DELOITTE ON THE DOT
LOSSES incurred from spoilage, deterioration or obsolescence of assets is an inevitable part of doing business for most companies. Machineries may be damaged during use; equipment may be impaired as part of normal wear and tear; and inventories may be rendered useless, outdated, and obsolete due to advances in technology. But as the poet, Francis Quarles wisely wrote, “There is no worldly loss without some gain.”
While these losses are unfortunate, taxpayers have a path to relief in the form of deductible expense against their gross income for purposes of corporate income tax.
Pursuant to the Philippine Tax Code, as amended, losses incurred due to the destruction or disposal of assets are allowed to be deducted against a taxpayer’s gross income for corporate income tax purposes. In order to substantiate this deductible expense, a certificate of deductibility of goods/assets destructed/disposed may be secured from the Bureau of Internal Revenue (BIR). While this is a pre-existing requirement, revised guidelines and procedures in obtaining it were recently issued by the BIR in Revenue Memorandum Order (RMO) 21-2020, allowing for third party witness and virtual witnessing – a critical alternative considering the various quarantine limitations throughout the country due to the coronavirus disease 2019 (Covid-19) pandemic.
Under the revised guidelines, a taxpayer that intends to obtain a certificate of deductibility of goods/ assets destructed/disposed is required to submit to the BIR’s Large Taxpayers’ Office (LTO) or revenue district office (RDO) where its principal place of business is registered an application for destruction/ disposal of goods/assets (Annex ‘A’ of the RMO) at least seven days before the proposed scheduled date of destruction/disposal of the inventories/equipment. The said application shall be accompanied by the following documents:
• Sworn declaration of goods/ assets as waste or obsolete (Annex ‘D’ of the RMO)
• List of goods/assets for destruction/disposal or list of machineries/ equipment for destruction/aisposal (Annex ‘E’ or ‘E.1’ of the RMO)
• Letter of intent to appoint/ nominate third party witness, if applicable
• Inventory list of goods duly received by the BIR
• Supporting documents to prove the reasons stated in the application as the cause for destruction/disposal of the goods/asset
• Other documents to prove the correctness of the value of the goods/ assets to be destroyed/disposed
It is to be noted, however, that for goods, products and articles subject to excise tax, the destruction/disposal shall be witnessed or validated by the authorized BIR official from the Excise Tax Division of the tax bureau’s LTO.
Upon receipt of the application, the BIR revenue officer-in-charge shall determine the appropriate manner of witnessing the destruction/disposal of the goods/asset, which may either be through physical witnessing, virtual means or through a third party. This, together with the schedule of destruction/disposal, must be communicated to the taxpayer within five days after receipt of the application. In addition, in case of third party witnessing, the BIR will issue an authorization to witness the conduct of destruction/disposal (Annex ‘B’ of the RMO) to the third party witness through the taxpayer.
During the disposal/destruction, the taxpayer is required to arrange the inventory/assets in a manner that facilitates ease of identification and counting, as well as to assist the duly authorized BIR representative in the verification of the value of the assets, and to supervise the actual destruction/disposal.
The following documents are required to be submitted by the taxpayer to the LTO or RDO within three days after the completion of destruction/disposal, hence, should be kept in mind during the destruction/disposal:
• Photographs of the assets before, during and after the destruction/disposal with proper labels, numbering and quantity together with the front page of a newspaper of national circulation as evidence of the actual date
• In case of third party witnessing, video footage of the activity before, during and after the destruction/ disposal bearing the front page of a newspaper of national circulation as evidence of the actual date of the activity
The above documents are to be submitted along with the sworn declaration of asset disposal (Annex ‘F’ of the RMO), latest audited financial statements of the taxpayer, and the report of the third party witness certifying that the prescribed procedures per the RMO were observed.
Within five days from the date of submission, the BIR shall issue the duly signed certificate of deductibility of goods/assets destructed/ disposed, which shall be the basis of the taxpayer in claiming its deductions.
While the above procedures, as detailed in the new RMO, may be considered tedious by some taxpayers, they do offer clear guidelines on how to claim tax deduction on losses. Considering the impact of the global Covid- 19 pandemic, which has once again slowed down economic activity in the capital, taxpayers should be aware of their rights so that they are prepared to avail of any relief they are entitled to. We need all the help we can get to weather the uncertain year ahead.