­uary. The RR ex­plic­itly re­vokes one of the no­table tax reg­u­la­tions pre­vi­ously is­sued by the Bu­reau of In­ter­nal Rev­enue (BIR), specif­i­cally RR No. 122013, which was an amenda­tory reg­u­la­tion on the re­quire­ments for de­ductibil­ity of cer­tain ex­penses. So, why would tax­pay­ers feel any love for this new RR?

REV­ENUE REG­U­LA­TIONS NO. 12-2013

Five years ago, RR No. 12-2013 amended Sec­tion 2.58.5 of the con­sol­i­dated with­hold­ing tax reg­u­la­tions or RR No. 2-98, cov­er­ing the re­quire­ments for de­ductibil­ity of ex­penses. Ac­cord­ing to RR No. 12-2013, no de­duc­tion for in­come tax pur­poses shall be al­lowed where there was fail­ure to with­hold tax not­with­stand­ing sub­se­quent pay­ment of such with­hold­ing tax at the time of au­dit in­ves­ti­ga­tion or rein­ves­ti­ga­tion/re­con­sid­er­a­tion.

Ef­fec­tively, a de­fi­ciency with­hold­ing tax as­sess­ment on an oth­er­wise de­ductible ex­pense would have also re­sulted in a de­fi­ciency in­come tax as­sess­ment since the ex­pense would still be dis­al­lowed, re­gard­less of the pay­ment of de­fi­ciency with­hold­ing tax dur­ing a tax au­dit. Ad­di­tion­ally, both of these de­fi­ciency taxes would also have been sub­jected to sur­charge and in­ter­est penal­ties. The 2013 RR was most im­pact­ful on tax­pay­ers clas­si­fied as Top 20,000 Pri­vate Cor­po­ra­tions for with­hold­ing tax pur­poses since they are re­quired to with­hold taxes on their reg­u­lar pur­chases of goods and ser­vices from lo­cal sup­pli­ers at the rate of 1% and 2%, re­spec­tively. Most tax­pay­ers would agree that no mat­ter how dili­gent the fi­nance peo­ple are in a com­pany, there are prac­ti­cal chal­lenges that make it dif­fi­cult to be 100% com­pli­ant in terms of with­hold­ing taxes on sup­pli­ers.

REV­ENUE REG­U­LA­TIONS NO. 6-2018

With the is­suance of RR No. 6-2018, the afore­men­tioned 2013 reg­u­la­tion was re­voked and the pre­vi­ous pro­vi­sions of Sec­tion 2.58.5 of RR No. 2-98 have been re­in­stated. Ac­cord­ingly, the pre­vail­ing rule now states that an ex­pense shall be al­lowed as a de­duc­tion pro­vided that the re­quired with­hold­ing tax is re­mit­ted to the BIR, even if such re­mit­tance is done be­lat­edly, dur­ing a tax au­dit and with the con­cur­rent penal­ties as a re­sult of un­der-with­hold­ing or non-with­hold­ing.

There­fore, set­tle­ment of a de­fi­ciency with­hold­ing tax as­sess­ment dur­ing a tax au­dit will ef­fec­tively ad­dress the is­sue on the dis­al­lowance of the re­lated ex­pense and cor­re­spond­ingly, the re­lated de­fi­ciency in­come tax as­sess­ment should be can­celled.

It must be em­pha­sized that re­gard­less of the ap­pli­ca­ble RR, the with­hold­ing tax re­quire­ment for the de­ductibil­ity of ex­penses is clearly man­dated un­der Sec­tion 34(K) of the Tax Code. How­ever, the re­in­stated rule un­der RR No. 6-2018 qual­i­fies that sat­is­fy­ing the re­quire­ment to pay with­hold­ing tax, even be­lat­edly dur­ing a tax au­dit, will suf­fice for pur­poses of in­come tax de­duc­tion.

RETROAC­TIVE OR PROSPEC­TIVE AP­PLI­CA­TION?

When does this re­in­stated rule ac­tu­ally be­come ef­fec­tive?

RR No. 6-2018 states that the reg­u­la­tions shall take ef­fect 15 days fol­low­ing its pub­li­ca­tion in any news­pa­per of gen­eral cir­cu­la­tion. Gen­er­ally, an RR has no retroac­tive ef­fect. Does this gen­eral rule ap­ply in the case of an is­suance like RR No. 6-2018, which re­vokes an­other RR and re­in­states a pre­vi­ously ef­fec­tive rule?

The prin­ci­ple of non- retroac­tiv­ity of rul­ings un­der Sec­tion 246 of the Tax Code pro­vides that any re­vo­ca­tion, mod­i­fi­ca­tion, or re­ver­sal of any rules and reg­u­la­tions pro­mul­gated in ac­cor­dance with the Tax Code (e.g., rev­enue reg­u­la­tions) shall not be given retroac­tive ef­fect if the re­vo­ca­tion, mod­i­fi­ca­tion, or re­ver­sal will be prej­u­di­cial to the tax­payer.

A care­ful read­ing of this pro­vi­sion re­veals that the non- retroac­tiv­ity of a re­voked, mod­i­fied, or re­versed RR is couched on the con­di­tion that such re­vo­ca­tion, mod­i­fi­ca­tion, or re­ver­sal would prej­u­dice the tax­payer. In­versely, if the re­vo­ca­tion, mod­i­fi­ca­tion or re­ver­sal is ben­e­fi­cial to the tax­payer, would the RR have retroac­tive ef­fect?

A 2011 Supreme Court case has tack­led this ques­tion. In its de­ci­sion, the high court ap­plied a par­tic­u­lar RR retroac­tively — the RR pro­mul­gated in 1999 was ap­plied to a trans­ac­tion in 1995 — and noted that “while rev­enue reg­u­la­tions as a gen­eral rule have no retroac­tive ef­fect, if the re­vo­ca­tion is due to the fact that the reg­u­la­tion is er­ro­neous or con­trary to law, such 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 the tax­payer.”

Ap­ply­ing the rul­ing, if it can be suc­cess­fully ar­gued that RR No. 12- 2013 was prej­u­di­cial to tax­pay­ers and based on a wrong con­struc­tion of the law, there may be ba­sis to ap­ply its re­vo­ca­tion un­der RR No. 6- 2018 retroac­tively. We can, how­ever, ex­pect that the BIR would most likely dis­agree with this ar­gu­ment dur­ing the course of a tax au­dit.

But for now, the fact that RR No. 6-2018 was even pro­mul­gated is some­thing tax­pay­ers may con­sider laud­able.

It is a step in the right di­rec­tion in terms of tax­payer- friendly rules and reg­u­la­tions. While the BIR’s tax cam­paign of “I love Philip­pines, I pay taxes” at­tempts to evoke a sense of pa­tri­o­tism among the tax­pay­ing pub­lic, this au­thor like­wise wishes to ap­peal to the tax au­thor­i­ties’ love for their du­ti­ful tax­pay­ers by con­tin­u­ing to is­sue sen­si­ble, rea­son­able, and prac­ti­cal rules and reg­u­la­tions, es­pe­cially in light of the on-go­ing evo­lu­tion of our tax laws with present and fu­ture tax re­form pack­ages. Per­haps there is love in tax­a­tion af­ter all.

The views or opin­ions ex­pressed in this ar­ti­cle are solely those of the au­thor and do not nec­es­sar­ily rep­re­sent those of Isla Li­pana & Co. The con­tent is for gen­eral in­for­ma­tion pur­poses only, and should not be used as a sub­sti­tute for spe­cific ad­vice.

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