REQUISITES ON THE DEDUCTIBILITY OF INTEREST

1. There must be a valid indebtedness.

2. The indebtedness must be that of the taxpayer.
3. The indebtedness must be connected with the taxpayer’s trade, business or exercise of profession.
4. Interest expense must have been paid or incurred during the taxable year.
5. Interest must have been stipulated in writing.
6. Interest must be legally due.
7. Interest payments must not be between related taxpayers.
8. Interest must not be incurred to finance petroleum operations.
9. In case of interest incurred in the acquisition of property, used in trade, business or profession, the
same is not treated as a capital expenditure.
10. The interest is not expressly disallowed by law to be deducted from gross income of the taxpayer.

ARBITRAGE SCHEME
The deductible amount of interest expense is the gross interest expense reduced by the following
percentage of the interest income subject to final tax:
Effectivity Percentage
January 1, 2009 33%
January 1, 2021 20%
Rationale: The limit is intended to recover the tax savings of taxpayers who take advantage of higher
regular tax savings created from interest expense deduction and a lower final tax on deposit interest
income.

DETERMINATION OF THE ARBITRAGE LIMIT

(Corporate income tax rate – final tax on interest income)
Corporate income tax rate

Under current corporate income tax rate, the arbitrage limit is (25-20)/25 or 20%

DEDUCTIBILITY OF DISCOUNT OR PRE-DEDUCTED INTEREST

Discount or pre-deducted interest is a prepayment. Hence, it is not deductible upon release of the loan
but upon payment of the same or as it accrues as expense. If the loan is due on instalments, the interest
pertaining to each instalment shall be deductible.

OPTIONAL TREATMENT OF INTEREST EXPENSE

Interest incurred in financing the acquisition of property used in trade or business may, at the option of
the taxpayer, be claimed as:
1. an outright deduction from gross income or
2. a capital expenditure claimable through depreciation.

DEDUCTIBILITY OF TAXES
Taxes paid or incurred within the taxable year in connection within the taxpayer’s trade, business, or
exercise of profession shall be allowed as a deduction.
NON-DEDUCTIBLE TAXES:
1. Philippine income taxes except fringe benefit tax
a. Final income tax
b. Capital gains tax
c. Regular income tax
2. Foreign income tax, if claimed as tax credit
3. Estate tax and donor’s tax
4. Special assessment
5. Business taxes, in particular VAT
6. Surcharges or penalties in delinquent taxes

FOREIGN TAX CREDIT

The foreign tax credit shall be the lower of the actual foreign income tax paid and the following limit:
Foreign taxable income x Philippine income tax due
World taxable income

REQUISITES FOR THE DEDUCTION OF LOSSES

1. It must be incurred in trade, profession, or business of the taxpayer. (The loss must be a business loss,
not a personal loss.)
2. It must pertain to property connected with the trade, business or profession, if the loss arises from
fictitious events or from robbery, theft, or embezzlement. (The loss must be an ordinary loss.)
3. The loss must not be compensated by insurance or indemnity contract. (The loss must be actually
sustained, not temporary.)
4. A declaration of loss must have been filed by the taxpayer within 45 days from the date of discovery
of the casualty or robbery, theft or embezzlement giving rise to the loss.
5. The loss must not have been claimed as a deduction for estate tax purposes in the estate tax return.
(Double deduction is not allowed.)

REQUISITES OF CLAIM FOR DEDUCTION OF BAD DEBT

1. The debt must have been ascertained to be worthless.
2. It must be charged off within the taxable year.
3. It must be connected with the taxpayer’s profession, trade or business. (i.e., uncollectible personal
credits are non-deductible).
4. The taxpayer must be under the accrual basis of accounting.
5. It must not be incurred from a related party.

SPECIAL RULES ON DEPRECIATION

1. Life tenancy to a property
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 was the absolute owner of the property and shall be allowed to
the life tenant.
2. Properties 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.
3. Depreciation on revalued property
The depreciation of an asset must be premised on its acquisition cost and not on its reappraised value.
4. Rules on Deductibility on Depreciation on Passenger Vehicles
a. Substantiation of the purchase with sufficient evidence such as official receipts and other documents
bearing the total purchase price including specific motor vehicle identification numbers of the vehicles.
b. Substantiation of the direct connection or relation of the vehicle to the development, operation
and/or conduct of the trade, business, or profession of the taxpayer.
c. Only one vehicle for land transport is allowed for an official employee, and the value of which shall
not exceed P2,400,000.
d. No depreciation shall be allowed for yachts, helicopter, airplanes or aircrafts, and land vehicles
which exceed the threshold unless the main line of business is transport operation or lease of
transportation equipment and the vehicles purchased are used in said operations.

TREATMENT OF TANGIBLE DEVELOPMENT COSTS

Tangible development costs include the acquisition or improvement of tangible property which are of a
character subject to the allowance for depreciation.

Tangible exploration and development drilling costs are capitalized and deducted through allowance for
depreciation subject to the following rules:

1. Petroleum operations
Properties directly used in petroleum operations
 Straight-line method or declining-balance method at the option of the taxpayer. The useful life shall
be 10 yrs or such shorter life as may be permitted by the CIR.
Properties not used directly in petroleum operations
 Straight-line method on the basis of an estimated useful life of 5 years.

2. Mining Operations
 If expected useful life is 10 years or less, the taxpayer can use the normal rate of depreciation. If the
expected life is more than 10 years, the property can be depreciated over any number of years
between 5 years or 10 years.

REQUISITES ON DEDUCTIBILITY OF CONTRIBUTIONS

1. The donee institution must be a domestic institution.
2. No income of the done institution must inure to the benefit of any private stockholder or individual.
3. The contribution must be valued at the tax basis of the property donated.
4. The taxpayer must be engaged in trade or business.
5. The done must issue a Certificate of Donation which includes a donor’s statement of values.
6. If the amount of donation is at least P50,000 the donor shall file a Notice of Donation to the RDO
where he is registered within 30 days upon receipt of the Certificate of Donation
FULLY DEDUCTIBLE PARTIALLY DEDUCTIBLE
1. Donations to government or political 1. Donations not in accordance with priority
subdivisions fully owned government and activities
controlled corporations to be used exclusively in 2. Donation to non-accredited non-government
undertaking Priority activities
2. In pursuance or compliance with agreements,
Treaties or special laws
3. Accredited domestic non-government
organizations
organizations of domestic organizations
Limit of deduction for contributions
net income derived from trade, business or
profession multiply by:
1. 10% for individuals
2. 5% for corporations

RULES IN COMPUTING DEDUCTIBLE EXPENSE

1. The contribution to the fund is first attributed to current service cost. Contributions are deductible up
to the extent of current service cost.
2. The excess funding is attributed to any unfunded past service cost. Any excess funding over the
current service cost is presumed funding past service cost and is amortized over 10 years regardless of
the actual vesting period covered employees.

TAX TREATMENT OF RESEARCH AND DEVELOPMENT (R&D) COSTS

1. Research and development costs related to capital accounts such as property used in business are
capitalized as part of the cost of the property and deducted through depreciation expense.
2. Research and development costs not related to capital accounts are treated as follows at the option
of the taxpayer:
a. Outright expense or
b. Deferred expense amortized over a period not less than 60 months beginning from the month the
taxpayer realize benefits from the R&D expenditures.

Entertainment, Amusement, and Recreation (EAR) Expense

Includes representation expense and/or depreciation or rental expense relating to entertainment
facilities.

Ceiling on deduction:
 Taxpayers engaged in the sales of goods or properties – 0.5% of net sales
 Taxpayers engaged in the sales of service – 1% of net revenues
“Net sales” = gross sales less sales returns, allowances and sales discounts
“Net revenue” = gross revenue less sales discounts

Apportionment:
Net sales/Net revenue x Actual EAR
Total net sales and net revenue