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10
December

3 Tax Deductible Expenses with Limitations in Philippines

By: Tax and Accounting Center Philippines

As a rule, business expenses in the Philippines that is ordinary and necessary to the conduct of trade, business, or practice of profession in the Philippines is deductible to the extent of actual payments. In general, there is no limitation on deductible amount under the itemized deductions (as compared to optional standard deduction in the Philippines that is only up to 40% of gross income), except that is has to be reasonable. Under the following expenses however, the rules provides a limitation as to the amount deductible:

Limitation on deductible Interest Expense in the Philippines

Interest expense is what you pay for borrowed funds legitimately used in business. In the past, this has been used as a tax planning scheme where taxpayer would simply borrow funds from banks or financing institutions in order to generate deductible interest expense in the Philippines. The funds borrowed are not actually used in business so it is simply deposited in a bank yielding an interest income. As a result, the interest expense lowers down the taxable income by and benefits 30% of such reduction, while the interest income is subjected to final tax lower than the income tax rate of 30% (say 20% for savings deposit). This scenario is what is commonly called as “tax arbitrage”, and is now the subject of this limitation on deductible interest expense in the Philippines.

Under the Tax Code, as amended, interest expense deduction shall be reduced by 33% (starting 2009) of the interest income subjected to final withholding tax. The purpose of which is to neutralize the tax effect of interest expense reduction and the lower final income tax rate on interest income. Please see our sample computation on the interest expense limitation in the Philippines:

Let us assume Interest expense during the period – P20,000, and Interest income, net of 20% final tax – P8,000. Under this, deductible interest expense reduction will be reduced by 33% of the amount of gross income or P3,300 (33% multiplied by the quotient of P8,000 divided by 80% (100% less 20% FWT). Deductible interest expense would only be P16,700 (P20,000 less P3,300).

Deductible representation and entertainment in Philippines

Filipinos are hospitable by nature and such trait is carried on in doing business in the Philippines. The rules allow as tax deduction those expenses of taxpayers in entertaining its guests and employees in order to develop a friendlier atmosphere for a better business yielding more taxes from better operating income. However, business is business, and taxpayer’s resources shall not be exhausted on most representations and entertainment.

For this reason, the rule provides for the following limitations on deductible representation and entertainment:

  •  Sellers of goods – 1% of net sales, net of sales returns, discounts and allowances; and
  • Sellers of services – 2% of gross receipts

If the taxpayer is engaged in the sale of both the goods and the service, then, specific identification or segregation has to be made, otherwise, the dominant figure for the principal operations would overrule the other. Notably, the sellers of service enjoy the higher rate because sellers of service are more prone to spending representation and entertainment is dealings with its guest, clients, or customers.

Tax deduction for charitable contributions

Government is under obligation to render protection and support, but with the very broad and varied needs of its constituents, private institutions and individuals are on to the rescue. These entities are non-profit oriented with noble intentions to cater the needs of the less fortunate members of the society in terms of health, education, natural calamity victims (flash floods in the Philippines, earth quakes, etc.) and the likes.

Under the rules, deductions for charitable contributions could be deductible in full or under limitation. Donations to BIR accredited donee institutions properly documented with Certificates of Donations and other papers; and, donations to government priority projects certified by NEDA are 100% fully deductible. Deductible charitable contributions of taxpayers – corporate and individuals shall not exceed the following rates based on their respective taxable income before such charitable contributions:

  • Individual income taxpayers – 10%
  • Corporate income taxpayers – 5%

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


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


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Comments

  1. MJ says:

    Hello., is there any regulation in the BIR code regarding the limitation of Depreciation of depreciable assets such as Building, Machinery etc.? and also, what is the procedure if going to extend the useful life of an depreciable asset for BIR purposes, thank you

  2. TaxAcctgCenter says:

    Hi MJ, Reveneu Regulations No. 12-2012 may help you on depreciation. You will need BIR for the change of useful life, pleae feel free to contact them.

  3. MJ says:

    ok., thanks a lot ma’am/ sir..

  4. TaxAcctgCenter says:

    Our pleasure MJ.

  5. Yvette says:

    Hi Sir/Mam,

    Just to clarify on the contribution to charitable institutions. If the contribution is ot the BIR accredited donee or to go’vt priority projects as certified by NEDA, even if the donation exceeds the rates you provided for individual/corporate, it is still 100% deductible? Thank you very much for your patience and wisdom

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