IN BRIEF:
• RMC No. 81-2025 emphasizes a transition from mere compliance to a deeper understanding of business integrity, redefining deductibility as a reflection of ethical practices rather than just technicalities.
• The circular outlines stricter requirements for documentation, relevance, and reasonableness of expenses, urging taxpayers to reassess their expense claims and align them with the principles of transparency and accountability.
• Businesses are encouraged to adopt a proactive approach to tax management, viewing compliance as a shared responsibility that fosters trust and accountability.
In the realm of taxation, clarity is power. With the issuance of Revenue Memorandum Circular (RMC) No. 81-2025, the Bureau of Internal Revenue (BIR) has taken a bold step toward reaffirming the principles of fairness, transparency, and accountability in tax reporting.
This circular, which reiterates the criteria and guidelines for the deductibility of ordinary and necessary business expenses, can potentially reshape the landscape of income tax rules and the role of regulatory interpretation in the Philippine tax system.
THE CORE OF RMC 81-2025RMC 81-2025 reiterates the criteria for and guidelines on the deductibility of ordinary and necessary business expenses under Section 34(A)(1)(a) of the National Internal Revenue Code (NIRC) of 1997, as amended. While the language of the circular emphasizes reiteration, the tone and structure suggest a deeper intent: to refine the boundaries of what is considered deductible and to reframe the expectations around documentation, substantiation, and reasonableness.
The circular outlines that for an expense to be deductible, it must be ordinary: one that is normal, usual, and customary in the type of business conducted by the taxpayer. It does not need to be habitual or recurring but should be common in the context of the business. It denotes that the expense must be typical and usual in relation to the business activities.
It must also be necessary, appropriate and helpful for the development of the taxpayer’s business. This implies that the expense should be directly connected and proximately resulting from carrying on the business and must contribute to the generation of income or profit or minimizing a loss.
This dual test is not new, but its reiteration is timely. In recent years, the rise of hybrid business models, digital transactions and cross-border operations has blurred the lines of what constitutes an “ordinary” and “necessary” business expense. By reasserting these definitions, the BIR aims to anchor deductibility in economic substance rather than mere form.
RMC 81-2025 also underscores the need for:
• Adequate documentation: Invoices, receipts, contracts, and other records must clearly support the expense.
• Business relevance: The expense must be directly connected to the taxpayer’s operations.
• Reasonableness: The amount must be proportionate and justifiable.
These requirements form the backbone of the circular’s guidance as it shifts from broad interpretation to precision and accountability.
OPERATIONAL CHALLENGESRMC 81-2025 also introduces a series of operational challenges that compel taxpayers to reassess not only their documentation practices but also the economic rationale behind their expense claims.
One of the challenging aspects of RMC 81-2025 is its emphasis on reasonableness and proportionality. It cautions against claiming deductions for expenses that are inordinately large or disproportionate to the taxpayer’s overall operations. This signals a shift from a purely documentary approach to a substance-over-form doctrine, where the economic reality of the expense is scrutinized.
For instance, compensation paid to individuals that far exceeds the value of their actual services may be disallowed, even if properly documented.
RMC No. 81-2025 also presents a nuanced discussion on the classification of income — whether active, passive, tax-exempt, or subject to final or preferential tax rates — and its impact on deductibility.
Expenses related to tax-exempt income are not deductible, as they do not contribute to the generation of regular taxable income. Expenses tied to income subject to final withholding tax are similarly excluded, preserving the integrity of the final tax regime, which states that since this passive income has already been taxed at a final rate, allowing further deductions would distort the taxation principle that final withholding tax is comprehensive and conclusive. Lastly, business expenses attributed to preferential tax rate income, such as those under the 5% Special Corporate Income Tax (SCIT) regime for registered enterprises, are not deducted from the regular taxable income.
This framework reinforces the principle of matching, i.e., that expenses must be directly attributable to the income they help generate. It also prevents double-dipping, where taxpayers might seek deductions against income that has already received favorable tax treatment.
Finally, a notable aspect of RMC 81-2025 is its tone of interpretive confidence. While the BIR is tasked with implementing tax laws, this circular appears to extend its interpretive reach by offering more detailed definitions and examples of what qualifies as “ordinary” and “necessary” business expenses.
This may be seen as a proactive move to reduce ambiguity and promote compliance. However, it also raises concerns about the extent of administrative interpretation, particularly when such interpretations risk drifting from the firm grounding of statutory law.
IMPLICATIONSFrom a business standpoint, RMC 81-2025 calls for a shift from reactive tax management to purposeful tax governance, where compliance becomes a reflection of corporate integrity. Entities must now take a harder look at their internal expense policies, ensuring they are not only aligned with the provisions of the circular but also with its spirit of transparency and accountability. This means strengthening documentation protocols, embedding rigor into financial processes, and empowering tax teams with the knowledge to navigate the evolving standards of deductibility and substantiation.
Ultimately, RMC 81-2025 invites taxpayers to reimagine taxation not as a transactional obligation, but as a shared responsibility. It shifts the narrative from catching errors to cultivating ethics, from maximizing deductions to maximizing trust. Instead of just meeting regulatory expectations, its implementation is also about building a resilient, trustworthy enterprise that thrives in a landscape shaped by clarity, fairness, and ethical leadership.
RMC 81-2025 is more than just a procedural update; it marks a significant change. The circular encourages taxpayers to shift from merely following rules to understanding their importance, focusing on the substance of the transactions rather than just documentation. It redefines deductibility as a matter of business integrity and positions the BIR as a supportive guide rather than just an enforcer.
Going forward, taxpayers should see this circular as a chance to not only learn the rules but also to influence a culture of compliance. They should seek clarity and promote checks and balances. It’s important to remember that in taxation, as in leadership, authority must come with accountability.
Ultimately, the focus should be on what we stand for, not just what we deduct.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Jay A. Ballesteros is a Financial Services Tax Partner of SGV & Co.
