Disallowance of expenses for failure to withhold taxes in Philippines


By: Tax and Accounting Center Philippines

Update under Republic Act No. 11976 or Ease of Paying Taxes Act:

Section 34(K) of the Tax Code, as amended, as discussed below has already been repealed. This would mean that an expense subject to withholding tax could still be deducted from gross income even if the taxpayer failed to withhold on them. However, BIR could still make an assessment of withholding taxes that the taxpayer failed.

Revenue Regulations No. 12-2013 dated July 12, 2013 (RR No. 12-2013) entitled “Amending Section 2.58.5 of Revenue Regulations No. 2 – 1998 (RR 2-98), as amended, Relative to the Requirements for Deductibility of Certain Income Payments” has been issued by the Bureau of Internal Revenue (BIR) implementing Section 34(k) of the Tax Code, as amended, in relation to Section 245 of the Tax Code, as amended.

Under Revenue Regulations No. 12-2013, Section 2.58.5 of Revenue Regulations No. 2- 98 was amended to read as follows:

“Section 2.85.5. Requirements for Deductibility. – Any income payment which is otherwise deductible under the Code shall be allowed as a deduction from the payor’s gross income only if it is shown that the income tax required to be withheld has been paid to the Bureau in accordance with Section 57 and 58 of the Code.

No deduction will also be allowed notwithstanding payments of withholding tax at the time of the audit investigation or reinvestigation/reconsideration in cases where no withholding of tax was made in accordance with Section 57 and 58 of the Code”

Implication of RR No. 12-2013

Section 34(K) under the 1997 Tax Code was worded and quoted below for easy reference:

“(K) Additional Requirements for Deductibility of Certain Payments. — Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, 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 58 and 81 of this Code.” (Emphasis supplied)

Section 34(K) provides a mandatory requirement for deductibility of certain expenses – showing that the applicable withholding tax, if any, has been paid to the Bureau of Internal Revenue (BIR). In the past, deficiency withholding taxes during tax examinations or tax assessment in the Philippines carries a corresponding deficiency income tax assessment caused by the disallowance of the expense for failure to withhold. If the taxpayer would pay the deficiency withholding tax liability, then, such expense shall be allowed and the income tax assessment for disallowance of related expense shall then be cancelled.

With the new rule under RR No. 12-2013, an expense will not be allowed as a deduction for income tax if taxpayer failed to withhold applicable tax during tax examination. The disallowance would still be made even if the taxpayer will pay the deficiency withholding tax during tax audit or examination in the Philippines.

How to avoid withholding tax liability  

In essence, the rule under RR No. 12-2013 simply states that taxpayers must be very conscious of its withholding tax liabilities. It is the taxpayer who determines which expense or which income payment is subject to withholding tax required under Revenue Regulations No. 2-1998, as amended. Failure to properly apply withholding tax rules are subject to penalty for disallowance of related expense or cost. As such, the best way to avoid is to invest in education – learning which expense is subject to withholding, the applicable rates, and the related reports and submissions.


Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at 

in**@ta************.org











or you may post a question at Tax and Accounting Center Forum and participate therein.

Contact Us
Please enable JavaScript in your browser to complete this form.

© Tax and Accounting Center 2024. All Rights Reserved

error: Content is protected !!