Depreciation Expense of Vehicles in the Philippines

By: Tax and Accounting Center Philippines

Under Section 34(F) of the Tax Code of the Philippines, 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 trade or business. To implement this provision, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 12-2012 dated 12 October 2012 (RR 12-2012) to define depreciation    expenses   relating   to  taxpayer’s    purchase   of  Vehicles  of  all  types   (defined   herein   as passenger  vehicles  of  all type,  whether   by land, water,  or air)  providing  for  limits  on the  deductibility thereof  and all expenses  related thereto,   and the disallowance  of input taxes for disallowed  expenses.

Under Section 3 of RR 12-2012, the following   guidelines   shall  be observed  in determining   whether   depreciation   expense  can be claimed  or not  on account  of Vehicles  capitalized  by the taxpayer,  or in claiming  other  expenses and input  taxes on account  of said Vehicle:

  • No  deduction    from  gross  income   for  depreciation    shall  be  allowed   unless the  taxpayer substantiates the   purchase   with   sufficient    evidence,   such  as  official   receipts   or  other adequate  records which  contain  the following,   among others:
  1. Specific   Motor    Vehicle   Identification      Number,    Chassis  Number,    or   other registrable  identification    numbers  of the Vehicle;
  2. The total  price of the specific Vehicle subject  to depreciation;   and
  3. The   direct    connection     or   relation    of   the   Vehicle    to   the   development, management,   operation,   and/or   conduct  of the trade  or business or profession of the taxpayer;
  • Only   one Vehicle  for  land transport   is allowed  for  the  use of  an official  or  employee,   the value   of   which    should   not   exceed   Two   Million    Four   Hundred   Thousand   Pesos  (Php2,400,000.00);
  • No depreciation    shall be allowed  for yachts,  helicopters,  airplanes  and/or  aircrafts,  and land vehicles   which   exceed  the  above  threshold   amount,     unless  the  taxpayer’s   main  line  of business   is transport    operations   or  lease  of  transportation     equipment   and  the  vehicles purchased  are  used in said operations;
  • All maintenance   expenses on account  of non-depreciable   Vehicles  for taxation  purposes  are disallowed   in its entirety;
  • The   input   taxes   on  the   purchase   of   non-depreciable    Vehicles   and  all  input   taxes  on maintenance   expenses incurred  thereon   are likewise disallowed   for taxation  purposes.

For the information and guidance of taxpayers, the BIR issued Revenue Memorandum Circular No. 2-2013 dated 28 December 2012 (RMC No. 2-2013)  to clarify certain provisions of Revenue Regulations (RR) No. 12-2012 on the Deductibility of Depreciation Expenses as it Relates to Purchase of Vehicles and Other Expenses Related Thereto, and the Input Taxes Allowed Therefor.

Q1. Does the RR apply to land vehicles purchased prior to its effectivity where the purchased amount exceeded the threshold of P2,400,00.00?

A1.      No. The RR applies prospectively, thus, it applies to land vehicles purchased upon its effectivity.

Q2.      When is the effectivity-date of the RR?

A2.      The RR was published last October 17, 2012 and, based on its provisions, it shall take effect immediately. Hence, the RR took effect on October 17, 2012.

Q3.      In case the Vehicles (defined in the RR as passenger vehicles of all type, whether by land, water, or air) which are not allowed depreciation expense, or the non-depreciable Vehicles, will be sold at a loss, will the loss to be incurred from such sale deductible from gross income?

A3.      No. Any loss that will be incurred as a result of a sale of the non-depreciable Vehicles shall likewise be NOT allowed as a deduction from gross income.

Q4.      What are the other expenses that are also disallowed for income tax and VAT purposes for the non-depreciable Vehicles?

A4.      For income tax purposes, all expenses related to the non-depreciable Vehicles such as but not limited to repairs and maintenance, oil and lubricants, gasoline, spare parts, tires and accessories, premium paid for insurance covering said vehicles and registration fees shall not be allowed as a deduction in its entirety. For VAT purposes, all input taxes corresponding to the disallowed expenses mentioned above for income tax purposes are likewise not allowed.

Summary

In buying a new vehicle for use in trade or business, see to it that your comply with the above as to cost of P2.4M and as to the required details of the motor vehicle. Failure to follow the guideline would mean disallowance of depreciation expense from such motor vehicles, maintenance expenses, along with the related input taxes for VAT purposes.


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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