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.

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 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: cda

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
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 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

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