An Overview of Financial Management

People’s Technology Complex –
Special Economic Zone

November 13, 2014
Presented by:
ARLENE C. JALOS, CPA

Manager, Audit & Assurance
Alas, Oplas & Co. CPA’s
Alas, Oplas & Co., CPAs
Where in Formula
Gross sales/ receipts xxx

Less: Returns, discounts & allowances xxx
Net sales xxx
Less: Cost of sales xxx
Gross income/ gross profit xxx
Less: ALLOWABLE DEDUCTIONS xxx
Taxable net income xxx
Regular tax rate 30%
Amount to be paid xxx
CLASSIFICATIONS
• 40% Optional Standard Deduction

(introduced to Corp. by RA 9337)
• Itemized deductions
OSD Formula
Gross sales/ receipts xxx

Less: Returns, discounts & allowances xxx
Net sales xxx
Less: Cost of sales xxx
Gross income/ gross profit xxx
Multiplied by OSD 40%
Allowable deduction xxx
Optional Standard Deduction
 Disclosure of election to use the OSD (RMC 16-2010)
 Taxpayers availing of the OSD are required to check the

appropriate box in the ITR for the first quarter.
 Failure to indicate the election to avail of the OSD shall be

considered as having availed of the itemized deduction.
9
Optional Standard Deduction
 Implication of OSD
 Option is irrevocable for the taxable year for which the return is
made.
 Any subsequent amendment of ITR filed for the first/initial

quarter shall not affect the irrevocable character of the election to
avail of the OSD or itemized deduction.
 Individual claiming the OSD is not required to submit financial

statements but shall keep records of his gross sales/receipts 10
Itemized Deductions : Requisites
• Applicable, in general
• Trade/ business/ profession related
• On a per item of expense basis
• Incurred or paid during the taxable year
• Generally no limit as to amount
• Substantiation requirement, in general
• Reasonable in amount
• Not contrary to public policy, morals, or order
• Properly withheld, if required
Itemized deduction (Sec. 34)
 Ordinary and necessary expenses (Sec. 34 (A))

 Interest (Sec. 34 (B))
 Taxes (Sec. 34 C)
 Losses (Sec. 34 (D))
 Bad debts (Sec. 34 (E))
 Depreciation/ depletion (Sec. 34 (F))
 Charitable contribution (Sec. 34 (H))
 Research & development (Sec. 34 (I))
 Pension trusts (Sec. 34 (J))
Ordinary and necessary expenses
• Necessary
• Appropriate and helpful in the development of taxpayer’s business
and are intended to minimize losses or to increase profits.
• Ordinary
• Normal or usual in relation to the taxpayer’s business and
surrounding circumstances.
Ordinary and necessary expenses
• Salaries & wages;

• Travel expenses;
• Rentals;
• Entertainment, amusement and recreation expenses;
• Supplies, repairs & maintenance & other incidental expenses;
• Advertising;
• Insurance premiums
Salaries & wages
• Compensation for personal services actually rendered
• Includes allowances, no matter how called, provided to employees

under employee-employer relationship;
• Must have been subjected to w/holding tax on compensation,

unless, exempted thereof
• Fringe benefit to managerial & supervisory employees on a separate

account
• Employer’s share on SSS, PHIC, HDMF may be added

Salaries & Wages : Exempted from withholding tax
• De minimis benefits
• Minimum wage income earners
• Fringe benefit
• Separation pay for causes beyond control of employee
• Retirement pay under RA7641

Travel expenses
• Incurred here and abroad while away from home in pursuit of trade,
business or profession
• Includes transportation expenses, meals and lodging, as long as

incurred solely for carrying trade, business, or profession
• Not included: Personal foreign travels sponsored by employer

subject to FBT
Rental expenses
• Incurred for the continued use or possession of property to which

the taxpayer is not taking title or in which he has no equity other
than that of a lessee, user or possessor
• Property may be real or personal property under operating lease
• Must have been subjected to EWT of 5% (RR No. 2-98)

Other deductions on rentals
• Advance payment of lease – deductible upon lapse of the period

applicable
• Lease improvements
– An improvement constructed on a leased property;
– Depreciation of such improvement is allowed as a deduction
• Lease bonus paid to secure lease is deductible on pro-rate basis

Entertainment, amusement & recreation
• Representation expenses – entertaining, providing amusement and

recreation to, or meeting with, a guests at a dining place, place of
amusement, country club, theater, concert, play, sporting event, &
similar establishments (Sec. 2, RR 10-02)
• Depreciation or rental expense relating to entertainment facilities

(e.g. yacht, vacation club, or any similar item or real or personal
property for entertainment, amusement or recreation of guests or
employees (Sec. 2, RR 10-02);
Entertainment, amusement & recreation : Requisites
• Paid or incurred during the taxable year;
• Directly connected with development, management & operation;

or furtherance of the conduct of trade, business, or profession
• Not contrary to law, morals, good customs, public policy;
• Substantiated by adequate proof;
• Subjected to withholding tax, if applicable;
• Limitation: (a) 0.5% of net sales (goods); (b) 1% of net revenue

(services)
Entertainment, amusement & recreation : Exclusions
• Compensation or expenses subjected to FBT;
• For charitable or fund raising event;
• For bona fide business meetings or stockholders, partners or

directors;
• For attending or sponsoring an employee to a league or

professional organization meeting;
• For events for promotion, marketing, and advertising like concerts,

seminars, workshops, conventions, etc;
• Expenses of similar in nature

Example: Limitation on Representation expense
Illustration 1: Illustration 2:
Sale of goods 10,000,000 Sale of goods 50,000,000
Representation expense 65,000 Sale of service 30,000,000
Representation expense 600,000
Representati
Illustration 1: Illustration 2: on expense Limit Allowable Disallowed
Sale of goods 50,000,000 375,000.00 250,000.00 250,000.00 125,000.00

Allowed deduction 50,000 Sale of services 30,000,000 225,000.00 300,000.00 225,000.00 -
Disallowed 15,000 600,000.00 550,000.00 475,000.00 125,000.00
Interest expense
The amount of interest paid or incurred within the taxable year on

indebtedness related to trade or business.
Requisites:
• There must be an indebtedness stipulated in writing;
• Indebtedness connected with trade, business, profession;
• There must be an interest paid or incurred during the year;
• Interest must be legally due & demandable
Interest expense : Exceptions
Loans between related parties:
– Individual and corporation where individual owns more than 50%

interest, directly or indirectly;
– Same individual owns more than 50% interest on both parties to

loan;
– Loan between fiduciaries of two trusts owned by same grantor

Interest expense : Exceptions
• Optional treatment of interest on acquisition of property
• Interest to finance petroleum operations
• Interest under cash basis

– Deductible upon actual payment of interest on amortization;
– If interest is paid in advance, interest is deductible only upon full
payment of the principal
– If service enterprise, prepaid interest is deductible in year
interest is paid
Interest expense : Non-deductible
Interest expense – Deduction = 33% of the interest income subjected to final tax
Interest expense paid/ incurred xxx

Less: Interest expense limitation
33% of gross interest income (xxx)
Deductible interest expense xxx
Illustration: Interest expense
Example 1: Example 1:
Interest expense 12,000 Deductible interest expense 12,000
Interest income 0
Example 2:
Interest expense 12,000 Example 2:
Interest income (12,000 x 80%) 9,600 Interest expense 12,000
Less: Limitation
Example 2: (12,000 x 33.33%) 4,000
Deductible interest expense 8,000 Deductible interest expense 8,000
Interest expense limitation: Rationale
• This limitation on the deductibility of interest expense was legislated

specifically to address the tax arbitrage arising from the difference
between the 20% final tax on interest income and the regular
corporate income tax rate (RCIT) under which interest expense can
be claimed as a deduction.
Interest expense limitation: Rationale

Example 2: Example 2:
Interest expense 12,000 Benefit (12,000 x 30%) 3,600
Interest income 12,000 Final tax paid (12,000 x 20%) (2,400)
Net benefit 1,200
Example 2: 33.3333333333% ???

Interest expense 12,000
Less: Limitation
(12,000 x 33.33%) 4,000 (30% - 20%)/ 30%
Deductible interest expense 8,000
Tax rate 30% What if the RCIT rate becomes 35%
Benefit 2,400 again? What is the rate of interest
Final tax paid (12,000 x 20%) (2,400) expense limitation?
Net benefit -0-
42.857142857…% √
Interest expense
Is interest expense from YES. Taxes constitutes an

delinquent payment of indebtedness for purposes of
taxes deductible? income tax, thus, interest on
delinquent payments of tax is
allowed as deduction. (CIR vs.
Palanca GR#1-166266.10-29-66)
Taxes
• Paid or incurred within the taxable year;
• Incurred in connection with taxpayer’s trade business, or profession;
• Imposed directly upon taxpayer

Taxes : Deductible
• Documentary stamp tax;

• Occupation tax;
• Privilege & licenses fees;
• Excise tax;
• Import duties;
• Local business tax;
• Automobile registration fees;
• Community tax;
• Municipal tax
Taxes : Nondeductible
• Philippine income tax;

• Estate & donor’s tax;
• Stock transaction tax (1/2 of 1%);
• Value-added tax;
• Foreign income tax, if used as tax credit;
• Non-business/ trade taxes;
• Special assessments/ levy for increases in property values;
• Interest on delinquency taxes – as interest expense;
• Additions to tax: surcharge and compromise penalties
Foreign tax credits : Limitation
• Foreign tax paid by a domestic corporation may be credited

proportionately against Philippine tax on the same profits, but the
credit is limited to the amount of Philippine tax payable on the
foreign income.
Foreign taxes : Proof of credits
• The total amount of income derived from sources without the

Philippines;
• The amount of income derived from each country, the tax paid or
incurred to which is claimed as a credit
• All other information necessary for the verification and computation

of such credits.
Taxes : General limitation
• In the case of a non-resident alien individual engaged in trade or

business in the Philippines and a resident foreign corporation, the
deductions for taxes shall be allowed only if and to the extent that
they are connected with income from sources within the Philippines.
Losses
• Actually sustained during the taxable year relative to the property

used in the conduct of trade, business, or profession and not
compensated for by insurance or other form of indemnity.
• Transaction losses
• Casualty losses
• Capital losses
• Special losses; or
• NOLCO
Transaction Losses
• Losses arising from closed and completed transactions in the

conduct of trade or business.
• Example:
– Loss on sale of ordinary assets;
– Foreign exchange losses
Casualty Losses : Requisites
• Loss of properties used in trade, business, or practice of profession.
• Arising from fires, storms, shipwreck or other casualties or robbery,

theft, or embezzlement;
• Not compensated by insurance or other indemnity;
• Reported to the BIR within 45 days from date of discovery

Capital Losses
• Losses from capital assets other than those subjected to CGT.
• Deductible only to the extent of capital gains
• Examples:
– Sales or exchanges of capital assets;
– Short sales of property;
– Securities becoming worthless;
– Loss for failure to exercise option to buy capital asset;
– Wagering/ gambling losses
Special Losses
Allowed:
– Write-off of inventories
– Abandonment of petroleum operations
Non-deductible:
– Loss on voluntary removable of buildings
– Loss from illegal transactions
– Loss on exchange between related parties
– Shrinkage of value of shares
NOLCO
• Excess of allowable deductions over gross income;
• Carried over the next 3 immediately succeeding years;
• Forms part of the deductions as a special allowable deductions upon

application;
• Applied in first-in; first-out basis (FIFO);
• Not applicable under OSD;
• Not applicable against MCIT;
• Not transferable except in merger and consolidation where NOLCO of

absorbed is transferred to the surviving corporation.
Bad debts
• Business, trade or profession related debts due to taxpayer actually

ascertained to become worthless and actually charged off during the
taxable year;
• Under direct write-off method for BIR purposes

Bad debts : Requisites
• Valid and subsisting claim connected with trade, business or

profession;
• Not between related parties;
• Actually ascertained to be worthless and uncollectible at the end of

the taxable year;
• Written-off during the taxable year

Depreciation
• Allowance to reduce value of tangible fixed assets resulting form

wear and tear and normal obsolescence for the taxpayer to recover
cost of the asset;
• Requisites:
– Must be reasonable;
– Charged off during the period;
– Asset must be used in trade, business or profession
– Asset must have limited useful life; and,
– Must be located in the Philippines for NRA and foreign
corporations
Charitable contributions
• Contributions or gifts actually paid or made within the taxable year

to, or for the use of the Government of the Philippines or any of its
agencies or any political subdivision thereof exclusively for public
purposes, or to accredited domestic corporation or associations
organized and operated exclusively for religious, charitable,
scientific, youth and sports development, cultural or educational
purposes or for the rehabilitation of veterans, or to social welfare
institutions, or to non-government organizations.
• Not necessarily business, trade or profession expenses.
• Subject to substantiation requirements.
• Valuation – based on cost of property.

Contributions deductible in FULL
• Donations to NEDA projects
• Donations to foreign institutions based on international agreement,

treaties, or commitments entered into by Philippines;
• Donations to accredited NGOs

– Non-stock and non-profit;
– Utilization of donation not later than the 15th day of the 3rd month
after the close of the taxable year;
– Not more than 30% is used for administrative purposes;
– In event of dissolution, assets of the NGO would be distributed to
an NGO of similar purpose or in accordance with Court’s
judgment
Charitable Contributions : Limitation
 Individual donor - 10% of net income

before deducting
donations
 Corporate donor - 5% of net income before

deducting donations
OR
Actual contribution/donation
49
WHICHEVER IS LOWER
Research and Development
• Research
• Original and planned investigation undertaken by the taxpayer with
the prospect of gaining new scientific or technical knowledge and
understanding;
• Development
• Application of the research findings or other knowledge to a plan or
design for production of new or substantially improved materials,
devices, products, processes, systems or services before the start of
commercial production or use
Research and Development : Optional treatment
• Deferred expenses charged to a capital account but not to property

subject to depreciation or development and amortized over 60
months from the month first benefits were realized from such
expenditures.
Pension Trusts
• A pension plan intended to provide retirement benefits to covered

employees at a certain period of time under the circumstances and
amounts provided for.
• Types of pensions:
• Defined contribution plan
• Defined benefit plan
Itemized deduction : Summary
 Ordinary and necessary expenses (Sec. 34 (A))

 Interest (Sec. 34 (B))
 Taxes (Sec. 34 C)
 Losses (Sec. 34 (D))
 Bad debts (Sec. 34 (E))
 Depreciation/ depletion (Sec. 34 (F))
 Charitable contribution (Sec. 34 (H))
 Research & development (Sec. 34 (I))
 Pension trusts (Sec. 34 (J))

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People’s Technology Complex –

Special Economic Zone

ARLENE C. JALOS, CPA

Gross sales/ receipts xxx

• 40% Optional Standard Deduction

Gross sales/ receipts xxx

Optional Standard Deduction

 Disclosure of election to use the OSD (RMC 16-2010)

 Taxpayers availing of the OSD are required to check the

 Failure to indicate the election to avail of the OSD shall be

Optional Standard Deduction

 Any subsequent amendment of ITR filed for the first/initial

 Individual claiming the OSD is not required to submit financial

Itemized Deductions : Requisites

Itemized deduction (Sec. 34)

 Ordinary and necessary expenses (Sec. 34 (A))

Ordinary and necessary expenses

Ordinary and necessary expenses

• Salaries & wages;

Salaries & wages

• Compensation for personal services actually rendered

• Includes allowances, no matter how called, provided to employees

• Must have been subjected to w/holding tax on compensation,

• Fringe benefit to managerial & supervisory employees on a separate

• Employer’s share on SSS, PHIC, HDMF may be added

Salaries & Wages : Exempted from withholding tax

• Minimum wage income earners

• Separation pay for causes beyond control of employee

• Retirement pay under RA7641

• Includes transportation expenses, meals and lodging, as long as

• Not included: Personal foreign travels sponsored by employer

• Incurred for the continued use or possession of property to which

• Property may be real or personal property under operating lease

• Must have been subjected to EWT of 5% (RR No. 2-98)

Other deductions on rentals

• Advance payment of lease – deductible upon lapse of the period

• Lease bonus paid to secure lease is deductible on pro-rate basis

Entertainment, amusement & recreation

• Representation expenses – entertaining, providing amusement and

• Depreciation or rental expense relating to entertainment facilities

Entertainment, amusement & recreation : Requisites

• Paid or incurred during the taxable year;

• Directly connected with development, management & operation;

• Not contrary to law, morals, good customs, public policy;

• Substantiated by adequate proof;

• Subjected to withholding tax, if applicable;

• Limitation: (a) 0.5% of net sales (goods); (b) 1% of net revenue

Entertainment, amusement & recreation : Exclusions

• Compensation or expenses subjected to FBT;

• For charitable or fund raising event;

• For bona fide business meetings or stockholders, partners or

• For attending or sponsoring an employee to a league or

• For events for promotion, marketing, and advertising like concerts,

• Expenses of similar in nature

Example: Limitation on Representation expense

Sale of goods 50,000,000 375,000.00 250,000.00 250,000.00 125,000.00

The amount of interest paid or incurred within the taxable year on

Interest expense : Exceptions

Loans between related parties:

– Individual and corporation where individual owns more than 50%

– Same individual owns more than 50% interest on both parties to

– Loan between fiduciaries of two trusts owned by same grantor

Interest expense : Exceptions

• Optional treatment of interest on acquisition of property