to have been withheld, inclusive of surcharges, interest and penalties incident to his

REVENUE MEMORANDUM ORDER NO. 38-83 failure to withhold.3.1/3 The withholding agent erroneously underwithheld the tax but
November 14, 1983 pays during the original audit and investigation the difference in theamount supposed to
have been withheld, inclusive of surcharges, interest and penalties incident to such
SUBJECT : Guidelines for Allowance of Deductions for Certain Income Payments Under Se error.3.2 Items of deductions disallowed due to non-compliance with Section 30 (1), the
ction 30 (1) of the Tax Code.TO : All Internal Revenue Officers Concerned deficiency income tax assessment for which hadbeen issued before the effectivity of this
1. Background Revenue Memorandum Order may be allowed upon payment not later than May 15,
1.1 Section 30 (1) of the National Internal Revenue Code, as amended by Batas Pambansa 1984 of the withholding tax required and supposed to have been withheld and/or
Blg. 135 , provides:"(1) Additional requirement for deductibility of certain payments. - surcharges, interest and penalties. However, no refund or credit arising from such re-
Any amount paid or payable which is otherwise deductible from, or taken into account allowance of a previously disallowed deduction shall be granted.
in computing gross income for which depreciation or amortization may be allowed 4. Effectivity
under this section and Section 29, shall be allowed as a deduction only if it is shown that This Revenue Memorandum Order shall take effect immediately
the tax required to be deducted and withheld therefrom has been paid to theBureau of
Internal Revenue in accordance with this section, Sections 54 and 93 of this Code.
"1.2 The abovequoted provisions of the Tax Code is frequently cited by Revenue
Examiners in their reports of investigation to justifydisallowances of certain expense and
other itemized deductions for which the taxpayer is obliged to make a withholding under
Sections54 and 93 of the Code and implementing regulations. Since the amounts
otherwise deductible are substantial, some taxpayers havevigorously 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), thisRevenue 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 anadditional requirement for deductibility
of itemized deductions representing income payments which are subject to withholding.
BatasPambansa Blg. 125 which was approved September 7, 1979 expanded the scope of
the items of deductions subject to the requirementby including amounts taken into
account in computing gross income for which depreciation or amortization may be
allowed. Theobvious 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),
areadequate to compel taxpayers/withholding agents to comply with the requirements
of the withholding tax law and regulations, outrightdisallowance of deductions
representing income payment for mere failure to withhold and remit will in effect, in
case of corporations, betantamount 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 inthe 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
paysduring 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, butthe
withholding agent pays during the original audit and investigation the amount supposed