A thinning line

In administrative law, rulemaking is the process that executive agencies use to promulgate regulations.  While the Legislative Department first sets broad policies and mandates by passing statutes/laws, it is upon these agencies to implement these laws and create a more detailed regulation through rulemaking. 

These executive agencies are charged with executing and not promulgating a regulatory scheme. They only provide the specification of necessary details in order to implement the statues/laws passed but does not pass the statutes/laws themselves. The regulations to be issued by the executive agencies should be in consonance with the statutes/laws it intends to implement.  It should not amend, revise, add, nor remove the substantial requirements provided by the law.

The Department of Finance (DOF) and the Bureau of Internal Revenue (BIR) are two of these executive agencies tasked to implement laws and provide regulations on the procedure for implementation. 

Pursuant to this rule making power, the DOF has issued Revenue Regulations No. 01-2014 (RR No. 01-2014) as its first implementing rules/regulations for the year 2014. 

RR No. 01-2014 sets the new rules for the submission of the alphabetical list (the “Alphalist”) of employees and list of payees on income payments subject to creditable and withholding taxes that are required to be attached as integral part of the Annual Information Returns (BIR Form No. 1604CF/1604E) and Monthly Remittance Returns (BIR Form No. 1601C, 1601E, etc.).

RR No. 01-2014 requires all withholding agents (regardless of number of employees/payees and whether or not employees/payees are exempt from tax) to submit to the BIR the Alphalist via the following modes: 1) attachment in the Electronic Filing and Payment System (eFPS); 2) electronic submission using the BIR’s website; or 3) through email at dedicated BIR addresses using the prescribed CSV file format.  Those withholding agents without any internet connection/facility may submit the alphabetical list via email through the e-Lounge facility of the nearest Revenue District Office or Revenue Region of the BIR. 

Clarifications on the above modes/procedure and certain issues raised in RR No 01-2014 are tackled in Revenue Memorandum Circular No. 05-2014 (RMC No. 05-2014), issued by the BIR on Jan. 29, 2014.  

The electronic submission of the Alphalist does not remove the obligation of the taxpayer to manually submit such Alphalists as attachments to the BIR Returns except in cases where an Alphalist contains less than ten (10) employees/payees. RR No. 01-2014 expressly states that such submission of Alphalist with less than ten (10) employees/payees shall be immediately discontinued beginning Jan 31, 2014 for the Annual Information Returns and March 1, 2014 for the Monthly Remittance Returns and every year thereafter.  Moreover, RR No. 01-2014 expressly prohibits the lumping of income payments and taxes into a single amount in the Alphalist. 

The above can be seen as merely procedural in nature and does not necessarily affect the substance on the rules of deductibility.

Be that as it may, RR No. 01-2014 expressly states that the submission of an alphalist that lumps the income payments and taxes into a single amount, including those that do not conform to the prescribed file format thereby resulting to the unsuccessful uploading into the BIR system, is deemed not received and the corresponding expenses will not qualify as a deductible expense for income tax purposes.

It is salient to note that this provision of non-qualification of expense changes the rules on deductibility of business expense provided in the National Internal Revenue Code (Tax Code). 

Under the Tax Code, all ordinary and necessary expenses paid or incurred during the taxable year, which are directly attributable to the development, management, operation, and/or conduct of the trade or business may be deducted from the gross income in order to arrive at the taxable income of the corporation.  These deductions are allowed as long as the taxpayer substantiates with sufficient evidence the amount of the expense and its direct connection or relation to the business, such as official receipts or other adequate records. 

Further, the applicable withholding tax of said business expense must be deducted and remitted to the BIR by the taxpayer to qualify for deductibility.

Now, by this regulation, it would seem that the submission of the Alphalist through acceptable modes and presentation in the prescribed details are additional qualifications for deductibility of business expense.  This is regardless of the fact that the business expense may be substantiated by the taxpayer by other sufficient evidence as allowed by the Tax Code.

We then may ask.  Is the imposition of additional qualifications for deductibility proper?  As to what extent will rulemaking be may be an issue.  While we contemplate on this, one thing is for sure.  Taxpayers are obligated to follow RR No. 01-2014 absent any subsequent change in our rules, especially now with the issuance of RMC No. 05-2014.

Katrina Monserrat F. Aznar is a Supervisor from the Tax Group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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