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Expense Disallowed if Withholding Tax Was Not Paid? NIRC Section 34(K) Explained

·8 mins
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Under the former NIRC Section 34(K), a payer could not deduct an otherwise deductible expense unless the tax required to be withheld on it had been paid to the Bureau of Internal Revenue (BIR). Republic Act (RA) No. 11976, the Ease of Paying Taxes (EOPT) Act, repealed that rule, but it continues to matter for taxable periods before January 1, 2024. This guide covers the payer’s side: what was disallowed, how, and what changed.

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This guide looks at the payer (withholding agent) side. For what BIR Form 2307 does and does not prove for the payee and for the expense, see Does BIR Form 2307 Prove Your Expense Deduction, or Just the Withholding?. For the withholding obligation itself, see Expanded Withholding Tax Rates in the Philippines.

What did NIRC Section 34(K) require? #

Section 34(K), titled “Additional Requirements for Deductibility of Certain Payments,” made the payer’s deduction conditional on the withholding tax having been paid to the BIR. The condition applied on top of the ordinary rules for deductible expenses, so a legitimate, receipted business cost could still be lost if the withholding on it had not been paid.

The text of the provision, as reproduced by LawPhil from Republic Act No. 8424 (the NIRC of 1997), reads:

“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 58 and 81 of this Code.”

— NIRC, Section 34(K) (RA 8424), as reproduced on LawPhil

Sections 58 and 81, which the provision cites, deal with returns and payment of withholding taxes and with the withholding of tax on compensation. The effect fell on the payer: the failure was the payer’s, yet the cost was a lost deduction.

How did the disallowance work in an audit? #

In a BIR audit of a withholding agent, the examiner tested whether each income payment that was subject to withholding had a matching remittance, and expenses without one were added back to taxable income. The agent then faced two assessments: the withholding tax that should have been paid, and income tax on the disallowed expense.

Revenue Regulations (RR) No. 2-98, Section 2.58.5, implemented the rule. The BIR later revoked RR No. 12-2013 through RR No. 6-2018, which reinstated Section 2.58.5 as amended by RR No. 14-2002. Per the text of RR No. 6-2018 as published by Lawyerly, the reinstated rule allowed the deduction where no tax was withheld in three situations, each when the tax, interest, and surcharges were paid at audit, investigation, or reconsideration:

  • The payee reported the income and paid the tax, and the withholding agent pays what is due.
  • The payee reported the income late, and the withholding agent or taxpayer pays what is due.
  • The withholding agent under-withheld and pays the difference.

In other words, under the pre-2024 rule the deduction could be preserved by paying the withholding tax with its penalties during the audit, rather than being lost permanently. (This summary comes from a secondary republication of RR No. 6-2018; the full regulation text should be checked before relying on it for a specific case.)

Worked example: a ₱100,000 professional fee with no withholding #

A corporation that pays a ₱100,000 professional fee without withholding, in a period governed by Section 34(K), risks a ₱100,000 add-back to taxable income and a separate withholding tax assessment. The numbers below are fictional but follow the rules described above.

Assume a domestic corporation paid a consultant (an individual whose prior-year gross receipts exceeded ₱3,000,000, so the 10% rate applies) a ₱100,000 professional fee in 2023. The corporation did not withhold or remit. It is subject to the 25% regular corporate income tax rate.

ItemComputationAmount
Professional fee paid—₱100,000
Expanded withholding tax that should have been withheld₱100,000 × 10%₱10,000
Expense disallowed under former Section 34(K)Fee added back to taxable income₱100,000
Additional income tax from the disallowance₱100,000 × 25%₱25,000
Basic taxes exposed (before surcharge and interest)₱10,000 + ₱25,000₱35,000

On those facts the corporation would owe ₱10,000 of withholding tax plus ₱25,000 of income tax on the disallowed fee, before any surcharge and interest. If the corporation instead paid the ₱10,000 with its penalties before the audit report went forward, the expense would not have been disallowed under the rules described above, which would remove the ₱25,000 income tax add-back. The consultant, for their part, still reports the ₱100,000 as income.

What changed under the EOPT Act? #

Section 5 of RA 11976 repealed Section 34(K), so for later periods an unwithheld expense is no longer disallowed merely because withholding tax was not paid. The payer still has to withhold and remit, but the missing remittance no longer wipes out the deduction.

The Act’s text, as published on LawPhil, states:

“Section 34(K) of the National Internal Revenue Code of 1997, as amended, is repealed, and the succeeding paragraph is renumbered accordingly.”

— Republic Act No. 11976, Section 5, as reproduced on LawPhil

The BIR implemented the repeal through RR No. 4-2024, which, per MTF Counsel, repealed provisions of RR No. 2-98, “particularly Section 2.58.5.” RMC No. 60-2024 then clarified how the repeal applies. According to KPMG’s summary of the circular:

Period or case statusTreatment per RMC No. 60-2024 (as summarized by KPMG)
Taxable periods from January 1, 2024Expenses subject to withholding are deductible even if no tax was withheld, provided the other deductibility requirements are met; the taxpayer remains liable for the withholding tax
Earlier periods, audit ongoingDeduction allowed only if the required withholding tax was paid, before the audit or before the audit report goes to the Reviewing Office; otherwise assessments for both income tax and withholding tax are recommended
Earlier periods, audit already assessedThe deductibility requirement of the then Section 34(K) still applies

Practitioners have questioned the circular’s cutoff for settling withholding tax, since MTF Counsel observes it appears narrower than the audit-stage settlement the earlier regulations allowed. Treat that commentary as a view, not as a ruling, and confirm with the circular’s full text.

What should a payer check now? #

A payer should reconcile each period before 2024 that remains open to audit against its withholding returns, and keep current withholding compliant, because the repeal removes the deduction penalty but not the withholding duty. Doing so closes the gap that an examiner would otherwise assess.

  1. List income payments subject to withholding for open periods, such as professional fees, rent, and contractor payments.
  2. Match each payment to the quarterly or monthly withholding return and remittance.
  3. Pay any missing withholding tax, with interest and surcharge, before an audit report goes forward.
  4. Correct wrong amounts or codes using the process in Correcting a Wrong ATC or Amount on a Filed BIR Withholding Tax Return.
  5. For ongoing compliance, see BIR Compromise Penalty for a Withholding Agent’s Failure to Withhold or Remit Tax.

Frequently asked questions #

Is an expense not deductible if withholding tax was not paid? #

For taxable periods before January 1, 2024, generally yes. The former NIRC Section 34(K) allowed an otherwise deductible expense only if the tax required to be withheld was paid to the BIR. RA 11976 (the EOPT Act) repealed Section 34(K), so for later periods the missing withholding no longer disallows the expense, although the withholding tax itself remains payable.

What did NIRC Section 34(K) say? #

Section 34(K), titled Additional Requirements for Deductibility of Certain Payments, said an amount otherwise deductible is allowed as a deduction only if it is shown that the tax required to be deducted and withheld from it has been paid to the Bureau of Internal Revenue in accordance with Sections 58 and 81 of the Code.

Was Section 34(K) repealed? #

Yes. Section 5 of RA 11976, the Ease of Paying Taxes Act, states that Section 34(K) of the National Internal Revenue Code of 1997, as amended, is repealed. The BIR implemented the repeal through RR No. 4-2024 and clarified it in RMC No. 60-2024.

Can the BIR still disallow an expense for a 2023 or earlier return? #

Possibly. RMC No. 60-2024, as summarized by KPMG, says that for taxable periods before January 1, 2024, a deduction in an ongoing audit is allowed only if the required withholding tax has been paid, and for assessed cases the former Section 34(K) requirement still applies. Check the circular’s full text against the specific case.

If an expense is no longer disallowed, does the payer still owe the withholding tax? #

Yes. The repeal removes the deduction consequence, not the withholding obligation. As summarized by KPMG, RMC No. 60-2024 states that the taxpayer is still liable for the corresponding withholding tax due on the income payments, so surcharge and interest can still apply to unremitted amounts.

How is this different from needing a receipt for the expense? #

Proof that withholding tax was paid and proof of the expense itself are two separate requirements. Section 34(K) concerned the first. Substantiation by receipts, invoices, or other adequate records, discussed in the BIR Form 2307 expense-substantiation guide on this site, concerns the second and was not repealed.

Summary #

Former NIRC Section 34(K) conditioned a payer’s deduction on payment of the withholding tax due on it, so a ₱100,000 unwithheld fee could cost the payer both the withholding tax and income tax on the add-back. RA 11976 repealed the rule, and RMC No. 60-2024 (as summarized by KPMG) keeps it alive for audits of earlier periods. Reconcile open pre-2024 periods, and keep withholding current for all periods. See also Withholding Tax on a Supplier With No TIN.

Sources #

Primary sources

Secondary sources