Withholding tax requirement repeal issues

REPUBLIC Act 11976, or the Ease of Paying Taxes Act (EOPTA), repealed Section 34(K) of the National Internal Revenue Code (Tax Code), which provides that expenses or income payments are allowed as deductions from gross income "only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue (BIR)." The immediate effect of this amendment is the elimination of the long-standing requirement that, for expenses or income payments to be deductible for tax purposes, the tax required to be withheld on the amount paid should have been paid to the BIR.

Prior to the aforesaid amendment, Revenue Regulations (RR) 2-1998, specifically, Section 2.58.2, provides that a taxpayer or withholding agent is allowed to deduct certain expenses or income payments from gross income despite the failure to withhold tax at the time of the payment, on the condition that the withholding agent or taxpayer pays the withholding tax, along with any interest or applicable surcharges, even at the time of audit. Thus, it has been the standing rule that expenses or income payments subject to withholding tax can be allowed as income tax deductions, even if no withholding tax was made, provided that the withholding agent pays the tax, including surcharges at the time of the audit.