Requirement for the Substantiation of a Loss

The taxpayer bears the burden of proving and substantiating his claim for deduction for loss and should comply with the following substantiation requirements:

1. A sworn declaration of loss must be filed within the period prescribed; and

2. Proof of the elements of the loss claimed, such as the actual nature and occurrence of the event and the amount of the loss.

Requisites for the Deductibility of a Loss

Losses are deductible for Income Tax purposes if the following requisites are met:

1. The loss must be incurred in trade, profession, or business of the taxpayer, or any transaction entered into for profit;

2. It must be actually sustained within the taxable year;

3. It must be evidenced by a closed and completed transaction;

4. It must not be compensated for by insurance or other form of indemnity; and

5. The taxpayer has filed a sworn declaration of loss within 45 days after the date of the occurrence of casualty or robbery, theft, or embezzlement.

NOTE: No loss shall be allowed as a deduction if a the time of the filing of the return, if such loss has been claimed as a deduction for estate tax in the return.

Taxes that are Not Deductible for Taxation Purposes

All taxes are deductible except:

1. Income Tax
2. Estate Tax
3. Energy Tax
4. Special Assessment Tax
5. Value Added Tax
6. 10% penalty tax on undue accumulation of profit
7. Amnesty tax
8. Penalty 25% surcharge; 50% surcharge & compromise payment.

Requisites for Deductability of Interest Expense

For taxation purposes, interest expense is deductible if it is met with the following requisites: 

1. These must be a valid and existing indebtedness;

2. There should be an interest expense paid or incurred upon such indebtedness;

3. The indebtedness must be that of the taxpayer;

4. The indebtedness must be connected with the taxpayer's trade, business or exercise of profession;

5. The interest expense must have been paid or incurred during the taxable year;

6. The interest must have been stipulated in writing;

7. The interest must be legally due;

8. The interest payment arrangement must not between related taxpayers;

9. The interest must not be incurred to finance petroleum operations;

10. 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.
11. The interest payment arrangement must not be between related taxpayers as mandated in Section 34(B) (2) (b), in relation to Section 36(B), of the NIRC.
12. Is not expressly disallowed by law to be deduced from the taxpayer's gross income (e.g interest on indebtedness to finance petroleum operations); and
13. Shall be reduced by an amount equal to the 33% of the interest income subjected to final tax of 20%, earned during the same period. [Sec. 34(B)(1), NIRC].

Generally, the amount of interest paid or incurred within the taxable year on indebtedness in connection with the taxpayer profession, trade or business shall be allowable deduction from gross income: Provided, however, that the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax:

Thirty three percent (33%) beginning January 1, 2009

Assuming that a taxpayer incurred in 2013, interest expense amounting to P100,000. This is "Otherwise Allowable Deduction for Interest Expense" but it will be reduced by an amount equal to the prescribed percentage of interest income subjected to the final tax.

Thus, if in 2013, the taxpayer received P60,000 net interest income on which the final tax was withheld and remitted to the BIR by the payor of such income, then the deductible amount of interest will be computed as follows:

Total Interest Expense                                     P100,000

Less: 33% of P60,000/.80                                    24,750

AMOUNT DEDUCTIBLE                             P  75,250

References: RMC 13-2009; RR No. 13-2000.

Ceiling on Entertainment, Amusement, and Recreation Expense

The bureau has issued the Revenue Regulations No. 10-2002 authorizing the Imposition of a Ceiling on "Entertainment, Amusement and Recreational Expense".

Coverage:

1. Individuals engaged in business, including taxable estates and trust;

2. Individuals engaged in the practice of profession;

3. Domestic corporations;

4. Resident foreign corporations;

5. General professional partnerships, including its members

Actual entertainment, amusement and recreation (EAR) expenses paid or incurred with the taxable year by the taxpayer, but in no case shall such deduction exceed 1/2 of 1% of net sales (i.e., gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties; or 1% of net revenue (i. e., gross revenue less discounts) for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties.

APPOINTMENT FORMULA:

NET SALES/NET REVENUE                         X ACTUAL EXPENSE

TOTAL NET SALES AND NET REVENUE

ILLUSTRATION: EAR Corporation is engaged in the sale of goods and services with net sales/net revenue of P200,000 and P100,000, respectively. The actual entertainment, amusement and recreation expense for the taxable quarter totaled to P3,000.

Appointment Formula:

Sales of Goods (P200,000 / P300,000  x P3,000) = P2,000

Sale of Services (P100,000 / P300,000 x P3,000) = P1,000

Maximum Percentage Ceilings:

Sales of Goods (P200,000 x .50%) = P1,000

Sales of Services (P100,000 x 1%) = P1,000

Allowable amount to be claimed as Entertainment, Amusement, and Recreation (EAR) Expense (Whichever is lower of Appointment Formula and Maximum Percentage Ceilings):

Sales of Goods = P1,000

Sales of Services = P1,000

However, if after verification a taxpayer is found to have shifted the amount of the entertainment of the entertainment, amusement and recreation expense to any other expense in order to avoid being subjected to the ceiling herein prescribed, the amount shifted shall be disallowed in its totality.

Optional Standard Deduction (OSD) Allowed to Individuals and Corporations in Computing their Taxable Income

The Revenue Regulations No. 16-2008, as amended was issued by the bureau to determine the Optional Standard Deduction (OSD) allowed to Individuals and Corporations in computing their Taxable Income.

Persons covered are as follows:

1. Individuals: Residents Citizen; Non-resident Citizen; Resident Alien; Taxable Estates and Trusts

2. Corporations: Domestic Corporation and Resident Foreign Corporation

The OSD allowed to individual taxpayers shall be a maximum of forty percent (40%) of gross sales or gross receipts during the taxable year. if the individual is on the accrual basis of accounting for his income and deductions, the OSD shall be based on the gross sales during the taxable year. In the other hand, if the individual employs the cash basis of accounting for his income and deductions, the OSD shall be based on his gross receipts during the taxable year.

                                              If Individual                       If Corporation

Gross Sales                            P100,000                                 P100,000

Less: Cost of Goods Sold                                                           80,000 

Basis of the OSD                      100,000                                     20,000

X OSD Rate (maximum)                  .40                                            .40

OSD Amount                        P 40,000                                    P 8,000 


Gross Sales                            P100,000                                 P100,000
Less: Cost of sales                         -                                            80,000
Gross Sales                              100,000                                      20,000
Less: OSD (maximum)                40,000                                        8,000
Net Income                                60,000                                       12,000
Less: Personal Exemption           50,000                                          -
         Additional Exemption        25,000                                                -
Taxable Income                     P(15,000)                                   P 12,000

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

Revenue Regulations No. 2-2001 was issued by the bureau to determine the Improperly Accumulated Earnings Tax on corporations.

Improperly Accumulated Earnings Tax (IAET) is imposed for each taxable year, a tax equal to 10% of the improperly accumulated taxable income of corporations.

The following corporations shall not apply of the Improperly Accumulated Earnings (IAET):

1. Banks and other non-bank financial intermediaries;

2. Insurance companies;

3. Publicly-held corporations;

4. Taxable partnerships;

5. General professional partnerships;

6. Non-taxable joint ventures;

7. Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R. A. #7916, and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under RA# 7227.

Minimum Corporate Income Tax on Domestic Corporations

The Revenue Regulations 12-2007 was issued by the bureau as amended with regards to Minimum Corporate Income Tax on Domestic Corporations: 

1. Imposition of Tax - A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, beginning of the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than normal income tax.

2. Carry Forward of Excess Minimum Tax - any excess of the minimum corporate income tax over the normal income tax shall be carried forward and credited against the normal income tax four the three (3) immediately succeeding taxable years.

But the minimum corporate income tax shall not be imposed upon any of the following:

1. Domestic corporations operating as proprietory educational institutions subject to tax at ten percent (10%) on their taxable income; or

2. Domestic corporations engaged in hospital operations which are nonprofit subject to tax at ten (10%) on their taxable income; and

3. Corporations engaged in business as depository banks under expanded foreign currency deposits system, otherwise known as Foreign Currency Deposit Units

4. Firms that are taxed under a special income tax regime

Please refer ftp://ftp.bir.gov.ph/webadmin1/pdf/37123rr%20no.%2012-2007.pdf of the full text of Revenue Regulations 12-2007.

Value of Shares of Stock at the Time of Sale Not Listed and Traded in the Local Stock Exchanges and Requirements in Compliance for the Issuance of Certificate Authorizing Registration (CAR) from the BIR

Last April 11, 2013, the bureau has issued Revenue Regulations No. 06-2013 amending Certain Provision of Revenue Regulations No. 06-2008 Entitled Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets.

Under Section 2 of these Regulations as amended, Section 7 of RR No. 06-2008, (c.2.2) In the case of share of stock not listed and traded in the local stock exchanges, the value of the shares of stock at the time of sale shall be the fair market value. In determining the value of the shares, the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of adjusted asset minus the liability values is the indicated value of the equity. For the purposes of this section, the appraised value of real property at the time of sale shall be the higher of - 

1. The fair market value as determined by the Commissioner, or 

2. The fair market value as shown in the schedule of value fixed by the Provincial and City Assessors, or

3. The fair market value as determined by Independent Appraiser.

Illustrations:

For the purpose in securing a Certificate Authorizing Registration (CAR) from the Bureau of Internal Revenue (BIR) with regards to Onerous Transfer of Shares of Stock Not Traded Through the Local Stock Exchange, the taxpayer should comply the requirements and pay related taxes and fees as follows:

1. Certification Fee (BIR Form 0605); 

2. Documentary Stamp Tax (BIR Form 2000-OT); - Deadline is within five (5) days after the close of the month when the taxable document was made, signed, issued, accepted or transferred.

3. Capital Gains Tax (if any but still required to file BIR Form 1707 showing the computation) - Deadline is within thirty (30) days after each sale, barter, exchange or other disposition of shares of stock not traded through the local stock exchange;

4. Donors Tax (if the Fair Market Value of the Shares Sold is lower than the Adjusted Book Value of the Issuing Corporation which will result a deemed donated transactions)

The Adjusted Book Value of the Issuing Corporation is computed as Adjusted Book Value Per Share Multiply by Cost of the Shares of Stocks Sold. The Adjusted Book Value Per Share is computed as Total Adjusted Net Asset (please refer to the illustrations) Divided by Issued and Outstanding Shares (Issued Shares Less Treasury Shares).

If the Adjusted Book Value is greater than the Cost of the Shares of Stocks Sold, then there's Net Capital Gain which is subject to Capital Gains Tax (Tax Due is 5% on the first 100,000; 10% over 100,000). 

The Documentary Stamp Tax is computed as Total Par Value (Cost of Shares of Stock(s) Sold) Divided by P200.00 Multiply by P1.50 for every P200.00 or a fraction thereof.

If the Adjusted Book Value of the Issuing Corporation is greater than the Cost of the Shares Sold, it is considered as a deemed donation transactions which is subject to Donors Tax as a Stranger computed as Adjusted Book Value of the Issuing Corporation Less Fair Market Value of the Shares Sold Multiply by 30%.

Please refer ftp://ftp.bir.gov.ph/webadmin1/pdf/70201RR%206-2013.pdf of the full text RR Nos. 6-2013.

Issuance of Principal Receipts / Invoices for the Purpose of Value Added Tax (VAT) & Percentage Tax and Supplementary Receipts / Invoices or Commercial Invoices

Under Revenue Regulations No. 18-2012, Section 2 defines PRINCIPAL RECEIPTS / INVOICES as a written account evidencing the sale of goods and/or services issued to customers in  an ordinary course of business which necessary includes the following:

1. VAT SALES INVOICE - for the purposes of Value Added Tax (VAT) pursuant to Section 106 of the NIRC, as amended, it is written account evidencing the sale of goods and/or properties issued to customers in an ordinary course of business, whether cash sales or on account (credit) which shall be the basis of the output tax liability of the seller and the input tax claim of the buyer. Cash Sales Invoices and Charge Sales Invoices falls under this definition.

2. VAT OFFICIAL RECEIPT - for purposes of Value Added Tax (VAT) pursuant to Section 108 of the NIRC as amended it s a proof of sale of service and/or leasing of properties which shall be the basis of the output tax liability of the seller and the input tax claim of the buyer. It is a written admission or acknowledgment of the fact that the money has been paid and received for the payment or settlement persons rendering services and its customers.

3. NON-VAT SALES INVOICES - for purposes of Percentage tax pursuant to Section 116 of the NIRC, as amended, it is a written account evidencing the sale of goods and/or properties issued to customers in an ordinary course of business, whether cash sales or on account (credit) which shall be the basis of the Percentage Tax liability of the seller.

3. NON-VAT OFFICIAL RECEIPTS - for purposes of Percentage Tax pursuant to TITLE V of the NIRC, as amended, it is a proof of sale of service and/or leasing of properties which shall be the basis of the Percentage Tax liability of the seller. It is written admission or acknowledgment of the fact that money has been paid and received for the payment or settlement persons rendering services and its customers.

Besides, under Section 3 of these regulations, also stated the SUPPLEMENTARY RECEIPTS / INVOICES which are also known as COMMERCIAL INVOICES, a written account evidencing that a transaction has been made between the seller and the buyer of goods and/or services, forming part of the books of accounts of a business taxpayer for recording, monitoring and control purposes.

It is a document evidencing delivery, agreement to sell or transfer of goods and services which includes but are not limited to delivery receipts, order slips, debit and/or credit memo, purchase order, job order, provisional/temporary receipt, acknowledgement receipt, collection receipt, cash receipt, bill of lading, billing statement, statement of account, and any other documents, by whatever name it is known or called, whether prepared manually (handwritten information) or pre-printed/pre-numbered loose-leaf (information typed using excel program or typewriter) or computerized as long as it is used in the ordinary course of business being issued to customers or otherwise.

Supplementary receipts/invoices, for the purposes of Value-Added Tax, are not valid proof to support the claim of Input Taxes by buyers of goods and/or services.

Please refer ftp://ftp.bir.gov.ph/webadmin1/pdf/67524RR%2018-2012.pdf of the full text of RR Nos. 18-2012.