October 2022

DEDUCTIONS
By: Atty. C. Llamado

DEDUCTIONS
- Amounts allowed to be subtracted from Gross Income to arrive at taxable income in
the ITR.

- Taxpayers may choose NOT TO AVAIL of deductions.

- If deductions are claimed, the burden of proving the legality and correctness of the
deductions rests upon the taxpayer. The taxpayer has the obligation to substantiate
with receipts and other evidences every item of deduction when required.

Kinds of Deductions:

BEFORE TRAIN UNDER TRAIN

1) Personal Exemptions (Basic and
Additional) (for individuals, and estates in
year of decedent’s death)

2) Income distributed to heirs/beneficiaries Income distributed to heirs/beneficiaries

(for estates and trusts) (for estates and trusts)

3) ₱20,000 special exemption (for estates

after year of decedent’s death, and for
trusts)

4) Health and/or Hospitalization Insurance

Premium (“H/H premium”) under
Section 34 (M) of the Tax Code.

5) Itemized Deductions (“ID”) Or Optional Itemized Deductions (“ID”) Or Optional

Standard (“OSD”) Standard (“OSD”)

Notes:

a) Individuals engaged in trade or business, or profession can select the ID or the OSD, if
they are being taxed under the graduated rates. If they are taxed under the 8% tax
regime, no deductions shall be available in computing their tax bases.

b) Individuals earning compensation income are not allowed any deduction1 from their
compensation income.

c) Estates and trusts can claim the ID or the OSD, only if they are taxed under the
graduated rates.

d) Domestic corporations, resident foreign corporations, and partnerships can claim ID or

OSD.

1
Other than the mandatory GSIS, SSS, Philhealth, and Pag-ibig employee contributions, and union dues.

1
October 2022

Summary of Allowable Deductions (BEFORE TRAIN)

Deduction Individuals Estates Trusts Corps. Partnerships

EE Self-
Decedent Died
employed
W/in At least
taxable 1 year
year ago
1) ID or OSD ☺ ☺ ☺ ☺ ☺ ☺
2) H/H ☺ ☺
3) Income distributed
☺ ☺ ☺
to heirs/beneficiaries
4) Personal/Additional
☺ ☺ ☺
Exemptions
5) ₱20,000 special
☺ ☺
exemption

Summary of Allowable Deductions (AFTER TRAIN)

Deduction Individuals Estates Trusts Corps. Partnerships

EE Self-employed
taxed under
graduated rates
1) ID or OSD ☺ ☺ ☺ ☺ ☺

2) Income distributed ☺ ☺
to heirs/beneficiaries

2
October 2022

Optional Standard Deduction (OSD)

OSD is the deduction which can be taken in lieu of Itemized Deductions (both ordinary and
special IDs).

Who may claim the OSD?

1) For individuals: a) Citizens;

b) Resident aliens Who compute their income tax under the
c) Estates and trusts graduated rates.

NRAETBs cannot claim the OSD.

Amount of OSD = 40% of [Gross Sales, net of returns, allowances, and

discounts (accrual basis) + Other taxable income from
operations not subject to FTs]
or
40% of [Gross Receipts, net of returns, allowances, and
discounts (cash basis) + Other taxable income from
operations not subject to FTs]

For individuals, OSD is in lieu of COGS (or COS) + the Itemized Deductions

2) Corporations: Only domestic corporations and Subject to 25%/20% of net

resident foreign corporations taxable income

Amount of OSD = 40% of [Gross Income (GI)2 + Other taxable income not subject
to FTs]

For corporations, OSD is in lieu of the Itemized Deductions only.

Election of the OSD

- Made in the 1st Quarterly ITR. Failure by taxpayer to indicate OSD election in the
1st Quarterly ITR means that taxpayer is claiming IDs for the entire year.

- When made, it is irrevocable for the entire year;

- Failure to file the 1st Quarterly ITR is equivalent to availing IDs for the year.

2
GI = Sales (net of returns, allowances, and discounts) – COGS

3
October 2022

ITEMIZED DEDUCTIONS (IDs)

When a taxpayer claims IDs, the taxpayer is specifying the particular expenses to be deducted from
gross income.

Who may claim IDs? a) Domestic corporations including partnerships and GOCCs
b) Resident foreign corporations
c) Individuals engaged in trade, business, profession
d) Estates and trusts

Items of IDs: Business expenses Depletion of oil and gas wells

Interest expense Charitable and other contributions
Deductible taxes Research and development expenses
Losses Pension trust contributions
Bad Debts
Depreciation

I. ORDINARY ITEMIZED DEDUCTIONS (under the Tax Code)

A) BUSINESS EXPENSES

Requisites for deductibility:

1) Ordinary and necessary for the business;
2) Incurred or paid during the taxable year;
3) Connected with the trade, profession, or business of the taxpayer;
4) Reasonable expenses of the business;
5) Substantiated by official receipts/records;
6) The withholding tax required to be withheld has been withheld and remitted to the
BIR.3

Notes: a) Bribes and kickbacks (to both local and foreign officials) are not allowed as
deductions.
b) Deductible business expenses of non-resident citizens, resident aliens,
NRAETBs, and RFCs constitute expenses paid or incurred in carrying out its
business in the Philippines.

(1) Compensation expenses (of employer) for personal services actually rendered;

(a) Includes salaries and other forms of compensation, including bonuses, and the
Grossed-up Monetary Value of fringe benefits subject to FT.
(b) Includes management and labor expenses, commissions, and pension payments.
(c) Incudes compensation for injuries paid by the employer less any insurance
proceeds.
(d) Includes premiums on life insurance of the employee where the beneficiary is not
the employer, but the employee.
(e) Includes salaries paid after death of the employee, but does not include donations
for coffin and wake expenses.
(f) Payments made by an employer as its share to GSIS, SSS, Medicare, and Pag-
ibig contributions are excluded from the gross income of employees. However,
such payments are allowable deductions of the employer.

3
Under RR 6-2018, a deduction shall be allowed even if no withholding tax was made if the withholding
tax + surcharges are paid at the time of the audit/investigation or reconsideration/reinvestigation.
4
October 2022

New (g) Additional deduction equivalent to ½ of the value of labor training expenses
incurred for skills development of enterprise-based trainees enrolled in public
senior high schools, public higher education institutions, or public technical and
vocational institutions and duly covered by an apprenticeship agreement under
the Labor Code. Provided, the enterprise secures proper certification from the
DepEd, TESDA, or CHED. Such deduction shall not exceed 10% of the direct
labor wage.4

Note: Since the training is covered by an apprenticeship agreement, training

expenses pertaining to the training of supervisory, managerial,
administrative, and support functions shall not be included in the
computation of the additional allowable deduction of ½ of the value of
labor training expenses.5

(2) Travelling Expenses;

- Includes transportation expenses, meals, and lodging

Additional requisites for deductibility:

- Must be incurred while away from home (“tax home”). Tax home refers to the
place of work, business, or employment.

(3) Entertainment, Amusement, and Recreational Expense (EAR);

- Expenses in entertaining or meeting with guests, or clients (called representation
expenses)
- Includes depreciation or rental expenses relating to entertainment facilities.

Subject to the following ceilings:

1) For taxpayers engaged in the sale of goods and properties: ½ of 1% of net sales;
2) For taxpayers engaged in the sale of services/leasing of properties: 1% of net
revenues.

(4) Materials and supplies actually consumed in business;

(5) Maintenance and repairs which do not add to the value of the property nor
appreciably prolong its life;

(6) Rental expense (of the lessee) of property used in business;

Notes:
(a) Advance or prepaid rentals are not allowed to be deducted in year of payment.
Instead, advance rentals shall be apportioned over the term of the lease.
(b) Taxes and other obligations of the lessor which are paid by the lessee, are
allowable deductions of the lessee.
(c) Depreciation of leasehold improvement is available as deduction to the lessee.

(7) Advertising and other selling expenses;

(8) Operating expenses of transportation equipment used in the trade, profession, or

business;

4
Sec. 34(A)(1(v), NIRC as amended by R.A. No. 11534 (CREATE).
5
RMC No. 62-2021.
5
 October 2022

(9) Insurance premiums against fire, storm, theft, accident, or other similar losses in
the trade or business;

(10) Miscellaneous expenses.

a) Amortization of pre-operating expenses, which are treated as deferred expenses, for

not more than 60 months;
b) Costs of suits (litigation) are allowed as deductions;
c) Judgments against the taxpayer less any amount compensated for by insurance or
otherwise;
d) Amortization of the discount upon issuance of a corporation’s bonds;
e) Loss upon a corporation’s retirement of its own bonds.

(11) Special Expense Allowed to Private Educational Institutions under Sec. 27(B)
Capital outlays for expansion of school facilities can either be:
a) Expensed immediately; or
b) Capitalized and depreciated.

B) INTEREST EXPENSE
(1) Requisites:
(a) Must be connected with the trade or business of the taxpayer;
Note: Interest on home mortgage is not allowed as deduction.
(b) There must be a liability to pay interest. The obligation to pay interest must be
stipulated in writing and must be legally due.
(c) Must be paid or accrued within the taxable year.
(d) Interest expense must be the obligation of the taxpayer.
(e) Interest payment must not be between related taxpayers described in Sec. 36(B)
of NIRC.
(f) Must not be incurred to finance petroleum operations.
(g) Interest must not be capitalized if such interest was incurred in acquiring property
used in the trade, business, or profession of the taxpayer.

(2) Reduction of Allowable Deduction for Interest Expense By:

Beginning January 1, 2009 - 33% of interest income subject to FT

NEW
Beginning July 1, 2020 - 20% of interest income subject to FT for corporations
subject to 25% corporate income tax rate6
- 0% of interest income subject to FT for corporations
subject to 20% corporate income tax rate.7

Exceptions: Where Interest Expense is Deductible in Full

a) If taxpayer has no interest income subject to FT;

b) Interest on all unpaid business-related taxes;8
c) Interest payments of an occupant of a socialized housing project incurred for the
construction or purchase of the house.9
d) If taxpayer is a DC, and the RCIT is 20%.

6
Sec. 34(B), NIRC as amended by R.A. No. 11534 (CREATE); RR No. 5-2021.
7
Ibid.
8
RR 13-2000.
9
RA No. 7279.
6
October 2022

(3) Optional Treatment of Interest Incurred to Acquire Property Used in Trade

or Business

a) Immediately expensed; or
b) Capitalized as part of the cost of the property.

(4) Non-Deductible Interest10

a) Interest paid in advance (thru discount) by a cash-basis taxpayer. The interest

expense is not allowed to be deducted in the year the cash-basis taxpayer takes out
the loan.

The interest expense will be deducted only in the year the debt is paid.

b) Interest Paid Between Members of a Family or Related Taxpayers under

Section 36(B):

1) Between the taxpayer and his brothers/sisters, spouse, ancestors, and lineal
descendants;
2) Between a corporation and an individual who owns, directly or indirectly, more
than 50% in value of the outstanding stock of such corporation (except in cases
of distributions in corporate liquidation);
3) Between 2 corporations where more than 50% in value of the outstanding
capital stock of each corporation is owned, directly or indirectly, by the same
individual (except in cases of distributions in corporate liquidation);
4) Between the grantor and a fiduciary (trustee) of a trust;
5) Between the fiduciaries of 2 trusts having the same grantor;
6) Between the fiduciary and a beneficiary of a trust.

c) If debt is incurred to finance petroleum exploration.

d) Interest expense attributable to income without the Philippines of an alien or foreign

corporation.

e) Interest on preferred stock which is actually a dividend.

f) Interest on debt incurred to purchase a tax-exempt security;

g) Interest which is not stipulated in writing.

C) DEDUCTIBLE TAXES

Requisites:
(1) Paid or incurred within the taxable year;
(2) Must be connected with the profession, trade, or business of the taxpayer; and
(3) Is directly imposed on the taxpayer.

Examples of deductible taxes: import duties; business taxes (like percentage taxes); local
business taxes; community tax; occupation tax; privilege and license taxes; excise taxes;

10
Sec. 34(B)(2), NIRC.
7
October 2022

DST; automobile registration fees; real property tax; fringe benefits tax (FBT); foreign tax
paid abroad and not claimed as tax credit.

Examples of non-deductible taxes: Income tax; foreign income tax if claimed as a tax
credit; foreign income tax paid by a domestic corporation in relation to exempt foreign-
sourced dividends; estate tax; donor’s tax; special assessments imposed by the National
Government; VAT; final taxes; stock transaction tax under Sec. 127; capital gains tax.

Notes:
(a) VAT is non-deductible except input VAT allocated to exempt sales (which is
deductible).
(b) Fines and penalties imposed due to late payment of tax are not deductible. But interest
imposed due to the same is deductible.
(c) Tax benefit rule applies to refund of deductible taxes.

D) LOSSES

ORDINARY LOSSES

1) Casualty losses due to mishap, accident, fortuitous event, robbery, theft,

embezzlement of property used in the trade, profession, or business of the taxpayer.

Requisites:
1) Must involve ordinary properties;
2) Actually sustained;
3) Not claimed as a deduction for estate tax purposes;
4) Not compensated for by insurance or by other forms of indemnity;
5) Must be reported to the BIR within 45 days from the date of loss.

If loss is total, the deductible amount is the book value of the asset less any amount of
insurance proceeds or compensation received.

If loss is partial, the deductible amount is the replacement cost or book value of the
asset, whichever is lower. If replacement cost is greater than the book value, the excess
shall be capitalized and depreciated over the remaining useful life of the property.

2) Business losses – losses incurred in the trade, profession, or business of the taxpayer.

(a) Losses from sale of ordinary assets

(b) Partner’s share in the losses of a GPP.
(c) A denied VAT refund claim is a valid loss which may be properly deducted
from gross income.11

3) Net Operating Loss Carry-Over (“NOLCO”) - excess of allowable deductions

(excludes NOLCO and any item of incentive deduction under special laws that does
not involve any cash outlay) over gross income in a taxable year;

a) Can be availed of by individual taxpayers engaged in trade, business, or a

profession, estates and trusts, domestic and resident foreign corporations subject to
11
CIR vs. Maersk Global Service Centers (Philippines) Ltd., CTA (En Banc) Case No. 1786, June 13, 2019.
8
October 2022

the normal income tax, and special corporations subject to preferential tax rates
(hospital corporations, proprietary educational corporations, and regional operating
headquarters of MNCs)

Taxpayers not entitled to NOLCO:

1) OBUs and FCDUs of domestic or foreign banking corporations;
2) PEZA, SBMA, CDA, etc. registered enterprises with respect to their registered
businesses;
3) Foreign corporations engaged in international shipping or air carriage business
in the Philippines.

b) No NOLCO if net operating loss was incurred in a year during which taxpayer
was exempt from income tax.

Ex. Corporations enjoying income tax holiday incentives from the BOI or PEZA
are not entitled to NOLCOs.

A loss in one line of business which is tax-exempt is not permitted as a deduction

in another line of business which is taxable.

Ex. Foreign corporations are allowed only losses sustained in business in the
Philippines or losses of property within the Philippines because foreign
corporations are taxable only on income within the Philippines.

c) Net operating loss can be carried over and deducted from gross income for the next
3 consecutive taxable years.

Note: Net operating loss of a business or enterprise for taxable years 2020 and
New 202112 shall be carried over as a deduction from gross income for the next
five (5) consecutive taxable years immediately following the year of such
loss.13

d) A corporation cannot enjoy the benefit of NOLCO for as long as it is subject to the
MCIT in any taxable year.

e) NOLCO shall be allowed only if there has been no substantial change in the
ownership of the business.

“No substantial change” means ≥ 75% in value of the outstanding shares or ≥ 75%
of the paid-up capital of a corporation, is held by or on behalf of the same persons.14

Note: Applies to transfers of NOLs as a result of a merger, consolidation or

business combination. This means that the transferee is not entitled to the
NOLCO unless the transferor owns at least 75% of the outstanding shares
or at least 75% of the paid up capital of the transferee.

12
Taxable year 2020 and 2021 shall include all those corporations with fiscal years ending on or before
June 30, 2021 and June 30, 2022, respectively (Sec. 3.6, Rev. Reg. No. 25-2020).
13
Sec. 4(bbb), R.A. No. 11494.
14
Sec. 34(D)(3), NIRC.
9
October 2022

f) For mines, other than oil and gas wells, NOL incurred without the benefit of
incentives provided under the Omnibus Investment Code, in any of the first 10
years of operations, can be carried over as deductions for the next 5 years following
the year of loss.

The net operating loss of a Registered Tourism Enterprise (registered with the
Tourism Infrastructure and Enterprise Zone Authority but taxed under the
regular rates) for any taxable year may be carried over as a deduction from gross
income for the next six (6) consecutive taxable years immediately following the
year of loss.

SPECIAL LOSSES

a) Loss of income which was previously reported under the accrual method.

b) Wagering losses – deductible only to the extent of gains or winnings.

Note: Cost of Lotto or Sweepstakes ticket will not be deductible from Lotto or
Sweepstakes winnings if such winnings are exempt from tax (not more than
₱10,000 if won by a citizen, RA, or NRAETB).

c) Loss due to the voluntary removal of old buildings or old machinery

No deduction: Where a taxpayer buys land on which structures are erected, and then
such taxpayer proceeds to remove the structures. It is presumed that
the price of the land already includes the cost of such removal.

d) Loss of Useful Value – loss of usefulness of an asset or property used in business due
to changes in business conditions. Loss must be charged off the books.

Amount of loss = Acquisition Cost – Accumulated Depreciation – Salvage Value

e) Securities, shares of stock (classified as ordinary assets) becoming worthless

- becoming worthless means value is close to zero (0); Mere shrinkage in value is
not deductible.

- Amount of loss = cost or basis of the shares of stock

Note: If shares of stock are held as capital assets, and have become worthless
during the taxable year, such loss shall be treated as capital losses which can be
deducted only against “other capital gains” in the ITR.

f) Abandonment Losses in Petroleum Operations

- when petroleum operations are abandoned, all accumulated exploration and
development expenditures, as well as unamortized costs and undepreciated costs of
equipment can be deducted;

g) Losses from Sale of Shares of Stock Where the Seller is a Dealer in Securities

10
October 2022

NON-DEDUCTIBLE LOSSES

a) Exchanges solely in kind pursuant to mergers/consolidations under Section 40(C)(2).

b) Losses from sales/exchanges between related taxpayers under Section 36(B).
c) Losses from wash sales15 where the seller is NOT a dealer in securities.

E) BAD DEBTS

Requisites: a) There must be a valid and subsisting debt owed the taxpayer;
b) The debt must be connected with the trade, business, or profession of the
taxpayer;
c) The debt must be ascertained to be worthless or uncollectible;
d) The debt must be charged off within the taxable year.

Note: Recovery of bad debts previously allowed as a deduction is governed by the Tax
Benefit Rule. The recovery of a bad debt is included in gross income if its
deduction in a previous year resulted in an income tax benefit to the taxpayer (i.e.,
a decrease in tax).

Non-deductible Debts:

1) Bad debts not connected with the trade, business, or profession of the taxpayer.
2) Bad debts between related parties under Section 36(B).
3) When mortgage is foreclosed and the collateral is bought by the mortgagee in the
foreclosure sale, the difference between the amount of the loan and the purchase price
of the collateral is not allowed as a bad debt deduction. Any loss is deferred until
the property is eventually sold by the mortgagee.

F) DEPRECIATION/DEPLETION
- Gradual decrease in the useful value of an asset/property from wear or tear, or
obsolescence
- Also includes amortization of intangible assets (patents, copyrights, etc.)
- Limited to the cost or amount invested in the asset/property
- Depletion (for oil and gas wells) refers to the exhaustion of natural resources

Requisites:
1) Asset must be used in trade, business, or profession of the taxpayer;
2) Asset has a limited useful life;
3) Allowance for depreciation must be reasonable;
4) Allowance for depreciation must be charged off during the taxable year.

Methods of Depreciation Allowed under Section 34(F)(1)

1) Straight-line method;
2) Declining-balance method;
3) Sum of the years digits method;
4) Units of production/hours of use method;

15
Wash sale is a sale of a security if, within a period 30 days before the date of sale and ending 30 days
after such sale, the taxpayer purchased the same identical shares.

11
October 2022

5) Any reasonable method of measuring obsolescence approved by the Secretary of

Finance.

Depreciation in petroleum operations

Properties used directly in the production of petroleum shall be depreciated over 10

years or such shorter life as may be permitted by the CIR.

Properties not directly used in the production of petroleum (such as cars, office
equipment) shall be depreciated over 5 years.

Favorable depreciation rate for mining operations

If the property used in mining has an expected life of more than 10 years, the cost can
be depreciated over any number of years between 5 years and the expected life of the
asset.

If the property has an expected life of not more than 10 years, the cost shall be
depreciated at the normal rate of depreciation.

Irrevocable election to deduct exploration and development expenditures in mining

operations

Provided, the total amount deductible for exploration and development expenditures
shall not exceed twenty-five percent (25%) of the net income from mining operations
computed without the benefit of any tax incentives under existing laws.

The actual exploration and development expenditures minus twenty-five percent (25%)
of the net income from mining shall be carried forward to the succeeding years until
fully deducted.

Intangible exploration and drilling costs (for both mines and wells)

After production in commercial quantities has commenced, certain intangible exploration

and development drilling costs:

(a) Shall be deductible in the year incurred if such expenditures are incurred for non-
producing wells and/or mines, or
(b) Shall be deductible in full in the year paid or incurred or, at the election of the taxpayer,
may be capitalized and amortized if such expenditures incurred are for producing wells
and/or mines in the same contract area.

Depreciation/Depletion by NRAETB and RFCs

- Only if the property/mine/well is located within the Philippines.

12
October 2022

No Depreciation for Certain Transportation Vehicles

No depreciation shall be allowed for (a) yachts, (b) helicopters, (c) airplanes and/or
aircraft, and (d) land vehicles which have a value of more than ₱2.4 Million. However,
this prohibition does not apply if the taxpayer’s main line of business is transportation or
the lease of transport equipment, and the vehicles purchased are used in said operations.

Maintenance expenses of non-depreciable vehicles are also NOT allowed as deductions.

G) PENSION TRUST CONTRIBUTIONS

- To provide for reasonable pensions to employees

Payment Deductibility
Present service cost contributions – In FULL
paid to cover current pension liabilities
accruing during the taxable year
Past service cost contributions – Prorated over 10 years beginning with
contributions in excess of the present the year in which the payment is made
service cost contribution in a taxable
year.

H) CHARITABLE CONTRIBUTIONS

Requisites:
1) Contributions or gifts are actually paid;
2) Given to entities specified by law;
3) Net income of the recipient does not inure to the benefit of any stockholder or
individual owner;
4) Taxpayer making the charitable contribution must be engaged in trade, business, or
profession.

Valuation: The amount of any charitable contribution of property other than money shall
be based on the net book value of said property as reflected in the financial
statements of the donor.

NOT SUBJECT TO LIMIT – deductible in full

(1) Donations to the government or to GOCCs for PRIORITY ACTIVITIES in education,

health, youth and sports development, human settlements, science and culture, or
economic development as determined by the NEDA;

(2) Donations to foreign institutions and organizations pursuant to treaties or agreements

entered into by the Philippine government;

(3) Donations which are not made subject to limits pursuant to special law, such as
donations to the following entities:
Exs. (a) State colleges and universities; (b) CCP; (c) National Commission for
Culture and the Arts; (d) Integrated Bar of the Philippines; (e) IRRI; (f)
Philippine Red Cross (RA 10072); (g) Any child-caring or child-placing
institution accredited by the DSWD (RA 10165); (h) donations made during the

13
October 2022

state of national emergency16 given to the government, NGOs, hospitals, and

other philanthropic organizations in the form money, supplies, equipment, relief
goods, as well as the use of property for the sole purpose of combatting the
COVID-19 pandemic (RA 11469).

(4) Donations to accredited NGOs17

“NGO” refers to a non-profit corporation:
(a) Organized and operated exclusively for scientific, research, educational, character-
building, youth and sports development, health, social welfare, cultural, or
charitable purposes;
(b) No part of the net income of such NGO inures to the benefit of any private
individual;
(c) Uses the donation not later than the 15th day of the 3rd month after the close of its
taxable year;
(d) Its administrative expenses ≤ 30% of total expenses;
(e) Its assets, upon dissolution, shall be given or distributed to another NGO organized
for a similar purpose, or to the state for a public purpose.

SUBJECT TO LIMIT

(1) Donations to the government or GOCCs exclusively for public purposes, but not for
PRIORITY activities;

(2) Donations to accredited domestic corporations or associations organized and operated

exclusively for religious, charitable, scientific, youth and sports development, cultural,
educational, or the rehabilitation of veterans.

(3) Donations to social welfare institutions;

(4) Donations to non-governmental organizations (“NGOs”).

Limit of Contributions

Corporations: 5%
Of taxable income derived from trade, profession, or
business without the benefit of the charitable deductions
(both subject and not subject to the limit)
Individual: 10%

I) RESEARCH AND DEVELOPMENT EXPENDITURES

- Must be connected with the trade, business, or profession of the taxpayer

Options of taxpayer:

1) Deduct as ordinary and necessary expenses. However, the taxpayer cannot use this
option if the expenditure is

a) for the acquisition of land or improvement of property which is subject to

depreciation or depletion; or

16
Which began on March 16, 2020.
17
The BIR has ruled that donations to accredited NGOs must also be for PRIORITY ACTIVITIES for
the same to be fully deductible, and not subject to a limit.
14
 October 2022

b) for the purpose of ascertaining the existence of location, extent, quality of a deposit
ore or other mineral, such as oil and gas.

OR

2) Treat as deferred expense and amortize over a period ≥ 60 months beginning in the
month that benefits are first realized from the expenditure.

J) FOREIGN INCOME TAXES PAID TAKEN AS DEDUCTIONS BY RESIDENT

CITIZENS OR DOMESTIC CORPORATIONS

Note: No deduction shall be allowed for any taxes of foreign countries paid or incurred
NEW
by a domestic corporation in relation to exempt foreign-sourced dividends.18

NEW K) ENHANCED DEDUCTIONS UNDER THE TAX CODE

Upon the effectivity of R.A. No. 11534 (CREATE) on April 11, 2021, domestic and
resident foreign corporations may avail of the Enhanced Deductions under Section 294 of
the Tax Code, in relation to their registered projects or activities.

Note: To qualify for the Enhanced Deductions (EDs), a corporation must comply with the
requirements of Section 304 of the Tax Code.19

Furthermore, such EDs may be enjoyed by a domestic market enterprise for a

period of 5 years after the expiration of the ITH or by an exporter for a period of 10
years after the expiration of the ITH.

The Enhanced Deductions (“EDs”) include the following:

1) Additional depreciation allowance of qualified capital expenditures20 – additional ten

percent (10%) for buildings, and additional twenty percent (20%) for machineries and
equipment.

18
Rev. Reg. No. 5-2021.
19
A registered business enterprise must:
(a) Be engaged in a project or activity included in the Strategic Investment Priority Plan;
(b) Meet the target performance metrics after the agreed time period;
(c) Install an adequate accounting system that shall identify the investments, revenues, costs, and profits
or losses of each registered project or activity; or establish a separate corporation for each registered
project or activity;
(d) Comply with the e-receipting and e-sales requirements of Section 237 of the Tax Code; and
(e) Submit annual reports of beneficial ownership of the organization and related parties (Sec. 304,
NIRC).
20
Qualified capital expenditure shall refer to purchases of capital goods with a useful life of more than one
(1) year acquired for the entity’s production of goods and services to be directly used in the project or
activity of the registered business enterprise (Sec. 293(L), NIRC).

15
October 2022

The additional depreciation allowance shall be allowed for assets that are directly related
to the registered enterprise’s production of goods and services other than administrative
and support services.21

2) Fifty percent (50%) additional deduction on the labor expense incurred in the
taxable year.

The additional deduction on the labor expense shall not include salaries, wages, benefits,
and other personnel costs incurred for managerial, administrative, indirect labor, and
support services.22

3) One hundred percent (100%) additional deduction on research and development23

expense incurred in the taxable year.

The additional deduction on research and development expense shall apply only to those
directly related to the registered project or activity of the entity. The same shall also be
limited to local expenditures incurred for salaries of Filipino employees, and
consumables and payments to local research and development organizations.24

4) One hundred percent (100%) additional deduction on training25 expense incurred

in the taxable year.

The additional deduction on training expense shall only apply to trainings, as approved
by the concerned Investment Promotion Agency based on the Strategic Investment
Priority Plan, given to the Filipino employees engaged directly in the production of
goods and services of the registered business enterprise.26

5) Fifty percent (50%) additional deduction on domestic input27 expense incurred in

the taxable year.

21
Sec. 295(B)(1), NIRC.
22
Sec. 295(B)(2), NIRC.
23
Research and development shall refer to experimental or other related projects or activities:
(1) Whose outcome cannot be known or determined in advance on the basis of current knowledge,
information, or experience, but can only be determined by applying a systematic progression of work:
(i) based on principles of established science, and (ii) proceeds from hypothesis to experiment,
observation, evaluation, and leads to logical conclusions.
(2) That are conducted for the purpose of generating new knowledge, including new knowledge in the
form of new or improved materials, products, devices, processes, or services (Sec. 293(N), NIRC).
24
Sec. 295(B)(3), NIRC.
25
Training refers to courses, curricula, certifications or modules provided to Filipino employees that are
directly related to the production of goods, or performance of services under the registered project or
activity and that are of a technical nature, which shall develop or improve the specific skills or practical
knowledge of the employee especially in the mechanical, industrial art, scientific field, or practical
science of a particular position or job function in the registered project or activity, or in preparation for
enhancing the value chain (Sec. 293(S), NIRC).
26
Sec. 295(B)(4), NIRC.
27
Domestic input refers to purchases of locally manufactured goods, or locally produced raw materials, or
domestically outsourced services known as services embedded in manufacturing, that are used directly
in the production of goods under the registered project or activity. In the case of locally manufactured
16
October 2022

The additional deduction on domestic input expense shall only apply to those that are
directly related to, and actually used in the registered export project or activity of the
registered business enterprise.28

6) Fifty percent (50%) additional deduction on power expense incurred in the taxable
year.

The additional deduction on power expense shall only apply to power utilized for the
registered project or activity.29

7) Fifty percent (50%) deduction for reinvestment allowance to manufacturing

industry.

When a manufacturing registered business enterprise reinvests its undistributed profit

or surplus in any of the projects or activities listed in the Strategic Investment Priority
Plan, the amount reinvested to a maximum of 50% shall be allowed as a deduction from
its taxable income within a period of five (5) years from the time of such reinvestment.

8) Enhanced net operating loss carry-over (“NOLCO”).

The net operating loss of the registered project or activity during the first three (3) years
from the start of commercial operations, which had not been previously deducted from
gross income, may be carried over as a deduction within the next five (5) consecutive
taxable years immediately following the year of such loss.

II. SPECIAL ITEMIZED DEDUCTIONS (UNDER SPECIAL LAWS)

L) SPECIAL DEDUCTIONS OF INSURANCE COMPANIES

1) The net additions, if any, required by law to be made within the year to reserve funds.
Provided, “released reserves” are treated as income in the year of release.

2) The sums paid within the year on policy and annuity contracts including matured
endowments, payments on installment policies and surrender values actually paid.

M) SPECIAL DEDUCTION OF REAL ESTATE INVESTMENT TRUSTS (“REITs”)

Dividends paid by a REIT shall be deductible.

goods, fifty percent (50%) of the value added of the said good should likewise be locally produced or
manufactured (Sec. 293(C), NIRC).
28
Sec. 295(B)(5), NIRC.
29
Sec. 295(B)(6), NIRC.

17
October 2022

Requirements:

1) The REIT must be a corporation whose shares are traded in the stock exchange.
2) The REIT must maintain a minimum public ownership of forty percent (40%) for its
first two (2) years, and sixty-seven percent (67%) on or before the 3rd year and
thereafter.
3) The REIT must distribute at least 90% of its distributable income.

N) DEDUCTIONS OF ESTABLISHMENTS GRANTING SALES DISCOUNTS TO

PERSONS WITH DISABILITY (PWDs30, 31)

Such establishments shall be entitled to deduct the said sales discount from their gross
income for income tax purposes, subject to the following conditions:

1) The total amount of the claimed tax deduction, net of VAT if applicable, shall be
included in gross sales/receipts;

2) The sales discounts shall be deducted from gross income after deducting the cost of
goods sold or the cost of services;

3) Only the actual amount of the sales discount granted or a sales discount not exceeding
20% of the gross selling price or gross receipts can be deducted from gross income, net
of VAT.

4) Only that portion of the gross sales exclusively used, consumed, or enjoyed by the
persons with disability shall be eligible for the deductible sales discount;

5) PWDs shall be entitled to at least a twenty percent (20%) discount and a VAT
exemption on payments for the following sales of goods and services for their exclusive
use and enjoyment or availment:
a) On the fees and charges relative to the utilization of all services in hotels and
similar lodging establishments, restaurants, and recreation centers;
b) On admission fees charged by theaters, cinema houses, concert halls, circuses,
carnivals, and other similar places of culture, leisure, and amusement;
c) On the purchase of medicines in all drugstores;
d) On medical and dental services including diagnostic and laboratory fees such as,
but not limited to x-rays, computerized tomography scans and blood tests, and
professional fees of attending doctors in all government and private hospitals and
medical facilities subject to guidelines to be issued by the DOH, in coordination
with the PHIC;
e) On fares for domestic air and sea travel except promotional fares.
f) On actual fares for land transportation travel such as, but not limited to (1)
public utility buses or jeepneys (“PUBs/PUJs”), (2) taxis, (3) Asian utility vehicles
(“AUVs”), (4) shuttle services, (5) public railways including the Light Rail Transit
(“LRT”), Metro Rail Transit (“MRT”), and Philippine National Railways (“PNR”),
(6) Transportation Network Vehicle Services (“TNVS”) such as Grab, Uber, and

30
PWD must be a Filipino or dual citizen.
31
Persons with rare diseases (as recognized by the DOH upon recommendation of the National Institutes
of Health) shall be considered as PWDs, in accordance with R.A. No. 7277 (Sec. 10, R.A. No. 10747).

Cancer patients, persons living with cancer, and cancer survivors are considered as PWDs in accordance
with R.A. No. 7277 (Sec. 25, R.A. No. 11215).
18
October 2022

the like, and (7) such other similar infrastructure that will be constructed,
established, and operated by a public or private entity;
g) On funeral and burial services for the death of the PWD.

Note: Aside from the abovementioned 20% discount, PWDs are also entitled to a special
discount of five percent (5%) off the regular retail price of basic necessities and
prime commodities.32 However, this 5% discount is not available as a special
deduction to establishments granting the same, pursuant to Section 32 of R.A.
No. 7277 as amended by R.A. No. 10754.

No Double Discount Rule

“No double discount” means that in the purchase of goods and services which are on
promotional discount, PWDs can avail of the establishment’s offered discount, or the
20% discount provided under R.A. No. 10754, whichever is higher or more favorable.

In cases where the PWD is also a senior citizen entitled to a 20% discount under a
valid Senior Citizen ID, the PWD shall use either his PWD ID card or his Senior
Citizen ID to avail of the 20% discount. Thus, a PWD who is also a senior citizen can
only claim one 20% discount on a particular sales transaction.

O) TAX INCENTIVES FOR EMPLOYERS OF DISABLED PERSONS

(1) Private entities that employ disabled persons either as regular employee, apprentice, or
learner shall be entitled to an additional deduction from gross income, equivalent to
twenty-five percent (25%) of the total amount paid as salaries and wages to
disabled persons;

(2) Private entities that improve or modify their physical facilities in order to provide
reasonable accommodation33 for disabled persons shall be entitled to an additional

32
Basic necessities shall include: (1) all kinds of variants of rice; (2) corn; (3) all kinds of bread (not
including pastries and cakes); (4) fresh, dried, and canned fish and other marine products (including those
which are frozen and in various modes of packaging); (5) fresh pork, beef, and poultry meat; (6) all kinds
of fresh eggs (not including quail eggs); (7) potable water in bottles and containers; (8) fresh and processed
milk (not including milk labelled as food supplement); (9) fresh vegetables including root crops; (10)
fresh fruits; (11) locally manufactured instant noodles; (12) coffee and coffee creamer; (13) all kinds of
sugar (not including sweeteners); (14) all kinds of cooking oil; (15) salt; (16) powdered, liquid, or bar
laundry and detergent soap; (17) firewood; (18) charcoal; (19) all kinds of candles; (20) household
liquefied petroleum gas (“LPG”), not more than 11 kilograms LPG content once every five (5) months
bought from LPG dealers; and (21) kerosene, not more than 2 liters per month (Joint DTI-DA-DOE
Administrative Order No. 17-01, Series of 2017; Sec. 2.8, Rev. Reg. No. 5-2017, as amended by Rev.
Reg. No. 9-2019).

Prime commodities shall include: (1) flour; (2) dried, processed, and canned pork, beef, and poultry meat;
(3) dairy products not falling under the definition of basic necessities; (4) onions and garlic; (5) vinegar,
patis, and soy sauce; (6) toilet/bath soap; (7) fertilizer; (8) pesticides; (9) herbicides; (10) poultry feeds,
livestock feeds, and fishery feeds; (11) veterinary products; (12) paper and school supplies; (13) nipa
shingle; (14) sawali; (15) cement, clinker, GI sheets; (16) hollow blocks; (17) plywood; (18) plyboard;
(19) construction nails; (20) batteries (not including cell phone and automotive batteries); (21) electrical
supplies and light bulbs; and (22) steel wires (Joint DTI-DA-DOE Administrative Order No. 17-01, Series
of 2017; Sec. 2.9. Rev. Reg. No. 5-2017, as amended by Rev. Reg. No. 9-2019).
33
This includes:
19
October 2022

deduction from their net taxable income, equivalent to fifty percent (50%) of the
direct costs of the improvements or modifications.

Note: The above provision does not apply to improvements or modifications of

facilities required under B.P. Bilang 344, otherwise known as “An Act To
Enhance The Mobility Of Disabled Persons By Requiring Certain Buildings,
Institutions, Establishments, and Public Utilities To Install Facilities And Other
Devices.” (R.A. No. 7277).

P) TAX INCENTIVES FOR ESTABLISHMENTS GRANTING SALES DISCOUNTS

TO SENIOR CITIZENS

All establishments supplying any of the goods and services below (in Rev. Reg. No. 7-
2010) may claim the discounts granted to Senior Citizens34 as a tax deduction.

(a) The following sales to Senior Citizens shall be given the Senior Citizens’ discount of
20%: (1) medicines, medical supplies, and medical equipment; (2) professional fees
of physicians and licensed professional health workers; (3) medical and dental
diagnostic and laboratory services; (4) actual fares for land transportation in public
utility buses, jeepneys, taxis, asian utility vehicles, LRT, MRT, PNR (except toll fees);
(5) actual fares for domestic air transport and sea vessels; (6) services and other
amenities in hotels and similar lodging establishments, restaurants, and recreation
centers; (7) admission to theaters, concert halls, circuses, carnivals, and similar places
of culture, leisure, and entertainment; and (8) funeral and burial services.

Public utilities supplying water and electricity to senior citizens shall grant a 5%
discount on their monthly bill.

Public utilities supplying water, electricity or telephone services to Senior Citizen

Centers and care or group homes run by the government or a non-profit corporation
shall grant a 50% discount.

(b) The total amount of the claimed tax deduction, net of VAT, if applicable, shall be
included in the establishment’s gross sales/receipts for tax purposes. This means that,

1. Improvement of existing facilities used by employees in order to render these readily accessible to
PWDs;
2. Modification of work schedules;
3. Acquisition or modification of equipment or devices;
4. Modification of examinations, training materials or company policies, rules and regulations
pertaining to hiring; and
5. Provision of auxiliary aids and assistive devices, and other similar accommodations to PWDs,
which include the following:
• Qualified interpreters or other effective methods of delivering materials to individuals with
hearing impairment;
• Qualified readers, taped tests, or other effective methods of delivering materials to individuals
with visual impairment;
• Acquisition or modification of equipment or devices; and
• Other similar services and actions, or all types of aids and services that facilitate the learning
process of persons with mental disabilities. (IRR of R.A. No. 10524; RMC No. 48-2017).
34
“Senior Citizen” or “Elderly” shall refer to any Filipino citizen who is a resident of the Philippines, and
at least sixty (60) years old. The term may apply to senior citizens with “dual citizenship” status
provided they prove their Filipino citizenship, and residency in the Philippines for at least 6 months.

20
October 2022

for the discount to be allowed as a deduction, the amount of sales that must be reported
for tax purposes by the establishment is the undiscounted selling price.

(c) The income statement of the seller must reflect the discount not as a reduction of sales
to arrive at net sales, but as a deduction from its gross income (sales less cost of sales).

(d) Only that portion of the gross sales exclusively used, consumed, or enjoyed by the
Senior Citizen shall be eligible for the deductible sales discount.

The following sales are not subject to the Senior Citizen discount: bulk orders; set
orders for children; “pasalubong” food items; non-consumable items sold in
restaurants; cigars and cigarettes; delivery fees which are billed separately.

(e) The actual amount of the discount granted or the statutory rate based on the gross
selling price (the 20% discount, the 5% discount on water and electric consumption by
Senior Citizens, or the 50% discount on electricity, water, and telephone consumption
by a Senior Citizens Center) can be deducted from gross income.35

Note: Aside from the abovementioned discounts, Senior Citizens are also entitled to a
special discount of five percent (5%) off the regular retail price of basic necessities
and prime commodities. However, this 5% discount is not available as a special
deduction to establishments granting the same, pursuant to Section 4 of R.A. No.
7432 as amended by R.A. Nos. 9257 and 9994.

Note: Senior citizens, like PWDs, shall also follow the “No Double Discount Rule” in
availing of discounts.

Q) ADDITIONAL DEDUCTION FROM GROSS INCOME OF PRIVATE

ESTABLISHMENTS FOR COMPENSATION PAID TO SENIOR CITIZENS

Private establishments employing Senior Citizens shall be entitled to an additional

deduction from their gross income equivalent to fifteen percent (15%) of the total amount
paid as salaries and wages to Senior Citizens subject to the following conditions:

1) The employment shall have to continue for a period of at least six (6) months;

2) The annual taxable income of the Senior Citizen does not exceed the poverty level as
may be determined by the National Economic and Development Authority (“NEDA”)
thru the National Statistical Coordinating Board (“NSCB”).

R) TAX INCENTIVES FOR ESTABLISHMENTS GRANTING DISCOUNTS TO

NATIONAL ATHLETES and COACHES

Establishments granting the 20% discount under R.A. No. 10699 to national athletes and
coaches36 shall be entitled to deduct such discounts from their gross income, subject to the
following conditions:

35
RR 7-2010.
36
National athletes and coaches shall refer to (1) Filipino citizens; (2) members of the national training pool; (3)
recognized and accredited by the Philippine Olympic Committee and Philippines Sports Commission or National
Paralympics Committee; and (4) have represented the Philippines in international sports competitions.

21
October 2022

(1) The total amount of the deduction shall first be included in gross sales/receipts;
(2) The deduction from the gross income is for the same taxable year that the discount is
granted; and
(3) Only the actual amount of the sales discount granted or a sales discount not exceeding
20% of the selling price can be deducted from gross income for income tax purposes.

Qualified national athletes and coaches shall be entitled to a twenty percent (20%) discount
on the sales amount (exclusive of VAT) for the following sales of goods and services for
their exclusive use or enjoyment: (1) actual fares for domestic air, sea, and land
transportation including baggage allowance; (2) services and other amenities in hotels,
resorts, and other similar lodging establishments, restaurants, and recreation centers; (3)
medicine and drug purchases, including vaccines, vitamins, and mineral supplements at
any drugstore or pharmacy; (4) sports equipment purchases; and (5) admission to theaters,
cinema houses, concert halls, circuses, carnivals, and other similar places of culture,
leisure, and amusement. 37

The sale of other goods and services which are not included in the above enumeration,
though sold by the foregoing establishments, shall not be granted with the discount
privilege.

Note: National athletes and coaches shall also follow the “No Double Discount Rule” in
availing of discounts.

S) TAX INCENTIVES FOR ESTABLISHMENTS AND INSTITUTIONS WITH

ROOMING-IN AND BREASTFEEDING PRACTICES

Expenses incurred by a private health or non-health facility, establishment, or institution

in:

(a) the provision of facilities for rooming-in and breastfeeding, including equipment,
facilities, and supplies for breastmilk collection, storage, and utilization; or

(b) the provision of lactation stations including the necessary equipment and facilities
such as: lavatory for hand-washing, unless there is an easily-accessible lavatory nearby;
refrigeration or appropriate cooling facilities for storing expressed breastmilk;
electrical outlets for breast pumps; a small table; comfortable seats; and other items,

shall be deductible expenses for income tax purposes up to twice (2x) the actual amount
incurred. Provided, such facilities, establishments, or institutions shall secure a “Working
Mother-Baby-Friendly Certificate” from the DOH to be filed with the BIR.

T) TAX INCENTIVES FOR LAWYERS or GPPs RENDERING FREE LEGAL

SERVICES

A lawyer or professional partnership rendering actual free legal services shall be entitled
to an allowable deduction from gross income equivalent to the lower of (a) the amount
that could have been collected for the actual free legal services, or (b) ten percent (10%) of
the gross income derived from the provision of legal services.

37
Sec. 4(a) and (b), R.A. No. 10699; Rev. Reg. No. 13-2020.
22
October 2022

(1) The actual free legal services mentioned above shall not include the minimum sixty
(60)-hour mandatory legal aid services rendered to indigent litigants as required under
the Rule on Mandatory Legal Aid Service for Practicing Lawyers, under Bar Matter
No. 2012, issued by the Supreme Court; and

(2) The lawyer or professional partnership shall secure a certification from the Public
Attorney’s Office (“PAO”), the Department of Justice (“DOJ”), or any accredited
association of the Supreme Court, indicating that the aforementioned agencies cannot
provide the legal services to be provided by the private counsel.

U) TAX INCENTIVES FOR ESTABLISHMENTS PARTICIPATING IN THE DUAL

TRAINING SYSTEM UNDER REPUBLIC ACT NO. 7686 (“DUAL TRAINING
SYSTEM ACT OF 1994”)

A participating agricultural, industrial, or business establishment shall be allowed to deduct

from its taxable income the amount of fifty percent (50%) of the system expenses paid
to the accredited educational institution for its trainees. Provided, that such expenses
shall not exceed five percent (5%) of the establishment’s direct labor expenses, but in no
case shall it exceed Twenty Five Million Pesos (₱25,000,000) a year.

V) TAX INCENTIVES FOR ENTERPRISES ADOPTING PRODUCTIVITY

INCENTIVES PROGRAMS UNDER REPUBLIC ACT NO. 6971 (“AN ACT TO
ENCOURAGE PRODUCTIVITY AND MAINTAIN INDUSTRIAL PEACE BY
PROVIDING INCENTIVES TO BOTH LABOR AND CAPITAL”)

Tax Incentives In Adopting a Productivity Incentives Program

(a) A business enterprise which adopts a productivity incentives program, duly and
mutually agreed upon by parties to its labor-management committee, shall be granted
a special deduction from gross income equivalent to fifty percent (50%) of the total
productivity bonuses given to employees under the program over and above the total
allowable ordinary and necessary business deductions for said bonuses.

(b) Grants for manpower training and special studies given to rank-and-file employees
pursuant to a program prepared by the labor-management committee of the enterprise
for the development of skills identified as necessary by the appropriate government
agencies shall entitle the business enterprise to a special deduction from gross income
equivalent to fifty percent (50%) of the total grants over and above the allowable
ordinary and necessary business deductions for said grants.

W) DONATION TO PUBLIC SCHOOLS

Under R.A. No. 8525 and Rev. Reg. No. 10-2003, the amount of assistance, contribution,
or donation to public schools (elementary, secondary, or tertiary) made by private entities,
that were actually, directly and exclusively incurred for the program in team up with the
Department of Education, Commission on Higher Education, or with TESDA, may be
deducted from gross income.

23
October 2022

If the program is a priority project, the actual amount of the donation, contribution, or
assistance plus fifty percent (50%) of said donation shall be available for deduction.

Note: If the program is not a priority project, the lower of five percent (5%) of the net
income of the corporation (10% if an individual) before charitable contributions, or
the actual contribution, plus fifty percent (50%) of said amount shall be available
for deduction.

X) QUALIFIED EMPLOYER’S CONTRIBUTION TO EMPLOYEE’S PERSONAL

EQUITY AND RETIREMENT ACCOUNT (PERA)

An employer can claim as deduction the actual amount of its or his contribution that would
complete the maximum allowable PERA contribution of an employee.

The maximum allowable PERA contribution shall not exceed ₱200,000 per year for an
Overseas Filipino, or ₱100,000 per year for a non-Overseas Filipino.

For example, an Overseas Filipino employee made PERA contributions amounting to

₱110,000 for the year. His employer decides to make a matching contribution of ₱110,000
for the same period. In such case, the employer can only claim ₱90,000 as deduction.

Y) TAX INCENTIVES GRANTED TO REGISTERED TOURISM ENTERPRISES

(“RTEs”) IN TOURISM ENTERPRISE ZONES (“TEZs”) UNDER REPUBLIC
ACT NO. 9593 (“TOURISM ACT OF 2009”)

Tourism Enterprises registered with the Tourism Infrastructure and Enterprise Zone
(“TIEZA”) and which are within the Tourism Enterprise Zones (“TEZs”) shall be entitled
to a tax deduction of up to fifty percent (50%) of the cost of:

(a) Environmental protection activities in the surrounding areas of the enterprise or the
TEZ as certified by the Department of Environment and Natural Resources
(“DENR”).
(b) Cultural heritage preservation activities in the surrounding areas of the enterprise or
the TEZ, conducted pursuant to R.A. No. 10066, as certified by the appropriate
cultural agency and the Local Culture and Arts Council in the local government unit
where the RTE is located; and
(c) Sustainable livelihood programs for local communities in the surrounding areas of
the enterprise or the TEZ which may be chosen from the list of activities identified
by the National Anti-Poverty Commission (“NAPC”).

(Z) TAX INCENTIVES GRANTED TO QUALIFIED JEWELRY ENTERPRISES

(“QJEs”) UNDER R.A. NO. 8502 (“JEWELRY INDUSTRY DEVELOPMENT ACT
OF 1998”)

A Qualified Jewelry Enterprise (“QJE”) is a natural or juridical entity, either a single

proprietorship, cooperative, partnership, or corporation, organized and existing under
Philippine laws which is issued a Board of Investments (“BOI”) accreditation under R.A.
No. 8502 and its Implementing Rules and Regulations.

24
October 2022

A QJE providing training to its employees may avail of the additional deduction
equivalent to fifty percent (50%) of the expenses incurred in training schemes for the
purpose of computing the net taxable income.

(AA) TAX DEDUCTION FOR HOSPITALS OR MEDICAL CLINICS UNDER R.A. NO.
10932 (AN ACT STRENGTHENING THE ANTI-HOSPITAL DEPOSIT LAW)

R.A. No. 10932 amended Section 1 of B.P. No. 702 otherwise known as “An Act
Prohibiting the Demand of Deposits or Advance Payments for the Confinement or
Treatment of Patients in Hospitals and Medical Clinics in Certain Cases”.

Section 7 of B.P. No. 702 now provides that PhilHealth shall reimburse the cost of basic
emergency care and transportation services incurred by the hospital or medical clinic for
the emergency services given to poor and indigent patients.

Tax Deduction

Under Section 8 of the same amended law, expenses incurred by a hospital or medical
clinic in providing basic emergency care to poor and indigent patients which are not
reimbursed by Philhealth, shall be tax deductible.

(BB) Deduction of Private Filipino Seed Producers under R.A. No. 7308 (the
“Seed Industry Development Act of 1992”)

Private Filipino seed producers shall enjoy a two hundred percent (200%) deduction for
expenses on seed research, development, and extension for the first five (5) years of
operations.

(CC) Deduction of Business Enterprises that Generate and Sustain Green Jobs

Green jobs refer to employment that contributes to preserving or restoring the quality of
the environment, be it in the agriculture, industry or services sector. Specifically, but not
exclusively, these include jobs that help to protect ecosystems and biodiversity, reduce
energy, materials and water consumption through high efficiency strategies, decarbonize
the economy, and minimize or altogether avoid generation of all forms of waste and
pollution.38

Business enterprises which generate and sustain green jobs as certified by the Climate
Change Commission shall enjoy a special deduction equivalent to fifty percent (50%)
of the total expenses for skills training and research development expenses which is over
and above the allowable ordinary and necessary business deductions for said expenses
under the Tax Code.39

38
Sec. 4(c), R.A. No. 10771.
39
Sec. 5(a), R.A. No. 10771.

25
October 2022

(DD) TAX INCENTIVES FOR PUBLIC TRANSPORTATION UTILITY OPERATORS

GRANTING FARE DISCOUNTS TO STUDENTS UNDER R.A. NO. 11314 (the
STUDENT FARE DISCOUNT ACT)

A student40 under R.A. No. 11314 shall be entitled to a twenty percent (20%) discount on
domestic regular fares upon presentation of his/her duly issued school identification card
(“ID”) or current validated enrollment form supported by the prescribed government-issued
identification document. Provided, in the case of air public transportation utilities, the
discount shall apply only to the base fare or the price of the ticket before taxes and costs
for ancillary services.

The fare discount shall be available during the entire period while the student is enrolled,
including weekends and holidays. Provided, where a promotional fare is granted by a
public transportation utility operator, the student may choose between (a) the promotional
fare, and (b) the regular fare less the 20% discount provided under R.A. No. 11314.

R.A. No. 11314 covers all public transportation utilities41 such as but not limited to public
utility buses (“PUBs”), public utility jeepneys (“PUJs”), taxis, and other similar vehicles-
for-hire, tricycles, passenger trains, aircrafts, and marine vessels. However, it does not
cover school service, shuttle service, tourist service, and any similar service covered by
contract or charter agreement.

No Double Discount Rule

The 20% discount cannot be claimed if the student claims a higher discount as may be
granted by the public transportation utility, or under other existing laws, or in combination
with other discount programs or incentives.

Tax Deduction

The public transportation utility operator may claim as tax deduction the student fare
discount granted under R.A. No. 11314 based on the cost of the services rendered.

The cost of the discount shall be allowed as a deduction from gross income in the taxable
year the discount is granted.

Provided, the total amount of the tax deduction, net of VAT (if applicable), shall be
included in the operator’s gross sales/receipts, and shall be subject to proper
documentation.

40
Student refers to any Filipino citizen currently enrolled in a duly authorized elementary, secondary,
technical-vocational, or higher education institution. The term does not include those enrolled in post-
graduate degree courses, informal short-term courses such as dancing, swimming, music, driving
lessons, and seminar-type courses (Sec. 3(a), R.A. No. 11314).
41
Public transportation utilities shall refer to all Philippine common carriers engaged in the business of
carrying or transporting passengers or goods by land, sea, or air, for compensation, offering their services
to the public (Sec. 3(b), R.A. No. 11314).

Public transportation utility operator shall refer to the person or entity granted with a Certificate of
Public Convenience by a regulatory agency to operate as a common carrier (Sec. 3(c), R.A. No. 11314).

26
 October 2022

NON-DEDUCTIBLE ITEMS

1) Personal, living, and family expenses;

2) Expenditures which are capitalized, except intangible drilling and development costs
incurred in petroleum operations which may be deducted in full.

3) Premiums paid by an employer:

a) Covering the life of an employee; and
b) The beneficiary is the employer.
Note: IF the employee is the beneficiary, the premiums paid by the employer are
deductible, and are fringe benefits to the employee.

4) Losses from sales/exchanges of property between related parties under Sec. 36 (B).
5) Interest expense between related parties under Sec. 36 (B).
6) Bad debts between related parties under Sec. 36(B).

7) Fines and penalties due to late payment of tax.

8) Foreign taxes paid or incurred by a domestic corporation in relation to exempt foreign-

NEW
sourced dividends.

27
 October 2022

FOREIGN INCOME TAX CREDITS

Amount of Tax Credit

The tax credit allowed is equivalent to the amount of income tax paid or incurred to any foreign
country during the taxable year but not to exceed the limitations prescribed by law.

New Note: No credit or deduction shall be allowed for any foreign taxes paid or incurred by a
domestic corporation in relation to exempt foreign-sourced dividends.42

Limitations on Tax Credit43

(A) 1st Limitation

Taxable Income (per foreign country) Philippine

x = Limit
Total Taxable Income Income Tax

(B) 2nd Limitation

Taxable Income (all foreign countries) Philippine

x = Limit
Total Taxable Income Income Tax

New Note: Any foreign taxes paid or incurred by a domestic corporation in relation to exempt
foreign-sourced dividends shall be disregarded in computing the aforementioned
limitations.44

Tax credit is the amount of income tax paid or incurred to the foreign country but not to exceed
the limit. In other words, tax credit is the income tax paid to the foreign country or the limit,
whichever is lower.

Rules in the Application of the Limits Formula

(1) If there is one foreign country involved, use only the formula for the first limitation.

(2) If there are two or more foreign countries involved, use both formulas.

(3) In case both formulas are used, two tax credits will be computed. One based on the first
limit, and the other based on the second limit.

The final tax credit is whichever is the lower between the two amounts.

42
Sec. 5, Rev. Reg. No. 5-2021.
43
Sec. 34(C)(4), NIRC.
44
Sec. 5, Rev. Reg. No. 5-2021.
28
 October 2022

Example: The records of a domestic company show the following data:

Gross Business Foreign

Income Expenses Tax

Philippines ₱ 350,000 ₱ 150,000 -

U.S. 500,000 200,000 ₱ 98,000
Canada 100,000 50,000 20,000
Japan 250,000 300,000 -

Required: Compute the tax due claiming the foreign taxes as tax credits.

Gross income, Philippines ₱ 350,000

Less: Business expenses, Philippines (150,000) ₱ 200,000

Gross income, U.S. ₱ 500,000

Less: Business expenses, U.S. (200,000) 300,000

Gross income, Canada ₱ 100,000

Less: Business expenses, Canada (50,000) 50,000

Gross income, Japan ₱ 250,000

Less: Business expenses, Japan (300,000) (50,000)

Total taxable income ₱ 500,000

Tax due (₱500,000 x 25%) ₱ 125,000

Less: Tax Credit (1st limit)

(a) Tax paid in U.S. ₱ 98,000
Limit: (₱300,000/₱500,000) x ₱125,000 75,000
Tax Credit (lower) ₱ 75,000

(b) Tax paid in Canada ₱ 20,000

Limit: (₱50,000/₱500,000) x ₱125,000 12,500
Tax Credit (lower) 12,500

Total tax credit, 1st limit ₱ 87,500

Tax Credit (2nd limit)

Total taxes paid in foreign countries ₱ 118,000
Limit: (₱300,000/₱500,000) x ₱125,000 75,000
Tax Credit (2nd limit), lower ₱ 75,000

Tax Credit allowed (lower) (75,000)

Tax due after tax credit ₱ 50,000

29
October 2022

APPENDIX A: SUMMARY OF PRIVILEGES OF SENIOR CITIZENS AND PWDs45

Senior PWD
Privilege Goods and Services
Citizen
20% discount (1) Medicines and medical supplies subject to DOH
and guidelines;
VAT-
exemption (2) Professional fees of attending physicians in all
(on purchase) private hospitals, medical facilities, outpatient
clinics, and home health care services;

(3) Professional fees of licensed health care

professionals providing home health care
services;

(4) Medical and dental services, diagnostic and

laboratory fees in all private hospitals;

(5) Medical facilities, outpatient clinics, and home

health care services;

(6) Actual fare for land transportation travel in

public utilities, including domestic air transport
services and sea shipping vessels, and the like;

(7) Utilization of services in hotels and similar

lodging establishments, restaurants, and
recreation centers, including the purchase of
foods, drinks, desserts, and other consumable
food items;

(8) Admission fees charged by theaters, cinema

houses, concert halls, circuses, and similar
places of leisure and amusement;

(9) Funeral and burial services

5% Special
Discount Basic Necessities

Prime Commodities

45
RMC 71-2022, Annex A

30