3 Tax Deductible Expenses with Limitations in Philippines

By: Tax and Accounting Center Philippines

As a rule, business expenses in the Philippines that is ordinary and necessary to the
conduct of trade, business, or practice of profession in the Philippines is deductible to the
extent of actual payments. In general, there is no limitation on deductible amount under
the itemized deductions (as compared to optional standard deduction in the Philippines
that is only up to 40% of gross income), except that is has to be reasonable. Under the
following expenses however, the rules provides a limitation as to the amount deductible:
Limitation on deductible Interest Expense in the Philippines
Interest expense is what you pay for borrowed funds legitimately used in business. In the
past, this has been used as a tax planning scheme where taxpayer would simply borrow
funds from banks or financing institutions in order to generate deductible interest
expense in the Philippines. The funds borrowed are not actually used in business so it is
simply deposited in a bank yielding an interest income. As a result, the interest expense
lowers down the taxable income by and benefits 30% of such reduction, while the
interest income is subjected to final tax lower than the income tax rate of 30% (say 20%
for savings deposit). This scenario is what is commonly called as tax arbitrage, and is
now the subject of this limitation on deductible interest expense in the Philippines.
Under the Tax Code, as amended, interest expense deduction shall be reduced by 33%
(starting 2009) of the interest income subjected to final withholding tax. The purpose of
which is to neutralize the tax effect of interest expense reduction and the lower final
income tax rate on interest income. Please see our sample computation on the interest
expense limitation in the Philippines:
Let us assume Interest expense during the period P20,000, and Interest income, net of
20% final tax P8,000. Under this, deductible interest expense reduction will be reduced
by 33% of the amount of gross income or P3,300 (33% multiplied by the quotient of
P8,000 divided by 80% (100% less 20% FWT). Deductible interest expense would only be
P16,700 (P20,000 less P3,300).
Deductible representation and entertainment in Philippines
Filipinos are hospitable by nature and such trait is carried on in doing business in the
Philippines. The rules allow as tax deduction those expenses of taxpayers in entertaining
its guests and employees in order to develop a friendlier atmosphere for a better
business yielding more taxes from better operating income. However, business is
business, and taxpayers resources shall not be exhausted on most representations and
entertainment.
For this reason, the rule provides for the following limitations on deductible
representation and entertainment:

Sellers of goods 0.5% of net sales, net of sales returns, discounts and
allowances; and
Sellers of services 1% of gross receipts

If the taxpayer is engaged in the sale of both the goods and the service, then, specific
identification or segregation has to be made, otherwise, the dominant figure for the
principal operations would overrule the other. Notably, the sellers of service enjoy the
higher rate because sellers of service are more prone to spending representation and
entertainment is dealings with its guest, clients, or customers.
Tax deduction for charitable contributions
Government is under obligation to render protection and support, but with the very
broad and varied needs of its constituents, private institutions and individuals are on to
the rescue. These entities are non-profit oriented with noble intentions to cater the needs
of the less fortunate members of the society in terms of health, education, natural
calamity victims (flash floods in the Philippines, earth quakes, etc.) and the likes.
Under the rules, deductions for charitable contributions could be deductible in full or
under limitation. Donations to BIR accredited donee institutions properly documented
with Certificates of Donations and other papers; and, donations to government priority
projects certified by NEDA are 100% fully deductible. Deductible charitable contributions
of taxpayers corporate and individuals shall not exceed the following rates based on
their respective taxable income before such charitable contributions:

Individual income taxpayers 10%

Corporate income taxpayers 5%

Obviously, rate for the corporate taxpayers should be lower because in the Philippines,
corporations are the ones normally used for big time operations. In claiming the
deduction for charitable contributions, please see to it that they are properly
documented in accordance with the rules.

Disclaimer: This article is for general conceptual guidance only and is not a substitute
for an expert opinion. Please consult your preferred tax and/or legal consultant for the
specific details applicable to your circumstances. For comments, you may please send
mail at info@taxacctgcenter.org.