Revisiting RMC No. 81-2025

In the Philippines, ghosts or multo are more than just supernatural phenomena. They can also be a metaphor for unresolved issues or unanswered questions. In our personal lives, ghosts may represent the enduring presence of loved ones lost, regrets over paths not taken, and even traumatic events. The ghost metaphor also has materialized in the case of the ghost projects scandal that is currently gripping the Philippines.

- JUANITO RAFAEL CLEMENCE 0.UY

Ghost metaphors extend beyond mere symbolism or unbuilt structures and may also emerge within the framework of Philippine taxation.

In September, the BIR issued Revenue Memorandum Circular (RMC) No. 81-2025, reiterating the criteria and guidelines on the deductibility of ordinary and necessary expenses under the Tax Code. While the circular was framed as a reiteration of existing rules and principles under the Tax Code and relevant jurisprudence, its practical impact on taxpayers’ claims for deductions for income tax purposes, as well as possible implications during tax audits, is more than just a reminder.

For many taxpayers, the circular revived longstanding uncertainties about what qualifies as a valid deduction. It has also prompted concerns that revenue officers may adopt stricter interpretations during tax audits, potentially leading to the disallowance of expenses and the imposition of penalties.

These concerns are not entirely unfounded. Many taxpayers may recall ghosts of past audits where expenses were disallowed based on vague interpretations of what expenses qualify as “ordinary and necessary” or were disallowed for being allegedly excessive or disproportionate. Notably, the circular also appears to revive the rule on allocation of common expenses among income subject to different tax regimes (regular and exempt). This rule, previously promulgated by the BIR in 2011 and applied to banks and other financial institutions, had been effectively buried by a Supreme Court decision in 2021.

The discussion below deals with key rules on expense deductibility provided under RMC No. 81-2025, which may haunt taxpayers during a tax audit.

INORDINATELY LARGE EXPENSES