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 be allowed under Subsection (A) hereof unless the taxpayer shall
employer-employee relationship where no deductions shall be allowed substantiate with sufficient evidence, such as official receipts or other
under this Section other than under subsection (M) hereof, in computing adequate records: (i) the amount of the expense being deducted, and (ii)
taxable income subject to income tax under Sections 24(A); 25(A); 26; the direct connection or relation of the expense being deducted to the
27(A), (B) and (C); and 28(A)(1), there shall be allowed the following development, management, operation and/or conduct of the trade,
deductions from gross income; business or profession of the taxpayer.
(A) Expenses. - (c) Bribes, Kickbacks and Other Similar Payments. - No deduction from
(1) Ordinary and Necessary Trade, Business or Professional Expenses. - gross income shall be allowed under Subsection (A) hereof for any
(a) In General. - There shall be allowed as deduction from gross income payment made, directly or indirectly, to an official or employee of the
all the ordinary and necessary expenses paid or incurred during the taxable national government, or to an official or employee of any local
year in carrying on or which are directly attributable to, the development, government unit, or to an official or employee of a government-owned or -
management, operation and/or conduct of the trade, business or exercise controlled corporation, or to an official or employee or representative of a
of a profession, including: foreign government, or to a private corporation, general professional
(i) A reasonable allowance for salaries, wages, and other forms of partnership, or a similar entity, if the payment constitutes a bribe or
compensation for personal services actually rendered, including the kickback.
grossed-up monetary value of fringe benefit furnished or granted by the (2) Expenses Allowable to Private Educational Institutions. - In addition
employer to the employee: Provided, That the final tax imposed under to the expenses allowable as deductions under this Chapter, a private
Section 33 hereof has been paid; educational institution, referred to under Section 27 (B) of this Code, may
(ii) A reasonable allowance for travel expenses, here and abroad, while at its option elect either: (a) to deduct expenditures otherwise considered
away from home in the pursuit of trade, business or profession; as capital outlays of depreciable assets incurred during the taxable year for
(iii) A reasonable allowance for rentals and/or other payments which are the expansion of school facilities or (b) to deduct allowance for
required as a condition for the continued use or possession, for purposes of depreciation thereof under Subsection (F) hereof.
the trade, business or profession, of property to which the taxpayer has not (B) Interest. -
taken or is not taking title or in which he has no equity other than that of a (1) In General. - The amount of interest paid or incurred within a taxable
lessee, user or possessor; year on indebtedness in connection with the taxpayer's profession, trade or
(iv) A reasonable allowance for entertainment, amusement and recreation business shall be allowed as deduction from gross income: Provided,
expenses during the taxable year, that are directly connected to the however, That the taxpayer's otherwise allowable deduction for interest
development, management and operation of the trade, business or expense shall be reduced by forty-two percent (42%) of the interest income
profession of the taxpayer, or that are directly related to or in furtherance subjected to final tax: Provided, That effective January 1, 2009, the
of the conduct of his or its trade, business or exercise of a profession not to percentage shall be thirty-three percent
exceed such ceilings as the Secretary of Finance may, by rules and (33%). [29]
regulations prescribe, upon recommendation of the Commissioner, taking (2) Exceptions. - No deduction shall be allowed in respect of interest
into account the needs as well as the special circumstances, nature and under the succeeding subparagraphs:
character of the industry, trade, business, or profession of the taxpayer: (a) If within the taxable year an individual taxpayer reporting income on
Provided, That any expense incurred for entertainment, amusement or the cash basis incurs an indebtedness on which an interest is paid in
recreation that is contrary to law, morals public policy or public order shall advance through discount or otherwise: Provided, That such interest shall
in no case be allowed as a deduction. be allowed as a deduction in the year the indebtedness is paid: Provided,
further, That if the indebtedness is payable in periodic amortizations, the (b) Partnerships and Estates. - In the case of any such individual who is a
amount of interest which corresponds to the amount of the principal member of a general professional partnership or a beneficiary of an estate
amortized or paid during the year shall be allowed as deduction in such or trust, his proportionate share of such taxes of the general professional
taxable year; partnership or the estate or trust paid or incurred during the taxable year to
(b) If both the taxpayer and the person to whom the payment has been a foreign country, if his distributive share of the income of such
made or is to be made are persons specified under Section 36 (B); or partnership or trust is reported for taxation under this Title.
(c) If the indebtedness is incurred to finance petroleum exploration. An alien individual and a foreign corporation shall not be allowed the
(3) Optional Treatment of Interest Expense. - At the option of the credits against the tax for the taxes of foreign countries allowed under this
taxpayer, interest incurred to acquire property used in trade business or paragraph.
exercise of a profession may be allowed as a deduction or treated as a (4) Limitations on Credit. - The amount of the credit taken under this
capital expenditure. Section shall be subject to each of the following limitations:
(C) Taxes. - (a) The amount of the credit in respect to the tax paid or incurred to any
(1) In General. - Taxes paid or incurred within the taxable year in country shall not exceed the same proportion of the tax against which such
connection with the taxpayer's profession, trade or business, shall be credit is taken, which the taxpayer's taxable income from sources within
allowed as deduction, except: such country under this Title bears to his entire taxable income for the
(a) The income tax provided for under this Title; same taxable year; and
(b) Income taxes imposed by authority of any foreign country; but this (b) The total amount of the credit shall not exceed the same proportion of
deduction shall be allowed in the case of a taxpayer who does not signify the tax against which such credit is taken, which the taxpayer's taxable
in his return his desire to have to any extent the benefits of paragraph (3) income from sources without the Philippines taxable under this Title bears
of this subsection (relating to credits for taxes of foreign countries); to his entire taxable income for the same taxable year.
(c) Estate and donor's taxes; and (5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when
(d) Taxes assessed against local benefits of a kind tending to increase the paid differ from the amounts claimed as credits by the taxpayer, or if any
value of the property assessed. tax paid is refunded in whole or in part, the taxpayer shall notify the
Provided, That taxes allowed under this Subsection, when refunded or Commissioner; who shall re-determine the amount of the tax for the year
credited, shall be included as part of gross income in the year of receipt to or years affected, and the amount of tax due upon such re-determination,
the extent of the income tax benefit of said deduction. if any, shall be paid by the taxpayer upon notice and demand by the
(2) Limitations on Deductions. - In the case of a nonresident alien Commissioner, or the amount of tax overpaid, if any, shall be credited or
individual engaged in trade or business in the Philippines and a resident refunded to the taxpayer. In the case of such a tax incurred but not paid,
foreign corporation, the deductions for taxes provided in paragraph (1) of the Commissioner as a condition precedent to the allowance of this credit
this Subsection (C) shall be allowed only if and to the extent that they are may require the taxpayer to give a bond with sureties satisfactory to and to
connected with income from sources within the Philippines. be approved by the Commissioner in such sum as he may require,
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer conditioned upon the payment by the taxpayer of any amount of tax found
signifies in his return his desire to have the benefits of this paragraph, the due upon any such redetermination. The bond herein prescribed shall
tax imposed by this Title shall be credited with: contain such further conditions as the Commissioner may require.
(a) Citizen and Domestic Corporation. - In the case of a citizen of the (6) Year in Which Credit Taken. - The credits provided for in Subsection
Philippines and of a domestic corporation, the amount of income taxes (C)(3) of this Section may, at the option of the taxpayer and irrespective of
paid or incurred during the taxable year to any foreign country; and 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. the year incurred in business, trade or exercise of a profession conducted
If the taxpayer elects to take such credits in the year in which the taxes of within the Philippines, when such losses are not compensated for by
the foreign country accrued, the credits for all subsequent years shall be insurance or other forms of indemnity. The secretary of Finance, upon
taken upon the same basis and no portion of any such taxes shall be recommendation of the Commissioner, is hereby authorized to
allowed as a deduction in the same or any succeeding year. promulgate rules and regulations prescribing, among other things, the time
(7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof and manner by which the taxpayer shall submit a declaration of loss
shall be allowed only if the taxpayer establishes to the satisfaction of the sustained from casualty or from robbery, theft or embezzlement during the
Commissioner the following: taxable year: Provided, That the time to be so prescribed in the rules and
(a) The total amount of income derived from sources without the regulations shall not be less than thirty (30) days nor more than ninety (90)
Philippines; days from the date of discovery of the casualty or robbery, theft or
(b) The amount of income derived from each country, the tax paid or embezzlement giving rise to the loss; and
incurred to which is claimed as a credit under said paragraph, such (3) Net Operating Loss Carry-Over. - The net operating loss of the
amount to be determined under rules and regulations prescribed by the business or enterprise for any taxable year immediately preceding the
Secretary of Finance; and current taxable year, which had not been previously offset as deduction
(c) All other information necessary for the verification and computation of from gross income shall be carried over as a deduction from gross income
such credits. for the next 3 consecutive taxable years immediately following the year of
(D) Losses. - such loss: Provided, however, That any net loss incurred in a taxable year
(1) In General. - Losses actually sustained during the taxable year and not during which the taxpayer was exempt from income tax shall not be
compensated for by insurance or other forms of indemnity shall be allowed as a deduction under this Subsection: Provided, further, That a
allowed as deductions: net operating loss carry-over shall be allowed only if there has been no
(a) If incurred in trade, profession or business; substantial change in the ownership of the business or enterprise in that -
(b) Of property connected with the trade, business or profession, if the loss (i) Not less than seventy-five percent (75%) in nominal value of
arises from fires, storms, shipwreck, or other casualties, or from robbery, outstanding issued shares., if the business is in the name of a corporation,
theft or embezzlement. is held by or on behalf of the same persons; or
The Secretary of Finance, upon recommendation of the Commissioner, is (ii) Not less than seventy-five percent (75%) of the paid up capital of the
hereby authorized to promulgate rules and regulations prescribing, among corporation, if the business is in the name of a corporation, is held by or
other things, the time and manner by which the taxpayer shall submit a on behalf of the same persons.
declaration of loss sustained from casualty or from robbery, theft or For purposes of this subsection, the term 'net operating loss' shall mean the
embezzlement during the taxable year: Provided, however, That the time excess of allowable deduction over gross income of the business in a
limit to be so prescribed in the rules and regulations shall not be less than taxable year.
thirty (30) days nor more than ninety (90) days from the date of discovery Provided, That for mines other than oil and gas wells, a net operating loss
of the casualty or robbery, theft or embezzlement giving rise to the loss. without the benefit of incentives provided for under Executive Order No.
(amended by RR 12-77 to be 45 days now) 226, as amended, otherwise known as the Omnibus Investments Code of
(c) No loss shall be allowed as a deduction under this Subsection if at the 1987, incurred in any of the first ten (10) years of operation may be carried
time of the filing of the return, such loss has been claimed as a deduction over as a deduction from taxable income for the next five (5) years
for estate tax purposes in the estate tax return. immediately following the year of such loss. The entire amount of the loss
(2) Proof of Loss. - In the case of a nonresident alien individual or foreign shall be carried over to the first of the five (5) taxable years following the
corporation, the losses deductible shall be those actually sustained during 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 income in the year of recovery to the extent of the income tax benefit of
the next remaining 4 years. said deduction.
(4) Capital Losses. - (2) Securities Becoming Worthless. - If securities, as defined in Section
(a) Limitations. - Loss from sales or Exchanges of capital assets shall be 22 (T), are ascertained to be worthless and charged off within the taxable
allowed only to the extent provided in Section 39. year and are capital assets, the loss resulting therefrom shall, in the case of
(b) Securities Becoming Worthless. - If securities as defined in Section 22 a taxpayer other than a bank or trust company incorporated under the
(T) become worthless during the taxable year and are capital assets, the laws of the Philippines a substantial part of whose business is the receipt of
loss resulting therefrom shall, for purposes of this Title, be considered as a deposits, for the purpose of this Title, be considered as a loss from the sale
loss from the sale or exchange, on the last day of such taxable year, of or exchange, on the last day of such taxable year, of capital assets.
capital assets. (F) Depreciation. -
(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash (1) General Rule. - There shall be allowed as a depreciation deduction a
sales' of stock or securities as provided in Section 38. reasonable allowance for the exhaustion, wear and tear (including
(6) Wagering Losses. - Losses from wagering transactions shall be reasonable allowance for obsolescence) of property used in the trade or
allowed only to the extent of the gains from such transactions. business. In the case of property held by one person for life with remainder
(7) Abandonment Losses. - to another person, the deduction shall be computed as if the life tenant
(a) In the event a contract area where petroleum operations are undertaken were the absolute owner of the property and shall be allowed to the life
is partially or wholly abandoned, all accumulated exploration and tenant. In the case of property held in trust, the allowable deduction shall
development expenditures pertaining thereto shall be allowed as a be apportioned between the income beneficiaries and the trustees in
deduction: Provided, That accumulated expenditures incurred in that area accordance with the pertinent provisions of the instrument creating the
prior to January 1, 1979 shall be allowed as a deduction only from any trust, or in the absence of such provisions, on the basis of the trust income
income derived from the same contract area. In all cases, notices of allowable to each.
abandonment shall be filed with the Commissioner. (2) Use of Certain Methods and Rates. - The term 'reasonable allowance'
(b) In case a producing well is subsequently abandoned, the un-amortized as used in the preceding paragraph shall include, but not limited to, an
costs thereof, as well as the un-depreciated costs of equipment directly allowance computed in accordance with rules and regulations prescribed
used therein , shall be allowed as a deduction in the year such well, by the Secretary of Finance, upon recommendation of the Commissioner,
equipment or facility is abandoned by the contractor: Provided, That if under any of the following methods:
such abandoned well is re-entered and production is resumed, or if such (a) The straight-line method;
equipment or facility is restored into service, the said costs shall be (b) Declining-balance method, using a rate not exceeding twice the rate
included as part of gross income in the year of resumption or restoration which would have been used had the annual allowance been computed
and shall be amortized or depreciated, as the case may be. under the method described in Subsection (F) (1);
(E) Bad Debts. - (c) The sum-of-the-years-digit method; and
(1) In General. - Debts due to the taxpayer actually ascertained to be (d) Any other method which may be prescribed by the Secretary of
worthless and charged off within the taxable year except those not Finance upon recommendation of the Commissioner.
connected with profession, trade or business and those sustained in a (3) Agreement as to Useful Life on Which Depreciation Rate is Based. -
transaction entered into between parties mentioned under Section 36 (B) Where under rules and regulations prescribed by the Secretary of Finance
of this Code: Provided, That recovery of bad debts previously allowed as upon recommendation of the Commissioner, the taxpayer and the
deduction in the preceding years shall be included as part of the gross 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 contractor notifies the Commissioner at the beginning of the depreciation
Government in the absence of facts and circumstances not taken into period which depreciation rate allowed by this Section will be used.
consideration during the adoption of such agreement. The responsibility of (6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or
establishing the existence of such facts and circumstances shall rest with Business or Resident Foreign Corporations. - In the case of a nonresident
the party initiating the modification. Any change in the agreed rate and alien individual engaged in trade or business or resident foreign
useful life of the depreciable property as specified in the agreement shall corporation, a reasonable allowance for the deterioration of Property
not be effective for taxable years prior to the taxable year in which notice arising out of its use or employment or its non-use in the business trade or
in writing by certified mail or registered mail is served by the party profession shall be permitted only when such property is located in the
initiating such change to the other party to the agreement: Philippines.
Provided, however, that where the taxpayer has adopted such useful life (G) Depletion of Oil and Gas Wells and Mines. -
and depreciation rate for any depreciable and claimed the depreciation (1) In General. - In the case of oil and gas wells or mines, a reasonable
expenses as deduction from his gross income, without any written allowance for depletion or amortization computed in accordance with the
objection on the part of the Commissioner or his duly authorized cost-depletion method shall be granted under rules and regulations to be
representatives, the aforesaid useful life and depreciation rate so adopted prescribed by the Secretary of finance, upon recommendation of the
by the taxpayer for the aforesaid depreciable asset shall be considered Commissioner. Provided, That when the allowance for depletion shall
binding for purposes of this Subsection. equal the capital invested no further allowance shall be granted: Provided,
(4) Depreciation of Properties Used in Petroleum Operations. - An further, That after production in commercial quantities has commenced,
allowance for depreciation in respect of all properties directly related to certain intangible exploration and development drilling costs: (a) shall be
production of petroleum initially placed in service in a taxable year shall deductible in the year incurred if such expenditures are incurred for non-
be allowed under the straight-line or declining-balance method of producing wells and/or mines, or (b) shall be deductible in full in the year
depreciation at the option of the service contractor. paid or incurred or at the election of the taxpayer, may be capitalized and
However, if the service contractor initially elects the declining-balance amortized if such expenditures incurred are for producing wells and/or
method, it may at any subsequent date, shift to the straight-line method. mines in the same contract area.
The useful life of properties used in or related to production of petroleum 'Intangible costs in petroleum operations' refers to any cost incurred in
shall be ten (10) years of such shorter life as may be permitted by the petroleum operations which in itself has no salvage value and which is
Commissioner. incidental to and necessary for the drilling of wells and preparation of
Properties not used directly in the production of petroleum shall be wells for the production of petroleum: Provided, That said costs shall not
depreciated under the straight-line method on the basis of an estimated pertain to the acquisition or improvement of property of a character
useful life of five (5) years. subject to the allowance for depreciation except that the allowances for
(5) Depreciation of Properties Used in Mining Operations. - an depreciation on such property shall be deductible under this Subsection.
allowance for depreciation in respect of all properties used in mining Any intangible exploration, drilling and development expenses allowed as
operations other than petroleum operations, shall be computed as follows: a deduction in computing taxable income during the year shall not be
(a) At the normal rate of depreciation if the expected life is ten (10) years taken into consideration in computing the adjusted cost basis for the
or less; or purpose of computing allowable cost depletion.
(b) Depreciated over any number of years between five (5) years and the (2) Election to Deduct Exploration and Development Expenditures. - In
expected life if the latter is more than ten (10) years, and the depreciation computing taxable income from mining operations, the taxpayer may at
thereon allowed as deduction from taxable income: Provided, That the 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 (1) In General. - Contributions or gifts actually paid or made within the
taxable year: Provided, That the amount deductible for exploration and taxable year to, or for the use of the Government of the Philippines or any
development expenditures shall not exceed twenty-five percent (25%) of of its agencies or any political subdivision thereof exclusively for public
the net income from mining operations computed without the benefit of purposes, or to accredited domestic corporation or associations organized
any tax incentives under existing laws. The actual exploration and and operated exclusively for religious, charitable, scientific, youth and
development expenditures minus twenty-five percent (25%) of the net sports development, cultural or educational purposes or for the
income from mining shall be carried forward to the succeeding years until rehabilitation of veterans, or to social welfare institutions, or to non-
fully deducted. government organizations, in accordance with rules and regulations
The election by the taxpayer to deduct the exploration and development promulgated by the Secretary of finance, upon recommendation of the
expenditures is irrevocable and shall be binding in succeeding taxable Commissioner, no part of the net [30] income of which inures to the benefit
years. of any private stockholder or individual in an amount not in excess of ten
'Net income from mining operations', as used in this Subsection, shall mean percent (10%) in the case of an individual, and five percent (%) in the case
gross income from operations less 'allowable deductions' which are of a corporation, of the taxpayer's taxable income derived from trade,
necessary or related to mining operations. 'Allowable deductions' shall business or profession as computed without the benefit of this and the
include mining, milling and marketing expenses, and depreciation of following subparagraphs.
properties directly used in the mining operations. This paragraph shall not (2) Contributions Deductible in Full. - Notwithstanding the provisions of
apply to expenditures for the acquisition or improvement of property of a the preceding subparagraph, donations to the following institutions or
character which is subject to the allowance for depreciation. entities shall be deductible in full:
In no case shall this paragraph apply with respect to amounts paid or (a) Donations to the Government. - Donations to the Government of the
incurred for the exploration and development of oil and gas. Philippines or to any of its agencies or political subdivisions, including
The term 'exploration expenditures' means expenditures paid or incurred for fully-owned government corporations, exclusively to finance, to provide
the purpose of ascertaining the existence, location, extent or quality of any for, or to be used in undertaking priority activities in education, health,
deposit of ore or other mineral, and paid or incurred before the beginning youth and sports development, human settlements, science and culture,
of the development stage of the mine or deposit. and in economic development according to a National Priority Plan
The term 'development expenditures' means expenditures paid or incurred determined by the National Economic and Development Authority
during the development stage of the mine or other natural deposits. The (NEDA), In consultation with appropriate government agencies, including
development stage of a mine or other natural deposit shall begin at the its regional development councils and private philanthropic persons and
time when deposits of ore or other minerals are shown to exist in sufficient institutions: Provided, That any donation which is made to the
commercial quantity and quality and shall end upon commencement of Government or to any of its agencies or political subdivisions not in
actual commercial extraction. accordance with the said annual priority plan shall be subject to the
(3) Depletion of Oil and Gas Wells and Mines Deductible by a limitations prescribed in paragraph (1) of this Subsection;
Nonresident Alien individual or Foreign Corporation. - In the case of a (b) Donations to Certain Foreign Institutions or International
nonresident alien individual engaged in trade or business in the Organizations. - donations to foreign institutions or international
Philippines or a resident foreign corporation, allowance for depletion of oil organizations which are fully deductible in pursuance of or in compliance
and gas wells or mines under paragraph (1) of this Subsection shall be with agreements, treaties, or commitments entered into by the
authorized only in respect to oil and gas wells or mines located within the Government of the Philippines and the foreign institutions or international
Philippines. organizations or in pursuance of special laws;
(H) Charitable and Other Contributions. -
(c) Donations to Accredited Nongovernment Organizations. -The term Secretary of Finance, upon recommendation of the Commissioner, but not
'nongovernment organization' means a non-profit domestic corporation: to exceed five (5) years, and the project is one which can be better
(1) Organized and operated exclusively for scientific, research, accomplished by setting aside such amount than by immediate payment of
educational, character-building and youth and sports development, health, funds.
social welfare, cultural or charitable purposes, or a combination thereof, (3) Valuation. - The amount of any charitable contribution of property
no part of the net [31] income of which inures to the benefit of any private other than money shall be based on the acquisition cost of said property.
individual; (4) Proof of Deductions. - Contributions or gifts shall be allowable as
(2) Which, not later than the 15th day of the third month after the close of deductions only if verified under the rules and regulations prescribed by
the accredited nongovernment organizations taxable year in which the Secretary of Finance, upon recommendation of the Commissioner.
contributions are received, makes utilization directly for the active conduct (I) Research and Development. -
of the activities constituting the purpose or function for which it is (1) In General. - A taxpayer may treat research or development
organized and operated, unless an extended period is granted by the expenditures which are paid or incurred by him during the taxable year in
Secretary of Finance in accordance with the rules and regulations to be connection with his trade, business or profession as ordinary and
promulgated, upon recommendation of the Commissioner; necessary expenses which are not chargeable to capital account. The
(3) The level of administrative expense of which shall, on an annual basis, expenditures so treated shall be allowed as deduction during the taxable
conform with the rules and regulations to be prescribed by the Secretary of year when paid or incurred.
Finance, upon recommendation of the Commissioner, but in no case to (2) Amortization of Certain Research and Development Expenditures. -
exceed thirty percent (30%) of the total expenses; and At the election of the taxpayer and in accordance with the rules and
(4) The assets of which, in the event of dissolution, would be distributed to regulations to be prescribed by the Secretary of Finance, upon
another non-profit domestic corporation organized for similar purpose or recommendation of the Commissioner, the following research and
purposes, or to the state for public purpose, or would be distributed by a development expenditures may be treated as deferred expenses:
court to another organization to be used in such manner as in the (a) Paid or incurred by the taxpayer in connection with his trade, business
judgment of said court shall best accomplish the general purpose for which or profession;
the dissolved organization was organized. (b) Not treated as expenses under paragraph (1) hereof; and
Subject to such terms and conditions as may be prescribed by the Secretary (c) Chargeable to capital account but not chargeable to property of a
of Finance, the term 'utilization' means: character which is subject to depreciation or depletion.
(i) Any amount in cash or in kind (including administrative expenses) In computing taxable income, such deferred expenses shall be allowed as
paid or utilized to accomplish one or more purposes for which the deduction ratably distributed over a period of not less than sixty (60)
accredited nongovernment organization was created or organized. months as may be elected by the taxpayer (beginning with the month in
(ii) Any amount paid to acquire an asset used (or held for use) directly in which the taxpayer first realizes benefits from such expenditures).
carrying out one or more purposes for which the accredited The election provided by paragraph (2) hereof may be made for any
nongovernment organization was created or organized. taxable year beginning after the effectivity of this Code, but only if made
An amount set aside for a specific project which comes within one or more not later than the time prescribed by law for filing the return for such
purposes of the accredited nongovernment organization may be treated as taxable year. The method so elected, and the period selected by the
a utilization, but only if at the time such amount is set aside, the accredited taxpayer, shall be adhered to in computing taxable income for the taxable
nongovernment organization has established to the satisfaction of the year for which the election is made and for all subsequent taxable years
Commissioner that the amount will be paid for the specific project within unless with the approval of the Commissioner, a change to a different
a period to be prescribed in rules and regulations to be promulgated by the 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 irrevocable for the taxable year for which the return is made: Provided,
any taxable year for which the taxpayer makes the election. That an individual who is entitled to and claimed for the optional standard
(3) Limitations on Deduction. - This Subsection shall not apply to: deduction shall not be required to submit with his tax return such financial
(a) Any expenditure for the acquisition or improvement of land, or for the statements otherwise required under this Code: Provided, further, That
improvement of property to be used in connection with research and except when the Commissioner otherwise permits, the said individual
development of a character which is subject to depreciation and depletion; shall keep such records pertaining to his gross sales or gross receipts, or the
and said corporation shall keep such records pertaining to his gross income as
(b) Any expenditure paid or incurred for the purpose of ascertaining the defined in Section 32 of this Code during the taxable year, as may be
existence, location, extent, or quality of any deposit of ore or other required by the rules and regulations promulgated by the Secretary of
mineral, including oil or gas. Finance, upon, recommendation of the Commissioner. [32]
(J) Pension Trusts. - An employer establishing or maintaining a pension (M) Premium Payments on Health and/or Hospitalization Insurance of
trust to provide for the payment of reasonable pensions to his employees an Individual Taxpayer. - the amount of premiums not to exceed -P2,400
shall be allowed as a deduction (in addition to the contributions to such per family or P200 a month paid during the taxable year for health and/or
trust during the taxable year to cover the pension liability accruing during hospitalization insurance taken by the taxpayer for himself, including his
the year, allowed as a deduction under Subsection (A)(1) of this Section) a family, shall be allowed as a deduction from his gross income: Provided,
reasonable amount transferred or paid into such trust during the taxable That said family has a gross income of not more than P250,000 for the
year in excess of such contributions, but only if such amount (1)has not taxable year: Provided, finally, That in the case of married taxpayers, only
theretofore been allowed as a deduction, and (2) is apportioned in equal the spouse claiming the additional exemption for dependents shall be
parts over a period of ten (10) consecutive years beginning with the year in entitled to this deduction.
which the transfer or payment is made. Notwithstanding the provision of the preceding Subsections, The Secretary
(K) Additional Requirements for Deductibility of Certain Payments. - of Finance, upon recommendation of the Commissioner, after a public
Any amount paid or payable which is otherwise deductible from, or taken hearing shall have been held for this purpose, may prescribe by rules and
into account in computing gross income or for which depreciation or regulations, limitations or ceilings for any of the itemized deductions
amortization may be allowed under this Section, shall be allowed as a under Subsections (A) to (J) of this Section: Provided, That for purposes of
deduction only if it is shown that the tax required to be deducted and determining such ceilings or limitations, the Secretary of Finance shall
withheld therefrom has been paid to the Bureau of Internal Revenue in consider the following factors: (1) adequacy of the prescribed limits on the
accordance with this Section 58 and 81 of this Code. actual expenditure requirements of each particular industry; and (2)effects
(L) Optional Standard Deduction (OSD). - In lieu of the deductions of inflation on expenditure levels: Provided, further, That no ceilings shall
allowed under the preceding Subsections, an individual subject to tax further be imposed on items of expense already subject to ceilings under
under Section 24, other than a nonresident alien, may elect a standard present law.
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 SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
income as defined in Section 32 of this Code. Unless the taxpayer signifies (A) In General. - For purposes of determining the tax provided in Section
in his return his intention to elect the optional standard deduction, he shall 24 (A) of this Title, there shall be allowed a basic personal exemption
be considered as having availed himself of the deductions allowed in the amounting to P50k for each individual taxpayer.
preceding Subsections. Such election when made in the return shall be
In the case of married individuals where only one of the spouses is this Section as exemption for citizens or resident of the Philippines:
deriving gross income, only such spouse shall be allowed the personal Provided, That said nonresident alien should file a true and accurate
exemption. return of the total income received by him from all sources in the
(B) Additional Exemption for Dependents. - There shall be allowed an Philippines, as required by this Title.
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. SEC. 36. Items not Deductible. -
In the case of legally separated spouses, additional exemptions may be (A) General Rule. - In computing net income, no deduction shall in any
claimed only by the spouse who has custody of the child or children: case be allowed in respect to -
Provided, That the total amount of additional exemptions that may be (1) Personal, living or family expenses;
claimed by both shall not exceed the maximum additional exemptions (2) Any amount paid out for new buildings or for permanent
herein allowed. improvements, or betterments made to increase the value of any property
For purposes of this Subsection, a 'dependent' means a legitimate, or estate;
illegitimate or legally adopted child chiefly dependent upon and living This Subsection shall not apply to intangible drilling and development
with the taxpayer if such dependent is not more than 21 years of age, costs incurred in petroleum operations which are deductible under
unmarried and not gainfully employed or if such dependent, regardless of Subsection (G) (1) of Section 34 of this Code.
age, is incapable of self-support because of mental or physical defect. (3) Any amount expended in restoring property or in making good the
(<21 years old) exhaustion thereof for which an allowance is or has been made; or
(C) Change of Status. - If the taxpayer marries or should have additional (4) Premiums paid on any life insurance policy covering the life of any
dependent(s) as defined above during the taxable year, the taxpayer may officer or employee, or of any person financially interested in any trade or
claim the corresponding additional exemption, as the case may be, in full business carried on by the taxpayer, individual or corporate, when the
for such year. taxpayer is directly or indirectly a beneficiary under such policy.
If the taxpayer dies during the taxable year, his estate may still claim the (B) Losses from Sales or Exchanges of Property. - In computing net
personal and additional exemptions for himself and his dependent(s) as if income, no deductions shall in any case be allowed in respect of losses
he died at the close of such year. from sales or exchanges of property directly or indirectly -
If the spouse or any of the dependents dies or if any of such dependents (1) Between members of a family. For purposes of this paragraph, the
marries, becomes 21 years old or becomes gainfully employed during the family of an individual shall include only his brothers and sisters (whether
taxable year, the taxpayer may still claim the same exemptions as if the by the whole or half-blood), spouse, ancestors, and lineal descendants; or
spouse or any of the dependents died, or as if such dependents married, (2) Except in the case of distributions in liquidation, between an individual
became 21 years old or became gainfully employed at the close of such and corporation more than 50% in value of the outstanding stock of which
year. is owned, directly or indirectly, by or for such individual; or
(D) Personal Exemption Allowable to Nonresident Alien Individual. - (3) Except in the case of distributions in liquidation, between two
A nonresident alien individual engaged in trade, business or in the corporations more than 50% in value of the outstanding stock of which is
exercise of a profession in the Philippines shall be entitled to a personal owned, directly or indirectly, by or for the same individual if either one of
exemption in the amount equal to the exemptions allowed in the income such corporations, with respect to the taxable year of the corporation
tax law in the country of which he is a subject - or citizen, to citizens of the preceding the date of the sale of exchange was under the law applicable to
Philippines not residing in such country, not to exceed the amount fixed in
such taxable year, a personal holding company or a foreign personal establishments or institutions shall secure a "Working Mother-Baby-
holding company; Friendly Certificate" from the Department of Health to be filed with the
(4) Between the grantor and a fiduciary of any trust; or Bureau of Internal Revenue, before they can avail of the incentive.
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary "Government facilities, establishments or institutions shall receive an
of another trust if the same person is a grantor with respect to each trust; additional appropriation equivalent to the savings they may derive as a
or result of complying with the provisions of this Act. The additional
(6) Between a fiduciary of a trust and beneficiary of such trust. appropriation shall be included in their budget for the next fiscal year."

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

RA 10028 Expanded Breastfeeding Promotion Act of 2009 RA 8502 Jewelry Industry Development Act of 1998
Section 3. Section 3 of Republic Act No. 7600 is hereby amended to read
as follows: Section 2. Declaration of policy. Recognizing that the jewelry industry
"Sec. 3. Definition of Terms. - For purposes of this Act, the following has the potential for more employment generation, enhance tax collection
definitions are adopted: xxx efficiency, increase the industry linkages with the other sectors of the
"j) Health institutions - are hospitals, health infirmaries, health economy, and to increase our foreign exchange earnings through exports
centers, lying-in centers, or puericulture centers with obstetrical and import substitutes, it is hereby declared to be the policy of the State to
and pediatric services. support, promote and encourage the growth and development of the
"t) Non-health facilities, establishment or institution - public places and predominantly, small and medium scale jewelry industries. Toward this
working places, as defined in subparagraphs (u) and (y), end, the State shall undertake to encourage the development of the jewelry
respectively. industry:
"u) Public place - enclosed or confined areas such as schools, public a) by promoting and encouraging local jewelers to join the formal sector
transportation terminals, shopping malls, and the like. by making the jewelry industry sector a partner in the task of building
"y) Workplace - work premises, whether private enterprises or up the small and medium enterprises through the establishment of an
government agencies, including their subdivisions, adequate support structure and the creation of a business environment
instrumentalities and government-owned and -controlled conducive to the viability, legalization and development of the jewelry
corporations. sector;
b) by adopting appropriate tax incentives and programs necessary for the
Section 14. Section 13 of Republic Act No. 7600 is hereby renumbered acceleration and growth of the industry; and
and amended to read as follows: c) by promoting and institutionalizing the effective promotion and
"Sec. 19. Incentives. - The expenses incurred by a private health and non- participation of associations of the jewelry industry and cooperatives
health facility, establishment or institution, in complying with the particularly in the advancement of the skills and craftsmanship of
provisions of this Act, shall be deductible expenses for income tax Filipino workers therein.
purposes up to twice the actual amount incurred: Provided, That the Section 3. Development incentives. The following incentives shall be
deduction shall apply for the taxable period when the expenses were available to qualified jewelry enterprises in the jewelry industry:
incurred: Provided, further, That all health and non-health facilities, a) Entitlement to zero duty on imported raw materials which include
establishments and institutions shall comply with the provisions of this Act precious metals, loose gems, precious stones, jewelry parts, accessories
within 6 months after its approval: Provided, finally, That such facilities, 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, Section 2. Declaration of policy. It is the policy of the State to provide
Chapter 71 of Sec. XIV, Chapter 83 of Sec. XV, and Chapter 96 of quality and relevant education to the Filipino youth and to encourage
Sec. XX of the Tariff and Customs Code, as amended; private initiative to support public education. Towards this end, the State
b) Exemption from the imposition of excise tax on all goods commonly shall institute programs to encourage private companies and enterprises to
or commercially known as jewelry, whether real or imitation pearls, help in the upgrading and modernization of public schools in the country,
precious and semi-precious stones and imitations thereof; all goods particularly those in poverty-stricken provinces.
made of, or ornamented, mounted or fitted with precious metals or
imitations thereof, as specifically mentioned in Sec. 150(a) of the Section 3. Adopt-a-School Program. There is hereby established
National Internal Revenue Code of the Philippines, as amended; the "Adopt-a-School Program" which will allow private entities to assist a
c) Entitlement to zero duty on imported capital equipment, including public school, whether elementary, secondary, or tertiary, preferably
spare parts and toolings thereof falling within Chapter 69 of Sec. XIII, located in any of the 20 poorest provinces identified by the Presidential
Chapter 82 of Sec. XV, Chapters 84 and 85 of Sec. XVI, and Chapter Council for Countryside Development or any other government agency
90 of Sec. XVIII of the Tariff and Customs Code, as amended; tasked with identifying the poorest provinces in, but not limited to, the
d) Additional deduction from taxable income of 50% of expenses following areas: staff and faculty development for training and further
incurred in training schemes approved by the appropriate agency and education; construction of facilities; upgrading of existing facilities,
which shall be deductible during the financial year the expenses were provision of books, publications and other instructional materials; and
incurred; modernization of instructional technologies.
e) Gold and silver sales by the Bangko Sentral ng Pilipinas to jewelry A Memorandum of Agreement (MOA) specifying the details of the
enterprises wider minimal margins; adoption shall be entered into between the adopting entity and the head of
f) Authority for jewelry enterprises to buy gold and silver directly from the school concerned: Provided, That such MOA shall be subject to review
other sources and approval of the Superintendent of Schools of the province or district
g) Inclusion of locally-manufactured jewelry in the government's tourist concerned: Provided, further, That the agreement shall last for at least 2
duty free shops including the promotion, advertisement and sale years with the possibility of extension: Provided, finally, That such period
thereof; and may be shortened only in cases where the adopting entity is dissolved
h) Jewelry enterprises availing of incentives provided under this Act before the end of such period unless otherwise earlier terminated in
shall still be eligible to incentives provided by other special laws such accordance with the succeeding Sec..
as Republic Act No. 7844 (Export Development Act of 1994), Republic
Act No. 7916 (Special Economic Zone Act of 1995), Executive Order Section 4. Periodic review. A review of the adoption shall be undertaken
226 (BOI Omnibus Investments Code), among others: Provided, That the by the local school board of the province or city where the school is
activity is export-oriented and that there is no double availment of the located. The standards and guidelines for the review shall be formulated
same incentives. 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
RA 8525 ADOPT-A-SCHOOL ACT OF 1998 termination of the adoption. The adopting entity may appeal the
Section 1. Title. This Act shall be known and cited as the "Adopt-a- assessment to the Coordinating Council whose decision shall be final and
School Act of 1998." unappealable.
 exclusive of the minimum 60-hour mandatory legal aid services rendered
Section 5. Additional deduction for expenses incurred for the adoption. to indigent litigants as required under the Rule on Mandatory Legal Aid
Provisions of existing laws to the contrary notwithstanding, expenses Services for Practicing Lawyers, under BAR Matter No. 2012, issued by
incurred by the adopting entity for the "Adopt-A-School Program" shall be the Supreme Court.
allowed an additional deduction from the gross income equivalent to 50% Section 6. Information, Education and Communication (IEC) Campaign. - The
of such expenses. DOJ, in cooperation with the Philippine Information Agency (PIA), is
Valuation of assistance other than money shall be based on the acquisition hereby mandated to conduct an annual IEC campaign in order to inform
cost of the property. Such valuation shall take into consideration the the lawyers of the procedures and guidelines in availing tax deductions
depreciated value of the property in case said property has already been and inform the general public that a free legal assistance to those who
used. 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
RA 9999 FREE LEGAL ASSISTANCE ACT OF 2010 component as envisioned in this Act.
Section 4. Requirements for Availment. - For purposes of availing of the The Supreme Court shall formulate the necessary implementing rules and
benefits and services as envisioned in this Act, a lawyer or professional regulations with respect to the legal services covered under this Act and
partnership shall secure a certification from the Public Attorney's Office the process of accreditation of organizations and/or associations which
(PAO), the Department of Justice (DOJ) or accredited association of the will provide free legal assistance.
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 CIR v. Isabela Cultural Corporation
lawyer and/or professional firm in the provision of legal services, the
association and/or organization duly accredited by the Supreme Court FACTS
shall issue the necessary certification that said legal services were actually Isabela Cultural Corporation (ICC), a domestic corp, received from the
undertaken. CIR an assessment letter demanding payment of the amounts of P333k+
The certification issued by, among others, the PAO, the DOJ and other and P4k+ as deficiency income tax and expanded withholding tax
accredited association by the Supreme Court shall be submitted to the inclusive of surcharge and interest, respectively, for the 1986.
Bureau of Internal Revenue (BIR) for purposes of availing the tax ICC requested reconsideration in a letter. However, it received a final
deductions as provided for in this Act and to the DOJ for purposes of notice before seizure demanding payment of the amounts stated in the
monitoring. said notices.
Section 5. Incentives to Lawyers. - For purposes of this Act, a lawyer or ICC thus filed a petition for review w/ CTA.
professional partnerships rendering actual free legal services, as defined by CTA rendered a decision canceling and setting aside the assessment
the Supreme Court, shall be entitled to an allowable deduction from the notices issued against ICC. It held that the claimed deductions for
gross income, the amount that could have been collected for the actual professional and security services were properly claimed by ICC in 1986
free legal services rendered or up to 10% of the gross income derived because it was only in the said year when the bills demanding payment
from the actual performance of the legal profession, whichever is lower: were sent to ICC.
Provided, That the actual free legal services herein contemplated shall be
 Hence, even if some of these professional services were rendered to ICC For a taxpayer using the accrual method, the determinative question is,
in 1984 or 1985, it could not declare the same as deduction for the said when do the facts present themselves in such a manner that the taxpayer
years as the amount thereof could not be determined at that time. must recognize income or expense? The accrual of income and expense
CTA also held that ICC did not understate its interest income on the subject is permitted when the all-events test has been met. This test requires: (1)
promissory notes. It found that it was the BIR which made an overstatement of fixing of a right to income or liability to pay; and (2) the availability of
said income when it compounded the interest income receivable by ICC from the the reasonable accurate determination of such income or liability.
promissory notes of Realty Investment, Inc., despite the absence of a stipulation The propriety of an accrual must be judged by the facts that a taxpayer
in the contract providing for a compounded interest; nor of a circumstance, like knew, or could reasonably be expected to have known, at the closing of
delay in payment or breach of contract, that would justify the application of its books for the taxable year. Accrual method of accounting presents
compounded interest. largely a question of fact; such that the taxpayer bears the burden of
CA affirmed this. proof of establishing the accrual of an item of income or deduction.
ISSSUES: In this case, the expenses for professional fees consist of expenses for
W/n CA correctly: legal and auditing services. The expenses for legal services pertain to the
(1) sustained the deduction of the expenses for professional and security 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga
services from ICCs gross income; and Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of
(2) held that ICC did not understate its interest income from the the expenses of said firm in connection with ICCs tax problems for the
promissory notes of Realty Investment, Inc; and that ICC withheld the year 1984.
required 1% withholding tax from the deductions for security services. As testified by the Treasurer of ICC, the firm has been its counsel since
RATIO: the 1960s. From the nature of the claimed deductions and the span of
YES. time during which the firm was retained, ICC can be expected to have
The requisites for the deductibility of ordinary and necessary trade, reasonably known the retainer fees charged by the firm as well as the
business, or professional expenses, like expenses paid for legal and compensation for its legal services. The failure to determine the exact
auditing services, are: amount of the expense during the taxable year when they could have
o (a) the expense must be ordinary and necessary; been claimed as deductions cannot thus be attributed solely to the
o (b) it must have been paid or incurred during the taxable year; delayed billing of these liabilities by the firm.
o (c) it must have been paid or incurred in carrying on the trade or For one, ICC, in the exercise of due diligence could have inquired into
business of the taxpayer; and the amount of their obligation to the firm, especially so that it is using
o (d) it must be supported by receipts, records or other pertinent papers the accrual method of accounting. For another, it could have reasonably
Accounting methods for tax purposes comprise a set of rules for determined the amount of legal and retainer fees owing to its familiarity
determining when and how to report income and deductions. In the with the rates charged by their long time legal consultant.
instant case, the accounting method used by ICC is the accrual method. In the same vein, the professional fees of SGV & Co. for auditing the
The accrual method relies upon the taxpayers right to receive amounts financial statements of ICC for the year 1985 cannot be validly claimed
or its obligation to pay them, in opposition to actual receipt or payment, as expense deductions in 1986. This is so because ICC failed to present
which characterizes the cash method of accounting. Amounts of income evidence showing that even with only "reasonable accuracy," as the
accrue where the right to receive them become fixed, where there is standard to ascertain its liability to SGV & Co. in the year 1985, it
created an enforceable liability. Similarly, liabilities are accrued when cannot determine the professional fees which said company would
fixed and determinable in amount, without regard to indeterminacy charge for its services.
merely of time of payment.
 ICC thus failed to discharge the burden of proving that the claimed tax return for the fiscal year ending February 28, 1985. GF claimed as
expense deductions for the professional services were allowable deduction, among others, the amount of P9,461,246 for media advertising
deductions for the taxable year 1986 of Tang. The Commissioner disallowed 50% or P4,730,623 of the
Decision of BIR to not grant legal and auditing services as deductible deduction claimed by GF. Consequently, GF was assessed deficiency
expenses is held VALID. 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.
ING BANK v. CIR
ING Bank accrued bonuses in the taxable years 1996 and 1997. It Issue: Whether or not the subject media advertising expense for Tang
recorded such bonuses as deductible in its books; although no withholding incurred by the respondent corporation was an ordinary and necessary
taxes were withheld in the year of accrual. expense fully deductible under the NIRC?
The taxpayer was then assessed for deficiency withholding taxes in the
year of accrual. Taxpayer maintained that the liability of the employer to Held:
withhold the tax does not arise until such bonus is actually distributed,
citing Section 72 of the 1977 NIRC which states that every employer No. It was a capital expenditure.
making payment of wages shall deduct and withhold upon such wages.
Since the supposed bonuses were not distributed to the officers and Deductions for income tax purposes partake of the nature of tax
employees in 1996 and 1997 but were distributed in the succeeding year exemptions; hence, must be strictly construed. To be deductible from gross
when the amounts of bonuses were finally determined, taxpayer asserts income, the subject advertising expense must be ordinary and necessary.
that its duty to withhold tax during those years did not arise. The Court There being no hard and fast rule on the reasonableness of an advertising
agrees with the assessment. The Court ruled that the taxpayer is liable for expense, the right to a deduction depends on a number of factors such as
the withholding tax on the bonuses since it claimed the same as expense in but not limited to: the type and size of business in which the taxpayer is
the year they were accrued. It obligation to withhold the related engaged; the volume and amount of its net earnings; the nature of the
withholding tax on such accrued bonuses arose at the time of accrual and expenditure itself; the intention of the taxpayer and the general economic
not at the time of actual payment. The obligation of the payor/employer conditions.
to deduct and withhold the related withholding tax arises at the time the
income was paid or accrued or recorded as expense in the The amount claimed as media advertising expense for Tang alone was
payors/employers books, whichever comes first. 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
CIR v. General Foods tantamount to efforts to establish a reputation, and should not, therefore,
G.R. No. 143672, April 4, 2003 be considered as business expense but as capital expenditure, which
normally should be spread out over a reasonable period of time.
Facts:
General Foods, Inc. is a corporation engaged in the manufacture of Advertising is of 2 kinds: (1) advertising to stimulate current sale and (2)
beverages such as Tang, Calumet and Kool-Aid. It filed its income advertising designed to stimulate future sale. 2nd type involves
expenditures incurred to create or maintain some form of goodwill for AIC contends that the money was paid as an allowance or bonus to its
taxpayers trade/business. If expenditures are of 1st kind, deductible as officers as provided in its by-laws (20% of profit of business will go to
business expenses. If 2nd kind, they are normally spread out over a President, VP, Board members, Secretary, Gen. Manager and Asst. Gen
reasonable period of time. Managers.
CTA upheld the CIRs decision and held Aguinaldo Industries liable for
Protection of brand franchise is analogous to the maintenance of goodwill 17k in back taxes.
or title to ones property. This is a capital expenditure which is spread out AIC argues that the profit derived from the sale of the Muntinlupa land
over a reasonable period of time. 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.
GF to pay assessment made by CIR. ISSUE:
W/n the bonus given to Aguinaldos officers was an ordinary and
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ necessary business expense and therefore deductible
RATIO:
AGUINALDO INDUSTRIES CORPORATION v. CIR No, it was not deductible.
The records show that the sale was carried out through a broker who
FACTS was paid a commission, thus the broker was the one who rendered the
Aguinaldo Industries Corp. was engaged in two lines of business: the actual services. There is no evidence of any service rendered by the
manufacture of fishing nets, handled by its Fish Net Division, and the officer which would have been the basis of such bonus.
manufacture of furniture, which in turn was handled by its Furniture In computing net income, there shall be allowed as deductions all
Division. ordinary and necessary expenses paid or incurred during the taxable
For accounting purposes, each division kept separate books of accounts year in carrying on any trade or business including reasonable
as required by the Department of Finance. The net incomes for the Fish allowances for personal services actually incurred.
Net Division and the Furniture Division were computed separately. In the basis of the forgoing standard, the bonus cannot be deemed as a
Aguinaldo Industries had previously acquired land in Muntinlupa for its deductible expense for tax purposes, even though the sale could be
fishing net factory, but when it acquired more suitable land for the classified as a transaction for carrying on the trade or business of the
purpose, it sold the Muntinlupa property for a profit, which was entered corporation.
in its books as miscellaneous income as distinguished from its tax There is no actual evidence that the officers actually rendered some
exempt income. service in the perfection of the sal
In 1951, Aguinaldo Industries filed separate returns for its fishing and For bonuses to be deductible it must answer two questions:
furniture divisions. o First, has personal service actually been rendered by the officers?
The BIR investigating officers found that AIC Fish Net deducted from o Second, if so, is it a reasonable allowance therefore?
its gross income the amount of 61k as additional renumeration paid to In this case, the shares in the profit were extraordinary and unusual
the officers of Aguinaldo Industries. expenses and as such, cannot be deemed as necessary expenses.
The examiner found that this money was taken from the sale of the Aguinaldo was also held liable to pay surcharge and interest on the back
Muntinlupa property, an isolated transaction not in the usual course of taxes.
business. Thus, the examiner recommended that the amount be
disallowed as a deduction. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
ATLAS CONSOLIDATED MINING DEVELOPMENT CORP v. CIR paid or incurred within the taxable year, and (3) it must be paid or
ATLAS CONSOLIDATED VS. CIR incurred in carrying in a trade or business.
Facts
Arose from the 1957 and 1958 deficiency income tax assessments made by Necessary" where the expenditure is appropriate and helpful in the
the Commissioner, where Atlas, was assessed P546,295.16 for 1957 and development of the taxpayer's business. 8 It is "ordinary" when it connotes
P215,493.96 for 1958 deficiency income taxes. 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
It was the opinion of the Commissioner that Atlas is not entitled to the payments be habitual or normal in the sense that the same taxpayer
exemption from the income tax under Section 4 of Republic Act will have to make them often; the payment may be unique or non-
909 1 because same covers only gold mines. recurring to the particular taxpayer affected.

The Secretary of Finance ruled that the exemption provided in Republic The said expense is not deductible from Atlas gross income in 1958
Act 909 embraces all new mines and old mines whether gold or other because expenses relating to recapitalization and reorganization of the
minerals. Atlas conceded but appealed the decision stating that the P25k corporation , the cost of obtaining stock subscription, promotion
they paid to PK Macker was not deductible. expenses and commission or fees paid for the sale of stock reorganization
are capital expenditures.
ISSUE:
W/N the amount of P25,523.14 paid in 1958 as annual public relations Efforts to establish reputation are akin to acquisition of c capital assets and
expenses is a deductible expense from gross income under Section 30 (a) are thus not business expenses but capital expenditures.
(1) of the National Internal Revenue Code?
CTAs decision not to exempt the promotional services rendered by Pk
HELD: Macker are not deductible as ordinary and necessary expenses of Atlas.
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 ZAMORA V. CIR
expense. FACTS
Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora,
The principle is recognized that when a taxpayer claims a deduction, he Manila, filed his income tax returns the years 1951 and 1952. The
must point to some specific provision of the statute in which that Collector of Internal Revenue found that he failed to file his return of the
deduction is authorized and must be able to prove that he is entitled to the capital gains derived from the sale of certain real properties and claimed
deduction which the law allows. deductions which were not allowable. The collector required him to pay
the deficiency income tax for the years 1951 and 1952. On appeal by
We come, then, to the statutory test of deductibility where it is axiomatic Zamora, the CTA modified the decision appealed from and ordered him
that to be deductible as a business expense, three conditions are imposed, to pay the reduced total sum of P30,258.00 (P22,980.00 and P7,278.00, as
namely: (1) the expense must be ordinary and necessary, (2) it must be 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 Ratio:
appealed. It is alleged by Mariano Zamora that the CTA erred in Section 30, of the Tax Code, provides that in computing net income,
disallowing P10,478.50 as promotion expenses incurred by his wife for the there shall be allowed as deductions all the ordinary and necessary
promotion of the Bay View Hotel and Farmacia Zamora. He contends expenses paid or incurred during the taxable year, in carrying on any
that the whole amount of P20,957.00 as promotion expenses in his 1951 trade or business
income tax returns, should be allowed and not merely one-half of it, on the o Since promotion expenses constitute one of the deductions in
ground that, while not all the itemized expenses are supported by receipts, conducting a business, same must testify these requirements. Claims
the absence of some supporting receipts has been sufficiently and for the deduction of promotion expenses or entertainment expenses
satisfactorily established. must also be substantiated or supported by record showing in detail
the amount and nature of the expenses incurred.
For the said amount was spent by Mrs. Esperanza A. Zamora (wife of o Considering that the application of Mrs. Zamora for dollar allocation
Mariano), during her travel to Japan and the United States to purchase shows that she went abroad on a combined medical and business trip,
machinery for a new Tiki-Tiki plant, and to observe hotel management in not all of her expenses came under the category of ordinary and
modern hotels. necessary expenses; part thereof constituted her personal expenses.
o There having been no means by which to ascertain which expense was
The CTA, however, found that for said trip Mrs. Zamora obtained only incurred by her in connection with the business of Mariano Zamora
the sum of P5,000.00 from the Central Bank and that in her application for and which was incurred for her personal benefit, the Collector and the
dollar allocation, she stated that she was going abroad on a combined CTA in their decisions, considered 50% of the said amount as
medical and business trip, which facts were not denied by Mariano business expenses and the other 50%, as her personal expenses. The
Zamora. No evidence had been submitted as to where Mariano had allocation is very fair to Mariano Zamora, there having been no
obtained the amount in excess of P5,000.00 given to his wife which she receipt whatsoever, submitted to explain the alleged business
spent abroad. No explanation had been made either that the statement expenses, or proof of the connection which said expenses had to the
contained in Mrs. Zamora's application for dollar allocation that she was business or the reasonableness. While in situations like the present,
going abroad on a combined medical and business trip, was not correct. absolute certainty is usually no possible, the CTA should make as
The alleged expenses were not supported by receipts. Mrs. Zamora could close an approximation as it can, bearing heavily, if it chooses, upon
not even remember how much money she had when she left abroad in the taxpayer whose inexactness is of his own making.
1951, and how the alleged amount of P20,957.00 was spent. Representation expenses fall under the category of business expenses
which are allowable deductions from gross income, if they meet the
Issue: conditions prescribed by law, particularly section 30 (a) [1], of the Tax
Whether the CTA erred in (1) disallowing P10,478.50, as promotion Code; that to be deductible:
expenses incurred by his wife for the promotion of the Bay View Hotel and o Business expenses must be ordinary and necessary expenses paid or
Farmacia Zamora (which is of P20,957.00, supposed business incurred in carrying on any trade or business.
expenses); (2) disallowing 3-% per annum as the rate of depreciation of o Those expenses must also meet the further test of reasonableness in
the Bay View Hotel Building amount.
o That when some of the representation expenses claimed by the
Held: taxpayer were evidenced by vouchers or chits, but others were without
Petition is dismissed. Decision appealed from is affirmed. vouchers or chits, documents or supporting papers.
 o There is no more than oral proof to the effect that payments have been Fast Facts:
made for representation expenses allegedly made by the taxpayer and CM Hoskins (company) is a domestic corporation engaged in real estate
about the general nature of such alleged expenses. as brokers, managing agents and administrators
o Accordingly, it is not possible to determine the actual amount Hoskins own 99.6% of the shares of the company. Every year, he
covered by supporting papers and the amount without supporting receives P45,000 salary and an annual salary bonus P40,000 plus free
papers, the court should determine from all available data, the amount use of the company car and receipt of other similar allowances and
properly deductible as representation expenses. benefits. He received an additional sum of P99,977.91 as his equal or
o In view hereof, the CTA did not commit error in allowing as 50% share of the 8% supervision fees received by the corporation as
promotion expenses of Mrs. Zamora claimed in Mariano Zamora's managing agents of Paradise Farms and Realty Ivestments. This
1951 income tax returns, merely one-half. additional sum was deducted from the tax payable.
Petitioner Mariano Zamora alleges that the CTA erred in disallowing 3- This was disallowed by the CIR because the additional sum is a
% per annum as the rate of depreciation of the Bay View Hotel distribution of earnings and profits of the taxpayer. On appeal, the Tax
Building but only 2-%. In justifying depreciation deduction of 3-%, Court concurred with the CIR and disallowed the deduction because it
Mariano Zamora contends that (1) the Ermita District, where the Bay was inordinately large and could not be accorded the treatment of an
View Hotel is located, is now becoming a commercial district; (2) the ordinary and necessary expense; akin to a distribution of its earnings to
hotel has no room for improvement; and (3) the changing modes in a stockholder (dividends).
architecture, styles of furniture and decorative designs, "must meet the Issue:
taste of a fickle public". It is a fact, however, that the CTA, in estimating W/N the deduction is allowed.
the reasonable rate of depreciation allowance for hotels made of Doctrine:
concrete and steel at 2-%, the three factors just mentioned had been No.
taken into account already. 1. This is a case of disguised dividends. Deduction was also clearly
o Normally, an average hotel building is estimated to have a useful life excessive.
of 50 years, but inasmuch as the useful life of the building for business 2.Payment was inordinately large and could not be accorded the treatment
purposes depends to a large extent on the suitability of the structure to of ordinary and necessary expenses allowed as deductible items within
its use and location, its architectural quality, the rate of change in the purview of the Tax Code. If such payment of P99,977.91 were to be
population, the shifting of land values, as well as the extent and allowed as a deductible item, then Hoskins would receive on these three
maintenance and rehabilitation. items alone (salary, bonus and supervision fee) a total of P184,977.91,
o It is allowed a depreciation rate of 2-% corresponding to a normal which would be double the corporation's reported net income for the
useful life of only 40 years. Consequently, the stand of the petitioners year of P92,540.25. If independently, a one-time P100,000.00-fee to plan
cannot be sustained. and lay down the rules for supervision of a subdivision project were to
CTA decision of only crediting 50% of representation/promotional be paid to an experienced realtor such as Hoskins, its fairness and
expenses and 2 % depreciation rate as deductible items from gross deductibility by the taxpayer could be conceded; but here 50% of the
income AFFIRMED. 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
CM HOSKINS v. CIR petitioner included such planning and supervision and were already
November 28, 1969 handsomely paid for by petitioner.
3.It is a general rule that 'Bonuses to employees made in good faith and as Calanoc financed and promoted a boxing and wrestling exhibition at the
additional compensation for the services actually rendered by the Rizal Memorial Stadium for a charitable purpose. Gross sales from event
employees are deductible, provided such payments, when added to the amounted to P26,553.00; the expenditures incurred was P25,157.62; and
stipulated salaries, do not exceed a reasonable compensation for the the net profit turned over to the Social Welfare Commission was only
services rendered. P1,375.38. Event was to solicit and receive contributions for orphans and
4.There is no fixed test for determining the reasonableness of a given destitute children of Child welfare Workers Club of the Social Welfare
bonus as compensation. The conditions precedent to the deduction of Commission.
bonuses to employees are:
a. the payment of the bonuses is in fact compensation; Calanoc applied for exemption from payment of amusement tax.
b. It must be for personal services actually rendered; and
c. The bonuses, when added to the salaries, are 'reasonable . . . when Also BIR also found the following items of expenditures: (a) P461.65 for
measured by the amount and quality of the services performed with police protection; (b) P460.00 for gifts; (c) P1,880.05 for parties; and (d)
relation to the business of the particular taxpayer' several items for representation.
5.Other tests suggested are:
a. Payment must be 'made in good faith'; CIR assessed Calanoc of amusement tax (~P7k) cotending that payment
b.' the character of the taxpayer's business, the volume and amount of its of amusement tax should be had where the net proceeds are not
net earnings, its locality, the type and extent of the services rendered, substantial or where the expenses are exorbitant.
the salary policy of the corporation';
c. 'the size of the particular business'; CTA affirmed.
d. 'the employees' qualifications and contributions to the business
venture'; and Issue: WON assessment was valid Yes; W/N Calanoc is exempt from
e.'general economic conditions' paying amusement tax No.
6. However, 'in determining whether the particular salary or compensation
payment is reasonable, the situation must be considered as whole. Doctrine:
Ordinarily, no single factor is decisive; ordinarily it is the interplay of Application for exemption from payment of amusement tax will be denied
several factors, properly weighted for the particular case, which must where the net proceeds of the exhibition conducted for charitable purposes
furnish the final answer." are not substantial or where the expenses incurred by the taxpayer are
exorbitant.
While employer has the right to fix compensation of employees, it is
subject to determination by the CIR. For income tax purposes, the Calanoc denies having received the stadium fee of P1,000, which is not
employer cannot legally claim such bonuses as deductible expenses unless included in the receipts. But evidence was submitted that while he did not
shown to be reasonable. To hold otherwise would open the gate for receive said stadium fee of P1,000, said amount was paid by the O-SO
rampant tax evasion. 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
CALANOC v. CIR of his expenses. It results, therefore, that P1,000 went into Calanocs
pocket which is not accounted for.
Facts:
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 More likely issue: Whether payment of bonuses is reasonable?
latter of the functions required of them to be rendered by law. The REASONABLE.
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 Held:
exhibition was for a charitable cause. Bonuses paid to officers and employees of Kuenzle, whether
non/resident were paid to them as additional compensation for personal
Calanoc cannot justify other expenses since his accountant died. services actually rendered (can be considered as ordinary and necessary
expenses).
CTA decision that Calanoc is NOT exempted from amusement tax is Nonresident 133 % of annual salaries (1950-51); 125 2/3% (1952)
AFFIRMED. 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
KUENZLE & STREIFF v. CIR 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
Facts: efficient personal service and contribution to deserve equal treatment in
Petitioner is a domestic corporation engaged in the importation of certain compensation and other emoluments with the particularity that their
products. Petitioner deducted from its gross income certain items such as liberation yearly salaries had been much smaller.
bonuses of resident and non-resident officers. 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
CIR disallowed deductions and demanded deficiency income taxes. of said bonuses should be only equal to their respective yearly salaries
Petitioner requested for the re-examination. CIR modified the same by cannot also be sustained. This claim cannot be justified considering the
allowing as deductible the directors fees and salaries of the non-resident factors we have already mentioned that play in the determination of the
President and VP, but disallowing the bonuses insofar as they execeed the reasonableness of the bonuses or additional compensation that may be
salaries of the recipients. Petitioner appealed questioning measure of given to an officer or an employee which, if properly considered,
reasonableness of bonuses paid in determinining deductibility. warrant the payment of the bonuses in question to the extent allowed by
the trial court.
CTA ruled that bonuses given were quite excessive. No reason to grant
greater bonuses to lower ranking officers. Doctrine:
The condition precedents to the deduction of bonuses to employees are:
Issue: (1) the payment of the bonuses is in fact compensation; (2) it must be for
Should determination of reasonableness for bonuses given to resident personal services actually rendered; and (3) the bonuses, when added to
officers and employees follow same pattern for determining the salaries, are reasonable when measured by the amount and quality of
reasonableness of bonuses given to non-resident officers in determining the services performed with relation to the business of the particular
deductibility? YES taxpayer.
 There is no fixed test for determining the reasonableness of a given PAPER INDUSTRIES CORPORATION OF THE PHILS. v. CA
bonus as compensation. This depends upon many factors. In Paper Industries Corporation (PICOP) v CA (December 1,
determining whether the particular salary or compensation payment is 1995)
reasonable, the situation must be considered as a whole. Fast Facts:
Bonuses paid > yearly salaries are reasonable because post-war policy of PICOP is a Philippine corp registered with BOI because its a pioneer
giving lower salaries, more government control of imports and exports, enterprise with respect to its integrated pulp and paper mill. Its also a non-
use of foreign exchange resulted to loss of profits for corporation. pioneer enterprise with respect to its integrated plywood and veneer mills.
Also, interest on unclaimed salaries and bonus participation are not the
interest contemplated in law because the latter is interest paid on PICOP received from the CIR 2 letters of assessment, the first one for
indebtedness. deficiency transaction tax with documentary and science stamp tax, and
Indebtedness amount which one contracted to pay the use of borrowed the other for deficiency income tax. Both PICOP and the CIR went to the
money CTA, the CA, and eventually to the SC regarding the assessment.
Corporation had at all times sufficient funds to pay salaries of Deficiency income tax ~P1.5M
employees.
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
RR 10-2002 payments on loans for the purchase of machinery and equipment; and (3)
certain claimed financial guarantees
RR 1-2009
1st deduction: PICOP entered into a merger with RPPM and Rustan
RR 7-2010 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
INTEREST so when the merger occurred, PICOP claimed 44M of RPPMs
accumulated losses as deduction on its gross income.
RA 9337 AMENDMENT
"(B) Interest. -
2nd deduction: PICOP obtained loans from foreign creditors to finance the
"(1) In General. - The amount of interest paid or incurred within a
purchase of machinery and equipment so in its 1977 ITR, PICOP claimed
taxable year on indebtedness in connection with the taxpayer's
interest payments on such loans. CIR was contending that the interest
profession, trade or business shall be allowed as deduction from gross
payments here should have been capitalized instead of being claimed as a
income: Provided, however, That the taxpayer's otherwise allowable
depreciation deduction.
deduction for interest expense shall be reduced by forty-two percent
(42%) of the interest income subjected to final tax: Provided, That
3rd deduction: The deduction is related to chattel and real estate
effective January 1, 2009, the percentage shall be thirty-three percent
mortgages required from PICOP by PNB and DBP as guarantors of loans
(33%).
incurred by PICOP from foreign creditors.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Issue: CIR v. VDA DE PRIETO
(1) Whether PICOP is entitled to deduct against current income net (September 30, 1960)
operating losses incurred by RPPM. FACTS
(2) Whether PICOP is entitled to deduct against current income interest Consuelo Vda. de Prieto conveyed by way of gifts to her 4 children real
payments on loans for the purchase of machinery and equipment. property with a total assessed value of P892,497.50. After the filing of the
(3) Whether PICOP is entitled to deduct against current income certain gift tax returns, CIR appraised the real property donated for gift tax
claimed financial guarantee expenses. purposes at P1,231,268.00 and assessed the total sum of P117,706.50 as
Held: (1) NO donor's gift tax, interests and compromises due thereon. Of the total sum
(2) YES of P117,706.50 paid by de Prieto, the sum of P55,978.65 represents the
(3) NO total interest on account of delinquency. This sum of P55,978.65 was
Doctrine: claimed as deduction. CIR, however, disallowed the claim and as a
(1) The ordinary rule (ordinary being those applicable to corps not consequence of such disallowance assessed respondent for 1954 the total
registered with the Bureau of Investments) is that net operating losses sum of P21,410.38 as deficiency income tax due on the aforesaid
cannot be carried over. RA 5186 introduced the carry-over of NOLCO P55,978.65, including interest, surcharge and compromise for the late
as a special incentive to registered pioneer enterprises and only with payment.
respect to their registered operations. PICOP is registered under the BOI ISSUE
but it is claiming losses of another enterprise with operations that are WON the interest paid for the late payment of her donor's tax is deductible
different from it. In effect, to grant PICOP's claimed deduction would be from the gross income
to permit it to purchase a tax deduction and RPPM to peddle its HELD / RATIO
accumulated operating losses. 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
(2) Interest payments on loans are allowed by the NIRC as deductions what is claimed as an interest deduction should have been paid or accrued
against the taxpayers gross income. The general rule is that interest within the year. It is here conceded that the interest paid by respondent
expenses are deductible against gross income and this certainly includes was in consequence of the late payment of her donor's tax, and the same
interest paid under loans incurred in connection with the carrying on of was paid within the year it is sought to be deducted.
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 term "indebtedness" has been defined as an unconditional and legally
the taxpayer the option to capitalize the cost basis of the capital assets enforceable obligation for the payment of money. Within the meaning of
(machinery and equipment), which the CIR insists on this scenario. CIR that definition, it is apparent that a tax may be considered indebtedness.
was not able to point to any provision that requires the disallowance of "Although taxes already due have not, strictly speaking, the same concept
the interest payments made by PICOP. 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
(3) PICOP failed to prove the entitlement to the deduction as there is no least in a board sense, a debt. It follows that the interest paid by herein
receipt to evidence its payments. 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 Fast Facts:
under Section 30(c) of the Tax Code and section 80 of the Income Tax The Philippine government gave Philippine National Bank (PNB) 12-year
Regulations, the taxpayer is not precluded thereby from claiming said treasury bonds as payment for its liabilities to PNB. PNB is arguing that
interest payment (for indebtedness)as deduction under section 30(b) of since Section 34(B) of NIRC was put in place to mitigate the effects of a
the same Code. 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
Penalties are distinguished from taxes and are thus not deductible under interest expense not allowed as a deduction from gross income. (so
the heading of taxes. basically it wants that the interest of the treasury bonds be allowed as a
deduction from gross income).
CTA DECISION that the interest on delinquent donors tax can be
deductible as an interest expense. 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?
REV REG 13-2000
Held:
Issued December 29, 2000 implements the provisions of Section 34(B) of No. Request that interest income be allowed as a deduction from gross
the Tax Code of 1997 relative to the requirements for the deductibility of income is DENIED.
interest expense from the gross income of a corporation or an individual
engaged in trade, business or in the practice of profession. Doctrine:
G.R. amount of interest expense paid/incurred by TP within a taxable
In general, subject to certain limitations, the following are the requisites year on indebtedness in connection to his trade, business or exercise as a
for the deductibility of interest expense from gross income: a) there must profession shall be allowed as deduction from his income [Section
be an indebtedness; b) there should be an interest expense paid or incurred 34(B)]
upon such indebtedness; c) the indebtedness must be that of the taxpayer; E: Interest expense allowed to be deducted will be reduced if TP has
d) the indebtedness must be connected with the taxpayer's trade, business derived certain interest income which had been subjected to final
or exercise of profession; e) the interest expense must have been paid or withholding tax. [Section 34(B)]. As of January 1, 2000, the reduction
incurred during the taxable year; f) the interest must have been stipulated shall be 38% of interest income.
in writing; g) the interest must be legally due; h) the interest payment Tax arbitrage scheme: where TPs evade tax by placing their excess funds
arrangement must not be between related taxpayers; i) the interest must in government securities and only paying 20% tax on interest derived
not be incurred to finance petroleum operations; and j) in case of interest therefrom than the 34% corporate tax that would have been imposed if
incurred to acquire property used in trade, business or exercise of the TP used such excess funds for other income-generating activities
profession, the same was not treated as a capital expenditure 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
BIR RULING NO. 006-00 withholding tax.
(January 5, 2000)