SEC. 34. Deductions from Gross Income. - Except for taxpayers earning (b) Substantiation Requirements.
equirements. - No deduction from gross income shall
compensation income arising from personal services rendered under an
employer-employee relationship where no deductions shall be allowed
under this Section other than under subsection (M) hereof, in computing
taxable income subject to income tax under Sections 24(A); 25(A); 26;
27(A), (B) and (C); and 28(A)(1), there shall be allowed the following
deductions from gross income;
(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or Professional Expenses. -
(a) In General. - There shall be allowed as deduction from gross income
all the ordinary and necessary expenses paid or incurred during the taxable
year in carrying on or which are directly attributable to, the development,
management, operation and/or conduct of the trade, business or exercise
of a profession, including:
(i) A reasonable allowance for salaries, wages, and other forms of
compensation for personal services actually rendered, including the
grossed-up monetary value of fringe benefit furnished or granted by the
employer to the employee: Provided, That the final tax imposed under
Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and abroad, while
away from home in the pursuit of trade, business or profession;
(iii) A reasonable allowance for rentals and/or other payments which are
required as a condition for the continued use or possession, for purposes of
the trade, business or profession, of property to which the taxpayer has not
taken or is not taking title or in which he has no equity other than that of a
lessee, user or possessor;
(iv) A reasonable allowance for entertainment, amusement and recreation
expenses during the taxable year, that are directly connected to the
development, management and operation of the trade, business or
profession of the taxpayer, or that are directly related to or in furtherance
of the conduct of his or its trade, business or exercise of a profession not to
exceed such ceilings as the Secretary of Finance may, by rules and
regulations prescribe, upon recommendation of the Commissioner, taking
into account the needs as well as the special circumstances, nature and
character of the industry, trade, business, or profession of the taxpayer:
Provided, That any expense incurred for entertainment, amusement or
recreation that is contrary to law, morals public policy or public order shall
in no case be allowed as a deduction.
be allowed under Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as official receipts or other
adequate records: (i) the amount of the expense being deducted, and (ii)
the direct connection or relation of the expense being deducted to the
development, management, operation and/or conduct of the trade,
business or profession of the taxpayer.
(c) Bribes, Kickbacks and Other Similar Payments. - No deduction from
gross income shall be allowed under Subsection (A) hereof for any
payment made, directly or indirectly, to an official or employee of the
national government, or to an official or employee of any local
government unit, or to an official or employee of a government-owned or -
controlled corporation, or to an official or employee or representative of a
foreign government, or to a private corporation, general professional
partnership, or a similar entity, if the payment constitutes a bribe or
kickback.
(2) Expenses Allowable to Private Educational Institutions. - In addition
to the expenses allowable as deductions under this Chapter, a private
educational institution, referred to under Section 27 (B) of this Code, may
at its option elect either: (a) to deduct expenditures otherwise considered
as capital outlays of depreciable assets incurred during the taxable year for
the expansion of school facilities or (b) to deduct allowance for
depreciation thereof under Subsection (F) hereof.
(B) Interest. -
(1) In General. - The amount of interest paid or incurred within a taxable
year on indebtedness in connection with the taxpayer's profession, trade or
business shall be allowed as deduction from gross income: Provided,
however, That the taxpayer's otherwise allowable deduction for interest
expense shall be reduced by forty-two percent (42%) of the interest income
subjected to final tax: Provided, That effective January 1, 2009, the
percentage shall be thirty-three percent
(33%). [29]
(2) Exceptions. - No deduction shall be allowed in respect of interest
under the succeeding subparagraphs:
(a) If within the taxable year an individual taxpayer reporting income on
the cash basis incurs an indebtedness on which an interest is paid in
advance through discount or otherwise: Provided, That such interest shall
be allowed as a deduction in the year the indebtedness is paid: Provided,
further, That if the indebtedness is payable in periodic amortizations, the
amount of interest which corresponds to the amount of the principal
amortized or paid during the year shall be allowed as deduction in such
taxable year;
(b) If both the taxpayer and the person to whom the payment has been
made or is to be made are persons specified under Section 36 (B); or
(c) If the indebtedness is incurred to finance petroleum exploration.
(3) Optional Treatment of Interest Expense. - At the option of the
taxpayer, interest incurred to acquire property used in trade business or
exercise of a profession may be allowed as a deduction or treated as a
capital expenditure.
(C) Taxes. -
(1) In General. - Taxes paid or incurred within the taxable year in
connection with the taxpayer's profession, trade or business, shall be
allowed as deduction, except:
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this
deduction shall be allowed in the case of a taxpayer who does not signify
in his return his desire to have to any extent the benefits of paragraph (3)
of this subsection (relating to credits for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the
value of the property assessed.
Provided, That taxes allowed under this Subsection, when refunded or
credited, shall be included as part of gross income in the year of receipt to
the extent of the income tax benefit of said deduction.
(2) Limitations on Deductions. - In the case of a nonresident alien
individual engaged in trade or business in the Philippines and a resident
foreign corporation, the deductions for taxes provided in paragraph (1) of
this Subsection (C) shall be allowed only if and to the extent that they are
connected with income from sources within the Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer
signifies in his return his desire to have the benefits of this paragraph, the
tax imposed by this Title shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the
Philippines and of a domestic corporation, the amount of income taxes
paid or incurred during the taxable year to any foreign country; and
(b) Partnerships and Estates. - In the case of any such individual who is a
member of a general professional partnership or a beneficiary of an estate
or trust, his proportionate share of such taxes of the general professional
partnership or the estate or trust paid or incurred during the taxable year to
a foreign country, if his distributive share of the income of such
partnership or trust is reported for taxation under this Title.
An alien individual and a foreign corporation shall not be allowed the
credits against the tax for the taxes of foreign countries allowed under this
paragraph.
(4) Limitations on Credit. - The amount of the credit taken under this
Section shall be subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any
country shall not exceed the same proportion of the tax against which such
credit is taken, which the taxpayer's taxable income from sources within
such country under this Title bears to his entire taxable income for the
same taxable year; and
(b) The total amount of the credit shall not exceed the same proportion of
the tax against which such credit is taken, which the taxpayer's taxable
income from sources without the Philippines taxable under this Title bears
to his entire taxable income for the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when
paid differ from the amounts claimed as credits by the taxpayer, or if any
tax paid is refunded in whole or in part, the taxpayer shall notify the
Commissioner; who shall re-determine the amount of the tax for the year
or years affected, and the amount of tax due upon such re-determination,
if any, shall be paid by the taxpayer upon notice and demand by the
Commissioner, or the amount of tax overpaid, if any, shall be credited or
refunded to the taxpayer. In the case of such a tax incurred but not paid,
the Commissioner as a condition precedent to the allowance of this credit
may require the taxpayer to give a bond with sureties satisfactory to and to
be approved by the Commissioner in such sum as he may require,
conditioned upon the payment by the taxpayer of any amount of tax found
due upon any such redetermination. The bond herein prescribed shall
contain such further conditions as the Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection
(C)(3) of this Section may, at the option of the taxpayer and irrespective of
the method of accounting employed in keeping his books, be taken in the
year which the taxes of the foreign country were incurred, subject,
however, to the conditions prescribed in Subsection (C)(5) of this Section.
If the taxpayer elects to take such credits in the year in which the taxes of
the foreign country accrued, the credits for all subsequent years shall be
taken upon the same basis and no portion of any such taxes shall be
allowed as a deduction in the same or any succeeding year.
(7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof
shall be allowed only if the taxpayer establishes to the satisfaction of the
Commissioner the following:
(a) The total amount of income derived from sources without the
Philippines;
(b) The amount of income derived from each country, the tax paid or
incurred to which is claimed as a credit under said paragraph, such
amount to be determined under rules and regulations prescribed by the
Secretary of Finance; and
(c) All other information necessary for the verification and computation of
such credits.
(D) Losses. -
(1) In General. - Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity shall be
allowed as deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if the loss
arises from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement.
The Secretary of Finance, upon recommendation of the Commissioner, is
hereby authorized to promulgate rules and regulations prescribing, among
other things, the time and manner by which the taxpayer shall submit a
declaration of loss sustained from casualty or from robbery, theft or
embezzlement during the taxable year: Provided, however, That the time
limit to be so prescribed in the rules and regulations shall not be less than
thirty (30) days nor more than ninety (90) days from the date of discovery
of the casualty or robbery, theft or embezzlement giving rise to the loss.
(amended by RR 12-77 to be 45 days now)
(c) No loss shall be allowed as a deduction under this Subsection if at the
time of the filing of the return, such loss has been claimed as a deduction
for estate tax purposes in the estate tax return.
(2) Proof of Loss. - In the case of a nonresident alien individual or foreign
corporation, the losses deductible shall be those actually sustained during
the year incurred in business, trade or exercise of a profession conducted
within the Philippines, when such losses are not compensated for by
insurance or other forms of indemnity. The secretary of Finance, upon
recommendation of the Commissioner, is hereby authorized to
promulgate rules and regulations prescribing, among other things, the time
and manner by which the taxpayer shall submit a declaration of loss
sustained from casualty or from robbery, theft or embezzlement during the
taxable year: Provided, That the time to be so prescribed in the rules and
regulations shall not be less than thirty (30) days nor more than ninety (90)
days from the date of discovery of the casualty or robbery, theft or
embezzlement giving rise to the loss; and
(3) Net Operating Loss Carry-Over. - The net operating loss of the
business or enterprise for any taxable year immediately preceding the
current taxable year, which had not been previously offset as deduction
from gross income shall be carried over as a deduction from gross income
for the next 3 consecutive taxable years immediately following the year of
such loss: Provided, however, That any net loss incurred in a taxable year
during which the taxpayer was exempt from income tax shall not be
allowed as a deduction under this Subsection: Provided, further, That a
net operating loss carry-over shall be allowed only if there has been no
substantial change in the ownership of the business or enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal value of
outstanding issued shares., if the business is in the name of a corporation,
is held by or on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the
corporation, if the business is in the name of a corporation, is held by or
on behalf of the same persons.
For purposes of this subsection, the term 'net operating loss' shall mean the
excess of allowable deduction over gross income of the business in a
taxable year.
Provided, That for mines other than oil and gas wells, a net operating loss
without the benefit of incentives provided for under Executive Order No.
226, as amended, otherwise known as the Omnibus Investments Code of
1987, incurred in any of the first ten (10) years of operation may be carried
over as a deduction from taxable income for the next five (5) years
immediately following the year of such loss. The entire amount of the loss
shall be carried over to the first of the five (5) taxable years following the
loss, and any portion of such loss which exceeds the taxable income of
such first year shall be deducted in like manner form the taxable income of
the next remaining 4 years.
(4) Capital Losses. -
(a) Limitations. - Loss from sales or Exchanges of capital assets shall be
allowed only to the extent provided in Section 39.
(b) Securities Becoming Worthless. - If securities as defined in Section 22
(T) become worthless during the taxable year and are capital assets, the
loss resulting therefrom shall, for purposes of this Title, be considered as a
loss from the sale or exchange, on the last day of such taxable year, of
capital assets.
(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash
sales' of stock or securities as provided in Section 38.
(6) Wagering Losses. - Losses from wagering transactions shall be
allowed only to the extent of the gains from such transactions.
(7) Abandonment Losses. -
(a) In the event a contract area where petroleum operations are undertaken
is partially or wholly abandoned, all accumulated exploration and
development expenditures pertaining thereto shall be allowed as a
deduction: Provided, That accumulated expenditures incurred in that area
prior to January 1, 1979 shall be allowed as a deduction only from any
income derived from the same contract area. In all cases, notices of
abandonment shall be filed with the Commissioner.
(b) In case a producing well is subsequently abandoned, the un-amortized
costs thereof, as well as the un-depreciated costs of equipment directly
used therein , shall be allowed as a deduction in the year such well,
equipment or facility is abandoned by the contractor: Provided, That if
such abandoned well is re-entered and production is resumed, or if such
equipment or facility is restored into service, the said costs shall be
included as part of gross income in the year of resumption or restoration
and shall be amortized or depreciated, as the case may be.
(E) Bad Debts. -
(1) In General. - Debts due to the taxpayer actually ascertained to be
worthless and charged off within the taxable year except those not
connected with profession, trade or business and those sustained in a
transaction entered into between parties mentioned under Section 36 (B)
of this Code: Provided, That recovery of bad debts previously allowed as
deduction in the preceding years shall be included as part of the gross
income in the year of recovery to the extent of the income tax benefit of
said deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section
22 (T), are ascertained to be worthless and charged off within the taxable
year and are capital assets, the loss resulting therefrom shall, in the case of
a taxpayer other than a bank or trust company incorporated under the
laws of the Philippines a substantial part of whose business is the receipt of
deposits, for the purpose of this Title, be considered as a loss from the sale
or exchange, on the last day of such taxable year, of capital assets.
(F) Depreciation. -
(1) General Rule. - There shall be allowed as a depreciation deduction a
reasonable allowance for the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property used in the trade or
business. In the case of property held by one person for life with remainder
to another person, the deduction shall be computed as if the life tenant
were the absolute owner of the property and shall be allowed to the life
tenant. In the case of property held in trust, the allowable deduction shall
be apportioned between the income beneficiaries and the trustees in
accordance with the pertinent provisions of the instrument creating the
trust, or in the absence of such provisions, on the basis of the trust income
allowable to each.
(2) Use of Certain Methods and Rates. - The term 'reasonable allowance'
as used in the preceding paragraph shall include, but not limited to, an
allowance computed in accordance with rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the Commissioner,
under any of the following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the rate
which would have been used had the annual allowance been computed
under the method described in Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
(d) Any other method which may be prescribed by the Secretary of
Finance upon recommendation of the Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is Based. -
Where under rules and regulations prescribed by the Secretary of Finance
upon recommendation of the Commissioner, the taxpayer and the
Commissioner have entered into an agreement in writing specifically
dealing with the useful life and rate of depreciation of any property, the
rate so agreed upon shall be binding on both the taxpayer and the national
Government in the absence of facts and circumstances not taken into
consideration during the adoption of such agreement. The responsibility of
establishing the existence of such facts and circumstances shall rest with
the party initiating the modification. Any change in the agreed rate and
useful life of the depreciable property as specified in the agreement shall
not be effective for taxable years prior to the taxable year in which notice
in writing by certified mail or registered mail is served by the party
initiating such change to the other party to the agreement:
Provided, however, that where the taxpayer has adopted such useful life
and depreciation rate for any depreciable and claimed the depreciation
expenses as deduction from his gross income, without any written
objection on the part of the Commissioner or his duly authorized
representatives, the aforesaid useful life and depreciation rate so adopted
by the taxpayer for the aforesaid depreciable asset shall be considered
binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An
allowance for depreciation in respect of all properties directly related to
production of petroleum initially placed in service in a taxable year shall
be allowed under the straight-line or declining-balance method of
depreciation at the option of the service contractor.
However, if the service contractor initially elects the declining-balance
method, it may at any subsequent date, shift to the straight-line method.
The useful life of properties used in or related to production of petroleum
shall be ten (10) years of such shorter life as may be permitted by the
Commissioner.
Properties not used directly in the production of petroleum shall be
depreciated under the straight-line method on the basis of an estimated
useful life of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. - an
allowance for depreciation in respect of all properties used in mining
operations other than petroleum operations, shall be computed as follows:
(a) At the normal rate of depreciation if the expected life is ten (10) years
or less; or
(b) Depreciated over any number of years between five (5) years and the
expected life if the latter is more than ten (10) years, and the depreciation
thereon allowed as deduction from taxable income: Provided, That the
contractor notifies the Commissioner at the beginning of the depreciation
period which depreciation rate allowed by this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or
Business or Resident Foreign Corporations. - In the case of a nonresident
alien individual engaged in trade or business or resident foreign
corporation, a reasonable allowance for the deterioration of Property
arising out of its use or employment or its non-use in the business trade or
profession shall be permitted only when such property is located in the
Philippines.
(G) Depletion of Oil and Gas Wells and Mines. -
(1) In General. - In the case of oil and gas wells or mines, a reasonable
allowance for depletion or amortization computed in accordance with the
cost-depletion method shall be granted under rules and regulations to be
prescribed by the Secretary of finance, upon recommendation of the
Commissioner. Provided, That when the allowance for depletion shall
equal the capital invested no further allowance shall be granted: Provided,
further, That 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.
'Intangible costs in petroleum operations' refers to any cost incurred in
petroleum operations which in itself has no salvage value and which is
incidental to and necessary for the drilling of wells and preparation of
wells for the production of petroleum: Provided, That said costs shall not
pertain to the acquisition or improvement of property of a character
subject to the allowance for depreciation except that the allowances for
depreciation on such property shall be deductible under this Subsection.
Any intangible exploration, drilling and development expenses allowed as
a deduction in computing taxable income during the year shall not be
taken into consideration in computing the adjusted cost basis for the
purpose of computing allowable cost depletion.
(2) Election to Deduct Exploration and Development Expenditures. - In
computing taxable income from mining operations, the taxpayer may at
his option, deduct exploration and development expenditures accumulated
as cost or adjusted basis for cost depletion as of date of prospecting, as well
as exploration and development expenditures paid or incurred during the
taxable year: Provided, That the 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.
The election by the taxpayer to deduct the exploration and development
expenditures is irrevocable and shall be binding in succeeding taxable
years.
'Net income from mining operations', as used in this Subsection, shall mean
gross income from operations less 'allowable deductions' which are
necessary or related to mining operations. 'Allowable deductions' shall
include mining, milling and marketing expenses, and depreciation of
properties directly used in the mining operations. This paragraph shall not
apply to expenditures for the acquisition or improvement of property of a
character which is subject to the allowance for depreciation.
In no case shall this paragraph apply with respect to amounts paid or
incurred for the exploration and development of oil and gas.
The term 'exploration expenditures' means expenditures paid or incurred for
the purpose of ascertaining the existence, location, extent or quality of any
deposit of ore or other mineral, and paid or incurred before the beginning
of the development stage of the mine or deposit.
The term 'development expenditures' means expenditures paid or incurred
during the development stage of the mine or other natural deposits. The
development stage of a mine or other natural deposit shall begin at the
time when deposits of ore or other minerals are shown to exist in sufficient
commercial quantity and quality and shall end upon commencement of
actual commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a
Nonresident Alien individual or Foreign Corporation. - In the case of a
nonresident alien individual engaged in trade or business in the
Philippines or a resident foreign corporation, allowance for depletion of oil
and gas wells or mines under paragraph (1) of this Subsection shall be
authorized only in respect to oil and gas wells or mines located within the
Philippines.
(H) Charitable and Other Contributions. -
(1) In General. - Contributions or gifts actually paid or made within the
taxable year to, or for the use of the Government of the Philippines or any
of its agencies or any political subdivision thereof exclusively for public
purposes, or to accredited domestic corporation or associations organized
and operated exclusively for religious, charitable, scientific, youth and
sports development, cultural or educational purposes or for the
rehabilitation of veterans, or to social welfare institutions, or to non-
government organizations, in accordance with rules and regulations
promulgated by the Secretary of finance, upon recommendation of the
Commissioner, no part of the net [30] income of which inures to the benefit
of any private stockholder or individual in an amount not in excess of ten
percent (10%) in the case of an individual, and five percent (%) in the case
of a corporation, of the taxpayer's taxable income derived from trade,
business or profession as computed without the benefit of this and the
following subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the provisions of
the preceding subparagraph, donations to the following institutions or
entities shall be deductible in full:
(a) Donations to the Government. - Donations to the Government of the
Philippines or to any of its agencies or political subdivisions, including
fully-owned government corporations, exclusively to finance, to provide
for, or to be used in undertaking priority activities in education, health,
youth and sports development, human settlements, science and culture,
and in economic development according to a National Priority Plan
determined by the National Economic and Development Authority
(NEDA), In consultation with appropriate government agencies, including
its regional development councils and private philanthropic persons and
institutions: Provided, That any donation which is made to the
Government or to any of its agencies or political subdivisions not in
accordance with the said annual priority plan shall be subject to the
limitations prescribed in paragraph (1) of this Subsection;
(b) Donations to Certain Foreign Institutions or International
Organizations. - donations to foreign institutions or international
organizations which are fully deductible in pursuance of or in compliance
with agreements, treaties, or commitments entered into by the
Government of the Philippines and the foreign institutions or international
organizations or in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations. -The term
'nongovernment organization' means a non-profit domestic corporation:
(1) Organized and operated exclusively for scientific, research,
educational, character-building and youth and sports development, health,
social welfare, cultural or charitable purposes, or a combination thereof,
no part of the net [31] income of which inures to the benefit of any private
individual;
(2) Which, not later than the 15th day of the third month after the close of
the accredited nongovernment organizations taxable year in which
contributions are received, makes utilization directly for the active conduct
of the activities constituting the purpose or function for which it is
organized and operated, unless an extended period is granted by the
Secretary of Finance in accordance with the rules and regulations to be
promulgated, upon recommendation of the Commissioner;
(3) The level of administrative expense of which shall, on an annual basis,
conform with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, but in no case to
exceed thirty percent (30%) of the total expenses; and
(4) The assets of which, in the event of dissolution, would be distributed to
another non-profit domestic corporation organized for similar purpose or
purposes, or to the state for public purpose, or would be distributed by a
court to another organization to be used in such manner as in the
judgment of said court shall best accomplish the general purpose for which
the dissolved organization was organized.
Subject to such terms and conditions as may be prescribed by the Secretary
of Finance, the term 'utilization' means:
(i) Any amount in cash or in kind (including administrative expenses)
paid or utilized to accomplish one or more purposes for which the
accredited nongovernment organization was created or organized.
(ii) Any amount paid to acquire an asset used (or held for use) directly in
carrying out one or more purposes for which the accredited
nongovernment organization was created or organized.
An amount set aside for a specific project which comes within one or more
purposes of the accredited nongovernment organization may be treated as
a utilization, but only if at the time such amount is set aside, the accredited
nongovernment organization has established to the satisfaction of the
Commissioner that the amount will be paid for the specific project within
a period to be prescribed in rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner, but not
to exceed five (5) years, and the project is one which can be better
accomplished by setting aside such amount than by immediate payment of
funds.
(3) Valuation. - The amount of any charitable contribution of property
other than money shall be based on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as
deductions only if verified under the rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner.
(I) Research and Development. -
(1) In General. - A taxpayer may treat research or development
expenditures which are paid or incurred by him during the taxable year in
connection with his trade, business or profession as ordinary and
necessary expenses which are not chargeable to capital account. The
expenditures so treated shall be allowed as deduction during the taxable
year when paid or incurred.
(2) Amortization of Certain Research and Development Expenditures. -
At the election of the taxpayer and in accordance with the rules and
regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, the following research and
development expenditures may be treated as deferred expenses:
(a) Paid or incurred by the taxpayer in connection with his trade, business
or profession;
(b) Not treated as expenses under paragraph (1) hereof; and
(c) Chargeable to capital account but not chargeable to property of a
character which is subject to depreciation or depletion.
In computing taxable income, such deferred expenses shall be allowed as
deduction ratably distributed over a period of not less than sixty (60)
months as may be elected by the taxpayer (beginning with the month in
which the taxpayer first realizes benefits from such expenditures).
The election provided by paragraph (2) hereof may be made for any
taxable year beginning after the effectivity of this Code, but only if made
not later than the time prescribed by law for filing the return for such
taxable year. The method so elected, and the period selected by the
taxpayer, shall be adhered to in computing taxable income for the taxable
year for which the election is made and for all subsequent taxable years
unless with the approval of the Commissioner, a change to a different
method is authorized with respect to a part or all of such expenditures.
The election shall not apply to any expenditure paid or incurred during
any taxable year for which the taxpayer makes the election.
(3) Limitations on Deduction. - This Subsection shall not apply to:
(a) Any expenditure for the acquisition or improvement of land, or for the
improvement of property to be used in connection with research and
development of a character which is subject to depreciation and depletion;
and
(b) Any expenditure paid or incurred for the purpose of ascertaining the
existence, location, extent, or quality of any deposit of ore or other
mineral, including oil or gas.
(J) Pension Trusts. - An employer establishing or maintaining a pension
trust to provide for the payment of reasonable pensions to his employees
shall be allowed as a deduction (in addition to the contributions to such
trust during the taxable year to cover the pension liability accruing during
the year, allowed as a deduction under Subsection (A)(1) of this Section) a
reasonable amount transferred or paid into such trust during the taxable
year in excess of such contributions, but only if such amount (1)has not
theretofore been allowed as a deduction, and (2) is apportioned in equal
parts over a period of ten (10) consecutive years beginning with the year in
which the transfer or payment is made.
(K) Additional Requirements for Deductibility of Certain Payments. -
Any amount paid or payable which is otherwise deductible from, or taken
into account in computing gross income or for which depreciation or
amortization may be allowed under this Section, shall be allowed as a
deduction only if it is shown that the tax required to be deducted and
withheld therefrom has been paid to the Bureau of Internal Revenue in
accordance with this Section 58 and 81 of this Code.
(L) Optional Standard Deduction (OSD). - In lieu of the deductions
allowed under the preceding Subsections, an individual subject to tax
under Section 24, other than a nonresident alien, may elect a standard
deduction in an amount not exceeding forty percent (40%) of his gross
sales or gross receipts, as the case maybe. In the case of a corporation
subject to tax under Sections 27(A) and 28 (A)(1), it may elect a standard
deduction in an amount not exceeding forty percent (40%) of its gross
income as defined in Section 32 of this Code. Unless the taxpayer signifies
in his return his intention to elect the optional standard deduction, he shall
be considered as having availed himself of the deductions allowed in the
preceding Subsections. Such election when made in the return shall be
irrevocable for the taxable year for which the return is made: Provided,
That an individual who is entitled to and claimed for the optional standard
deduction shall not be required to submit with his tax return such financial
statements otherwise required under this Code: Provided, further, That
except when the Commissioner otherwise permits, the said individual
shall keep such records pertaining to his gross sales or gross receipts, or the
said corporation shall keep such records pertaining to his gross income as
defined in Section 32 of this Code during the taxable year, as may be
required by the rules and regulations promulgated by the Secretary of
Finance, upon, recommendation of the Commissioner. [32]
(M) Premium Payments on Health and/or Hospitalization Insurance of
an Individual Taxpayer. - the amount of premiums not to exceed -P2,400
per family or P200 a month paid during the taxable year for health and/or
hospitalization insurance taken by the taxpayer for himself, including his
family, shall be allowed as a deduction from his gross income: Provided,
That said family has a gross income of not more than P250,000 for the
taxable year: Provided, finally, That in the case of married taxpayers, only
the spouse claiming the additional exemption for dependents shall be
entitled to this deduction.
Notwithstanding the provision of the preceding Subsections, The Secretary
of Finance, upon recommendation of the Commissioner, after a public
hearing shall have been held for this purpose, may prescribe by rules and
regulations, limitations or ceilings for any of the itemized deductions
under Subsections (A) to (J) of this Section: Provided, That for purposes of
determining such ceilings or limitations, the Secretary of Finance shall
consider the following factors: (1) adequacy of the prescribed limits on the
actual expenditure requirements of each particular industry; and (2)effects
of inflation on expenditure levels: Provided, further, That no ceilings shall
further be imposed on items of expense already subject to ceilings under
present law.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
(A) In General. - For purposes of determining the tax provided in Section
24 (A) of this Title, there shall be allowed a basic personal exemption
amounting to P50k for each individual taxpayer.
In the case of married individuals where only one of the spouses is
deriving gross income, only such spouse shall be allowed the personal
exemption.
(B) Additional Exemption for Dependents. - There shall be allowed an
additional exemption of P25k for each dependent not exceeding 4.
(dependents <4)
The additional exemption for dependent shall be claimed by only one of
the spouses in the case of married individuals.
In the case of legally separated spouses, additional exemptions may be
claimed only by the spouse who has custody of the child or children:
Provided, That the total amount of additional exemptions that may be
claimed by both shall not exceed the maximum additional exemptions
herein allowed.
For purposes of this Subsection, a 'dependent' means a legitimate,
illegitimate or legally adopted child chiefly dependent upon and living
with the taxpayer if such dependent is not more than 21 years of age,
unmarried and not gainfully employed or if such dependent, regardless of
age, is incapable of self-support because of mental or physical defect.
(<21 years old)
(C) Change of Status. - If the taxpayer marries or should have additional
dependent(s) as defined above during the taxable year, the taxpayer may
claim the corresponding additional exemption, as the case may be, in full
for such year.
If the taxpayer dies during the taxable year, his estate may still claim the
personal and additional exemptions for himself and his dependent(s) as if
he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents
marries, becomes 21 years old or becomes gainfully employed during the
taxable year, the taxpayer may still claim the same exemptions as if the
spouse or any of the dependents died, or as if such dependents married,
became 21 years old or became gainfully employed at the close of such
year.
(D) Personal Exemption Allowable to Nonresident Alien Individual. -
A nonresident alien individual engaged in trade, business or in the
exercise of a profession in the Philippines shall be entitled to a personal
exemption in the amount equal to the exemptions allowed in the income
tax law in the country of which he is a subject - or citizen, to citizens of the
Philippines not residing in such country, not to exceed the amount fixed in
this Section as exemption for citizens or resident of the Philippines:
Provided, That said nonresident alien should file a true and accurate
return of the total income received by him from all sources in the
Philippines, as required by this Title.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SEC. 36. Items not Deductible. -
(A) General Rule. - In computing net income, no deduction shall in any
case be allowed in respect to -
(1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of any property
or estate;
This Subsection shall not apply to intangible drilling and development
costs incurred in petroleum operations which are deductible under
Subsection (G) (1) of Section 34 of this Code.
(3) Any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering the life of any
officer or employee, or of any person financially interested in any trade or
business carried on by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under such policy.
(B) Losses from Sales or Exchanges of Property. - In computing net
income, no deductions shall in any case be allowed in respect of losses
from sales or exchanges of property directly or indirectly -
(1) Between members of a family. For purposes of this paragraph, the
family of an individual shall include only his brothers and sisters (whether
by the whole or half-blood), spouse, ancestors, and lineal descendants; or
(2) Except in the case of distributions in liquidation, between an individual
and corporation more than 50% in value of the outstanding stock of which
is owned, directly or indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between two
corporations more than 50% in value of the outstanding stock of which is
owned, directly or indirectly, by or for the same individual if either one of
such corporations, with respect to the taxable year of the corporation
preceding the date of the sale of exchange was under the law applicable to
such taxable year, a personal holding company or a foreign personal
holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary
of another trust if the same person is a grantor with respect to each trust;
or
(6) Between a fiduciary of a trust and beneficiary of such trust.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
RA 10028 Expanded Breastfeeding Promotion Act of 2009
Section 3. Section 3 of Republic Act No. 7600 is hereby amended to read
as follows:
"Sec. 3. Definition of Terms. - For purposes of this Act, the following
definitions are adopted: xxx
"j) Health institutions - are hospitals, health infirmaries, health
centers, lying-in centers, or puericulture centers with obstetrical
and pediatric services.
"t) Non-health facilities, establishment or institution - public places and
working places, as defined in subparagraphs (u) and (y),
respectively.
"u) Public place - enclosed or confined areas such as schools, public
transportation terminals, shopping malls, and the like.
"y) Workplace - work premises, whether private enterprises or
government agencies, including their subdivisions,
instrumentalities and government-owned and -controlled
corporations.
Section 14. Section 13 of Republic Act No. 7600 is hereby renumbered
and amended to read as follows:
"Sec. 19. Incentives. - The expenses incurred by a private health and non-
health facility, establishment or institution, in complying with the
provisions of this Act, shall be deductible expenses for income tax
purposes up to twice the actual amount incurred: Provided, That the
deduction shall apply for the taxable period when the expenses were
incurred: Provided, further, That all health and non-health facilities,
establishments and institutions shall comply with the provisions of this Act
within 6 months after its approval: Provided, finally, That such facilities,
establishments or institutions shall secure a "Working Mother-Baby-
Friendly Certificate" from the Department of Health to be filed with the
Bureau of Internal Revenue, before they can avail of the incentive.
"Government facilities, establishments or institutions shall receive an
additional appropriation equivalent to the savings they may derive as a
result of complying with the provisions of this Act. The additional
appropriation shall be included in their budget for the next fiscal year."
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
RA 8502 Jewelry Industry Development Act of 1998
Section 2. Declaration of policy. Recognizing that the jewelry industry
has the potential for more employment generation, enhance tax collection
efficiency, increase the industry linkages with the other sectors of the
economy, and to increase our foreign exchange earnings through exports
and import substitutes, it is hereby declared to be the policy of the State to
support, promote and encourage the growth and development of the
predominantly, small and medium scale jewelry industries. Toward this
end, the State shall undertake to encourage the development of the jewelry
industry:
a) by promoting and encouraging local jewelers to join the formal sector
by making the jewelry industry sector a partner in the task of building
up the small and medium enterprises through the establishment of an
adequate support structure and the creation of a business environment
conducive to the viability, legalization and development of the jewelry
sector;
b) by adopting appropriate tax incentives and programs necessary for the
acceleration and growth of the industry; and
c) by promoting and institutionalizing the effective promotion and
participation of associations of the jewelry industry and cooperatives
particularly in the advancement of the skills and craftsmanship of
Filipino workers therein.
Section 3. Development incentives. The following incentives shall be
available to qualified jewelry enterprises in the jewelry industry:
a) Entitlement to zero duty on imported raw materials which include
precious metals, loose gems, precious stones, jewelry parts, accessories
and supplies for use by jewelry enterprise, as specifically mentioned in
 Chapter 5 of Sec. I, Chapter 12 of Sec. II, Chapters 25, 26 and 27 of
Sec. V, Chapters 28, 34 and 38 of Sec. VI, Chapter 70 of Sec. XIII,
Chapter 71 of Sec. XIV, Chapter 83 of Sec. XV, and Chapter 96 of
Sec. XX of the Tariff and Customs Code, as amended;
b) Exemption from the imposition of excise tax on all goods commonly
or commercially known as jewelry, whether real or imitation pearls,
precious and semi-precious stones and imitations thereof; all goods
made of, or ornamented, mounted or fitted with precious metals or
imitations thereof, as specifically mentioned in Sec. 150(a) of the
National Internal Revenue Code of the Philippines, as amended;
c) Entitlement to zero duty on imported capital equipment, including
spare parts and toolings thereof falling within Chapter 69 of Sec. XIII,
Chapter 82 of Sec. XV, Chapters 84 and 85 of Sec. XVI, and Chapter
90 of Sec. XVIII of the Tariff and Customs Code, as amended;
d) Additional deduction from taxable income of 50% of expenses
incurred in training schemes approved by the appropriate agency and
which shall be deductible during the financial year the expenses were
incurred;
e) Gold and silver sales by the Bangko Sentral ng Pilipinas to jewelry
enterprises wider minimal margins;
f) Authority for jewelry enterprises to buy gold and silver directly from
other sources
g) Inclusion of locally-manufactured jewelry in the government's tourist
duty free shops including the promotion, advertisement and sale
thereof; and
h) Jewelry enterprises availing of incentives provided under this Act
shall still be eligible to incentives provided by other special laws such
as Republic Act No. 7844 (Export Development Act of 1994), Republic
Act No. 7916 (Special Economic Zone Act of 1995), Executive Order
226 (BOI Omnibus Investments Code), among others: Provided, That the
activity is export-oriented and that there is no double availment of the
same incentives.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
RA 8525 ADOPT-A-SCHOOL ACT OF 1998
Section 1. Title. This Act shall be known and cited as the "Adopt-a-
School Act of 1998."
Section 2. Declaration of policy. It is the policy of the State to provide
quality and relevant education to the Filipino youth and to encourage
private initiative to support public education. Towards this end, the State
shall institute programs to encourage private companies and enterprises to
help in the upgrading and modernization of public schools in the country,
particularly those in poverty-stricken provinces.
Section 3. Adopt-a-School Program. There is hereby established
the "Adopt-a-School Program" which will allow private entities to assist a
public school, whether elementary, secondary, or tertiary, preferably
located in any of the 20 poorest provinces identified by the Presidential
Council for Countryside Development or any other government agency
tasked with identifying the poorest provinces in, but not limited to, the
following areas: staff and faculty development for training and further
education; construction of facilities; upgrading of existing facilities,
provision of books, publications and other instructional materials; and
modernization of instructional technologies.
A Memorandum of Agreement (MOA) specifying the details of the
adoption shall be entered into between the adopting entity and the head of
the school concerned: Provided, That such MOA shall be subject to review
and approval of the Superintendent of Schools of the province or district
concerned: Provided, further, That the agreement shall last for at least 2
years with the possibility of extension: Provided, finally, That such period
may be shortened only in cases where the adopting entity is dissolved
before the end of such period unless otherwise earlier terminated in
accordance with the succeeding Sec..
Section 4. Periodic review. A review of the adoption shall be undertaken
by the local school board of the province or city where the school is
located. The standards and guidelines for the review shall be formulated
by the Coordinating Council created under Sec. 7 hereof. The results of
the review shall be taken into consideration in the assessment of the
application for tax credits by the adopting entity. The school board may,
after an appropriate review, recommend to the Coordinating Council the
termination of the adoption. The adopting entity may appeal the
assessment to the Coordinating Council whose decision shall be final and
unappealable.

Section 5. Additional deduction for expenses incurred for the adoption.
Provisions of existing laws to the contrary notwithstanding, expenses
incurred by the adopting entity for the "Adopt-A-School Program" shall be
allowed an additional deduction from the gross income equivalent to 50%
of such expenses.
Valuation of assistance other than money shall be based on the acquisition
cost of the property. Such valuation shall take into consideration the
depreciated value of the property in case said property has already been
used.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
RA 9999 FREE LEGAL ASSISTANCE ACT OF 2010
Section 4. Requirements for Availment. - For purposes of availing of the
benefits and services as envisioned in this Act, a lawyer or professional
partnership shall secure a certification from the Public Attorney's Office
(PAO), the Department of Justice (DOJ) or accredited association of the
Supreme Court indicating that the said legal services to be provided are
within the services defined by the Supreme Court, and that the agencies
cannot provide the legal services to be provided by the private counsel.
For purpose of determining the number of hours actually provided by the
lawyer and/or professional firm in the provision of legal services, the
association and/or organization duly accredited by the Supreme Court
shall issue the necessary certification that said legal services were actually
undertaken.
The certification issued by, among others, the PAO, the DOJ and other
accredited association by the Supreme Court shall be submitted to the
Bureau of Internal Revenue (BIR) for purposes of availing the tax
deductions as provided for in this Act and to the DOJ for purposes of
monitoring.
Section 5. Incentives to Lawyers. - For purposes of this Act, a lawyer or
professional partnerships rendering actual free legal services, as defined by
the Supreme Court, shall be entitled to an allowable deduction from the
gross income, the amount that could have been collected for the actual
free legal services rendered or up to 10% of the gross income derived
from the actual performance of the legal profession, whichever is lower:
Provided, That the actual free legal services herein contemplated shall be
exclusive of the minimum 60-hour mandatory legal aid services rendered
to indigent litigants as required under the Rule on Mandatory Legal Aid
Services for Practicing Lawyers, under BAR Matter No. 2012, issued by
the Supreme Court.
Section 6. Information, Education and Communication (IEC) Campaign. - The
DOJ, in cooperation with the Philippine Information Agency (PIA), is
hereby mandated to conduct an annual IEC campaign in order to inform
the lawyers of the procedures and guidelines in availing tax deductions
and inform the general public that a free legal assistance to those who
cannot afford counsel is being provided by the State.1av
Section 8. Implementing Rules and Regulations (IRR). - Within ninety (90)
days from the date effectivity of this Act, the BIR shall formulate the
necessary revenue regulations for the proper implementation of the tax
component as envisioned in this Act.
The Supreme Court shall formulate the necessary implementing rules and
regulations with respect to the legal services covered under this Act and
the process of accreditation of organizations and/or associations which
will provide free legal assistance.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
CIR v. Isabela Cultural Corporation
FACTS
Isabela Cultural Corporation (ICC), a domestic corp, received from the
CIR an assessment letter demanding payment of the amounts of P333k+
and P4k+ as deficiency income tax and expanded withholding tax
inclusive of surcharge and interest, respectively, for the 1986.
ICC requested reconsideration in a letter. However, it received a final
notice before seizure demanding payment of the amounts stated in the
said notices.
ICC thus filed a petition for review w/ CTA.
CTA rendered a decision canceling and setting aside the assessment
notices issued against ICC. It held that the claimed deductions for
professional and security services were properly claimed by ICC in 1986
because it was only in the said year when the bills demanding payment
were sent to ICC.
 Hence, even if some of these professional services were rendered to ICC
in 1984 or 1985, it could not declare the same as deduction for the said
years as the amount thereof could not be determined at that time.
CTA also held that ICC did not understate its interest income on the subject
promissory notes. It found that it was the BIR which made an overstatement of
said income when it compounded the interest income receivable by ICC from the
promissory notes of Realty Investment, Inc., despite the absence of a stipulation
in the contract providing for a compounded interest; nor of a circumstance, like
delay in payment or breach of contract, that would justify the application of
compounded interest.
CA affirmed this.
ISSSUES:
W/n CA correctly:
(1) sustained the deduction of the expenses for professional and security
services from ICCs gross income; and
(2) held that ICC did not understate its interest income from the
promissory notes of Realty Investment, Inc; and that ICC withheld the
required 1% withholding tax from the deductions for security services.
RATIO:
YES.
The requisites for the deductibility of ordinary and necessary trade,
business, or professional expenses, like expenses paid for legal and
auditing services, are:
o (a) the expense must be ordinary and necessary;
o (b) it must have been paid or incurred during the taxable year;
o (c) it must have been paid or incurred in carrying on the trade or
business of the taxpayer; and
o (d) it must be supported by receipts, records or other pertinent papers
Accounting methods for tax purposes comprise a set of rules for
determining when and how to report income and deductions. In the
instant case, the accounting method used by ICC is the accrual method.
The accrual method relies upon the taxpayers right to receive amounts
or its obligation to pay them, in opposition to actual receipt or payment,
which characterizes the cash method of accounting. Amounts of income
accrue where the right to receive them become fixed, where there is
created an enforceable liability. Similarly, liabilities are accrued when
fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.
For a taxpayer using the accrual method, the determinative question is,
when do the facts present themselves in such a manner that the taxpayer
must recognize income or expense? The accrual of income and expense
is permitted when the all-events test has been met. This test requires: (1)
fixing of a right to income or liability to pay; and (2) the availability of
the reasonable accurate determination of such income or liability.
The propriety of an accrual must be judged by the facts that a taxpayer
knew, or could reasonably be expected to have known, at the closing of
its books for the taxable year. Accrual method of accounting presents
largely a question of fact; such that the taxpayer bears the burden of
proof of establishing the accrual of an item of income or deduction.
In this case, the expenses for professional fees consist of expenses for
legal and auditing services. The expenses for legal services pertain to the
1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of
the expenses of said firm in connection with ICCs tax problems for the
year 1984.
As testified by the Treasurer of ICC, the firm has been its counsel since
the 1960s. From the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be expected to have
reasonably known the retainer fees charged by the firm as well as the
compensation for its legal services. The failure to determine the exact
amount of the expense during the taxable year when they could have
been claimed as deductions cannot thus be attributed solely to the
delayed billing of these liabilities by the firm.
For one, ICC, in the exercise of due diligence could have inquired into
the amount of their obligation to the firm, especially so that it is using
the accrual method of accounting. For another, it could have reasonably
determined the amount of legal and retainer fees owing to its familiarity
with the rates charged by their long time legal consultant.
In the same vein, the professional fees of SGV & Co. for auditing the
financial statements of ICC for the year 1985 cannot be validly claimed
as expense deductions in 1986. This is so because ICC failed to present
evidence showing that even with only "reasonable accuracy," as the
standard to ascertain its liability to SGV & Co. in the year 1985, it
cannot determine the professional fees which said company would
charge for its services.
 ICC thus failed to discharge the burden of proving that the claimed
expense deductions for the professional services were allowable
deductions for the taxable year 1986
Decision of BIR to not grant legal and auditing services as deductible
expenses is held VALID.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
ING BANK v. CIR
ING Bank accrued bonuses in the taxable years 1996 and 1997. It
recorded such bonuses as deductible in its books; although no withholding
taxes were withheld in the year of accrual.
The taxpayer was then assessed for deficiency withholding taxes in the
year of accrual. Taxpayer maintained that the liability of the employer to
withhold the tax does not arise until such bonus is actually distributed,
citing Section 72 of the 1977 NIRC which states that every employer
making payment of wages shall deduct and withhold upon such wages.
Since the supposed bonuses were not distributed to the officers and
employees in 1996 and 1997 but were distributed in the succeeding year
when the amounts of bonuses were finally determined, taxpayer asserts
that its duty to withhold tax during those years did not arise. The Court
agrees with the assessment. The Court ruled that the taxpayer is liable for
the withholding tax on the bonuses since it claimed the same as expense in
the year they were accrued. It obligation to withhold the related
withholding tax on such accrued bonuses arose at the time of accrual and
not at the time of actual payment. The obligation of the payor/employer
to deduct and withhold the related withholding tax arises at the time the
income was paid or accrued or recorded as expense in the
payors/employers books, whichever comes first.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
CIR v. General Foods
G.R. No. 143672, April 4, 2003
Facts:
General Foods, Inc. is a corporation engaged in the manufacture of
beverages such as Tang, Calumet and Kool-Aid. It filed its income advertising designed to stimulate future sale. 2nd type involves
tax return for the fiscal year ending February 28, 1985. GF claimed as
deduction, among others, the amount of P9,461,246 for media advertising
of Tang. The Commissioner disallowed 50% or P4,730,623 of the
deduction claimed by GF. Consequently, GF was assessed deficiency
income taxes in the amount of P2,635,141.42. GF appealed to the CTA
but it was dismissed on the ground that such expenditure was incurred to
create or maintain some form of good will for the taxpayers trade or
business and not an ordinary expense.
Issue: Whether or not the subject media advertising expense for Tang
incurred by the respondent corporation was an ordinary and necessary
expense fully deductible under the NIRC?
Held:
No. It was a capital expenditure.
Deductions for income tax purposes partake of the nature of tax
exemptions; hence, must be strictly construed. To be deductible from gross
income, the subject advertising expense must be ordinary and necessary.
There being no hard and fast rule on the reasonableness of an advertising
expense, the right to a deduction depends on a number of factors such as
but not limited to: the type and size of business in which the taxpayer is
engaged; the volume and amount of its net earnings; the nature of the
expenditure itself; the intention of the taxpayer and the general economic
conditions.
The amount claimed as media advertising expense for Tang alone was
almost one-half of its total claim for marketing expenses. It was almost
double the amount of the corporations general and administrative
expenses. The subject expense for the ad of a single product is inordinately
large. Said venture of respondent to protect its brand franchise was
tantamount to efforts to establish a reputation, and should not, therefore,
be considered as business expense but as capital expenditure, which
normally should be spread out over a reasonable period of time.
Advertising is of 2 kinds: (1) advertising to stimulate current sale and (2)
expenditures incurred to create or maintain some form of goodwill for
taxpayers trade/business. If expenditures are of 1st kind, deductible as
business expenses. If 2nd kind, they are normally spread out over a
reasonable period of time.
Protection of brand franchise is analogous to the maintenance of goodwill
or title to ones property. This is a capital expenditure which is spread out
over a reasonable period of time.
GF to pay assessment made by CIR.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
AGUINALDO INDUSTRIES CORPORATION v. CIR
FACTS
Aguinaldo Industries Corp. was engaged in two lines of business: the
manufacture of fishing nets, handled by its Fish Net Division, and the
manufacture of furniture, which in turn was handled by its Furniture
Division.
For accounting purposes, each division kept separate books of accounts
as required by the Department of Finance. The net incomes for the Fish
Net Division and the Furniture Division were computed separately.
Aguinaldo Industries had previously acquired land in Muntinlupa for its
fishing net factory, but when it acquired more suitable land for the
purpose, it sold the Muntinlupa property for a profit, which was entered
in its books as miscellaneous income as distinguished from its tax
exempt income.
In 1951, Aguinaldo Industries filed separate returns for its fishing and
furniture divisions.
The BIR investigating officers found that AIC Fish Net deducted from
its gross income the amount of 61k as additional renumeration paid to
the officers of Aguinaldo Industries.
The examiner found that this money was taken from the sale of the
Muntinlupa property, an isolated transaction not in the usual course of
business. Thus, the examiner recommended that the amount be
disallowed as a deduction.
AIC contends that the money was paid as an allowance or bonus to its
officers as provided in its by-laws (20% of profit of business will go to
President, VP, Board members, Secretary, Gen. Manager and Asst. Gen
Managers.
CTA upheld the CIRs decision and held Aguinaldo Industries liable for
17k in back taxes.
AIC argues that the profit derived from the sale of the Muntinlupa land
is not taxable for it is tax exempt under RA 901 as a new and necessary
industry since Fish Netting is a new and necessary industry.
ISSUE:
W/n the bonus given to Aguinaldos officers was an ordinary and
necessary business expense and therefore deductible
RATIO:
No, it was not deductible.
The records show that the sale was carried out through a broker who
was paid a commission, thus the broker was the one who rendered the
actual services. There is no evidence of any service rendered by the
officer which would have been the basis of such bonus.
In computing net income, there shall be allowed as deductions all
ordinary and necessary expenses paid or incurred during the taxable
year in carrying on any trade or business including reasonable
allowances for personal services actually incurred.
In the basis of the forgoing standard, the bonus cannot be deemed as a
deductible expense for tax purposes, even though the sale could be
classified as a transaction for carrying on the trade or business of the
corporation.
There is no actual evidence that the officers actually rendered some
service in the perfection of the sal
For bonuses to be deductible it must answer two questions:
o First, has personal service actually been rendered by the officers?
o Second, if so, is it a reasonable allowance therefore?
In this case, the shares in the profit were extraordinary and unusual
expenses and as such, cannot be deemed as necessary expenses.
Aguinaldo was also held liable to pay surcharge and interest on the back
taxes.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
ATLAS CONSOLIDATED MINING DEVELOPMENT CORP v. CIR
ATLAS CONSOLIDATED VS. CIR
Facts
Arose from the 1957 and 1958 deficiency income tax assessments made by
the Commissioner, where Atlas, was assessed P546,295.16 for 1957 and
P215,493.96 for 1958 deficiency income taxes.
It was the opinion of the Commissioner that Atlas is not entitled to
exemption from the income tax under Section 4 of Republic Act
909 1 because same covers only gold mines.
The Secretary of Finance ruled that the exemption provided in Republic
Act 909 embraces all new mines and old mines whether gold or other
minerals. Atlas conceded but appealed the decision stating that the P25k
they paid to PK Macker was not deductible.
ISSUE:
W/N the amount of P25,523.14 paid in 1958 as annual public relations
expenses is a deductible expense from gross income under Section 30 (a)
(1) of the National Internal Revenue Code?
HELD:
NO.
Atlas claimed that it was paid for services carrying on the selling campaign
in an effort to sell Atlas' additional capital stock of P3,325,000 of a public
relations firm, P.K Macker & Co., a reputable public relations consultant
in New York City, U.S.A., hence, an ordinary and necessary business
expense.
The principle is recognized that when a taxpayer claims a deduction, he
must point to some specific provision of the statute in which that
deduction is authorized and must be able to prove that he is entitled to the
deduction which the law allows.
We come, then, to the statutory test of deductibility where it is axiomatic
that to be deductible as a business expense, three conditions are imposed,
namely: (1) the expense must be ordinary and necessary, (2) it must be
paid or incurred within the taxable year, and (3) it must be paid or
incurred in carrying in a trade or business.
Necessary" where the expenditure is appropriate and helpful in the
development of the taxpayer's business. 8 It is "ordinary" when it connotes
a payment which is normal in relation to the business of the taxpayer and
the surrounding circumstances. 9 The term "ordinary" does not require that
the payments be habitual or normal in the sense that the same taxpayer
will have to make them often; the payment may be unique or non-
recurring to the particular taxpayer affected.
The said expense is not deductible from Atlas gross income in 1958
because expenses relating to recapitalization and reorganization of the
corporation , the cost of obtaining stock subscription, promotion
expenses and commission or fees paid for the sale of stock reorganization
are capital expenditures.
Efforts to establish reputation are akin to acquisition of c capital assets and
are thus not business expenses but capital expenditures.
CTAs decision not to exempt the promotional services rendered by Pk
Macker are not deductible as ordinary and necessary expenses of Atlas.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
ZAMORA V. CIR
FACTS
Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora,
Manila, filed his income tax returns the years 1951 and 1952. The
Collector of Internal Revenue found that he failed to file his return of the
capital gains derived from the sale of certain real properties and claimed
deductions which were not allowable. The collector required him to pay
the deficiency income tax for the years 1951 and 1952. On appeal by
Zamora, the CTA modified the decision appealed from and ordered him
to pay the reduced total sum of P30,258.00 (P22,980.00 and P7,278.00, as
deficiency income tax for the years 1951 and 1952, respectively), pursuant
to section 51(e), Int. Revenue Code. With costs against petitioner. Having
failed to obtain a reconsideration of the decision, Mariano Zamora
appealed. It is alleged by Mariano Zamora that the CTA erred in
disallowing P10,478.50 as promotion expenses incurred by his wife for the
promotion of the Bay View Hotel and Farmacia Zamora. He contends
that the whole amount of P20,957.00 as promotion expenses in his 1951
income tax returns, should be allowed and not merely one-half of it, on the
ground that, while not all the itemized expenses are supported by receipts,
the absence of some supporting receipts has been sufficiently and
satisfactorily established.
For the said amount was spent by Mrs. Esperanza A. Zamora (wife of
Mariano), during her travel to Japan and the United States to purchase
machinery for a new Tiki-Tiki plant, and to observe hotel management in
modern hotels.
The CTA, however, found that for said trip Mrs. Zamora obtained only
the sum of P5,000.00 from the Central Bank and that in her application for
dollar allocation, she stated that she was going abroad on a combined
medical and business trip, which facts were not denied by Mariano
Zamora. No evidence had been submitted as to where Mariano had
obtained the amount in excess of P5,000.00 given to his wife which she
spent abroad. No explanation had been made either that the statement
contained in Mrs. Zamora's application for dollar allocation that she was
going abroad on a combined medical and business trip, was not correct.
The alleged expenses were not supported by receipts. Mrs. Zamora could
not even remember how much money she had when she left abroad in
1951, and how the alleged amount of P20,957.00 was spent.
Issue:
Whether the CTA erred in (1) disallowing P10,478.50, as promotion
expenses incurred by his wife for the promotion of the Bay View Hotel and
Farmacia Zamora (which is of P20,957.00, supposed business
expenses); (2) disallowing 3-% per annum as the rate of depreciation of
the Bay View Hotel Building
Held:
Petition is dismissed. Decision appealed from is affirmed.
Ratio:
Section 30, of the Tax Code, provides that in computing net income,
there shall be allowed as deductions all the ordinary and necessary
expenses paid or incurred during the taxable year, in carrying on any
trade or business
o Since promotion expenses constitute one of the deductions in
conducting a business, same must testify these requirements. Claims
for the deduction of promotion expenses or entertainment expenses
must also be substantiated or supported by record showing in detail
the amount and nature of the expenses incurred.
o Considering that the application of Mrs. Zamora for dollar allocation
shows that she went abroad on a combined medical and business trip,
not all of her expenses came under the category of ordinary and
necessary expenses; part thereof constituted her personal expenses.
o There having been no means by which to ascertain which expense was
incurred by her in connection with the business of Mariano Zamora
and which was incurred for her personal benefit, the Collector and the
CTA in their decisions, considered 50% of the said amount as
business expenses and the other 50%, as her personal expenses. The
allocation is very fair to Mariano Zamora, there having been no
receipt whatsoever, submitted to explain the alleged business
expenses, or proof of the connection which said expenses had to the
business or the reasonableness. While in situations like the present,
absolute certainty is usually no possible, the CTA should make as
close an approximation as it can, bearing heavily, if it chooses, upon
the taxpayer whose inexactness is of his own making.
Representation expenses fall under the category of business expenses
which are allowable deductions from gross income, if they meet the
conditions prescribed by law, particularly section 30 (a) [1], of the Tax
Code; that to be deductible:
o Business expenses must be ordinary and necessary expenses paid or
incurred in carrying on any trade or business.
o Those expenses must also meet the further test of reasonableness in
amount.
o That when some of the representation expenses claimed by the
taxpayer were evidenced by vouchers or chits, but others were without
vouchers or chits, documents or supporting papers.
 o There is no more than oral proof to the effect that payments have been
made for representation expenses allegedly made by the taxpayer and
about the general nature of such alleged expenses.
o Accordingly, it is not possible to determine the actual amount
covered by supporting papers and the amount without supporting
papers, the court should determine from all available data, the amount
properly deductible as representation expenses.
o In view hereof, the CTA did not commit error in allowing as
promotion expenses of Mrs. Zamora claimed in Mariano Zamora's
1951 income tax returns, merely one-half.
Petitioner Mariano Zamora alleges that the CTA erred in disallowing 3-
% per annum as the rate of depreciation of the Bay View Hotel
Building but only 2-%. In justifying depreciation deduction of 3-%,
Mariano Zamora contends that (1) the Ermita District, where the Bay
View Hotel is located, is now becoming a commercial district; (2) the
hotel has no room for improvement; and (3) the changing modes in
architecture, styles of furniture and decorative designs, "must meet the
taste of a fickle public". It is a fact, however, that the CTA, in estimating
the reasonable rate of depreciation allowance for hotels made of
concrete and steel at 2-%, the three factors just mentioned had been
taken into account already.
o Normally, an average hotel building is estimated to have a useful life
of 50 years, but inasmuch as the useful life of the building for business
purposes depends to a large extent on the suitability of the structure to
its use and location, its architectural quality, the rate of change in
population, the shifting of land values, as well as the extent and
maintenance and rehabilitation.
o It is allowed a depreciation rate of 2-% corresponding to a normal
useful life of only 40 years. Consequently, the stand of the petitioners
cannot be sustained.
CTA decision of only crediting 50% of representation/promotional
expenses and 2 % depreciation rate as deductible items from gross
income AFFIRMED.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
CM HOSKINS v. CIR
November 28, 1969
Fast Facts:
CM Hoskins (company) is a domestic corporation engaged in real estate
as brokers, managing agents and administrators
Hoskins own 99.6% of the shares of the company. Every year, he
receives P45,000 salary and an annual salary bonus P40,000 plus free
use of the company car and receipt of other similar allowances and
benefits. He received an additional sum of P99,977.91 as his equal or
50% share of the 8% supervision fees received by the corporation as
managing agents of Paradise Farms and Realty Ivestments. This
additional sum was deducted from the tax payable.
This was disallowed by the CIR because the additional sum is a
distribution of earnings and profits of the taxpayer. On appeal, the Tax
Court concurred with the CIR and disallowed the deduction because it
was inordinately large and could not be accorded the treatment of an
ordinary and necessary expense; akin to a distribution of its earnings to
a stockholder (dividends).
Issue:
W/N the deduction is allowed.
Doctrine:
No.
1. This is a case of disguised dividends. Deduction was also clearly
excessive.
2.Payment was inordinately large and could not be accorded the treatment
of ordinary and necessary expenses allowed as deductible items within
the purview of the Tax Code. If such payment of P99,977.91 were to be
allowed as a deductible item, then Hoskins would receive on these three
items alone (salary, bonus and supervision fee) a total of P184,977.91,
which would be double the corporation's reported net income for the
year of P92,540.25. If independently, a one-time P100,000.00-fee to plan
and lay down the rules for supervision of a subdivision project were to
be paid to an experienced realtor such as Hoskins, its fairness and
deductibility by the taxpayer could be conceded; but here 50% of the
supervision fee of petitioner was being paid by it to Hoskins every year
since 1955 up to 1963 and for as long as its contract with the subdivision
owner (Paradise Farms and Realty Investments) subsisted, regardless of
whether services were actually rendered by Hoskins, since his services to
petitioner included such planning and supervision and were already
handsomely paid for by petitioner.
3.It is a general rule that 'Bonuses to employees made in good faith and as
additional compensation for the services actually rendered by the
employees are deductible, provided such payments, when added to the
stipulated salaries, do not exceed a reasonable compensation for the
services rendered.
4.There is no fixed test for determining the reasonableness of a given
bonus as compensation. The conditions precedent to the deduction of
bonuses to employees are:
a. the payment of the bonuses is in fact compensation;
b. It must be for personal services actually rendered; and
c. The bonuses, when added to the salaries, are 'reasonable . . . when
measured by the amount and quality of the services performed with
relation to the business of the particular taxpayer'
5.Other tests suggested are:
a. Payment must be 'made in good faith';
b.' the character of the taxpayer's business, the volume and amount of its
net earnings, its locality, the type and extent of the services rendered,
the salary policy of the corporation';
c. 'the size of the particular business';
d. 'the employees' qualifications and contributions to the business
venture'; and
e.'general economic conditions'
6. However, 'in determining whether the particular salary or compensation
payment is reasonable, the situation must be considered as whole.
Ordinarily, no single factor is decisive; ordinarily it is the interplay of
several factors, properly weighted for the particular case, which must
furnish the final answer."
While employer has the right to fix compensation of employees, it is
subject to determination by the CIR. For income tax purposes, the
employer cannot legally claim such bonuses as deductible expenses unless
shown to be reasonable. To hold otherwise would open the gate for
rampant tax evasion.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
CALANOC v. CIR
Facts:
Calanoc financed and promoted a boxing and wrestling exhibition at the
Rizal Memorial Stadium for a charitable purpose. Gross sales from event
amounted to P26,553.00; the expenditures incurred was P25,157.62; and
the net profit turned over to the Social Welfare Commission was only
P1,375.38. Event was to solicit and receive contributions for orphans and
destitute children of Child welfare Workers Club of the Social Welfare
Commission.
Calanoc applied for exemption from payment of amusement tax.
Also BIR also found the following items of expenditures: (a) P461.65 for
police protection; (b) P460.00 for gifts; (c) P1,880.05 for parties; and (d)
several items for representation.
CIR assessed Calanoc of amusement tax (~P7k) cotending that payment
of amusement tax should be had where the net proceeds are not
substantial or where the expenses are exorbitant.
CTA affirmed.
Issue: WON assessment was valid Yes; W/N Calanoc is exempt from
paying amusement tax No.
Doctrine:
Application for exemption from payment of amusement tax will be denied
where the net proceeds of the exhibition conducted for charitable purposes
are not substantial or where the expenses incurred by the taxpayer are
exorbitant.
Calanoc denies having received the stadium fee of P1,000, which is not
included in the receipts. But evidence was submitted that while he did not
receive said stadium fee of P1,000, said amount was paid by the O-SO
Beverages directly to the stadium for advertisement privileges in the
evening of the entertainments. As the fee was paid by said concessionaire,
Calanoc had no right to include the P1,000 stadium fee among the items
of his expenses. It results, therefore, that P1,000 went into Calanocs
pocket which is not accounted for.
The payment of P461.65 for police protection is illegal as it is a
consideration given by Calanoc to the police for the performance by the
latter of the functions required of them to be rendered by law. The
expenditures of P460.00 for gifts, P1,880.05 for parties and other items for
representation are rather excessive, considering that the purpose of the
exhibition was for a charitable cause.
Calanoc cannot justify other expenses since his accountant died.
CTA decision that Calanoc is NOT exempted from amusement tax is
AFFIRMED.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
KUENZLE & STREIFF v. CIR
Facts:
Petitioner is a domestic corporation engaged in the importation of certain
products. Petitioner deducted from its gross income certain items such as
bonuses of resident and non-resident officers.
CIR disallowed deductions and demanded deficiency income taxes.
Petitioner requested for the re-examination. CIR modified the same by
allowing as deductible the directors fees and salaries of the non-resident
President and VP, but disallowing the bonuses insofar as they execeed the
salaries of the recipients. Petitioner appealed questioning measure of
reasonableness of bonuses paid in determinining deductibility.
CTA ruled that bonuses given were quite excessive. No reason to grant
greater bonuses to lower ranking officers.
Issue:
Should determination of reasonableness for bonuses given to resident
officers and employees follow same pattern for determining
reasonableness of bonuses given to non-resident officers in determining
deductibility? YES
More likely issue: Whether payment of bonuses is reasonable?
REASONABLE.
Held:
Bonuses paid to officers and employees of Kuenzle, whether
non/resident were paid to them as additional compensation for personal
services actually rendered (can be considered as ordinary and necessary
expenses).
Nonresident 133 % of annual salaries (1950-51); 125 2/3% (1952)
Resident officers and employees - More
While it may be admitted that the resident officers and employees had
performed their duty well and rendered efficient service and for that
reason were given greater amount of additional compensation in the
form of bonuses than what was given to the non-resident officers. The
reason for this is that, in the opinion of the management itself of the
corporation, said non-resident officers had rendered the same amount of
efficient personal service and contribution to deserve equal treatment in
compensation and other emoluments with the particularity that their
liberation yearly salaries had been much smaller.
The contention of CIR that the trial court erred in allowing the
deduction bonuses in excess of the yearly salaries of their respective
recipients predicated upon his own decision that the deductible amount
of said bonuses should be only equal to their respective yearly salaries
cannot also be sustained. This claim cannot be justified considering the
factors we have already mentioned that play in the determination of the
reasonableness of the bonuses or additional compensation that may be
given to an officer or an employee which, if properly considered,
warrant the payment of the bonuses in question to the extent allowed by
the trial court.
Doctrine:
The condition precedents to the deduction of bonuses to employees are:
(1) the payment of the bonuses is in fact compensation; (2) it must be for
personal services actually rendered; and (3) the bonuses, when added to
the salaries, are reasonable when measured by the amount and quality of
the services performed with relation to the business of the particular
taxpayer.
 There is no fixed test for determining the reasonableness of a given
bonus as compensation. This depends upon many factors. In
determining whether the particular salary or compensation payment is
reasonable, the situation must be considered as a whole.
Bonuses paid > yearly salaries are reasonable because post-war policy of
giving lower salaries, more government control of imports and exports,
use of foreign exchange resulted to loss of profits for corporation.
Also, interest on unclaimed salaries and bonus participation are not the
interest contemplated in law because the latter is interest paid on
indebtedness.
Indebtedness amount which one contracted to pay the use of borrowed
money
Corporation had at all times sufficient funds to pay salaries of
employees.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
RR 10-2002
RR 1-2009
RR 7-2010
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
INTEREST
RA 9337 AMENDMENT
"(B) Interest. -
"(1) In General. - The amount of interest paid or incurred within a
taxable year on indebtedness in connection with the taxpayer's
profession, trade or business shall be allowed as deduction from gross
income: Provided, however, That the taxpayer's otherwise allowable
deduction for interest expense shall be reduced by forty-two percent
(42%) of the interest income subjected to final tax: Provided, That
effective January 1, 2009, the percentage shall be thirty-three percent
(33%).
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
PAPER INDUSTRIES CORPORATION OF THE PHILS. v. CA
Paper Industries Corporation (PICOP) v CA (December 1,
1995)
Fast Facts:
PICOP is a Philippine corp registered with BOI because its a pioneer
enterprise with respect to its integrated pulp and paper mill. Its also a non-
pioneer enterprise with respect to its integrated plywood and veneer mills.
PICOP received from the CIR 2 letters of assessment, the first one for
deficiency transaction tax with documentary and science stamp tax, and
the other for deficiency income tax. Both PICOP and the CIR went to the
CTA, the CA, and eventually to the SC regarding the assessment.
Deficiency income tax ~P1.5M
On the issue related to deductions, the CIR is protesting the following
deductions that PICOP is availing of: (1) net operating losses of another
corporation (Rustan Pulp and Paper Mills, hereinafter RPPM); (2) interest
payments on loans for the purchase of machinery and equipment; and (3)
certain claimed financial guarantees
1st deduction: PICOP entered into a merger with RPPM and Rustan
Manufacturing Corp (RMC) wherein PICOP would be the surviving entity
and everything under RPPM and RMC would be transferred to PICOP.
The merger happened and eventually, RPPM and RMC were dissolved.
Before the merger, RPPM had accumulated losses in the amount of 80M
so when the merger occurred, PICOP claimed 44M of RPPMs
accumulated losses as deduction on its gross income.
2nd deduction: PICOP obtained loans from foreign creditors to finance the
purchase of machinery and equipment so in its 1977 ITR, PICOP claimed
interest payments on such loans. CIR was contending that the interest
payments here should have been capitalized instead of being claimed as a
depreciation deduction.
3rd deduction: The deduction is related to chattel and real estate
mortgages required from PICOP by PNB and DBP as guarantors of loans
incurred by PICOP from foreign creditors.
Issue:
(1) Whether PICOP is entitled to deduct against current income net
operating losses incurred by RPPM.
(2) Whether PICOP is entitled to deduct against current income interest
payments on loans for the purchase of machinery and equipment.
(3) Whether PICOP is entitled to deduct against current income certain
claimed financial guarantee expenses.
Held: (1) NO
(2) YES
(3) NO
Doctrine:
(1) The ordinary rule (ordinary being those applicable to corps not
registered with the Bureau of Investments) is that net operating losses
cannot be carried over. RA 5186 introduced the carry-over of NOLCO
as a special incentive to registered pioneer enterprises and only with
respect to their registered operations. PICOP is registered under the BOI
but it is claiming losses of another enterprise with operations that are
different from it. In effect, to grant PICOP's claimed deduction would be
to permit it to purchase a tax deduction and RPPM to peddle its
accumulated operating losses.
(2) Interest payments on loans are allowed by the NIRC as deductions
against the taxpayers gross income. The general rule is that interest
expenses are deductible against gross income and this certainly includes
interest paid under loans incurred in connection with the carrying on of
the business of the taxpayer. The taxpayer is neither prohibited from
deducting the interest on a loan on their income nor does it impose upon
the taxpayer the option to capitalize the cost basis of the capital assets
(machinery and equipment), which the CIR insists on this scenario. CIR
was not able to point to any provision that requires the disallowance of
the interest payments made by PICOP.
(3) PICOP failed to prove the entitlement to the deduction as there is no
receipt to evidence its payments.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
CIR v. VDA DE PRIETO
(September 30, 1960)
FACTS
Consuelo Vda. de Prieto conveyed by way of gifts to her 4 children real
property with a total assessed value of P892,497.50. After the filing of the
gift tax returns, CIR appraised the real property donated for gift tax
purposes at P1,231,268.00 and assessed the total sum of P117,706.50 as
donor's gift tax, interests and compromises due thereon. Of the total sum
of P117,706.50 paid by de Prieto, the sum of P55,978.65 represents the
total interest on account of delinquency. This sum of P55,978.65 was
claimed as deduction. CIR, however, disallowed the claim and as a
consequence of such disallowance assessed respondent for 1954 the total
sum of P21,410.38 as deficiency income tax due on the aforesaid
P55,978.65, including interest, surcharge and compromise for the late
payment.
ISSUE
WON the interest paid for the late payment of her donor's tax is deductible
from the gross income
HELD / RATIO
YES. Under the law, for interest to be deductible, it must be shown that
there be an indebtedness, that there should be interest upon it, and that
what is claimed as an interest deduction should have been paid or accrued
within the year. It is here conceded that the interest paid by respondent
was in consequence of the late payment of her donor's tax, and the same
was paid within the year it is sought to be deducted.
The term "indebtedness" has been defined as an unconditional and legally
enforceable obligation for the payment of money. Within the meaning of
that definition, it is apparent that a tax may be considered indebtedness.
"Although taxes already due have not, strictly speaking, the same concept
as debts, they are, however, obligations that may be considered as such.
Where statute imposes a personal liability for a tax, the tax becomes, at
least in a board sense, a debt. It follows that the interest paid by herein
respondent for the late payment of her donor's tax is deductible from her
gross income under section 30 (b) of the Tax Code above quoted.
The uniform ruling is that interest on taxes is interest on indebtedness and
is deductible. In conclusion, we are of the opinion and so hold that
although interest payment for delinquent taxes is not deductible as tax
under Section 30(c) of the Tax Code and section 80 of the Income Tax
Regulations, the taxpayer is not precluded thereby from claiming said
interest payment (for indebtedness)as deduction under section 30(b) of
the same Code.
Penalties are distinguished from taxes and are thus not deductible under
the heading of taxes.
CTA DECISION that the interest on delinquent donors tax can be
deductible as an interest expense.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
REV REG 13-2000
Issued December 29, 2000 implements the provisions of Section 34(B) of
the Tax Code of 1997 relative to the requirements for the deductibility of
interest expense from the gross income of a corporation or an individual
engaged in trade, business or in the practice of profession.
In general, subject to certain limitations, the following are the requisites
for the deductibility of interest expense from gross income: a) there must
be an indebtedness; b) there should be an interest expense paid or incurred
upon such indebtedness; c) the indebtedness must be that of the taxpayer;
d) the indebtedness must be connected with the taxpayer's trade, business
or exercise of profession; e) the interest expense must have been paid or
incurred during the taxable year; f) the interest must have been stipulated
in writing; g) the interest must be legally due; h) the interest payment
arrangement must not be between related taxpayers; i) the interest must
not be incurred to finance petroleum operations; and j) in case of interest
incurred to acquire property used in trade, business or exercise of
profession, the same was not treated as a capital expenditure
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
BIR RULING NO. 006-00
(January 5, 2000)
Fast Facts:
The Philippine government gave Philippine National Bank (PNB) 12-year
treasury bonds as payment for its liabilities to PNB. PNB is arguing that
since Section 34(B) of NIRC was put in place to mitigate the effects of a
tax arbitrage scheme, and PNB is not engaged in a tax arbitrage scheme,
then the interest on the treasury bonds should not be included in the
interest expense not allowed as a deduction from gross income. (so
basically it wants that the interest of the treasury bonds be allowed as a
deduction from gross income).
Issue:
W/N interest income derived from the treasury bonds be excluded in the
determination of the interest expense not allowable as deduction from
gross income?
Held:
No. Request that interest income be allowed as a deduction from gross
income is DENIED.
Doctrine:
G.R. amount of interest expense paid/incurred by TP within a taxable
year on indebtedness in connection to his trade, business or exercise as a
profession shall be allowed as deduction from his income [Section
34(B)]
E: Interest expense allowed to be deducted will be reduced if TP has
derived certain interest income which had been subjected to final
withholding tax. [Section 34(B)]. As of January 1, 2000, the reduction
shall be 38% of interest income.
Tax arbitrage scheme: where TPs evade tax by placing their excess funds
in government securities and only paying 20% tax on interest derived
therefrom than the 34% corporate tax that would have been imposed if
the TP used such excess funds for other income-generating activities
Limitation will apply regardless of w/n tax arbitrage scheme was
entered into by TP for as long as, during the taxable year, there is an
interest expense incurred on one side and an interest income earned
on the other side, which interest has been subjected to final
withholding tax.