REVENUE MEMORANDUM CIRCULAR NO. 5-2025 issued on January 16, 2025 amends certain provisions of Revenue Memorandum Circular (RMC) Nos. 11-2024, 12-2024, 13-2024 and 19-2024, and provides clarifications/ transitory provisions to align them with the provisions of Republic Act No. 11976 [Ease of Paying Taxes (EOPT) Act], its Implementing Rules and Regulations, and other issuances.

For purposes of taxation, initial direct costs shall be defined as payments which are directly related to the negotiation and execution of a lease agreement. The initial direct cost paid or incurred by the lessee in relation to the lease agreement shall be claimed as outright expenses in the year it was paid or incurred subject to substantiation requirements pursuant to Section 34(A)(1)(b) of the Tax Code of 1997, as amended.

Furthermore, the same shall be subject to withholding tax pursuant to Section 9 of the EOPT and Section 7 of Revenue Regulations (RR) No. 4-2024.

It was however clarified under RMC No. 60-2024 that the non-withholding of tax will no longer be a ground for the disallowance of the claimed deduction/expense for taxable year covering January 1, 2024 onwards.

The amounts paid by the lessee for certain expenses, which are properly for the account of the lessor as indicated in the contractual agreement between the parties, shall be allowed as deductions during the year the same has been paid or accrued pursuant to Section 34 of the Tax Code of 1997, as amended, which shall be properly substantiated with invoices issued by the lessor in the name of the lessee. Thus, it will form part as gross sales of lessor and allowable as deduction on the part of the lessee.

For business tax purposes, the corresponding input Value-Added Tax (VAT) shall only be creditable to the lessee for the amount of rentals paid incurred/accrued, which shall be
evidenced by a VAT Invoice pursuant to Section 110 in relation to Section 113 of the Tax Code, as amended.

The 5% Withholding Tax under Section 2.57.2 (B) of Revenue Regulations (RR) No. 02-98
shall be based on the amount payable, which refers to the value paid/accrued or recorded as an
expense or asset, whichever is applicable, in the payor’s book or at the issuance by the seller of
the sales invoice or other adequate document to support such payable, whichever comes first
pursuant to Section 7 of RR No. 4-2024.

For taxes other than Income Tax (e.g., VAT, Other Percentage Tax (OPT), Excise Tax, Documentary Stamp Tax (DST), etc.), the basis of the reportable amount for foreign currency transactions shall be the Philippine Peso-converted amount using the prevailing spot rate on the date of transaction. In determining the date of transaction, the enactment of RA 11976 or EOPT Act shall be taken into consideration which provides the revised bases for the reportable amounts for VAT, OPT and Withholding Taxes, as follows:

a. For VAT purposes, the reportable amount for sale of goods, properties and sale or exchange of services shall be the gross sales as supported by a corresponding VAT invoice;
b. For OPT, the reportable amount shall be the gross quarterly sales depending on the type of transaction subject to the said taxes;
c. For Excise, the reportable amount shall be:
 Specific tax. The Excise Taxes imposed based on weight or volume capacity or any other physical unit of measurement.
 Ad valorem tax. The Excise Tax shall be based on selling price or other specified value of goods before the removal/release of the excisable products;
d. For DST, the reportable amount shall be based on the value provided in the documents subject to stamp tax; and
e. For Withholding Taxes, in general, the reportable amount shall be the value of the taxable income payment at the time it has become payable, accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books, or at the issuance by the seller of the sales invoice or other adequate document to support such payable,
whichever comes first.

Interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s profession, trade or business shall be allowed as a deduction from gross income, subject to certain limitations, when the following requisites, provided in Section 34 (B)(2) of the National Internal Revenue Code (NIRC) of 1997, as amended, and as implemented by RR No. 13-2000 and Section 7(B) of RR No. 5-2021, are met:

a. The indebtedness must be that of the taxpayer;
b. The interest must have been stipulated in writing;
c. The interest must be legally due;
d. The interest payment arrangement must not be between related taxpayers as mandated in Sec. 34 (B)(2)(b), in relation to Sec. 36(B), both NIRCC of 1997, as amended;
e. The interest must not be incurred to finance petroleum operations;
f. The interest was not treated as “capital expenditure” if such interest was incurred in acquiring property used in trade, business or exercise of profession; and
g. The interest shall be reduced by an amount equivalent to twenty percent (20% of interest income subjected to final tax. However, if the Final Withholding Tax rate on interest
income of twenty percent (20%) will be adjusted in the future, the interest reduction shall be adjusted accordingly.

The requirement to withhold taxes in order to claim the interest expense as a deduction from the gross income was repealed under Section 5 of the EOPT Act, as implemented by Section 6 of RR No. 4-2024.

As clarified in RMC No. 60-2024, the non-withholding of tax will no longer be a ground for the disallowance of the claimed interest expense for taxable year covering January 1, 2024 onwards. However, the obligation of the payor to withhold tax and remit the same under Q9 remains, pursuant to Section 9 of the EOPT Act and as implemented by Section 7 of RR No. 4-2024.

The use of average rate for a period under Philippine Accounting Standards (PAS) 21 for Foreign Currency Transactions is only permitted for Financial Reporting purposes. For tax purposes, foreign currency transactions shall be converted to Philippine Peso using only the spot rate of exchange on the date of transaction.

Conversely, for financial reporting purposes, Paragraph 22 of PAS 21 allows a rate that approximates the actual rate at the date of the transaction (e g. an average rate for a week or a month might be used for all transactions in each foreign currency occurring that period) can be used for practical reasons provided that specific spot rate within the day (opening, closing, high, low or weighted average in a day) has been identified in the sworn statement. However, if exchange rates fluctuate significantly, the use of the average rate for a certain period is inappropriate.

In the event that in converting foreign currency transactions, the taxpayer used the average rate for a certain period for financial reporting purposes and the spot rate of exchange on the date of transaction for tax purposes, a reconciliation on the foreign exchange (forex) rates used must be prepared and must be available for presentation and submission, together with other supporting documents, during BIR audit.

Q&A No. 4 of RMC No. 12-2024 standardizes the forex rates to be used for tax purposes in converting foreign currency denominated transactions to Philippine Peso. It prescribes the use of forex rates from sources that are widely available to the taxpayers and that can be easily accessed by BIR during tax audits. Taxpayers are given freedom to choose the source of forex rates to be used that are deemed appropriate for their foreign currency transactions as long as the conditions under Q&A No. 4 of RMC No. 12-2024 are met.

For transactions occurring prior to the opening of the Banker’s Association of the Philippines (BAP) Rates at 9 AM, the taxpayer shall use the latest selected spot rate available on the business date immediately preceding the opening of the BAP rates. The use of selected spot rate shall cover the duration up to the cut-off period to avoid multiple use of forex spot rate resulting to various reconciliation. Thus, the duration of the opening/closing spot rate will be up to the next business day. However, if the taxpayer opts to use other or combination of spot rate within the day, such shall be included in the Sworn Statement for submission to BIR concerned office as a guide for proper calculation during audit.

Moreover, the taxpayer shall summarize its foreign currency transactions occurring prior to the opening of the BAP rates, adopting the latest selected spot rate available on the business date immediately preceding the opening of the BAP rates. The summary schedules, which is necessary to reconcile the date prior to opening of BAP rate, shall be made available for presentation and submission during the BIR audit.

The practice of offsetting or netting of separate and distinct transactions, and the accounting and recording of the same and its related/incidental transactions (e.g., forex gains/losses) in the taxpayer’s books, is strictly prohibited for tax purposes.

Each transaction is considered a separate taxable event, hence, shall be accounted for and taxed separately from other transactions. Regardless, if there is an offsetting or netting arrangement between parties, the income and expenses shall be recorded and taxed separately from each other. Moreover, since losses are among those deductions from Gross Income provided under Section 34 of the NIRC of 1997 (Tax Code), as amended, such losses (e.g., forex loss) shall
not form part of deduction from Gross Sales.

As a requirement under Q&A No. 4 of RMC 12-2024, the notarized sworn statement informing the concerned BIR offices of electing the use of forex rates other than BAP published rates shall be submitted within 30 days prior to the start of the taxable year. In case of subsequent change in forex rates used, a new notice shall be submitted to the concerned BIR office, which shall be applied from the start of the succeeding taxable year.

Since RMC No. 12-2024 was issued on January 22, 2024, which is beyond the required period of 30 days prior to the start of the taxable year, taxpayers shall submit the Notarized Sworn Statement to the concerned BIR offices for the selected forex rates for 2024 without penalty/sanction on or before December 31, 2024. In case elected/used forex rates for 2024 with corresponding Sworn Statement is the same for the succeeding year/s, there is no need to resubmit a Sworn Statement for the year 2025.

The template for the Notarized Sworn Statement is attached as Annex “A” of the Circular.

Taxpayers that are using duly registered Computerized Accounting System (CAS) or Computerized Books of Accounts (CBA) need to revisit their system in case alignment is
needed in terms of their use of forex rates for financial reporting and what is prescribed as source of forex rates under Q&A No. 4 of RMC 12-2024 for tax purposes. In case the adoption of forex rates will have a direct effect on the financial aspect, the system shall be updated/reconfigured following the existing policies and procedures on system enhancement.

To provide ample time for system reconfiguration, adjustments shall be allowed to be undertaken on or before December 31, 2024. In case, system reconfiguration has not been
accomplished within December 2024, a request for extension shall be submitted for approval by the Regional Director or Assistant Commissioner-Large Taxpayers Service (LTS) for a period of not more than six (6) months from December 31, 2024.

The RMCs issued by the BIR to address the gaps between the Philippine Financial Reporting Standard (PFRS) and the Tax Code only cover the standards under the full PFRS. The PFRS for Small-Medium Enterprises (SMEs) and Small Entities were excluded from the coverage since certain standards adopted in the full PFRS are not applicable to PFRS for SMEs and Small Entities. Hence, to avoid any confusion, the BIR initially limited the coverage of the same to full PFRS. Considering however, the manifestation that there are companies (subsidiary, conglomerates, headquarters, branches, etc.) which are required to comply with rules and standards irrespective of classification, SMEs and/or Small Entities may avail of the provisions of RMC No. 13-2024 on an optional basis and to comply with the required disclosure under PFRS.

To clarify the coverage, the definition from the Securities and Exchange Commission Memorandum Circular No. 5, series of 2018 has been adopted. It should be noted that the stated entity classification for PFRS purposes is not the same as the taxpayer’s classification under Section 21 of the Tax Code, which is based on annual Gross Sales.

In the absence of the actuarial valuation report for funding purposes, a taxpayer cannot use the current service cost under the actuarial valuation report under PAS 19R as replacement of normal cost. In reiteration of Q&A No. 8 of RMC No. 13-2024, there is a difference in the calculation of service/retirement costs under PAS/PFRS and the Tax Code. The current service cost pertains to the amount that the employee earned for his service in the current reporting period while actuarial valuation is an estimate established by an actuary.

If the taxpayer contributed to the retirement fund before the date of filing of a Tax Qualified Plan but within the taxable period of the interim period between the date of filing and issuance of certificate of qualification, the taxpayer cannot claim the contribution up to normal cost as a deductible expense. Employers may deduct their contributions to the retirement fund if they meet the requirements under RA No. 4917, evidenced by a certificate of tax qualification issued by the BIR. Nevertheless, pending employers’ application with the BIR, contributions to the retirement fund are allowed to be deducted from the gross income subject to the subsequent issuance of the said certificate (Q&A No. 12, RMC No. 13-2024). Any contributions made by an employer to the retirement fund before the filing of application for tax qualified plan is not deductible from gross income for income tax purposes.

Under RA No. 7641, “in the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year.” It is clear that an employee may only be entitled to the tax-exempt retirement benefits under RA No. 7641 if his/her employer has no existing retirement plan of which the employee is part of.

Accordingly, employees covered by a retirement benefit plan (whether determined as reasonable or not by the BIR) may not avail of the tax exemption benefit provided under RA No. 7641. However, in case the concerned employee is not covered by the retirement benefit plan of his/her employer, or any other retirement plan in the employer’s company (e.g. Collective Bargaining Agreement), then such employee may receive the tax-exempt retirement benefits provided under RA No. 7641.

An employee who was not included in the retirement benefit plan of the company but qualified under RA No. 7641 is entitled to claim an exempt retirement benefit since he/she was not included in the retirement benefit plan and no contribution was made in his behalf for income tax deduction purposes. In addition to the above clarifications, the following are the corrections made on the accounting entries provided in Annex B of RMC No. 13-2024. Provided also in the Circular are clarifications and corrections on the computations and accounting entries of Machines B and
C under Illustration B in Annex A of RMC No. 19-2024.

Taxpayers using official receipts (manual, POS, CRM, CAS, etc.) shall comply with the provisions of Revenue Regulations No. 7-2024 and other related issuances.