Reasonable criteria for deductibility

Revenue Memorandum Circular No. 81-2025 was issued to reiterate guidelines on the deductibility of expenses under the Tax Code, and lists the following criteria: it must be ordinary and necessary; paid or incurred within the taxable year; paid or incurred in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business, or exercise of a profession; and, supported by invoices, records, or other pertinent papers.

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A circular is an administrative issuance. It is not a law and is not binding precedent. In fact, the Tax Code does not strictly limit the definition of the words “ordinary” and “necessary.” A circumspect approach should be observed in understanding RMC 81-2025. While the guidelines refer to decisions of the Supreme Court, it must be considered that judicial precedents only apply to situations of substantially the same factual background.

RMC 81-2025 states that an “ordinary expense” is one that is, normal, usual, and customary in the type of business conducted by the taxpayer. It provides that the following are not ordinary expenses, and makes reference to decisions of the Supreme Court:

1. Inordinately large expenses.

The circular refers to a 2003 Supreme Court Decision (G.R. No. 143672, April 24, 2003) where the Bureau of Internal Revenue (BIR) disallowed 50% of the media advertising expense of a manufacturing company, describing it as a “gargantuan expense for the advertisement of a singular product.” The BIR rejected the company’s assertion that the amount was justified given the economic situation during the time of the EDSA People Power Revolution. The Supreme Court affirmed the disallowance finding that the amount was almost half of the corporation’s total claimed marketing expenses, and almost double the amount of its general and administrative expenses.

2. Expenses that do not meet the “reasonableness in amount test.”