No love withheld with RR No. 6-2018

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With the issuance of RR No. 6-2018, the aforementioned 2013 regulation was revoked and the previous provisions of Section 2.58.5 of RR No. 2-98 have been reinstated.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.