Global Tax Alert | 19 July 2013

Philippines' new regulation disallows a taxable deduction in the event of failure to withhold tax on the payment

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On 13 July 2013, the Philippines issued Revenue Regulation 12-2013 (Rev. Reg. 12-2013) which will disallow a payment as a taxable deduction when a payor fails to withhold the appropriate tax on the payment. This will be the case even if the payor ultimately pays the withholding tax liability at the time of a tax audit; whereas under the current law, the payor would be permitted to claim a deduction when the withholding tax is paid when the expense is paid, payable or accrued, whichever is earliest, or when the payor pays the withholding tax due plus interest and any applicable surcharge at the time of a tax audit investigation or reinvestigation/reconsideration.

Rev. Reg. 12-2013 is applicable to payments made to both domestic and foreign recipients and will become effective 28 July 2013 for payments made that are subject to withholding tax.

Impact of the regulation on tax treaty relief

Pursuant to Revenue Memorandum Order (RMO) No. 72-2010, a tax treaty relief application (TTRA) must be filed prior to the first taxable event. Since RMO No. 72-2010 only mandates the filing of a TTRA before the first taxable event, it may be argued that once a TTRA is filed, a withholding agent may withhold tax on a payment made to a treaty country resident at a rate specified in a treaty with that treaty country, subject to a final confirmation via a ruling. If the ruling denies the TTRA, the withholding agent must remit an additional withholding tax liability.

Based on the language in Rev. Reg. 12-2013, it would appear that it applies when no tax is withheld. Accordingly, if the withholding agent withholds tax at a reduced treaty rate based on a pending TTRA, but the TTRA is ultimately denied, Rev. Reg. 12-2013 does not seem applicable. The Bureau of Internal Revenue, however, may nevertheless interpret the language narrowly, in which case, it could result in a denial of the deduction to the withholding agent.

If a given treaty provides for a full exemption but the TTRA is later denied, the withholding agent's ability to deduct the payment would more likely than not be severely diminished.

A foreign recipient may file a refund claim when a payor disregards a pending TTRA by withholding tax at the statutory rate and the TTRA is ultimately granted under the provision of “Recovery of Tax Erroneously or Illegally Collected.” To avail of this provision, the foreign recipient must file a claim within two years from the date of the tax payment, i.e., the date the tax was withheld.


Rev. Reg. 12-2013 may cause a withholding agent to apply the statutory withholding tax rate on a payment to preserve its ability to claim a related deduction when a TTRA is pending on that payment. The foreign recipients' only remedy would be to file a refund claim, which generally takes more than a year.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Philippines (SGV & Co.), Makati City
  • Emmanuel C. Alcantara
    +63 2 894 8149
  • Fidela T. Isip-Reyes
    +63 2 894 8204
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
  • Jeff Hongo
    +1 212 773 6143
  • Kaz Parsch
    +1 212 773 7201
  • Bee-Khun Yap
    +1 212 773 1816

EYG no. CM3658