How tax laws can help pick up the pieces

By Karen Kaye M. Sta. Maria

First Published in Business World (9/3/2012)

Once again, the Philippines has suffered a significant blow because of the vagaries of the weather. In the aftermath of the recent torrential rains brought about by an unusually strong monsoon in the first week of August, the country is faced anew with the challenge of recovery and rebuilding.

Some measure of relief is accorded to business because our Tax Code allows a tax deduction for casualty losses or losses from the destruction of business property (e.g., inventory, equipment, buildings) from an identifiable event of a sudden, unexpected or unusual nature. The BIR had previously issued specific guidelines on how casualty losses may be claimed as a deduction from income, such as Revenue Memorandum Order (RMO) No. 031-09, which was issued following the onslaught of Typhoons Ondoy and Pepeng in 2009.
It must be emphasized that the casualty losses that may be claimed as a deduction from income must pertain to properties actually used in business. Thus, losses arising from the destruction of assets that are not used in the regular conduct of trade or business are not allowed as deductions. Additionally, the BIR requires that the damaged properties must have been reported in the accounting records and financial statements as part of the taxpayer’s assets in the year preceding the occurrence of the loss.

Another limitation on the deductibility of casualty losses is that the amount of loss that may be claimed as a deduction is only to the extent of the net book value (acquisition cost less accumulated depreciation) of the property immediately preceding the casualty, reduced by the amount of insurance proceeds or other compensation received, if any. However, in case of partial destruction of property, the deductible loss is limited to the cost to restore the property back to its normal operating condition, but in no case shall the deductible amount be more than the net book value of the property immediately before the casualty. Should the restoration cost be more than the net book value of the property immediately before the casualty, the excess should be capitalized subject to depreciation over the remaining useful life of the property.

Evidence of the properties damaged (e.g., photographs of the properties before and after the casualty) and their valuation (e.g., vouchers, receipts and other documents showing their acquisition cost) must be submitted to the BIR, together with the Sworn Declaration of Loss, within 45 days after the date of the occurrence of the casualty. The Sworn Declaration of Loss must state the nature of the event that gave rise to such loss and the time of its occurrence, the description and location of the damaged properties, the basis for the computation of the loss, and the amount of insurance or other compensation received or receivable.

The burden of proving and substantiating the claim for deduction of casualty losses is with the taxpayer, with time being of the essence. Failure to submit the Sworn Declaration of Loss, together with the documentary requirements, within the 45-day period will result in the disallowance of the casualty losses claimed in the taxpayer’s income tax return.

We should also bear in mind that any claim for casualty losses is not granted as a matter of course. While RMO No. 031-09 encourages BIR officers to exert every effort to assist taxpayers who wish to file a claim for casualty losses, they are also mandated to verify all documents submitted to prove such losses. Careful verification is necessary in view of the well-settled rule in taxation that deductions, being in the nature of exemptions, should be strictly construed against the taxpayer. This will be done by the BIR Large Taxpayers (LT) office or Revenue District Office (RDO) where the principal office of the taxpayer is registered, which is also where the Sworn Declaration of Loss and the supporting documents should be filed. However, in instances where the damaged properties are located outside the territorial jurisdiction of the LT Office or RDO (for example, when a taxpayer’s principal office is in Makati, while its manufacturing facility is located in Laguna), the BIR recently clarified in RMO No. 06-2012 that verification of the casualty loss may be conducted by the LT Office or RDO having territorial jurisdiction over the place where the properties are located, with proper coordination with the concerned LT Office or RDO.

Recovery from natural disasters is a long and painstaking process. These provisions in our Tax Code, and their implementing rules and regulations, serve as a cushion that may help businessmen and entrepreneurs get back on their feet and ensure that the gears of the Philippine economy do not come to a standstill.

Karen Kaye M Sta. Maria is a Tax Associate Director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.