TAXATION 1 Transcripts - Atty. KMA - A.Y. 2020 - 2021: University of San Carlos School of Law and Governance 1

TAXATION 1 Transcripts | Atty. KMA | A.Y.
2020 - 2021
MODULE 10 - ALLOWABLE DEDUCTION Basically, because you need to prove that

(INDIVIDUAL & CORPORATE) : A you are entitled or allowed, it has to have
DETAILED DISCUSSION some sort of an imprimatur from the BIR.
otherwise stated, can the BIR disallow if the
MODULE 10.1 deduction you’re claiming is inappropriate?
Yes.
We will discuss allowable deductions. As
we’ve mentioned in previous discussions, I The third basic principle when it comes to
will just insert this discussion on allowable claiming deductions is the proper
deductions as we are done with the basics withholding. We emphasized these when
pertaining to individual income taxations for we discuss creditable withholding tax and
self-employed individuals. We’re also done when we discuss final withholding tax.
with the basics of income corporate There should have been proper withholding
taxation. As what we’ve discussed for a if required under the law. When it comes to
taxpayer who is earning business income or transactions, there are more than 20
who is considered self-employed, as a rule, transactions under the NIRC nga
unless that taxpayer is a non-resident alien kinahanglan nato withhholdan. If the
not engaged in trade or business, or a taxpayer is already classified as a tax
non-resident foreign corporation, it is taxed withholding agent, its a no brainer that the
on its NET or NET TAXABLE INCOME. taxpayer must withhold 1 % or 2% for
Meaning, there are allowable deductions. transactions it regularly enters into.
This discussion encompasses both Bare in mind the recent revenue regulation
self-employed individual taxpayers as well issued in 2018 by the BIR which states that
as corporate taxpayers or corporations even if there is no withholding, either under
considered as taxpayers. We’ve discussed withholding or failure to withhold, the
initially allowable deductions in our previous taxpayer may still be allowed to claim that
discussions, so let me discuss a little to go outflow as a deduction provided before
further on the basic principles. assessment or during assessment the
taxpayer pays the correct amount of
Just a quick recap on the basic principles withholding tax plus interest, penalties and
governing deductions, there are 3 basic surcharges. That ‘s basically an exception.
principles. The first is the double nexus
rule, and the third one is the expressed General Rule: No withholding, no deduction
provision in the tax code. Under the
double nexus rule, the taxpayer seeking Exception: If the taxpayer pays the correct
deduction, similar to if a taxpayer seeks an amount of withholding, the deficiency
exemption, must point to a specific provision withholding kung under withholding,
in the statute authorizing the deduction and including interest, penalties and surcharges.
he must be able to prove that he is entitled
Two kinds of allowable deductions:
to the deduction authorized under the law.
1. Itemized deductions
UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE 1

TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021
2. Optional Standard Deduction revaluation, this is applicable only

accounting wise, but for taxation, it do not
Itemized deductions - Ex. In. Ta. Lo. Ba.
take into consideration revaluation gain or
Cha. Re. Pen. Dep. Dep.:
take into consideration revaluation loss.
1. Expenses Because these are mere estimation as to
the increase or decrease of the value of the
2. Interest
asset for a particular period, despite the fact
3. Taxes that the asset was not or is not really
disposed of. Mao ng wala gyuy actual
4. Losses outflows kung loss, or wala gyuy actual
inflow if there is a revaluation gain. It does
5. Bad debts
not meet the criteria for a taxable income.
6. Charitable Contributions
Wash Sale
7. Research and development costs
This pertains to the buying and selling of
8. Pension contributions the same type of security or stock for a
9. Premiums paid on hospitalization and short period of time within a gap of 30
insurance (repealed) days. So, ni purchase ka sa shares, and
then 30 days, thereafter, gibaligya ra pud
10.Depreciation and amortization nimo ang shares at a loss or you don’t care
if it is a gain or a loss. Murag gihinluan lang
11.Depletion of oil, gas, wells, and mines)
nimo ang share.
Optional Standard Deduction (OSD) -40%
of the gross income, in short 60% will be Why is this non-deductible? In order to
subjected to tax. Take note: Gross income is prevent a scenario where a particular
applicable to corporate taxpayers. Under stockholder or investor would tend to play
corporate income taxation, OSD for
the stock exchange. Because if you buy and
individual income taxpayers earning
business income is based on gross receipts sell for a short period of time, what
or based on sales not based on gross happens is it will appear na active ang
income. trading ana, na taas ang demand ana. We
very well know the law on supply and
Method of Deductions
demand. You just want to drive or increase
1. OSD (40%) the price of that share so you make it
appear na active and buying and selling –
2. Itemized Deductions (Ex. In. Ta. Lo. Ba. even at a loss, you sell it para mag increase
Cha. Re. Pen. Dep. Dep)
ang price nya sa stock exchange. So, the
Loss due to loss to change in market NIRC don’t want that to happen, which is
values or the so-called revaluation why we have this provision on wash sale.
losses. So, if there is a loss pertaining to this
short-period sale, it is non-deductible.
Take note: when we talk about

However, take note that there is an of service if its is a service industry, if

exception to that. An exception wherein manufacturing it is cost of good
a wash sale maybe deducted is if the manufactured and sold, and in
seller is a dealer in securities. Because if the merchandising business, it is usually
seller is a dealer in securities, then that labelled as cost of sales. So, it is two—you
simply means that he really has to buy and have the financial statements of the
dispose that share regardless of the time company, you can see it in the income
statement of the company. Otherwise, in the
duration because that is his/her job. Incase
statement of financial performance and that
that happens, then the loss pertaining to
figure here, say for example this is your cost
the wash sale may be deducted.
of goods sold, of course, we will not discuss
The other type of loss which is also of how it is being computed. But the thing is,
the cost of goods sold in your financial
deductible – I’ve mentioned this type of loss
statement must coincide with your cost of
when we discussed about the requisite for
goods sold, cost of sales or cost of service
deductibility. If you recalled, we said that
in your tax return because that is one thing
one of the requisites for deductibility is that
being checked by the BIR.
the business expense must be paid or
incurred within the taxable year. We said, Can the cost of sales/service different from
that there is an exception to it, meaning the ITR? There are instances when it is
that even if it is not incurred or paid within different most especially when there is
the taxable year, deductible gyapon siya timing differences which will be discussed
and that pertains to the so-called NOLCO under accounting period and accounting
or the Net Operating Loss Carry-Over. methods.
As what I’ve discussed before, the cost of Financial statements usually follow the
goods sold or cost of service is incurred for accounting principle or accounting rule.
you to generate the sales or for you to have Income tax, on the other hand, follow the
the receipts. In short, there is no more tax rules. Unfortunately, there are instance
question if it is allowable or not. Definitely, when the accounting rules differ from tax
that is allowable. Allowable deductions rules.
- Cost of good sold / cost of services - incl.
all business expenses directly incurred
Issues usually comes in when it comes to Which is correct? Tax rules or accounting
the other expenses. So, for other expenses, rules? Both. However, accounting rules put
these are usually indirect expenses and this emphasis on the accrual of the income or
is where the tax code strictly comes in on expense. Tax rules is more on hybrid,
whether that indirect outflow is allowable of focuses on which comes first like when did
not. That is where we will try to dig in you pay it, so that is when the timing
further. difference comes in.
So, for cost of goods sold, just to give you So if ever the figure in your cost of goods
an idea of how this is presented. In the sold portion in the financial statement will
financial statements, usually you have this not match in the ITR, that’s when
cost of goods sold portion or it could be cost reconciliation happens.

Itemized Deduction – Expenses bank? Kinahanglan gyud present under the

normal or usual circumstances. Of course
Business expenses – deductible expenses sweldos teller nimo, sweldos security guard
– deducted to gross income when paid or that is basically ordinary or usual especially
incurred during the taxable year; considered in a banking institution.
as the ordinary expenses that you incur, the
normal or usual expenses; considered as
necessary, meaning it may not be normal
and usual but it must be appropriate and But if mo ingon ka necessary, it’s
helpful when it comes to the business. appropriate and helpful meaning
makafunctio gihapon ang banko even if
Let us understand what is ordinary. wala na siya it could be salary of the janitor
or salary of the IT something but still that is
Business Expenses deductible.
Kung mo ingon ta ordinary business

expenses, these are usually in short, the
direct expense. Depende sa negosyo nimo, When it comes to deductibility of expenses,
,ag depende na if you are into service, or you may ask do we have to determine if it is
manufacturing. If you are into ordinary or if it is necessary? Dili gyud
manufacturing, you have certain goods let’ kinahanglan. Basta ma identify lang nimo
say foe example ordinary/normal usually nga ordinary na siya or necessary na
nimo could be the salaries of your factory siya, as a rule, that is deductible. And it
workers; it could be the depreciation must be related to the trade business or
expense pertaining to your machineries. exercise of profession.
Perhaps, ang necessary which is
considered appropriate and helpful, it could
be the salary of the security guard, securing
the premises or the salary of your marketing Capital Expenses
personnel meaning to say, maka function
The other type of expense that you will
ang manufacturing business nimo even if
usually experience is the so called ‘capital
wala ang security guard or even if wala ang
expenses’, these are the expenses that are
marketing personnel nimo so that’s not
considered extraordinary expenses.
really ordinary, it’s still a deductible business
expense because it is necessary. What is
ordinary/necessary to one business may not
be ordinary/necessary to another type of Extraordinary expenses- characterized
business. primarily by two characterization:
1) It involves usually huge sum of money - it

is costly;
Kung ang negosyo nimo dili manufacturing,
rather ang negosyo nimo banko, so kung 2) The benefit for that capital is expense is
banko ka, what’s the ordinary expense of a expected to lapse beyond a one year period

or in short it covers several years. building, you don’t recognize the entire cost
on the year when you paid it or incurred it
because you expect to benefit from it in the
long term. You report it first as an asset and
A capital expense either increases the then on a staggered/yearly basis, you
value of an existing property e.g. major recognize what is now called the
repair and/or it prolongs the useful life of depreciation expense.
the property or the asset.
Requisites for Deductibility of Ordinary
and Necessary Expenses
What’s the rule if it is a capital expense? *We only focus on Business Expenses
because we are taking about allowable
If it is a capital expense, it is not deductible deductions
upon payment or incurrence. Rather it is
amortized or depreciated. What do we 1. Ordinary and Necessary
mean by that? It means to say nga instead
NOTE: What is ‘ordinary and necessary’ for
of recognizing it immediately as an
one business may not be ‘ordinary and
expense, what you will do is to recognize a
necessary’ for another.
capital expense as an asset.
1. Paid or incurred during the taxable
Capital Expense
year
RULE: Not deductible upon payment or
incurrence. It is amortized or depreciated. It must not pertain to a particular
expenditure that has been incurred during
IOW, instead of recognizing it immediately the previous year.
as an expense, it is recognized first as an
asset. Thus, it is not yet deducted to the Paying an Expense vs. Incurring an
gross sales or gross receipts. Expense
Accrual Method vs. Cash Method
However, on a staggered basis because it
(1) prolongs the useful life of the property or ● Accrual Method
it (2) increases the value of the property.
You can benefit beyond the one year period. The expense is recorded upon incurrence
Here, depreciation or amortization is even if it has not been paid yet. It is already
recognized. considered as an “incurred expense” when
one has already benefitted from it.
EXAMPLE (of capital asset): A company
constructs a building. More often than not, ● Cash Method
constructing a building is for investment
purposes with an expected life of 10 years,
20 years, or etc. The cost incurred in Differentiate Accrual Method and Cash
constructing the building, regardless of the Method
length of time it took to construct the

Under the Accrual Method you record the who spent for it. All events test is more an
expense once you have already incurred it adherence to the accrual method. In a one
even you have not yet paid for it. When you case, it as described as a situation where
say incurred – kanus.a ka maka-ingon na there is already a fixed right to the income
incur na nimo? - when you already or to the liability. The amount of such
benefited from it, nagamit na nimo like rent. income or liability has to be determined with
reasonable accuracy. It need not be
For example: Ni bayad ka 2 months absolute at least you can already determine
advance, that 2 months advance payment as that particular period kung pila ang
wala pa na nimo na incur nganu man? Kay bayranan.
wala paman ka nisugod ug occupy. But after
a month of stay, Pwede nabaka
maka-recognize ug rent expense under the
accrual method expense? Yes, because
1month has already elapsed, you already
have benefitted from it, that’s the concept of
accrual method.
Cash Method, the strict cash method,

simply means the moment you shell out
cash you recognize it as an expense, if you Paid or incurred during the taxable year ->
haven’t shell out any cash or wala kay the expense pertaining to the last year’s
napagawas na cash you do not recognize it activity, is it deductible? No. Because it
yet as an expense, in the Philippines we do must be paid during the taxable year or
not follow that. incurred during the taxable year
For taxation purposes, do we follow accrual Because there was one SC case. It was
or cash method? For taxation purposes, actually a fee for professional fee for audit.
what is usually being highlighted by
Supreme Court in various cases is not really The audit happened for example 2019 but
accrual or cash method rather it is what is the taxpayer paid it in 2020. The taxpayer
called “all events test”. When we say all claimed it as an expense in the year 2020.
events test, kung makapasar siya sa all Nakita ni BIR, gi disallow ni BIR. Went up to
events test then that expense or payment is the Supreme Court and held that it is
considered deductible. disallowable, it cannot be allowed because
even if you paid it in the year 2020 you did
not incur it in the year 2020.
Under the all events test this simply means
all the events to complete the transaction is In short, the service should have been
present. In short, the has already been claimed as an expense in the year 2019
perfected whether paid or not and in such because following the All Events Test it can
case taxable on the part of the income already be ascertained in 2019.
earner and deductible on the part of the one

That is already payable supposedly in 2019. means that is only what we describe as
Masulod naman sa All Events Test because AVOIDANCE.
there is already a fixed liability in the year
2019. Kung magkuha kag professional
service you already have an agreement in a MODULE 10.2
contract signed during that year as to how
much will be paying.
The third requisite for deductibility is
An exception to this rule during the taxable expense or the deduction must pertain to
year. There is one type of expense that the trade, business or profession of the
even if not paid or incurred during the taxpayer. In short, it should be traceable to
taxable year, ma deduct gihapon nimo and the business because personal expenses or
that is what we called Net Operating Loss even losses pertaining to related parties, as
Carry Over (NOLCO). a rule, are non-deductible.
How can you prove that is in connection

Although we will discuss in further detail this with the trade, business, or profession?
“Net Operating Loss Carry Over (NOLCO)” Through proper record and proper
but just to give you an overview, this is a substantiation. Because, this is also one
BUSINESS LOSS. If a business incurs a aspect that the BIR looks at, in disallowing
loss, as a rule, it’s deductible. It can be the expenses you are trying to claim, simply
carried over for the next, succeeding three because it has nothing to do with the
(3) years, mao na nga kung na “loss” ka sa business or profession.
2019, ma carry over na nimo sa 2020, 2021,
2022. So, that is an exception to the rule. What are some examples of expenses
Ang NOLCO na ma deduct nimo in 2020, which are deemed non-deductible because
let’s say for example, it was not payed or it is not related to the trade or business? If
incurred in that year because it was we base it on provisions of the law and
pertaining to year 2019 or ang NOLCO na jurisprudence, we have the expenses in
i-claim nimo in 2022, it was not an expense connection with passive investments. As a
or paid or incurred during that year. BUT rule, unless you are a holding company that
there is this provision under the law on is actively engaged in making investments
NOLCO and i will explain to you why there or a dealer in securities, for your passive
is such a thing as NOLCO. Mao na nga di ta investments, the expenses incurred herein
mag pataka sa pag interpret sa contents of are considered non-deductible. Why?
financial statement or sa ITR nga mu ingon Because it is not ordinary or necessary. It is
lang ka nga nag evade ni siya because na a passive investment. Or expenses on profit
zero out ang liability niya because of remittances abroad. This is common for
NOLCO. THAT IS NOT EVASION, that is resident foreign corporations.
provided under the law and there is a
reason why the law has that provision Or branches registered here in the Phils,
pertaining to NOLCO. So, if you want to nga magpadala sa profit nila or i-remit nila
avail of that provision, that is legal and by all abroad. Naa man nay mga transfer fee

pertaining to international banks. As rule

pwede ba na i-deduct? The answer is no As to reasonability: it is a case to case
because it has nothing to do with the basis.
operation. Or to some extent, political
campaign expenses. However, there are In relation to the operation: the sales
exceptions if it is made to a registered generation of the business.
political party. Registered political party with
the COMELEC or it is duly accounted or Exception or the only type of outflow
reported in accordance with the rules and where there is a limitation or threshold
regulations of the election code which has set under the law is entertainment,
been implemented by the Comelec. amusement and recreation expense. Why
is there a limit? Because this is the type of
In such instance, it can be deemed expense that was abused in the past.
deductible and there are other instances
which we will discuss later on when we go Example: In a family corporation - when
to the specifics of the itemized deductions. their children are very young, all their
expenses are being deducted in their tax
The fourth requisite is it must be return or financial statement. Ang kompanya
reasonable in amount. When we say ang naghatag allowance, nagpaeskwela sa
reasonable in amount, if you look at it, there anak, nagpa grocery and that's common for
is no fixed figure. Walay limit gi set and a family corporation. Usually kung dili nila
balaod. Mao na nga pwede gyud ka mu ma classify, kung unsa na type of itemized
report so long as it has been properly deduction before diri na nila isulod sa
substantiated. That is actually incurred in entertainment, amusement.
connection with business, you can actually
deduct it from your sales and receipt basta There must be proper substantiation.
reasonable.
Primarily, substantiation is composed of
There is only one exception to the rule. GR: official receipt and other official record.
reasonable in amount. Muingon ta nga First, is you Official Receipt Invoice.
reasonable in amount, pwede ba nga naay
portion nga i disallow in BIR or sa court This Official Receipt, because the VAT law,
because it’s unreasonable? The answer is the BIR instituted that an OR is issued by an
yes. institution engaged in the sale of service.
Sales Invoice, on the other hand, which
In one case, it pertains to the advertising must be BIR-registered under all
expense. Niingon ang korte, since the circumstances, this is an official
purpose of this advertisement is not only to documentation or substantiation issued by a
generate sales in the present period but taxpayer or seller of goods and properties.
also to generate sales in the future period,
only a portion will be allowed as a deduction What is walay official receipts and
advertising expense only those pertaining to invoice?
generation of present sales.

Because indeed, there are transactions BIR will not honor it as proper
which dili gyud puydi resibuhan, then, at substantiation.
least there should be adequate records,
the amount of the amount being deducted I tell you, per BIR assessment, as per
must be specified in the adequate record. experience, this is a common area where
Of course, there should also be a taxpayers fall short: walay proper
description as to the type of expense. These substantiation.
must specify also the date and place in
When it comes of proper substantiation
which such expense is paid or incurred and
rule, there is an exception to this – the
what is the nature of the expense – it must
so-called Cohan Principle or Cohan
be in connection or relation with the
Rule.
development, management, operation
and/or conduct of the trade or business. This is a principle laid out in a US case
wherein generally, the treatment is 50/50.
Other examples of expenses na ma-incur
This is a US case, in this case, what
nimo na di usually maresibuhan:
happened is that the tax payer was able to
prove that he incurred the expenses but it
Most common: Transportation Expenses.
cannot be supported by an official receipt.
If taxi or grab, then, you could have the What was presented by the taxpayer was
receipt there, but if mag jeep or tricycle, the other adequate records proving the fact
that he has purchased goods and the goods
definitely, they don’t even know what is an
were actually received by the tax payer and
official receipt.
converted to the products sold because this
However, deductible ba gyapon na? Yes. So involves a manufacturing company. In this
long as you have the appropriate supporting case, the US supreme court allowed 50% to
be deducted and the other 50% was
record or document. Mao na na usually,
disallowed. So, under the COHAN (?)
what a taxpayer can do when it comes to
principle, if there is a showing that expenses
transportation expenses incurred by its
have been actually incurred but the exact
employees in relation to their job or work
amount cannot be ascertained or it is not
gihapon is to ask for liquidation.
properly supported by a supporting
Ipa-liquidate, re-imbursan ang employee, document, the BIR has the authority to
and they claim it as expenses. So, that make an estimate. However, it has to weigh
could be considered as adequate record. heavily against the tax payer who failed to
present supporting documents. This
The general rule is the substantiation principle is actually an old rule or principle
rule. The substantiation must be produced that is still being used by the BIR. THIS IS
or at least recognized by a third party. COMMONLY USED BY THE BIR AND NOT
Why? To avoid any issues na dili na COMMONLY USED BY THE COURT.
arms-length transaction. If the evidence WHY? Because when we discuss remedies,
comes man gud from the company, then you will learn there that in so far as the tax
that comes of as self-serving. Generally, the court and in so far as the SC is concerned,

the BIR must show that its assessment is business. The common victims of this
duly supported and not just based on revolutionary taxes are telecom companies.
estimate. This COHAN principle is just
based on estimation of the BIR. When it is What are the common itemized deduction?
usually used by the BIR? Usually, this But first it is common because this is not an
principle is not used by BIR for legal exclusive list.
argumentation, the principle is being used
during negotiation, especially during What are the itemized deductions?
assessment. It is very common because What are the common deductions?
there are examiners, let us say for example,
Common because this is not an exclusive
you are being assessed of a particular type
list so long as you can prove that that
of expenses and then you go to that
particular outflow is related to your trade or
examiner and say “maam, it was really
business and the other requisites are
incurred or purchased but we cannot show
present, you can very well deduct it.
you an official receipt. What we can give is
an acknowledgment receipt.
Acknowledgment receipts are not proper
proof of documentation. The examiner will Itemized Deductions
then say “okay, for it to be negotiated, the (ExInTaLoBaChaRenDepDEp)
examiner can allow 50/50. Meaning, if the
examiner will disallow 50% for that l EXpense
particular expense, what will happen is that
the taxable income will go higher but you l INterest
will just have deficiency tax liability but it will
l TAxes
go high (musaka gamay) because of the
50% disallowed expense. Is there any basis
l LOsses
for this? Yes, and that is the COHAN rule or
the COHAN principle. But I tell you, when l BAd debts
you reach the court arguing about it, the
tendency is that basis will really be asked as l CHAritable Contributions
to why was the 50% disallowed and that is a
separate discussion under Tax 2. l REsearch & Development Costs
Another requisite for deductibility, the l PENsions

expense must not be against law, morals,
public policy or public order. So, if it is l DEPreciation
bribes or kickbacks which is termed as
l DEPletion
facilitation fees, as a rule, it is
non-deductible. Revolutionary taxes are
recall
also non-deductible. Revolutionary taxes when it comes to the composition or the
are collected by leftist groups and if you do inclusion of your gross income, we have the
not pay revolutionary taxes to the rebels or CGIRDAP. out of CGIRDAP you also deduct
the cost of good sold or cost of sales, and
leftists, they will wreak havoc to your you also deduct, if you choose itemized
decution, EXINTALOBACHAREPENDEPDEP

Expenses NOTE: Remember the tax base where you

will multiply the limitations - 0.5%, 1%. It is
multiplied on the Net Sales or Net Revenue.
What is meant in this Net Sales or Net

Revenue? Basically that is just Net of
returns, allowances and discounts.
So ang entertainment nimo related sa Let’s have this example: if the business is
negosyo, related sa profession. Kinsa ang engaged in the sale of goods or service
gi entertain nimo? Could be your guest/s.
Where? At a dining place, place of
amusement, country club, theater, concert, GOODS SERVICES
play, sporting event, and similar events or
places. Sales (net) 1M 1M
Multiply by 0.50% 1.00%

NOTE: This is the kind of expense which Limit 5,000 10,000
has a threshold depending on the nature of
business - either 1% or 0.5%. Since it has a Actual EAR 7,500 7,500
threshold, the actual entertainment, Expense
amusement, and recreation expenses must Disallowed 2,500 2,500
not exceed the allowable limits. Hence, the Portion
deductible amount is whichever is lower
between the actual entertainment, Allowable 5,000 7,500
amusement, and recreation expenses and EAR
Expense
the allowable limit.
Limitations Let’s say for example ang Net sales nila kay
1 million (both goods & service).
● Those engaged in sale of Ang limit niya kay .50% = 5,000 for goods
goods/properties and 1.00% = 10,000 for service.
0.5% of Net Sales You might ask, Nganung mas dako ang limit
if it sale of service? Because it is really
● Those engaged in sale of service
necessary in the sale of service for you to
market your service to meet your guest and
1% of Net Revenue
to entertain your guest. As to compare to
● Mixed Sales of Goods and Services sale of good or properties because for the
sale of good or properties is all you need to
Apportionment Formula do is display you goods or properties, show
it to the guest, but for the sale of service is
different, you need to talk to the potential

client, you need to entertain the client.

Lawyering, for example very common, The limit is 1% of net sales or net revenue
practice in law, when you are practicing on and .5% of net sales or net revenue.
your own, you need to show to your client
that you are gracious host, for example adto Ceiling/Limitations
jud mo magmeet sa social nga restaurant Sales of Goods: 600,000 x ½% = 3,000
sa hotel, or sa fine dining nga restaurant in Sales of Service: 400,000 x 1%= 4,000
order to talk to the potential client, mao na
nga ang limit medyo taas, medyo taas Comparison
compared to the limit set for the sale of
Apportio Ceiling Allowable
goods. nment Deductions
Expense
So you need to talk with the potential client, Sales of 3,600 3,000 3,000
that’s why the limit is a little bit high. Goods
Whatever is lower between the threshold Sales of 2,400 4,000 2,400
and the actual so that’s that amount that is Service
deductible.
Total 5,400
So, ang allowable deduction would be 3000.

For the Sale of Service, 2400 ang actual
apportioned, 2400 ang ceiling so natural,
What if mixed you have sales of goods and
ACTUAL. So, the total allowable deduction
sales of service? You don’t need specifically
will only be 5400. Why do I need to explain
if it pertains to sales of goods or sales of
this? Because this is not just a favorite in
service. What are you going to do in order
the BAR but in practice this is also one item
to ascertain is it is within the threshold. You
na makalimtan ni taxpayer.
need to apportion.
Take note however, there are expenses nga

Apportionment Formula
somehow kung tanawon nimo murag mu fall
Net Sales/Net Revenue x Actual EAR
under entertainment and amusement but
Total Net Sales and Revenue Expense
based on rulings, based on cases decided
are excluded from the “EAR CEILING”.
Sales of Goods:[600,000/1M]x6,000= 3,600
Meaning to say, if you incur these
Sales of Service:[400,000/1M]x6,000=2,400
expenses, you can deduct it in whole, nt
subject to the ceiling.
Net Sales = 600,000 + 400,000 = 1 million
Excluded from EAR ceiling:

The 3,600 and 2, 400 is not yet the value
1. Expenses treated as compensation
that is deductible because it is still subject to
or fringe benefits.
the limit.

2. Expenses for charitable or fund ● Expenses for attending or

raising events sponsoring a professional
3. Expenses for bonafide business organization meeting.
meeting of stockholders, partners or - Also not applicable, they are not
directors. not guests guests.
4. Expenses for attending or
sponsoring a professional ● Expenses for events organized for
organization meeting. promotion, marketing, and
5. Expenses for events organized for advertising including concerts,
promotion, marketing, and conference, seminars, workshop,
advertising including concerts, and conventions.
conference, seminars, workshop, - So, these are the so-called
and conventions. Marketing Expenses, the ads or
advertisements, it is not spent
● Expenses treated as compensation directly to a specific guest man
or fringe benefits. rather it is directed to the the public.
- Kato ni mga “FIXED That is why this is not subject to the
REPRESENTATION ALLOWANCE”. limit of the EAR. However, even
Although it is termed representation though pwede nimo ma deduct in
allowance, but fixed mana siya so it full, remember the requisite on
is considered as COMPENSATION REASONABILITY, so dapat
of the employee and considered reasonable na promotion na,
man as such, it is FULLY reasonable marketing expense for
DEDUCTIBLE. You do not add or the generation of your current or
lump it with your other present sales.
entertainment, amusement and
recreation expenses. PENALTY for reclassification of expense:
- Any findings of improper
● Expenses for charitable or fund classification or representation
raising events expense to avoid being subjected
- This would fall under Charitable into the ceiling shall be disallowed
Contributions and there is a in its totality.
separate set of rule, there is a
separate limitation applicable. What if i-reclassify nimo kana nga expense
supposedly fall as entertainment,
● Expenses for bonafide business amusement and recreation pero dili nimo
meeting of stockholders, partners or isulod nganha kay ma limit man ka into 1%
directors. or 0.5%. So what you will do, you make
- NOT APPLICABLE, di ni nimo ma another title to it pero ig tanaw sa resibo,
consider na “EAR” because they are klaro sa supporting document, klaro
not guests. They are not potential entertainment, amusement and recreation.
clients, they are part of the business. That’s dangerous because once the BIR
notices that, any findings of improper

classification or representation expense to of disclosure on the part of the taxpayer and

avoid being subjected into the ceiling shall it is a matter of investigation for the part of
be disallowed in its totality. BIR.
We know the consequence if that is

disallowed, mu saka ang taxable income For the BIR to say nga you cannot deduct
nimo and it leads to DEFICIENCY TAX in full depreciation expense subjected to the
LIABILITY. threshold because this falls under EAR (?)
expenses. If it's used not for business but
used lang by the guess of business.
MODULE 10.3
When it comes to instances, say for
example, depreciation na siya sa condo or
This discussion will pertain to allowable yacht used to entertain your guest or
deductions. So far, we’ve discussed the recreation purposes, now you don’t want it
requisites of deductibility of expenses in to be subject lang to 0.5% or 1% threshold
general of allowable deductions. In the so mao nang you make it appear na that’s a
previous sessions, we’ve discussed depreciation in relation to properties used
entertainment, amusement, and recreation inside your business. But it was founded
expenses. later on that indeed it is for entertainment.
The consequence is it can be disallowed in
As mentioned, the EAR (entertainment, totality by the BIR as part of the penalties.
amusement, and recreation) is the only RENTAL EXPENSE
type of expense which has a threshold or Then you have Rental Expense. As a rule,
limitation. When it comes to entertainment, kinsa ang claim sa expenses? It’s the
amusement, and recreation expense, as a lessee. The lessee may deduct the amount
rule, it pertains to expenses incurred in of rent actually paid or legally payable
relation with the entertainment, amusement, during the year. But then again, since this is
and recreation of guests of the trade or subject to a mandatory creditable
business. withholding tax, then the lessee must
ensure that it has properly withheld the 5%
One thing I forgot to mention before is that, creditable withholding tax.
take note, when it comes to EAR
(entertainment, amusement, and recreation) Just a quick mention of the other expenses
expenses, it also includes depreciation as discussed in the handout. I think you are
expenses relating to entertainment facilities also looking at your handout now while
being used to entertain the guests of the listening to the lecture.
business, such as yachts, vacation homes
or condominiums that are primarily used for
guests of the business. Why do I need to For repairs and maintenance expenses,
emphasize on this? Because this is usually even if it's just a minor repair which would
what is being abused in practice and it is the increase the value of the property or prolong
finding of the BIR. Of course, it is a matter the life of the property, then such repair and

maintenance expenses are deductible at 7. The interest must be legally due;

once. 8. The interest arrangement must not be
between related taxpayers;
If it's considered as capital expenditure, 9. The Interest must not be incurred to
increase the value of the property or prolong finance petroleum operations; and
the life of the property then it's considered 10. In case of interest incurred to acquire
as capital expenditure or extraordinary property used in trade, business or exercise
expense. of profession, the same, was not treated as
a capital expenditure because when it
Supplies and materials - it's deductible comes to interest expenses, duha ang
when it is actually consumed during a pwede buhaton duha ang pwede nimo
taxable year. buhaton. Again, this interest expense
relates to a loan, so, unsa ang purpose
Litigation expenses - when it comes to the ngano nag loan ka. If ang purpose na
cost of defending your business in a civil nagloan ka is to use it as your working
suit, example damages for infringement, capital for your daily operation, then, by all
irrespective of the judgment as a rule it is means, the corresponding expense there is
deductible but it must have been
deductible. However, if the purpose of the
adjudicated and paid already or settled
loan is for you to construct a building, let’s
already by the courts. Unless and until, the
say for example, pwede ba nimo i-consider
court makes a final decision and until you
ang interest expense as cost of the
paid it, consider lang na contingency and dili
building? I-record nimo as asset or
pa deductible.
INTEREST EXPENSE
property? The answer is yes. So, in such a
Interest expense - common expenses of case, it is treated as capital expenditure.
Corporate or individual taxpayers who are
So, if it is treated as part of the cost of the
engaged in a business. It is the amount that
you paid for the use or purveyance of building, you do not anymore deduct
money. separately an interest expense, otherwise,
madoble. Mao ng when it comes to such
REQUISITES FOR DEDUCTIBILITY transactions, we have to check unsa ang
1. There must be an indebtedness; mga nirecord as cost of the building. Does it
2. There should be an interest expense paid only include the principal cost or does it also
or incurred upon such indebtedness; include the interest expenses.
3. The indebtedness must be that of the
taxpayer; I tell you, there could be confusion when it
4. The indebtedness must be connected comes to this, especially when it involves
with the taxpayer's trade, business or big projects. Kay sa big projects, ang
exercise of profession; costing ana nila is inclusive na of interest
5. The interest expense must have been expense. So, kung makit-an n ani BIR, then
paid or incurred during the taxable year; definitely, the interest expense which is
6. The interest must have been stipulated in claimed as deduction will have to be
writing; disallowed.

What are the important things to difference between 20% and 30%. To
remember when it comes to interest capture 10 over 30, that is basically 1/3 or
expense? 33%. Caveat: the CITIRA bill may be
passed into law and in that bill, the
We have the so-called arbitrage rule. corporate tax rate will be changed from
Always remember that this expense pertains 30%, it will be reduced eventually.
to interest expense and under the tax code,
it provides that the tax payer’s allowable Every year, nag magkaubos ang corporate
deduction for interest expense shall be tax rate, reduction in your interest expense
reduced by an amount equal or equivalent will also change. But as of now wala pa
33% of the interest
tax income earned by the tax man. So we have to follow the rule that it
payer which has been subjected to final tax. will be reduced to an amount equivalent to
So, it follows that the arbitrage rule applies 30% of the interest income subjected to final
only if you want to deduct and interest tax.
expense, hence, at the same time, the
taxpayer wanting to deduct that interest
It will have to be reduced by an amount
expense also earns interest income which
equivalent to 33% of the interest income
has been subjected to final tax. What’s the
subject to Final Tax.
logic behind or what’s the reason? That’s
we always have to remember so as not to
forget arbitrage rule. Why do have this thing
call arbitrage rule? Its purpose is to address Sir wala man koy deposits banko, wala koy
the loophole wherein the tax payer can take interest income, do I still need to apply the
advantage of the tax rate under the present arbitrage rule? Dili na, pasabot you can
tax code. Why? Because if you claim or already deduct in pool your interest expense
deduct interest expense. So, for corporate basta it pertains to your daily operation. It is
tax payer, you deduct an interest expense, not considered as part of your capital
what will happen is that your taxable income expenditure which has to be recorded
will decrease. initially as an asset.
In short, you have tax savings. The rate for

corporate tax payers is 30%, so effectively
you saved 30 cents. Unsa nga scenario ang gi prevent sa
arbitrage rule? The scenario being
On the other hand, if the same tax payer prevented here is called the “back to back
earns an interest income from its deposit in loan transaction”, kani bitawng mag loan
the bank, passive income, it is subjected ka and then you claim or you deduct the
only to 20% final income tax. Alkansi ang interest expense and that what you will do
government or dili? Yes, alkansi, because kato gi loan nimo, ideposito nalang sad to
there is no arbitrage rule. On the side of the nimo sa banko and on that deposit, you will
tax payer, he has 30% savings, but on its be taxed only at 20%, tan awon nimo, naa
interest income, and gi-tax-an lang sa kay ginansya around 10%. To discourage
government is only 20% so there is 10% that scenario, you have the arbitrage rule.

interest income which has been subjected

to final tax.
ILLUSTRATION:
Now, if there is no arbitrage rule…
…the interest expense deductible is

computed as follows:
P1,000,000 x 10% = P100,000
(Tax shield at 30% = P30,000 reduction in
tax payable)
…the interest income is computed as
follows:
TN: Kana palang daan, it gives you an idea P1,000,000 x 10% = P100,000 x 20% =
na deductible immediately ang interest P20,000 (this is what the government earns
expense. Ngano man? “In connection with from you)
it’s operation” not for a purpose of
constructing a building or not for a purpose So, the government only collected P20,000
of any other capital expenditure. but you decreased your taxable income by
P30,000. Which is why we have the
Segue by Atty. KMA: In this illustration, we arbitrage rule. The interest expense that can
just fixed it at P1,000,000 so that we can be deducted will have to be reduced by 33%
see the difference. However, in practice, the of the income interest which has been
figures for interest expense and interest subjected to final tax.
income are different. But, nevertheless, the 30-20/30 = 10/30 = 33%
arbitrage rule is applied.
*Continues to read the last paragraph of the

illustration - “Assume that Tigan’s net
income…”
ANSWER & EXPLANATION: The August 1

loan is the interest expense. So,
P1,000,000 x 10% = P100,000 interest
expense.
The November 30 deposit is the company’s

passive income which is subjected to 20% The interest expense that you can deduct in
passive tax rate. So, P1,000,000 x 10% this case will have to be reduced by 33% of
interest income = P100,000 passive income. the interest income which has been
subjected to final tax. Mao nang 33% or 1/3
Hence, the P100,000 interest expense is of that interest income. In short, ang
not to be automatically entirely deducted. deductible nimo would be, how much?
Rather, it shall be reduced to 33% of the 100,000 less 33,333 so that the deductible

expense would be around 67,000 if I’m not

mistaken, around that figure ang pwede
lang nimo ang ma-deduct na interest
expense.
Interest expense – non-deductible
QUESTION: When it comes to interest

expense are there instances that to interest
expenses be deducted in full?
ANSWER: Yes, it can be deducted in full.

One instance is, if there is no interest
Are there instances when interest expense income earned during the taxable year or
may be considered non-deductible? Yes, if it even if there was interest income but it was
is advance payment of interest, through not subjected to final tax because it’s 30%
discount and you are reporting on a cash of interest income subjected to final tax or if
basis. So in such case, it's non-deductible the interest is paid in favor of the
because it is not incurred in the year on that government as, example deficiency interest
particular period. of delinquency interest. If there’s no
stipulation at all, there should be no
If it is indebtedness between the members deduction for interest expense.
of family, remember one of the requisites, NOT COVERED UNDER ARBITRAGE RULE
one must be incurred by non-member or Delinquency Interest

unrelated parties. These are assessed by the government
through the BIR if you failed to pay your tax
Indebtedness between a corporation and an assessment on time or upon demand by the
individual who owns, directly or indirectly, at government.
least 50% of the corporation- again there is
always this issue on arm’s length market Recall General Principles. The relationship
trait or market interest. between the taxpayer and the State is not a
debtor-creditor relationship. However, the
There is always this issue if it is a market moment the taxpayer is delinquent/deficient,
rate or market interest so in such case it is the relationship between the taxpayer and
considered nondeductible. the State now becomes a debtor-creditor
relationship because the State has already
a legal right to collect what is due from the
taxpayer. In that sense, an interest may now
be collected by the State.
Under the Tax Code, this interest expense is

usually at 6% and collected twice so 12%.

Kanang preferred stock, this amounts to

Delinquency Interest comes in if you fail to your investment. In a corporation, there is
pay despite demand of the government. no creditor-debtor relationship here but
rather there is investor-investee
Deficiency Interest comes in if the tax relationship. So kung naay interest na
payments made to the government are i-bayad ni corporation to the preferred
lacking based on the computation or stockholders, on top of the dividend, that
assessment of the government and have interest expense is NON-DEDUCTIBLE
failed to explain or justify your case. because it is merely dependent upon
corporate profits. So in short, it is included
In such cases, these expenses are in the Return of Investment somehow ni
deductible. preferred stockholder.
imposition of theoretical interest - not deductible Of course, if the interest is not dependent
So what happens, the Singapore office or on the profit generated or earned by the
parent of the company gave a dole out, corporation, it is fixed gyud na madawat ni
gave some sort of an advance to the preferred stockholder, in such case it is not
Philippine subsidiary without any a Return on Investment rather it is more on
stipulations for interest so eventually the debtor-creditor relationship. So, there
Philippine subsidiary was being assessed should be a corresponding separate
by the BIR and the BIR saw that dole out or agreement to that and that is when the
some sort of subsidy coming from foreign interest expense may now be deducted.
corporation, the BIR imposed theoretical
interest. Gipa bayad niya ug theoretical Second instance na dili ma deduct ang
interest so domestic corporation, the interest expense is when there is no
question now comes in. agreement in writing to pay the interest. If it
Q: Is this deductible? is an interest expense on loan entered
between the parties, interest paid or
A: NO. In such case, the SC even calculated for cost keeping purposes paid in
invalidated the theoretical interest imposed advance through discount, interest and
by the BIR for the simple reason that it is obligation to finance petroleum exploration,
against our laws because there was no interest on unclaimed salaries of the
stipulation between the parties. employees and the 33% of the interest
income subjected to final tax, those are
non-deductible.
IMPORTANT THINGS TO REMEMBER
You should need to remember the

limitations 0.5% and 1% pertaining to
entertainment, amusement and recreation
expense and you should remember the
arbitrary rule which requires that for you to
deduct an interest expense it must be

reduced by 33% of the interest income

which has been subjected to final tax. (1) Percentage tax except VAT. It is
If there is interest income but considered a deductible tax except
If it is not subjected to final tax because it is VAT because VAT is a type of
deemed an ordinary income then in such percentage tax. The deductible tax
case, the interest expense is still deductible here are the so-called other
in full. percentage taxes.
TAXES (2) Excise tax. You pay this to a
specific commodity which is
considered non-essential.
(3) Documentary Stamp Tax. This
pertains to your loan transactions or
issuances of the share.
(4) Local Taxes (Business Tax & Real
Property Tax). The business tax is a
type of tax that you pay when you
are going to renew your business
When it comes to taxes, as a rule, taxes permit or mayors permit.
paid or incurred within the taxable year or in (5) Import Duties.
connection with the trade or business, these (6) Income, war profits, and excess
are considered deductible. In relation to profits taxes imposed by foreign
taxes, you have to always remember on the countries, if the taxpayer does not
so-called “Tax Benefit Rule”. Taxes claim these taxes as tax credits.
previously claimed as deduction, when
refunded or credited, shall be included as
part of gross income in the year of receipt to Because this is what we call as Foreign
the extent of the income tax benefit of said Income Tax or these are the taxes that
deduction (this is the tax benefit rule). you’ve paid abroad. When it comes to this
foreign income tax, this may be claimed
MODULE 10.4 either as a deduction or tax credit. But that
option is mutually exclusive. Meaning to
As I mentioned before, for a tax to be say if gi claim nana nimo as deduction, you
deductible, it must be paid or incurred within cannot anymore claim it as tax credit.
the taxable year. It must also be in
connection with the trade or business. Are Sir, all parts of the taxpayer maka deduct sa
all taxes deductible? The answer is NO. foreign income tax? The answer is no. as a
When we talk of taxes that are considered rule, only those taxpayers who are taxable
deductible, we are referring to either on their income within and without. In short,
national or local taxes. We’ve discussed i’m talking about a Resident Citizen or a
before examples of national and local taxes. Domestic Corporation.
Considered Non Deductible Taxes are:
We go first to deductible taxes. What taxes
are considered deductible? 1. Philippine income tax

-Ang bottomline figure mismo 1. Those taxes which are not connected
sa liability nimo because if with the trade, business or profession of the
you allow the said deduction, taxpayer, personal in nature
it would be very difficult to 2. Final taxes being in the nature of income
come up with the final figure tax, as a rule you pay a final tax if you earn
as to how much is your tax passive income.
liability.
2. Estate and Donor’s tax Primary requisite for it to be deductible:
- Because usually it has It must be incurred in connection with
nothing to do with the taxpayers trade or business.
business. This is more
personal. Estate Tax is a tax Foreign Tax paid - income taxes imposed
on your property left behind by authority of any foreign country may be
when you die. Donor;s tax is claimed by the taxpayer:
a tax on properties you give
out 1. Deductible expense - deduction from
3. Taxes assessed against local gross income is allowed in the case of a
benefits increasing the value of real taxpayer who does not signify in his return
property assessed to claim the same as tax credit. defaukt
- This is our discussion on
special levy or sometimes 2. Foreign tax credit - deduction from
termed as special Philippine income tax if the taxpayer
assessment which are being signifies in his return to claim credits for
collected by the LGU. taxes paid in foreign countries. (A tax credit
- As what we’ve discussed is a direct reduction to your tax liability. This
under General Principles, is peso for peso return of the tax you paid
this is not strictly a tax. abroad. On the hard, for Domestic
corporation you only have a tax benefit
amounting to 30% not the entire amount
Under general principle, special levy or nga gibayad sa nimo ang mauli sa imo)
special assessment is not strictly a tax.
Although special levy or special assessment TAKE NOTE: Foreign tax credit this is
when it comes to local tax payments, iadd subject to audit by the BIR. If your Foreign
up ni siya sa basic real property tax. tax credit is disallowed, automatically you
will have deficiency income tax payable.
Commonly Non Deductible Tax Common reason that BIR disallow Foreign
1. Philippine income tax tax credit: lack of supporting documents.
2. Estate and donor's taxes The other reason why there is option to
3. Taxes assessed against local benefits deduct: Is that if you claim it as foreign tax
increasing the value of real property credit.
assessed
If you claim it as foreign tax credit, it is
Other non deductible tax subject to limitations. It does not follow nga

if pila gyud ang imo tagbayran abroad or in 2. Alien individuals (whether resident or
a foreign country – let’s say for example, non-resident); and
DC ka, then naa kay income sa US, so
natural na pabayron ka ug income tax sa 3. Foreign corporation
US. Diba taxable man a within and without,
What is the common thing about those not
so that income tax in the US, i-declare to
entitled? They are taxed only for the income
nimo sa Pilipinas, nya subject to tax pud ka
earned within. So, if income within, then
diri sa Pilipinas. Pero kadtong tax nga
and madeduct ra pud niya are the expenses
gibayad nimo sa US, pwede ba nimo to I
or outflows paid or incurred within. So, ang
claim as deduction or foreign tax credits
expenses or outflows paid or incurred
here in the Philippines? The answer is yes.
abroad, non-deductible.
And it’s up to you, which is best for you.
That’s where the option comes in. As I have mentioned it does not follow that
the total amount you paid abroad will be the
Who are entitled to foreign tax credit?
amount you will claim as tax credit because
As a rule, those taxpayers taxed within and
it is subject to limitation. We have two
without.
limitations; the so-called per country
limitation and the so-called global limitation.
Taxpayers entitled to tax credit:
Per country limitation ¬– per foreign country
1. Resident Citizen;
limitation. This limitation will have to be
compared to the actual amount of tax that
· The one earning business
was paid on that particular country.
income or self-employed.
Whichever is lower, that is the amount that
2. Domestic Corporations; you can claim as tax credit. This applies
only if the tax payer has operation and pays
3. Members of GPP; and tax in two or more foreign countries. If there
is only one foreign country involve, then we
· It follows that that member just use the so-called global limitation.
of GPP is also RC kay How to we compute?
requirement man na usually in For per country limitation For taxes paid in 1 foreign coutnry
the practice of profession sa Taxable income from foreign country /
Philippines. taxable income from all sources x Philippine
income tax (30% if corporate tax payer) =
4. Beneficiaries of estates and trusts tax credit
Versus
You compare it to actual foreign tax credit or
the one you paid abroad. Whichever is
Taxpayers not entitled to tax credit: lower, that is the amount that you can claim
as tax credit.
1. Non-resident citizens;

Taxes paid to 2 or more foreign coutnries
formula: allowable tax credit shall be the lower between -
limitation1- total of the lower tax credit as computed vs actual per country basis
limitation2 - the lower between total tax credit as computed vs total actual foreign taxes paid matic, you will have P300,00. In that case,
allowable tax credit = lower between limitation 1 and 2 ang kaning 300,000 nga gi bayran ni ABC
So we have to determine, para makabalo ta corp, a RFC, naa ba siyay action to claim it
how to compute the income tax in the as a deduction or tax credit? There is none
Philippines, derecho naman ni 30 time 30%. because disqualified siya under the law
Ngano man? net income naman ni or because as being a RFC, it is taxed only for
taxable income. So wala na tay problema sa its income earned within the PH.
cost of goods sold or operating expenses.
But we have to check the classification ni

ABC because if ABC corporation is However, if we change the classification of
classified as a resident foreign corporation ABC corp from a RFC to a DC taxable
(RFC), it is taxable for its income earned within and without pasabot, to compute the
within. Meaning and i-multiply nato sa 30% tax liability of ABC, itotal nimo ang PH net
is the Philippine net income which is 1 income and USA net income, so that’s a
million, so you will have 300k. total of 2M.
In that case, does ABC corporation has the

option to claim the 300k as a deduction or
tax credit? None, because ABC is To compute the income tax in the PH, that
disqualified under the law for being an RFC would be 2M x 30% = 600,000.
which is taxed only for its income earned
within the Philippines.
Segue by Atty. KMA: The Corporate Income
On the other hand, if ABC corporation is Tax and Incentives Rationalization Act
classified as a domestic corporation – (CITIRA Bill) has been substituted and is
taxable within and without – hence, to now the Corporate Recovery and Tax
compute the tax liability of ABC the Incentives for Enterprises (CREATE) Act.
Philippine net income and the USA net But nevertheless, it is the same thing. Once
income must be added, so you have 2 the CREATE is passed into law, it will
million. So, to compute the income tax in the change the corporate tax rate. In the
Philippines, that would be 2 million times CREATE, automatically it is reduced to 25%
30%, that would be 600k. compared to the gradual reduction before.
But anyhow, for now, what we will use is
Question mark ang income tax sa PH. So 30%.
we have to determine para makahibaw ta
how to compute the income tax in the PH. In this case, there is only one foreign
Deretcho naman ni 30x30% kay net income country. So, we only compare the global
naman ni. But we have to check unsa ang and the actual paid abroad of P300,000.
classification ni ABC because if ABC Corp.
Is classified as a RFC, an RFC is taxable In computing for the limit:
only for its income earned within meaning, P1,000,000 (USA) / P2,000,000 (total net
ang computon nato, ang imultiply nato sa income)
30% is only the PH net income of 1M. So x

P600,000 (PH income tax) or it can claim as tax credit to taxes paid
= abroad because it is applicable only tax
P300,000 is the limit payers tax within and without which is a
domestic corporation.
The actual paid abroad and the limit are the
same figures - P300,000. Now, the question
is, can you claim the entire P300,000 as tax
credit in this case? Yes, because it is within XYC Corporation, a Domestic Corporation
the limit
Phil. Net Income – 1 million
USA Net Income – 1 million
China Net Income – 1 million
BVI Net Income – 1 million
Pwede ba nimo ma-claim ang entire Income Tax paid in USA – 300,000
300,000 as tax credit in this case? Yes, it is Income Tax paid in China – 100,000
within the limit or threshold.
Income Tax Philippines - ???
What if 100,000 ang income tax paid sa
U.S.? Kung 100,000 ang income tax paid sa
U.S. the amount you can claim as foreign
cash credit is the lowest, so the amount you XYZ Corporation is a domestic corporation,
can claim would be 100,000 because the in this case, there are how many foreign
limit is 300,000. corporation?
On the other hand, kung ang income tax In this case there are three foreign
paid sa US is 400000, ma-claim ba nimo as corporations: USA, China and BVI.
credit? Dili, because the limit is 300,000. Philippine Income Tax is 1M. So your total
income would be 4M. You paid USA 300K
What if there are two (2) or more foreign and China to 100K. So if you don’t want to
countries? If there are two or more foreign claim it as a deduction, subject to limitation
countries we now have the so called per when you claim it as tax credit. So we have
country limitation v. global limitation v. actual to determine first how much is the income
amount paid abroad, whichever is the lower tax in the PH so 4m times 30% = 1.2M.
between the three that is the amount tax Applying the three limitations: If we use the
credit you can claim. Kung non-resident per country limitation so what’s important is
foreign corporation or resident foreign katong nagbayad ta so the actual payment
corporation na siya there is no issue on to USA is 300K and China 100K
whether it can deduct the taxes paid abroad

The primary support if you want to claim a

Does this entire amount be claimed as credit is the Tax Return that you’ve filed
tax credit? Under the per country limitation, and/or paid the foreign jurisdiction sa ilang
that is taxable income in that foreign taxing authority, equivalent to the BIR.
country.
Let’s go back to the Tax Benefit Rule, taxes
Per Country Limitation previously claimed as deduction, when
USA: 1 million x 1.2 million PH income tax refunded or credited, it will form part of
4 million total net income gross income in the year of receipt to the
=300,000 extent of the income tax benefit of said
deduction. Meaning to say, kung
China: 1 million x 1.2 million PH income tax pangutanon ka, gi refund ka ani nga type of
4 million tax and then you will be asked.
=300,000 Q: Is this taxable or not taxable?
A: You have to check if that type of tax is
Global Limitation deductible or non-deductible.
3 million x 1.2 million income tax =900,000 In the first place, because if it is
4 million non-deductible, say for example estate tax
or donor’s tax. Usually, you will be refunded
The entire amount (US - 300,000 and China if there is excess payment or if there is
- 100,000) is the total amount to claim as erroneous payment. So kung ang gi refund
deduction. sa imo is VAT, or estate tax, or donor’s tax,
these are non-deductible in the first place so
How about if there is no BVI? So the limit in the year where you’ve received the
would be 300,000 in each country; US and refund, to answer the question if it is subject
China. to tax? The answer is DILI because you did
not previously claim it as a deduction
because in te first place it is non-deductible.
When it comes to proof of tax credits, for
some taxpayers na dili ganahan ma hassle But if what is refunded to you is the DST, na
and if they want to claim it as tax credit, they sobraan ug bayad, gi refund ka sa RPT
will just opt for deduction. Under the Tax nimo, or gi refund ka sa Percetage Tax
Code, it specifically mentions that credit nimo, you must confirm with the taxpayer if
shall only be allowed if the taxpayer na claim ba to niya as deduction in the year
establishes with the satisfaction of the when it was incurred or paid because in the
Commissioner, the total amount of income year when the refund was received, it shall
sources outside the Philippines, the total form part of the gross income.
amount of income of each country, the tax
paid or incurred to which the taxpayer claim In one BAR Question, gipangutana if which
a credit and of course all other information of the following incomes is taxable? VAT=
for the verification and the computation. 10k, PST= 5k, LBT=20k. So, following the
Tax Benefit Rule, ask yourself first which of

these taxes which have been refunded, are It must be charged off during the taxable
deductible. In this case, VAT is year and incurred in trade or business, or
non-deductible (out). However for PST and pertaining to property related to the trade or
LBT, these are deductible taxes if this business. It must not pertain to a personal
amount was previously deducted then in the loss or to a property used personally by the
year when the taxpayer received his refund, taxpayer. It cannot be deducted as loss. It
this 25,000 should be included as part of the pertains to closed and completed
gross income and subjected to tax. transactions.
It must not be compensated for by

MODULE 10.5 insurance-- this is one thing taxpayers fail to
remember, especially when it comes to a
damaged vehicle. For example, if that
Just a quick recap, we have already vehicle is covered under insurance and the
discussed entertainment, amusement and taxpayer is compensated by the insurance
recreation expenses; interests; taxes. company, then that taxpayer company
cannot charge the loss as a deduction to its
We now move on to losses as a deduction gross income. Casualty losses are brought
in connection with the trade or business. I’ll about by fortuitous events. Is this a
just be focusing on things you need to deductible loss? The answer is YES. The
remember. For losses, foremost here, you inventory is gone. What you need to
have to master the requisites for losses to remember is that casualty that occured due
be considered deductible. to a typhoon for example, as a rule under
the regulations, must be reported to the BIR
Losses Requisites: within a period of 45 days. In practice, I’ve
(1) Actually sustained and charged off personally seen assessments wherein the
(2) Charged-off during the taxable year BIR disallowed deductions for losses for the
(3) Incurred in trade or business; of reason that the taxpayer failed to present
property connected with the trade or proof that they notified BIR within 45 days
business from the occurrence of that casualty loss.
(4) Closed and completed transactions
(5) Not compensated for by insurance
(6) Casualty loss - reported to BIR w/in
45 days
#1 It must be actually sustained and charged

off. This will be the first thing BIR will look
into. In short, it pertains to a closed or
completed transaction. In layman's terms, if
you do not own that particular item and it is
lost, then you do not claim the loss as your
deduction. When it comes to losses, when is it
deductible or non-deductible? A loss is

deductible if it is a foreign exchange loss, - Unrealized forex loss

and it is a realized foreign exchange loss. - Loss due to change in market value
When we say “realized”, it means that the - revaluation losses. When we talk
transaction is already closed and completed about revaluation losses, this is
and is not anymore an estimate. If I will applicable only accounting wise but
illustrate that, it usually happens for for taxation, it does not take into
example nipalit kag utang from abroad. You consideration revaluation gain or
are the buyer and then the seller is based loss. Why? Because these are mere
abroad. When you recorded that utang, ofc estimations as to the increase or
you have to pay it in dollars, say for decrease in the value of the asset
example, 1 dollar is 50 pesos. But the for a particular period. Despite the
moment you are about to pay after fact that the asset was not really
sometime, and na deliver na ang goods, the disposed off. Mao na wala gyuy
exchange rate suddenly changed and has actual outflow or inflow if there is a
been increased, nahimo na ug 1 is to 51. As revaluation gain. It does not meet
a buyer, basically you will be paying more the criteria for a taxable income.
than what you have initially reported. The - Loss on wash sales
moment you have actually paid for it, This simple pertains to the buying or
then,that becomes a realized foreign selling of the same type of securities
exchange loss. Is that deductible? The or stocks for a short period of time
answer is yes. within a gap of 30 days. Ni purchase
ka sa share but 30 days after,
The other side of the coin there is an gibaligya pud nimo ang share. You
unrealized foreign exchange loss. Meaning don't care whether its a gain or loss.
to say wala pa gyud actually payment but Gihinluan lang nimo ang shares, say
for accounting purposes, accrual basis, you for example.
need to record for this particular loss for this
particular period. But it remains to be Why is this non deductible?
unrealized. So if unrealized foreign loss, Primarily, wash sale is non
that’s non deduction. Why? Wala paman deductible in order to prevent a
kay actual cash outflow or actual cash scenario where a particular
payment or actual alkansi. stockholder or investor tend to play
the stock exchange. Because if you
For loss of properties due to fire or force buy ans sell for a short period of
majeure, this types of losses requires notice time, what will happen to the stock
to the BIr which must be done within 45 exchange? Sa stock exchange, it will
days. appear na active ang trading ana. It
will appear na medyo taas ang
For loss from robbery, theft or demand. We very well know the law
embezzlement, that’s also deductible but of supply and demand, so you just
notify the BIR. want to increase the price of that
share. You want to make it appear
Examples of Non Deductible losses: na active ang buying and selling.

Even if at loss, you sell it para mag Remember when I mentioned that MCIT
increase ang transaction nila sa together with NOLCO was instituted to
stock exchange. So the NIRC don't encourage taxpayer to report their correct
want that to happen which is why we income and expense and not to over
have this provision on wash sale. declare the expenses.
If there is loss pertaining to this short Ang mahitabo in a NOLCO is if you have the
period sale - it is nondeductible loss this period, ma carry-over mo na for
the next 3 period. Nindot gyud siya, but the
Exception: A loss due to wash sales may condition is, you can only carry it over if in
be deducted if the seller is a dealer in the following year, mas dako na ang RCIT
securities. It simply means, as security, he nimo kaysa sa MCIT. Otherwise, if in the
really has to buy and dispose of shares
following year will still report a loss –
regardless of the time duration because that
therefore, you will paying MCIT lang or if di
is his job.
paka masubject to MCIT then wala gyud
kay bayaran. Then, you cannot claim the
NOLCO (Net operating loss carry-over)
net operating loss as a deduction; you
Formula: cannot carry it over. In that sense,
Gross sales - xx magcontinue ug dagan si 3-year period.
- Cost of Sales - xx
Because the mindset of tax legislators here
= Gross Income - xx
- Allowable expenses - xx is that if operating loss ka this year, the
= if the result is negative, we call it as following year, you would really do your
Net operating loss. best to have a gain or net income. In that
sense, you will be paying the RCIT. So,
If the taxpayer has net operating loss, it encourage you to do better the next year
follows that the taxpayer will not pay any and ensure that your RCIT is greater that
taxes- zero tax liability. your MCIT, you can claim the net operating
loss as a carry over. Otherwise, kung mag
This net operating loss can be carried loss gihapon ka or subject to MCIT, you
over for any taxable year to be carried cannot carry over the operating loss if the
over as deduction for the next three (3) 3-year period will lapse—you cannot
consecutive taxable years following the benefit. So, what are the requirements so
year of such loss. you can carry over the NOLCO?
Take note: The net operating loss of NOLCO Requirements

business may be carried over as deduction
against Regular Corporate Income Tax 1. Has not been claimed as deduction
(RCIT) or the Normal Corporate Income Tax
(NCIT). 2. Excludes loss incurred during
exempt periods (example: you are a BOI
Why do we have this provision? registered company; you have this so-called

tax holiday for years where you will not pay mao bitaw na nga net operating loss carry
income tax. So, this is your exempt period. over.
So, if during this exempt period, you
incurred losses. Can those losses be carried
over? No, because that pertains to and
For year 2019, it follows nga wala kay tax
exempt period) liability. If course lahi nga estorya if subject
naka to MCIT.
3. No substantial change in ownership
of the business (when we talk about this,
this is defined as not less than 75% of
outstanding issued shares or paid-up capital In this case, kaning net operating loss nga
is held by an/or behalf of the same person.) 60,000 macarry over ba na nimo? YES for
In short, if there are changes in the the succeeding 3 years basta ma meet nimo
ownership where there is sell, i-transfer nga ang requirements, walay substantial
shares during that period, dapat dili na siya change, it is not an exempt period , walay
mu-exceed by 25% because you need to tax holiday etc.
retain the 75%.
If the company is at a loss, the tendency of

the tax holder most especially if the tax How are you going to carry over?
holder is risk-averse, is that he will divest
For the 2019 year of loss, three man. So
from the company. He will sell his shares to
para makahibaw ka kanus a mahuman mo
the company. If that happens, the
expire ang NOLCO nimo simply add 3 to
presumption of the government is there is
2019 pasabot, mo expire ang carry over
what we call as a white knight nga nisulod,
nimo by year 2022, this is your last year of
there is a savior sa company. So why avail
carry over.
pa of this NOLCO carry-over provision? And
that happens if the change in ownership is
substantial. So if ever nay ibaligya, it must
not exceed the 25% threshold. In 2023, you cannot anymore carry over this
NOLCO nga P60,000. so kung ikaw si
taxpayer, make sure that anytime between
year 1 (2020), year 2 (2021) and year 3
(2022), you earn income para at least ma
maximize ni nimo nga provision nga ma
deduct nimo ang NOLCO.
You may say alkanse ang gobyerno

nganhi? Not necessarily alkanse because
This is an operating law. This does not
as what I’ve said, the logic behind the
pertain to your passive income, there is no
NOLCO is to encourage proper disclosure
such thing as NOLCO sa passive income

on the part of the taxpayer. Of course kung ● Take the year 2021 in the table
mag tinud anay na ug disclose si taxpayer above.
di na siya pasabot proper disclosure on the
part of the taxpayer. This is basically a tax Can you carry over in 2021? No, because
avoidance provision on the part of the you have an operating loss.
taxpayer.
NOTE: It’s more of a win-win situation. If the

taxpayer knows of such provision, then the
taxpayer should at least do its best to avail
of the carry over provision.
How do we carry over the NOLCO?

*NOLCO in 2019 - 60,000 - can be carried
This operating laws in 2021 ma-carry over
over until 2022.
ba na nimo ? Yes, this is another fresh three
year period, so that would be 2021 plus 3,
EXAMPLE:
mo-expire ang carry over nimo for the 2021
● Take the year 2020 in the table loss by 2024. But remember from the 2019
below for example. loss, naa pakay 40,000 na pwede e-carry
over until 2022.
Here comes 2022, you have a gross income

of 180, deduction of 160, Net income of 20,
so pwede baka mag-carry over sa operating
loss nimo? Yes.
But the question now is, asa nimo kuha-on

ang carry over nimo nga 20, diri sa 20 nga
2021 nga loss or diri sa excess nga 40 from
the 2019 loss? Answer is take this from the
The 2020 net income is 20 and there is a excess 40,000 in the year 2019, so pasabot
net operating loss in 2019 of 60. intact pa ang 2021 nga loss. Why? Because
in this case, we follow the FIFO (First In –
Can you carry over the 20 out of the 60? First out) so kung unsa ang first loss, that
Yes, in order to make your taxable income first loss nga na incur ni taxpayer will also
in 2020 zero. be the first loss nge e-carry over nimo until
you exhaust it or until the three year period
So, now, you have carried over the 20, the expires. So in this case kung kuhaon nato
remaining net loss to be carried over ang 20 from the excess 40 000based on
pertaining to 2019 now is only 40. your 2019 operating loss, the remaining
nalang sa 2019 nimo will be 20.

Come 2023, you had a gross income of

200, 130, net income 70.
NOLCO vs. Net Capital Loss Carry-over

(NCLC)
NOLCO NCLC
Remember your 2019 will expire in 2022. Operations Capital Assets

Naa pa unta kay 20, the question is, can (ordinary income sale of capital assets
and ordinary
you still carry it over in 2023? Not anymore,
expenses)
because this is already beyond the 3-year
deadline. So you can only carry over in
2023 will be your net operation loss from
2022.
The NOLCO, as what we have illustrated,
results after deducting from your gross
sales or receipts, the cost of sales, as well
as the allowable deductions. NCLC on the
other hand, this results when you deduct the
cost of the capital asset from the selling
price of the capital asset and instead of
resulting into a gain, it results into a loss.
You can carry over if the corporation is
subject to RCIT or MCIT. As a way of Another difference is, this is carry-over man,
encouraging the corporation to report higher so the Net operating loss carry-over is 3
income and to report appropriately its years, dapat mag sunod ang 3 year period
expenses or deduction. It’s availed on a even if during that year, dili nimo ma deduct
first-in, first-out basis. The first loss, net ang NOLCO, mu continue gihapon ug
operating loss will be carried over until it is daghan ang 3 year period. Take note
exhausted or until the 3-year period ends. however that kani 3 years as of now, but
now, Congress, through Congressman
Who are not subject to NOLCO? Those Salceda, is now finalizing the CREATE
entities subject to preferential rates. which is a new bill pertaining to corporate
income taxation. Generally, CREATE
standings for Corporate Recovery and Tax
Incentives for Enterprises Act. In the initial
provisions of CREATE, what is good here is,

since ang aim ani is to recover man, previous year, pwede ba to nimo ma
partially assist corporate entities or carry-over under the NCLC?
companies to recover from the after effects A: YES.
of COVID-19. So, their proposition when it
comes to NOLCO is to lengthen the Be mindful of that because in the BAR, you
carry-ove period from 3 years to 5 years. might be asked what is the difference
That is under create but as of now we still between the NOLCO and the NCLC.
follow the 3 years. NOLCO pertains to operations and you can
carry it over in 3 years as a deduction
In NCLC, this is Net Capital Loss against your operating income provided that
Carry-over, the carry-over period is only 1 you are liable to pay the regular corporate
year, this can only be availed of by tax or the normal corporate income tax.
individual taxpayers. If you recall our NCLC carry-over on the other hand,
discussion on Capital Assets, it is more pertains to to sale of personal assets,
applicable to individual taxpayers as specifically shares of stocks and other
compared to corporate taxpayer because personal property, the carry-ove period is 1
the capital asset that we are discussing year immediately and this is applicable only
under this net capital loss carry-over does to individual taxpayers.
not cover Real Property Tax but it covers
Shares of Stocks and other personal NCLC does not apply in real property
property. That’s 15% of the capital gains, because you do not determine if its at a loss
kung naay gain. So, kung naay loss, that’s a or a gain and the presumption there is that
capital loss and you can carry-over that there is a gain. Mao to na ang tax base is
capital loss when it is made in immediate 6% either of the selling price or fair market
following year. value which ever is higher.
Q: If the NOLCO is deducted from the

taxable income or Net income, how about
the NCLC, can I deduct it from my ordinary MODULE 10.6
income?
A: NO. If you carry-over a Net Capital Loss, We’re still in the distinction of NOLCO vs
it can only be deducted or off-setted Net Capital Loss Carry-over (NCLC). I’ve
against Capital Gains. emphasized enough on the rule that a Net
Capital Loss Carry-over (NCLC) is one year
Example, individual ka, gi baligya nimo and this is available only to individual
imong shares of stocks this year, instead of taxpayers and not corporate taxpayers.
gain, IT IS A LOSS. So, wala kay bayaran
na Capital Gains Tax, the following year, What you need to remember is in the
nag baligya na sad ka ug another shares of provision of Net Capital Loss Carry-over
stocks which is considered Capital Asset (NCLC), the holding period rule. We’ve
but this time at a gain, kato loss nimo the discussed enough on the holding period
rule-- you recognize 100% if the capital

asset of the other personal property is capital losses. And if they are capital losses,
held for less than 12 months, and 50% if they can only be deductible from capital
long term (you’ve held it for more than gains. Ordinary income = ordinary loss.
12 months.) Capital gain = capital loss.
Will it matter in a net capital loss In your handout, you have discussions
recognition? The answer is YES. For pertaining to exceptions, such as wagering
example, if it pertains to the sale of your and gambling losses, and that amount is still
refrigerator this year, and the selling price is deductible, however deductible against
P50,000 but you acquired that for P100,000, waging games. Casualty losses include
so there is net capital loss. Will it matter losses from fire, storm, shipwreck etc.
how long you kept the refrigerator? For However, take note of the condition that I’ve
example, if more than 12 months, you only mentioned…
need to declare 50% of the net loss
because the holding period rule will apply. ALFAJARDO 10.6 (4:00-8:00)
Whether 100% or 50%, that pertains to the
declaration of the net gain, net loss or the A while ago, it must be reported within 45
net income pertaining to that capital asset days with a sworn statement to the BIR. it
sale or transaction. Remember the holding must also be actually sustained. It pertains
period rule. Declare 50% and deduct from to a close and completed transactions. Ikaw
your capital gain. ang owner sa nawala nimo nga inventory
ba karon, dili na under consignment say for
What are some examples of capital losses? exam=ple, it must be in relation to trade or
Loss arising from failure to exercise, business and must not be compensated by
privilege to sell or buy property, this usually insurance.
pertains to option money. If you are the one
paying the option money and you did not How about abandonment losses? In the
CAPITAL LOSSES
1. failure to exercise the privilege, then the option case of natural resources, so you have
e x e r c i s e
privilege to sell
money goes down the drain and it becomes invested to a property hoping to find a
or buy property. a loss. Securities becoming worthless are natural minerals and eventually discovering
e.g. option
money also considered capital loss, especially if that there is none. It is considered a capital
2. securities you are not a dealer in security. loss. Nganong dili paman operational loss?
b e c o m i n g
worthless Abandonment losses, in the case of natural Because wala man ka nakasugod sa
3. abandonment
losses
resources and loss from washed sale or operation nimo kay you did not find any
4. loss from stock securities. mineral na i mine. It’s still considered in its
washed sale or
stock securities exploratory stage. Capital loss instead of
Remember these 4 examples of capital operating loss.
losses. Why? Because they are not deemed
ordinary losses and are NOT immediately We have other special losses arising from
deductible. What does that mean? It means voluntary removal of buildings say for
there are certain conditions before they can example as an incident or renewal or
be considered ordinary losses. If those replacement. The other type is Foreign
conditions are not mentioned, they are Currency Loss. it is deductible only if it is

actually sustained in a closed and Unsa lang ang deduct nimo from your net
completed translation. If it is unrealized pa, income or regular income? only ordinary
then it is not deductible for taxation losses.
purposes. This is one of the provisions in
the tax code which is different from the Bad debts
accounting standard. This alone will result Conditions for deductibility
to a different figure in your taxable income 1. Debt is valid and subsisting;
versus your accounting net income. 2. Ascertained to be worthless or
uncollectible;
For Inventory Losses, what is the 3. Charged off during the taxable year;
requirement if the taxpayer wants to deduct 4. Connected with the trade, business or
this one. As a requisite, there need not a profession.
BIR Certification of the actual destruction of 5. Does not arise from a related party. (If it
the obsolete inventories. But there should is a related party there is presumption
be competent documents to substantiate coming from the BIR/taxing authority that it
the right of inventory. is not arm's length transaction. Definition of
related party, between brothers, sisters,
In the olden days, there’s this requirement more than 50% and etc.)
of the BIR Certification however it become
too complicated so mao na if we based it on Proof of worthless and uncollectibility:
the ruling of the tax court, enough na ang 1. Borrower's financial position (Usually, the
competent documentary evidence. But audited financial statement of the borrower,
when we talk about documentary evidence, this is a public document)
usually these are self serving documents. At 2. Lawyer's certification on legal obstacles
the end of the day, especially to the to collection
assessment cases that i’ve mentioned 3. All means of collection have been
involving merchandising company, it will be exhausted
up to the company to convince the BIR that 4. Value of collateral
these lists say for example of obsolete
inventories, dili lang ni himo’2 but with If it is secured debt with a collateral -
basis. In one of my clients, they submitted Difficult to declare it as bad debts because
aa list of a pharmacy, so they just merely by all means you can't foreclose the
submitted a list of the inventory with the collateral or the security.
manufacturing date and expiring date so of
course , Some companies prior to declaring bad
debts, ang irecord as doubtful accounts.
Arnaez 10.6 8:00-12:00 The creditor will recognize these doubtful
accounts at the moment the borrower fails
...if expired na, they won't anymore sell it, to pay within the maturity date or within the
considered already as inventory loss. deadline. However it is not enough na
malapse ang maturity date for you to
recognize bad debts, it requires effort to
collect on the part of the taxpayerand of

course, it requires judgement before the So, under the TBR, more or less same with
taxpayer can declare it as bad debts. taxes previously deducted but subsequently
refunded. As a rule, if the recovery of bad
Nakasend na ba ug letters to the debtors? debts resulted in a benefit to the taxpayer,
How about restructuring agreement? For it then, upon recovery, that is taxable.
to be recognized as bad debts expense.
When can you say that there is a tax
Ang uban unsay buhaton nila – like, let’s benefit?
say for example these credit card
companies. Ang buhaton nila if dili na na If the moment you deducted the bad debts,
makolekta kay naa silay aging and medjo it resulted to the deduction of the taxable
dugay na and hassle man na on their part income of the taxpayer. Meaning, ni-reduce
to do the collection, they would sell in bulk up to 0%. That is the amount of the benefit
the collectibles nila to a collecting agency at there. So, the moment you recover it, as a
a discounted price. So, and i-recognized rule, it becomes taxable. Otherwise, if it did
nalang nila as value of the bad debts will be not result to tax benefit to the taxpayer,
the amount, net of the discounted price that because even prior to deducting the bad
was bought by the collection agency. It is debts, P0 or negative na ang income, then
now the jobof the collecting agent to upon recovery of the bad debts, it is not
contact the delinquent debtor. taxable, You need not include it to you
gross income.
That’s why if you noticed in some credit
card companies – for example CityBank. To Illustrate:
Mangulekta si City Bank of course, but after
some time, it will be another entity and For example, and gross income nimo is
mangolekta; there would be another P1M, then ang deduction nimo after gross
collecting agency or entity, but before that income excluding bad debts is equal to
there will be a lawyer. Things like that. So, P900k. Then, you recognized bad debts of
these are all part of the criteria for you to 100k. Because your recognized bad debts of
be able to legitimately consider bad debts. 100k, the taxable income becomes zero. So,
in this case, do you have tax benefit? Yes.
What are some other things that you So, following the tax benefit rule, when you
need to remember: will recover just in case magpakita si debtor
and you discover
recover that 100k later on, are you
Remember the Tax Benefit Rule! obliged to report it as part of gross income?
Yes, and it will be subjected to income tax.
If you recall when we discussed on taxes
However, if let’s say for example, prior to
subsequently refunded, we said that we
the deduction of the bad debts, the
would apply the tax benefit rule.
deduction excluding bad debts is already
Does this rule apply to bad debts initially 1.2 million and your bad debts is 100k, that
recognized, however, subsequently is also a deduction so it’s a total of 300k.
collected? The answer is yes. So, what happened is that the net is 300k

loss. In this case, is there benefit? None, Take note, when we talk of reasonable
because there is already a loss of 200k. so, allowance, is there actual outflow? No,
it follows that of you recover this 100k, this because this is just a mere allowance. But
is not anymore taxable following the tax the Tax Code requires that it must be
benefit rule. reasonable, representing the wear and tear
of a particular asset or property used in
What is it is only partial? Then up to the trade or business. If you use it for personal
point the tax payer has benefited through purpose, there will be no depreciation.
the deduction of the bad debts. So, let us
Conditions for deductibility of
say for example, the deduction is 900k; bad
depreciation:
debts recognized is 200k—your loss is 100k.
meaning, your benefit is up to zero because 1. The allowance for depreciation must be
even if your loss is 100k, your payable is reasonable
still zero. Of this bad debt worth 200k, how
much is the amount that the taxable income 2. It must be for property arising out of its
will be zero out? If you look at it, you only use in the trade or business, or out of its not
need 100k to zero out the taxable being used temporarily during the year
income—your benefit is only up to the
extend of 100k. So, when you recover the 3. It must be charged off during the taxable
year.
entire 200k in a subsequent period (2021),
do you need to declare 100k as part of your Basis of depreciation: (RMC 70-2010)
gross income? Not necessarily because
following the tax benefit rule, you already Depreciation for tax purposes shall be
benefited up to 100k—that is enough to based on “cost” (without adjustments for
make your taxable income zero. revaluation losses or increments.
Again, tax benefit rule applies when it Note: Cost pertains to historical cost.
comes to taxes previously deducted but
subsequently refunded and it cost a Subject of depreciation:
deduction in your taxable income up to
depreciable assets – assets subject to wear
zero. The same also when it comes to bad
and tear; i.e. building, machinery, vehicle
debts previously charged of that
subsequently collected or recovered. Note: land is not subject to depreciation
except if there is an abnormal occurrence
Depreciation/Amortization like a calamity
GR- there shall be allowed as a depreciation Depreciation methods:

deduction a reasonable allowance for the - Straight line method; - most
exhaustion, wear and tear (including commonly used
reasonable allowance for obsolescence) of - declining balance method,
property used in the trade or business. using all right not exceeding twice

the rate of depreciation computed the taxpayer will do. As well as the
under general rule; depreciation method that the taxpayer will
- the sum of the years digit undertake. This is the agreement on the
method; and useful life as well as the depreciable rate
- any other method which may will have to be entered in writing between
be prescribed by the Secretary of the taxpayer and the Commissioner if
Finance upon recommendation of a Internal Revenue. Of course upon proper
Commissioner. application.
The initial determination of depreciation

method from among the prescribed by the
BIR is left to the discretion of the taxpayer.
However, any change in the depreciation

methods applied, requires approval by the
BIR.
Agreement on the useful life and

depreciable rate
- between the taxpayer and
the commissioner of internal Depreciation v Depletion
revenue
- in writing
Depreciation Depletion
There is no fixed rule issued by the BIR.
What is being followed is the industry
practice on the usual useful life. There are Pertains to the Pertains to the
applicable accounting standards… wear and tear of exhaustion of the
the use of natural resources
There are applicable accounting standards replaceable e.g. mining, oil and
man sad which are of course reasonable assets or gas exploitation.
estimates of the useful life of the building or replaceable
the useful life of the vehicle. property e.g.
barko, sakyanan,
computer, Once you take out
machineries etc. that resources, it is
What if the company has a machinery considered already
and dili common ang machinery nila in irreplaceable.
the industry? Pwede ba mag buot buot si
taxpayer as to the useful life or in
estimating the life?
Not necessarily. The best thing to do is to

enter into agreement with the BIR or with
the CIR as to the estimated useful life that

Essential Factors in Determining

Depletion Cost of a Particular Natural
Resource
1. Property
Take into consideration (1) the estimated

total recoverable units in the property and
(2) the number of units recovered during the
taxable year.
EXAMPLE 1: How much is the estimated Depreciation v. Amortization

maximum truck load that can be mined Is amortization the same with
versus how much is the actual truck load depreciation? Technically, they are different,
mined as of the particular period. although in essence they are the same,
why? It is a staggered recognition of the
Estimated maximum truck loads of mine for cost of a particular asset or property. Ang
a particular area within a period of 15 years amortization lang , this usually pertains
- 10 truck loads to assets which are considered
intangible properties. Let’s say for
Actual truck loads of mine produced for a example: Patents, copyright or purchased
particular year - 3 truck loads good will it can be subjected to amortization.
So, you produced 3 out of 10 expected truck

loads. Meaning, 30% of your cost of your
property should be depleted already.
NOTE: You record on a yearly basis how

much have you mined out of a particular
natural resource or of a particular area.
How about obsolescence is a loss, meaning

You also have there, intangible cost in obsolete. Kanus-a mosud si depreciation ug
petroleum operations so this pertains to any kanus-a mosud si obsolescence? For
cost incurred in petroleum operation which example: You have a Laptop, ang laptop
has no salvage value which is incidental to nimo kay Lenovo think pad, estimated
and necessary for the drilling of wealth and useful life usually is 5 years. So is it subject
for the production of petroleum. to depletion, depreciation, or amortization?
More of depreciation, why? Wear and tear
mani of a replaceable asset dili mani
intangible asset.

If the cost of the laptop, we use straight-line

method, is 400K
100k and the useful life is 10
years. The depreciation per year would be
10K that you will recognize in a yearly basis.
However, for example on the 3rd year,
obsolete na si Lenovo because there is
another version of the laptop. On year 3, its
depreciation is 30K, sa cost na 100K your
depreciation is 30K. So you still have 70K
MODULE 10.7
that is to be depreciated. But you will not
use it anymore on the 3rd year kay gi face
This pertains to allowable deductions. We
out naman nimo basically naa kay 70K
move on to another allowable deduction and
which is not to be subjected to depreciation
that is pension contributions pertaining to
so the 70K will now be considered
the establishment of a fund for the purpose
Obsolescence Loss especially, if the
of paying the retirement benefits of the
property becomes obsolete for that
employees of the employer. If you recall, we
particular period.
discussed retirement benefits received by
the employees as to the exemptions from
taxations. That’s from the side of the
employee.
This time around, we go to the side of the

employer on whether the contribution to the
retirement fund is deductible. When it
comes to the treatment of these pension
contributions, the annuity premiums
basically, to that retirement fund, as a rule,
that treatment depends on whether the
contributions are made to a BIR qualified
retirement plan, which is a reasonable
private plan. If the employee receives the
retirement benefit, there’s a retirement pay,
it is exempted if they are at least 50 years
old, and have 10 years of service etc.

When it comes to their qualified retirement involved. Based on this assessment of the
plan, usually, this has a certification coming actuaries, the actuaries provides a figure
from the BIR after they made the necessary kung pila dapat ang regular contribution ni
evaluation. Another way of establishing the employer to the fund. The one who pays the
fund is through this so-called non-qualified fund must be the employer because we are
or non-trusteed retirement plan. Say for supposed to be answering the question
example, through a deposit administrative kung pwede ba na i deduct ni employer and
contact or through a group deferred annuity it’s a no brainer . it can only be deducted if
contract. In short, these are basically its is an outflow of the employer together
non-qualified BIR retirement plans. The with the other requisites for deductibility.
question, will your contribution be deducted
in this case? Fifth, the amount contributed must be no
longer be subject to the control and position
The third mode of contribution to the of the employer. To be short, it must be free
retirement fund is through insurance plan, from any dictation to how the funds must be
these are usually group insurance to fund managed. And mahitabo lang is mag
retirement benefits. Usually, it is in the outflow or mag contribute regularly si
absence of a retirement plan, CBA, or employer and once an employer retires, it
employment contract. This insurance plan is will be taken from the fund. Dili maka dictate
common among companies who don’t have si employer nga since wala pay ni retire,
the capacity to apply for a BIR-qualified invest it in stocks or whatsoever because
retirement plan. Later on, I will discuss that is what’s happening in that retirement
whether the annuities or premium payments plan. It can be invested and can earn
to these insurance plans may be deducted. income. As a rule, if it is a qualified
retirement plan, whatever income that is
First things first, I detailed the requisites for earned whatever plan that is considered
deductibility of these contributions. There exempt from taxation. Ofc, the payment is
are 7. First, the employer must have not yet been allowed as a deduction and the
established a pension or retirement plan to deduction is aportion in equal parts over a
provide for the payment for reasonable period of 10 consecutive years beginning
pension for these employees. This does not with the year in which the transfer or
yet include these insurance plans to fund payment is made. We are talking there of
retirement benefits. Second, the pension the past years contribution.
plan is reasonable and sound. In short, to
determine the reasonableness, the one who We discuss the treatment of these
ascertains how much should be contributed contributions depending on whether
to the fund must be independent third party contributions are made to situations:
and duly licensed to estimate how much
should the employer or company contribute - First, if it is BIR qualified retirement
to the fund. This takes into consideration plan
several factors in their estimation. Primary - Second, it is is non-qualified or
to which is the number, age of the non-trusteed retirement plans
employees, nature of the work and risk

- Third, it is an insurance plan to fund in the business. So once the retirement fund
retirement benefits in the absence of is established, you have to make past years
retirement plan, CBA, employment contributions.
contract.
The tax code requires that past year
We go first to contributions to the contribution will have to be apportioned
BIR-Qualified Plan. What is the rule when it in equal parts over 10 consecutive years.
comes to this? Ofc it's deductible but we after
have to determine if it is a current year Example: 10 years na nagcontribute si
contribution or previous year contribution. If Company, the assessment is P 1 Million per
it is a current year contribution, it's year. In the 10th year, didto nag establish a
considered ordinary and necessary expense fund. Current year contribution is P 1 million
therefore, fully deductible. But for but the past year contribution for the past 10
contributions in excess of 1 year or for the years would be P 10 million. So the total
past years, as expressly provided under the contribution in the 10th year will be P 11
tax code, it is not fully deductible on te yar million. But the entire P 11 million
that you’ve paid that past year contribution. contribution, BIR qualified retirement plan
Rather, what you will do is to apportioned in deductible? The answer is no. When it
equal parts over 10 consecutive years comes to the deduction, the current year
beginning in the year in which the transfer contribution that will be entirely deductible
or payment is made. So long as it is BIr but for the previous year for P 10 million,
qualified, you have to ascertain if its is a this has to be divided by 10 years.
current year contribution or past year Allowable deduction 10 million divided by (/)
contribution. If current year, it is deductible 10 years = P 1 million. The total allowable
in full, but if its past year, you have to deduction is P 2 million. The remaining 9
apportion it or divide it by 10 years.why so? million, will have to be recognized every
Because this is to stagger the recognition year moving forward to 11th, 12th, 13th, tag
for past year contributions kay dako na sad 1 million together with the current year
kaayo if allow entirely on the year when contributions.
you've made the past year contribution, it's
actually advantageous on the part of the Now, you might ask, Sir, what if the past
government at least di necessary na year is only for the past year or for the past
manegative ka for that year, on the part of 2 years, do we still need to apportion it in
the taxpayer ma stagger ang recognition equal parts over 10 consecutive years?
nimo every year. Apparently, the answer is Yes. Because the
tax code expressly provided 10
Why is there a past year contribution? apportionment over 10 years.
Past year contribution pertains to
nonpayment of the contribution in the Ang mahitabo, is even if ma-miss ra nimo
previous years perhaps nakalimot si ang 1M/year, so, for this year, total
employer or wala pa na establish ang contribution nimo is 2M – 1M for the current
retirement fund. Retirement fund is being year and another 1M for the past year. Ang
established when there is perceived stability allowable deduction nimo will not be the

entire 2M. Ang mahitabo, 1M current year benefit. Is this deductible on the part of the
plus 1M/10 or 100k. So, 1.1M even if 1 year company? The answer is yes.
lang ang nilabay. So, that;s contributions to
BIR-qualified retirement benefit plan. Take note: it must be on the year of
payment regardless of when it was accrued.
Contributions to Non-Qualified
Retirement Plan Premium Payments to Life Insurance
to Fund Retirement Benefit Under RA
Retirement benefits (not the annuity 7641
premiums) are deductible in the year paid,
regardless when accrued. – BIR Ruling No. The premium paid by the
95-85, June 24, 1985; 092-86, June 24, employer/company for life insurance plans
1986; 116-90, June 8, 1990) in accordance with RA 7641 can be claimed
by the employer/company as a deductible
In short, there is no BIR evaluation or business expense under Sec 34 of the Tax
certification. Nag establish ra ka ug Code. – BIR Ruling No. UN-373-95,
retirement plan wala nimo gipa evaluate if October 11, 1995
ang contribution is not determined by an
actuary, just like in this cases: Deposit This is the usual group insurance that is
Administrative Contract (DAC) and Group being offered by Insurance Companies like
Deferred Annuity Contract (GDAC). ManuLife. They are already bundled or
packaged. Naay life insurance si employee,
What is the rule? Is the contribution or and at the same time, if the employee
annuity premium deductible? The answer is survives the plan and retires, then
dili. Because what the tax code provides, employee receives retirement benefit. That
that it must be a BIR retirement plan. Even premium payment by the company or
if the annuity premium na ginabayad nimo employer to these life insurances, can it be
is not deductible, but the moment nay mu claimed as deductible business expense?
retire na empleyado and the employee The answer is yes. And our basis to that is
receives a retirement benefit out of that RA 7641.
fund, then retirement benefit received by
the employee is deductible in the year paid In short, we just try to ascertain how it is
– regardless if when it was accrued. established by the employer or the company
its retirement fund to determine if the
To illustrate: For example, the current contribution thereto is considered
year contribution is 1M, but it is a deductible.
non-qualified retirement plan, then,
Other than pension contribution, another
generally, this is non-deductible. But, let’s
allowable deduction is the so-called—
say for example, Mr. X, an employee of the
company retired and he was paid P500k on Charitable and Other Contributions or
the year of retirement as a retirement Donations

I will divide my discussions into two. First is

the Charitable and Other Contributions in
the tax code and other normal situation. And
we will also discuss the provisions on
donations or deductibility of donations under
the Bayanihan Act for donations to fight
covid-19 during this pandemic.
We start first with the tax code. What is the

provision in the tax Code if you make
donations or contributions under normal …wherein deductibility of donation is
circumstances? allowed. So, if not, they are subject to the
5% or the 10% limitation.
You have the so-called
ordinary donations which is subject to Take note however for it to be fully
limitation and you have the so-called special deductible, the non-government
donation in the sense that these donations organization must be duly accredited by an
are fully deductible. accrediting institution.
Ordinary donations – these are subject to

the limitation of 10% or 5% if the donors and NGO Accrediting
individual 10% limit. If the donor is a Institution/Agency
corporation and the limitation is 5%, 10% of
the taxable income from trade, business, or Scientific DOST
profession without considering charitable
contribution. Education purposes CHED
Take note that the tax base here is the

taxable income. So, when we talk of taxable Social welfare DSWD
income, it should be net already of the
expenses but you will not yet include the In several instances where it is difficult to
charitable contribution or the donation. get accreditation, you can get accreditation
When can it be subject to limitation? If the from DSWD. But for other agencies, it might
recipient is not anyone of the of these be a bit challenging. That is why in order to
entities: streamline the accreditation process, the
government established Philippine
Certification for NGO Council (PCNC). It’s
the PCNC who accredits a particular NGO
and there is an existing agreement between
PCNC and the BIR that once an NGO is
PCNC-accredited, it is can already avail of
the incentives. Meaning, if there is a donor
who donates to a specific NGO, the donor
can claim that donation as a deduction and

that donation is exempt from donor’s tax Kinsa ang mo issue sa certificate of
among other incentives. However, other donation?
than accreditation and operation aspect,
take note that for that donation to be Of course primarily the donee or the
exempted, administrative expenses must recipient.
not exceed 30% of total expenses. The
donation must be used no later than 15 But it comes to certificate of donation TN:
days of the third month following the close this has to be accomplished both by the
of the taxable year and upon dissolution, donor and the donee because of course the
assets must be distributed to another donee on the first page declares usually the
non-profit domestic corporation. actual receipt of donation, date of receipt
etc but when it comes to the valuation, this
Government also pertains to the is usually declared by the donor esp if what
instrumentalities and agencies of the is donated is property or in kind. But even if
government and GOCCs. in kind, land say for example, pwede baya
na butangan ug value ni donor inig donate.
If the charitable and other donations are not So it is usually determined by the donor, so
given to the government nor to certain two pages ang certificate of donation.
foreign institutions nor to accredited NGOs,
then we must go to ordinary donations
subject to limitations, either 10% or 5%. For certificate of donation, the BIR requires
the execution of the so called ‘BIT form
Example: You donated to an NGO, but the 2322’ also known as the BIR Form for
NGO is not accredited. In such case, if you Certificate of Donation. This BIR form
want to deduct that donation, then subject it 2322 will have to be submitted to the BIR 30
to limitations of either 10% or 5% days from the date of the donation duly
signed by the donor and the authorized
Requirements for Deductibility representative of the donee.
When it comes to documentation…
If the value is more than 1M, there has to

have a notice of donation which must be
submitted to the BIR.
What are the requirements or requisites

for deductibility? These are the usual documentation
requirements under normal
When it comes to documentation, of course circumstances.
primary to it is the presentation of the
certificate of the donation.

Wrap up: Under normal circumstances, we Donee - National Government or any entity
have the so called ordinary donation and created by any of its agencies (including
the special donation. If dili mosulod sa hospitals) which is not conducted for profit,
special donation, then by all means it is or to any political subdivisions of the said
ordinary subject to 5% or 10% limitation. government, including fully-owned
government corporations.
EXCEPTION: If there is a special law
granting full deduction for donations. ● Certificate of Donation (BIR Form
2322)
EXAMPLE of instances when there could be Donee - Accredited non-stock, non-profit

full deduction of donation as provided under educational institution and-or charitable,
special laws: religious, cultural or social welfare
corporation, …
1. Donation to CCP
2. Donation to International Rice
Research Institute
3. Donation to IBP
EXCEPTION: Donations to combat

COVID-19 (RA 11469, as implemented in
Revenue Regulation No. 09-2020)
GENERAL RULE: Donations of cash, relief

goods, healthcare equipment/supplies, and
use of properties for the sole and exclusive
Or political subdi. Of the gov’t you just need
purpose of combatting COVID-19 are (1)
the deed of donation executed by the donor.
EXEMPT from donor’s tax and (2) qualifies
For accredited nonstock, non-profit
for full deductibility against gross income of
education institution certificate of donation
the donor.
lang ang kinahanglan (BIR FORM 2322).
Kato notice of donation if exceeding 1
IOW, under this condition, there will no
million no longer required. Although
longer be an ordinary deduction or an
ka-ganina as what I’ve discussed, that
ordinary donation that is subjected to 5% or
notice of donation is required under normal
10% limitation.
circumstances.
Atty. KMA: It will no longer matter because
the government wants to encourage
donations to combat COVID-19.
SUPPORTING DOCUMENTS
● Deed of Donation

Same benefit, exempt from donor tax and

full deduction of the donation provided the
donee can present a liquidation report and
the donor can present the certificate of
donation or the deed of donation issued by
the accredited NGO or the government
institution. The proof of purchase of
If the done are private hospitals, nonstock donation if it is in kind, and BIR registered
non-profit education instutitions, these are acknowledgement receipt as provided under
the non-accredited NGO’s, trust or Annex C or RR 9-2020.
philanthropic organizations deductible in
full gihapon and exempt from donor’s Take note, if you look at the donee here,
taxation, provided that the donee will there is no donee individual. The donee
present a liquidation report and the here is usually a juridical entity, government
donor will submit a sworn certification companies or institutions. Meaning to say, if
and a simple BIR registered you donate cash or relief goods to a
acknowledgement receipt. particular individual to combat COVID-19, it
is not covered under this regulation so if I
am BIR, I will not allow you to make full
deduction there or exempt you from donors
taxation. If you want to claim it as a
MODULE 10.8 deduction, it can be subjected to 5-10%
limitation, depending on the nature of the
ADARNA 10.8 (0:00-4:00) donor because if we base it on this, this is
usually institutions or organizations.
What are the requisites of these

donations? As a rule, you submit the
documentary requirements to the
respective RDO where the donor and the
donee is registered within 60 days from
lifting of ECQ. Take note, RDO where the
Donations of cash, relief goods, healthcare donor and the donee is registered. Meaning
equipment/s, and use of properties. to say, if the RDO of the donor is in RDO
The other donees are local private 80, and the RDO of the donee is RDO 81,
corporations, civic organizations, and/or both donor and donee must submit the
international organizations having actual, documentary requirements within 60 days.
direct transfer said donations, and are Because, it is subject to matching by BIR if
partners as conduit or logistical machinery the donation is recognized by donee.
with the accredited NGO’s or other national
government or entity created by any of its How about inventory? Relief goods or
agencies which is not conducted for profit. supplies? That forms part of your inventory

and then you donate it to combat should be at least proper simulation which is
COVID-19, we will discuss this in Tax 2. We more beneficial to him or to it. The taxpayer
have something called transaction deemed can claim the expenses as deduction in the
sale. It is when the thing is originally year incurred or treat it as deferred
intended to be sold, but you did not sell it expenses to be amortized over 5 years.
because you donated it. By the rules of the Meaning to say, initially i-record sa niya as
tax code under normal circumstances, that asset and i-amortized lang niya over 5 year
is considered a transaction deemed sale, period. Research and Development cost is
which should have been VAT-able. BUT, if it very material and it benefits the company
falls under these regulation, meaning to say, not only for the current year and also the
para baligya unta to pero gi donate nimo for upcoming years. Perhaps, the wise thing to
the purpose of combating covid-19, there is do is to amortized it for 5 year period.
this express provision in the regulation that
it’s not considered deemed sale, therefore Take note that R and D cost deduction
not subject to VAT. No VAT shall be imposed doesn't apply under these following
pertaining to that inventory donated to situations:
primarily combat covid 19 including - If it is for expenditures for the
equipments supplies and relief goods. acquisition or improvement of lans,
These shall not be treated as transactions or poetry to be used in connection
deemed sales subject to VAT. Any input tax with R and D (non deductible
attributable to such purchase of goods shall because it forms part to the cost of
be creditable against any output tax. the land)
Effectivity of this rule is 3 months from the - Expenditure paid or incurred for
effectivity of the Bayanihan to Heal As One ascertaining the existence, location,
ACt unless extended or withdrawn by extent or quality of any deposit or
Congress or ended by Presidential ore, or other mineral, including oil
Proclamation. DOnation under normal and gas (non deductible because
circumstances could either be ordinary there is no operation to speak of
donations subject to limitation 5% or10% of because expenses that are
the taxable income without deducting the deductible must be related to trade
charitable donations or it could be special and business. If it is exploratory
deduction fully deductible provided it meets stage pa, there is no business to
the criteria as to who will be the recipient. speak of. So whatever expenses
The other side are donations made to that involves to it can be capitalized
combat covid 19 which is fully deductible first instead of declaring it as
and exempt from donor’s tax regardless deduction. )
kung kinsa nag recipient basra dili individual
ang recipient. Ex. In. Ta. Lo. Ba. Cha. Re. Pen. Dep. Dep
1. Expenses - walay limit, the only limit is
Next allowable deduction is Research and imposed on entertainment, amusement and
Development Cost. this is a bit tricky recreation, the limit there is .5% and 1%
because 2 options and pwede buhaton ni depending if you are into sale of service or
taxpayer. On the side of the taxpayer, there

sale of goods. .5% and 1% will have to be 7. Research and development costs - It
multiplied to your net income. could be either deducted immediately or
2. Interest - it must be in writing for it to be amortized for the period of 5 years.
deductible and the arbitrage rule. Interest However, research and development related
expense will have to be reduced 33% of the to the exploratory stage is nondeductible.
interest income that has been subjected to 8. Pension contributions - depend
final tax. If you have no interest income or whether it is a contribution to BIR accredited
the interest income was not subjected to the plan or reasonable private benefit plan.
20% final tax, then no need in applying the Kung life insurance - deductible. Kung BIR
arbitrage rule. accredited - deductible for the current year,
3. Taxes - Foreign income taxes paid however for the past year contribution it
abroad subject to per country limitation and must be apportioned over 10 years.
subject to global limitation. Taxes refunded 9. Premiums paid on hospitalization and
or recovered subject to the tax benefit rule. insurance (repealed)
4. Losses - NOLCO can be carried over 10.Depreciation and amortization
against your regular income for the period of 11.Depletion of oil, gas, wells, and mines
3 consecutive years provided that you are
subject to the regular income corporate tax
or normal income corporate tax. Net capital
loss pertains to capital asset transactions. Depreciation and Depletion
The net capital loss can be carried over to 1
Again, depreciation pertains to the wear
year, however that carry over provision
applies lang to individual taxpayers or to and tear of the asset or properties used in
sale of shares of stocks classified as capital trade of business. Depletion, on the other
assets and other personal properties, not hand, is the use of natural resources which
sale of real properties. are considered irreplaceable resources.
5. Bad debts - is different from allowance
for doubtful accounts or doubtful accounts CASE TIME – LAND MARK CASES
expenses. Doubtful accounts expense is
CM Hoskins and Co. Inc. v. CIR, GR No.
nondeductible. Bad debts expense is
L-24059, November 28, 1969
deductible.
6. Charitable Contributions - Ordinary
This pertains to the question on whether
contributions or ordinary donations subject
the amount received by petitioner, a
to limitations and special donations which
controlling stockholder of the taxpayer
are considered fully deductible.
Government-International organizations corporation, is reasonable. Diba, I told you,
agreements are covered under special law that there is no specific rule for
or accredited NGO not more than 30% are reasonability, but it has to be determined on
used for admin purposes. Donations during a case-to-case basis.
this pandemic are fully deductible basta ang
recipients are usually organizations, In this case, this pertains to a corporate
associations and entities that we have taxpayer having a subdivision project. This
mentioned and subject to documentary. was in year 1969 and the controlling

stockholder is Hoskins and he is receiving 4. Filing of collection case in court

P99,9777 as a fee. At that time, that is very
big, so, it was deducted by the taxpayer
corporation.
Consolidated Mines, Inc. v. CTA, GR No.
BIR: disallowed the deduction for reason L-18843 and 18843, August 29, 1974.
that it is not a reasonable compensation.
This is now on the distinction between a
Why? Because it is not even a one-time fee
depletion and depreciation. This is the case
to plan and lay down the rules for
where the court clarified the difference
supervision of a subdivision project. It is
between a depletion and depreciation. So,
given on a fixed yearly basis, whether
the court explained that depletion is based
services are rendered by Hoskins or not. So,
upon the concept of the exhaustion of a
gi disallow ni BIR.
natural resource whereas depreciation is
Court: affirmed. based upon the concept of the exhaustion
of the property, not otherwise a natural
Philippine Refining Company v CA, GR No. resource, used in a trade or business or
118794, May 8, 1996 held for the production of income.
It is here where the court laid down the So, the court here, that depletion and
basic requisites when bad debts is depreciation, although more or less
considered deductible and not just a pare-pareha and essence nila, they should
doubtful account. Because if it is just a be used properly for a particular kind of
doubtful account, kay ni lapse lang ang asset.
maturity date and wala pa nabayaran, then
dili pa ni entirely deductible. A tax payer may not deduct that which the
court allows that of *inaudible*. So, if it is a
The court said that the taxpayer must prove national resource.
that he exerted diligent efforts to collect the
debts and despite such efforts, wala niya KNOWLEDGE CHECK
nakulekta, then it is already considered as
bad debts.
What are considered as diligent effort?
1. Sending of statement of
accounts;
2. Sending of collection letters;
3. Giving the account to a lawyer

for collection; and

Based on the facts provided, it gives you an Most likely, this is a capital gain.
idea that Natsu is an employee.
In 2017, Natsu accepted a loss of 200k
What is the 10k interest based on the facts? from the sale of his 2-year old Toyota
ordinary or passive? It is passive. So, most Fortuner car as he was desperate to earn
likely it us subject to final withholding tax money to buy Christmas gifts for his
and not to the graduated tax. family and his then 2017 income figures
only show a total operating income of
It turns out that Natsu is a mixed income 100k.
earner because he has consultancy fee that
So the sale of the Fortuner is a capital loss.
is 2 million.
A capital loss can only be charged off
*gi-read lang ni atty ang facts* against a capital gain, it cannot be charged
off against your gross income.
(note: bold text is part of the problem given
by atty. And the texts after them are his Currently, Natsu is only left with his
comments) Bumblebee Camaro which turns 2 years
by the end of the year and follow a
So naa siyay daug. Take note, ma-exclusion declining balance method of
ba na? No, because there is active depreciation under a 10-year useful life
participation on the part of Natsu. and salvage value of 200k. He purchased
the Camaro for the purpose of his
On June 2018, Natsu represented the consulting services.
Philippines in the international DOTA
Competition in Tokyo Japan where he This Camaro is used in trade and business,
won 1 million. While in Japan, Natsu was so it could be subjected to depreciation
paid a one-time royalty fee of 100k for expense.
the amazing move he used during the
tournament. Questions and answers for this specific
situation of Natsu:
Let us be clear that the 1 million is not
exempted because there is active
participation. While the 100k must be
declared by Natsu as part of his gross
income, subject to ordinary tax rate,
because as a passive income it is not
subject to final withholding tax since Natsu
is not in the Philippines. Passive income is
subject to final withholding tax only when
the payor is in the Philippines.
Before the year ended, Natsu was able to

sell his 6-month old Ford Everest car for
an income of 100k.

In this case, wala na gyud gi compute basta

ma batbat lang nimo unsa ang basic rule
that should be fine. For example in this
case, special charitable subject to the limit
of 10% of his net operating income vs 5,000
whicever is lower. And the depreciation
expense of his camaro kay used man to in
business at the rate of 10% based on the
declining balance method. If you notice wala
na nato gi compute rather gi describe
nalang.
Further, Natsu will have to account for his

passive income from abroad in the amount
of 1.1M. Mao na ako giingon ninyo, the
royalty will have to be added because there
can be no final withholding because the
payer is based abroad which will be
included in the determination of his taxable
income subject to tax rate. As the same
could not be subjected to final withholding
tax considering the situs of the income.
Furthermore, Natsu should record capital
gain of 100,00 from the sale of his ford
everest which is recognized at 100%
because the holding period is short term,
6month old paman lang. But will be reduced
by the capital loss carry-over in 2017 at
200,000 mana pero 2 years mana so kato
ako gi mention ninyo mo matter ang holding
Problem 3. Pila ang net income niya or period. If it is long term, more than 12
taxable income niya with excluding the months, only 50% will have to be declared
5,000 deduction from business walay labot as a loss. So, that is why instead of
ang compensation. 2M minus 1M thats 1M 200,000, what will be declared as capital
minus 500,000 so that’s 500,000. so the loss is only 100,000, as limited by the
limit, 10% of 500,000, the limit there would operating income on the year it was
be 50,000. Of course 5,000 raman so fully incurred. Basically, the capital gain will be
ma deduct niya because it’s within a zeroed-out by the capital loss.
threshold or the limit whichever is lower.

What if the capital gain was 200,000? duly noted that the same will be in lieu of all
Here, you will have a net capital gain. itemized deductions.) – copy of the answer
in the slide
Why do we have to add it? and it must be expressly stipulated. by natsu in his tax return
Because, the three types of assets: (1) real Yes, but pertaining lang to his business
property, (2) shares of stock, and (3) other income or gross income from consultancy
personal property. Under ‘other personal services, they used the option or the
property’, what will matter is the holding method nga OSD (optional standard
period. Then, after that, even if it was a deduction). However, it must be duly noted
capital asset, it will still be added to your that the same will be in lieu of all itemized
gross income subject to the 0%-35% for deductions. So meaning to say, there is no
individual taxpayers. This is because there more need to determine the depreciation or
is no special rate - that is why we add it. the capital loss over the capital gain
because that’s 40% automatic and it must
SUMMARY: What are subject to 0%-35% be expressly indicated by Natsu in his tax
tax: return. – Atty.’s explanation
1. compensation income (150 x 12) Third, aside from the annual income tax, is
2. business income (500,000 - 5,000 there any other tax obligation that he should
donation - depreciation expense for be mindful of?
the camaro + income winnings or
passive income abroad of 1.1) Yes, the final withholding tax on his passive
income earned within the Philippines, (kato
Plus, wala na ma zero out naman niya ang ako gi-mention for the savings deposit of
gain niya sa loss 10,000 and prize from the Philippine Dota
competition of 500k which is subject to 20%
based on gross amounts and will have to
account also as well as for other percentage
tax (OPT) at the rate of 3%of his gross
sales. The OPT would have never been
unnecessary had he opted for 8% gross
income tax.
Note: Remember kato business tax

mokuyog sa income tax nimo pertaining to
Second, if hes not able to substantiate his your business income.
expenses, will he still be able to avail od the
any reduction on his taxable income?
(Yes, Natsu Dragneel may claim the

optional standard deduction (OSD) at the
rate of 40% of his gross income from
consultancy services. However, it must be

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TAXATION 1 Transcripts | Atty. KMA | A.Y.

MODULE 10 - ALLOWABLE DEDUCTION Basically, because you need to prove that

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE 1

2. Optional Standard Deduction revaluation, this is applicable only

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However, take note that there is an of service if its is a service industry, if

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE 3

Itemized Deduction – Expenses bank? Kinahanglan gyud present under the

Kung mo ingon ta ordinary business

1) It involves usually huge sum of money - it

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE 4

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE 5

Cash Method, the strict cash method,

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How can you prove that is in connection

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pertaining to international banks. As rule

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE 8

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Another requisite for deductibility, the l PENsions

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Expenses NOTE: Remember the tax base where you

What is meant in this Net Sales or Net

Multiply by 0.50% 1.00%

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE 11

client, you need to entertain the client.

So, ang allowable deduction would be 3000.

Take note however, there are expenses nga

Excluded from EAR ceiling:

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2. Expenses for charitable or fund ● Expenses for attending or

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classification or representation expense to of disclosure on the part of the taxpayer and

We know the consequence if that is

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maintenance expenses are deductible at 7. The interest must be legally due;

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In short, you have tax savings. The rate for

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interest income which has been subjected

…the interest expense deductible is

*Continues to read the last paragraph of the

ANSWER & EXPLANATION: The August 1

The November 30 deposit is the company’s

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expense would be around 67,000 if I’m not

Interest expense – non-deductible

QUESTION: When it comes to interest

ANSWER: Yes, it can be deducted in full.

one must be incurred by non-member or Delinquency Interest

Under the Tax Code, this interest expense is

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Kanang preferred stock, this amounts to

You should need to remember the

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reduced by 33% of the interest income

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