Corporate taxpayers can avail themselves of the optional standard deduction computed at 40% of gross income. The optional standard deduction is in lieu of the itemised operating expenses.
Depreciation and depletion
Depreciation is generally computed on a straight-line basis, although there are a variety of acceptable depreciation methods. Management should select the method regarded as most appropriate, based on the expected pattern of consumption of future economic benefits, so as to allocate depreciation on a systematic basis over the asset's useful life. Gain on the sale of depreciated property is taxable as ordinary income. Generally, tax depreciation should conform to book depreciation, unless the former includes incentives.
Properties used in petroleum operations may be depreciated over a period of ten years using the straight-line or declining-balance method, at the option of the service contractor. Properties used in mining operations with expected life of more than ten years may be depreciated over any number of years between five years and their expected life.
A cost depletion allowance is available as follows:
- For oil and gas wells, depletion is based on actual reduction in flow and production ascertained, not by flush flow, but by the settled production or regular flow.
- For mines, depletion is allowable up to an amount not to exceed the market value, as used for purposes of imposing the mining ad valorem taxes, of the products mined and sold during the year.
Amortisation of goodwill is not deductible for tax purposes.
Start-up expenses are deductible when incurred.
The allowable deduction for interest expense shall be reduced by an amount equal to 20% of interest income that is subject to final tax, if any. The percentage of reduction was adjusted from 33% as a result of the lower CIT of 25% under the CREATE Law.
Bad debts are deductible expenses when written-off, subject to certain requirements.
The deduction for charitable contributions ordinarily may not exceed 5% of taxable income. However, contributions to certain institutions are 100% deductible, subject to certain conditions.
Entertainment, amusement, and recreation expenses should not exceed 0.5% of net sales for taxpayers engaged in the sale of goods or properties, or 1% of net revenue for taxpayers engaged in the sale of services, including professionals and lessors of properties.
Special deductions are allowed for certain businesses (e.g. insurance, mining, petroleum, and real estate investment trust).
Under the CREATE Law, labour training expenses incurred for skills development of enterprise-based trainees enrolled in public senior high schools, public higher education institutions, or public technical and vocational institutions are subject to additional deduction of 50% of such expense, subject to certain conditions.
Fines and penalties
Interest penalties are deductible. Surcharge and compromise penalties imposed for non-payment or late payment of taxes are not deductible for tax purposes.
Corporate taxpayers can claim a deduction for all taxes paid or accrued within the taxable year in connection with their trade or business, except for the following:
- Philippine CIT.
- Income taxes imposed by authority of any foreign country, unless the taxpayer elects to take a deduction in lieu of a foreign tax credit. For a resident foreign corporation, the only option is to deduct; foreign tax credit is not allowed to be claimed (see Foreign tax credit in the Tax credits and incentives section for more information).
- Donor’s tax and estate tax.
- Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
In the case of a foreign corporation, deductions for taxes are allowed only if they are connected with income from sources within the Philippines.
Net operating losses
A net operating loss for any taxable year immediately preceding the current taxable year, which had not been previously offset as a deduction from gross income, may be carried over as a deduction from gross income for the next three consecutive taxable years immediately following the year of this loss (except losses during the period when the taxpayer was tax-exempt), provided there has been no substantial change in the ownership of the business or enterprise where 75% of the paid up capital or nominal value of the shares are held by the same persons.
Under Republic Act No. 11494 or the Bayanihan to Recover as One Act, net operating loss for the taxable year 2020 and 2021 may be carried over for the next five consecutive taxable years following such loss.
For mines, other than oil and gas wells, a net operating loss calculated without the benefit of incentives provided for under EO No. 226, or the Omnibus Investments Code of 1987, as amended, incurred in any of the first ten years of operation may be carried over as a deduction from taxable income for the next five years immediately following the year of such loss.
Loss carrybacks are not allowed.
Payments to foreign affiliates
A Philippine corporation can claim a deduction for royalties, management service fees, and interest charges paid to foreign affiliates, under arm's-length terms, where the appropriate WHTs are withheld and remitted.
Head office expense allocations
A resident foreign corporation is allowed to claim allocated head office expenses as a deduction, subject to certain requirements.