O-Y Tax Laws

8/10/2019 O-Y Tax Laws

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REVENUE REGULATIONS NO. 05-99

SUBJECT : Implementing Section 34(E) of the Tax Code of 1997 on theRequirements for Deductibility of Bad Debts from Gross Income

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope.

Pursuant to the provisions of Section 244 of the Tax Code of 1997,these regulations are hereby promulgated to implement the provisions of Section 34(E) of thesame Code on the requirements for deductibility of bad debts from the gross income of acorporation or an individual engaged in trade or business or a professional engaged in thepractice of his profession. cdasia

SECTION 2. Definition of Terms.For purposes of these regulations, the following wordsand phrases shall have the following meaning, viz:

a. "Bad debts"shall refer to those debts resulting from the worthlessness oruncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from moneylent or from uncollectible amounts of income from goods sold or services rendered.

b. "Securities" shall mean shares of stock in a corporation and rights to subscribe for or to

receive such shares. The term includes bonds, debentures, notes or certificates, or other evidenceof indebtedness, issued by any corporation, including those issued by a government or politicalsubdivision thereof, with interest coupons or in registered form.

c. "Actually ascertained to be worthless"In general, a debt is not worthless simplybecause it is of doubtful value or difficult to collect. Worthlessness is not determined by aninflexible formula or slide rule calculation but upon the exercise of sound business judgment. Thedetermination of worthlessness in a given case must depend upon the particular facts and thecircumstances of the case. A taxpayer may not postpone a bad debt deduction on the basis of amere hope of ultimate collection or because of a continuance of attempts to collect notes whichhave long become overdue, and where there is no showing that the surrounding circumstancesdiffer from those relating to other notes which were charged off in a prior year. While a merehope probably will not justify postponement of the deduction, a reasonable possibility of

recovery will permit the account to be carried along notwithstanding that the probabilities arethat the debt may not be collected at all. The creditor may offer evidence to show someexpectation that the debt would have been paid in the intervening years, and that subsequently,the hope was shattered or appeared to have been unfounded. If, for example, the creditor couldshow that during the years he attempted to collect the debt, the debtor had property the title ofwhich was in dispute but which would enable him to pay his debts when the title was cleared,the creditor would be entitled to defer the deduction on the ground that there was no genuineascertainment of worthlessness.

Thus, accounts receivable, the amount whereof is insignificant and the collection of whichthrough court action may be more costly to the taxpayer, may be written-off as bad debts evenwithout conclusive evidence that the taxpayer's receivable from a debtor has definitely becomeworthless. LexLib

Good faith does not require that the taxpayer be an "incorrigible optimist" but on the other hand,he may not be unduly pessimistic. Creditors do not have to wait until some turn of the wheel offortune may bring their debtors into affluence. The taxpayer may strike a middle course betweenpessimism and optimism and determine debts to be worthless in the exercise of sound business

judgment based upon as complete information as is reasonably ascertainable. The taxpayer neednot have perfect discernment.

d. "Actually charged off from the taxpayers books of accounts"This phrase means thatthe amount of money lent by the taxpayer (in the course of his business, trade or profession) to


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his debtor had been recorded in his books of account as a receivable has actually becomeworthless as of the end of the taxable year, that the said receivable has been cancelled andwritten-off from the said taxpayer's books of account. A mere recording in the taxpayer's books ofaccount of estimated uncollectible accounts does not constitute a write-off of the said receivable,hence, shall not be a valid basis for its deduction as a bad debt expense. In no case may any baddebt deduction be allowed unless the facts pertaining to the money or property lent and its

cancellation or write-off from the taxpayer's accounting records, after having been determinedthat the same has actually become worthless, have been complied with by the taxpayer.

SECTION 3. Requisites for Valid Deduction of Bad Debts From Gross income.GeneralRule.In general, the requisites for deductibility of bad debts are:

(1) There must be an existing indebtedness due to the taxpayer which must be valid andlegally demandable;

(2) The same must be connected with the taxpayer's trade, business or practice of profession;

(3) The same must not be sustained in a transaction entered into between related partiesenumerated under Sec. 36(B) of the Tax Code of 1997 ;

(4) The same must be actually charged off the books of accounts of the taxpayer as of the end

of the taxable year; and

(5) The same must be actually ascertained to be worthless and uncollectible as of the end ofthe taxable year.

Before a taxpayer may charge off and deduct a debt, he must ascertain and be able todemonstrate with reasonable degree of certainty the uncollectibility of the debt. TheCommissioner of Internal Revenue will consider all pertinent evidence, including the value of thecollateral, if any, securing the debt and the financial condition of the debtor in determiningwhether a debt is worthless, or the assigning of the case for collection to an independentcollection lawyer who is not under the employ of the taxpayer and who shall report on the legalobstacle and the virtual impossibility of collecting the same from the debtor and who shall issue astatement under oath showing the propriety of the deductions thereon made for alleged bad

debts. Thus, where the surrounding circumstances indicate that a debt is worthless anduncollectible and that legal action to enforce payment would in all probability not result in thesatisfaction of execution on a judgment, a showing of those facts will be sufficient evidence of theworthlessness of the debt for the purpose of deduction.

Exception: In the case of banks, however, in lieu of requisite No. 5 above, the Bangko Sentral ngPilipinas (BSP), thru its Monetary Board, shall ascertain the worthlessness and uncollectibility ofthe bad debts and it shall approve the writing off of the said indebtedness from the banks' booksof accounts at the end of the taxable year. The bank though should still comply with requisitesNos. 1-4 as enumerated above before it can avail of the benefit of deduction.

Also, in no case may a receivable from an insurance or surety company be written-off from thetaxpayer's books and claimed as bad debts deduction unless such company has been declaredclosed due to insolvency or for any such similar reason by the Insurance Commissioner. cda

SECTION 4. Tax Benefit Rule.The recovery of bad debts previously allowed as deductionin the preceding year or years shall be included as part of the taxpayer's gross income in the yearof such recovery to the extent of the income tax benefit of said deduction. Example: If in the yearthe taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income taxdue from him on account of the said deduction, his subsequent recovery thereof from his debtorshall be treated as a receipt of realized taxable income. Conversely, if the said taxpayer did notbenefit from the deduction of the said bad debt written-off because it did not result to anyreduction of his income tax in the year of such deduction (i.e. where the result of his business


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operation was a net loss even without deduction of the bad debts written-off), then hissubsequent recovery thereof shall be treated as a mere recovery or a return of capital, hence, nottreated as receipt of realized taxable income.

SECTION 5. Securities Becoming Worthless.If securities, as defined under Sec. 2(b) hereof,held as capital asset, are ascertained to be worthless and charged off within the taxable year, theloss resulting therefrom shall be considered as a loss from the sale or exchange of capital assetmade on the last day of such taxable year. The taxpayer, however, has to prove through clear andconvincing evidence that the securities are in fact worthless.

This rule, however, is not true in the case of banks or trust companies incorporated under thelaws of the Philippines, a substantial part of whose business is the receipt of deposits.

SECTION 6. Repealing Clause.The provision of any revenue regulations, revenuememorandum order, revenue memorandum circular or any other revenue issuances inconsistentwith these Regulations are hereby repealed, amended, or modified accordingly. Cdpr

SECTION 7. Effectivity Clause.These Regulations shall take effect fifteen (15) days afterpublication in any newspaper of general circulation.


SUBJECT : Substantiation Requirement for Losses Arising from Casualty,Robbery, Theft or Embezzlement


Pursuant to the provisions of Section 326 in relation to Section 4 of the National Internal RevenueCode of 1977, these regulations are hereby promulgated to govern the manner of reporting lossesarising from casualty, robbery, theft, or embezzlement, for income tax purposes. cdtai

SECTION 1. Nature of deductible losses. Any loss arising from fires, storms or other

casualty, and from robbery, theft or embezzlement, is allowable as a deduction under Section30(d) for the taxable year in which the loss is sustained. The term "casualty" is the complete orpartial destruction of property resulting from an identifiable event of a sudden, unexpected, orunusual nature. It denotes accident, some sudden invasion by hostile agency, and excludesprogressive deterioration through steadily operating cause. Generally, theft is the criminalappropriation of another's property to the use of the taker. Embezzlement is the fraudulentappropriation of another's property by a person to whom it has been entrusted or into whosehands it has lawfully come.

SECTION 2. Requirements of substantiation.The taxpayer bears the burden of proving andsubstantiating his claim for deduction for losses allowed under Section 30(d) and should complywith the following substantiation requirements:

(a) A declaration of loss which must be filed with the Commissioner of Internal Revenue or

his deputies within a certain period prescribed in these regulations after the occurrence of thecasualty, robbery, theft or embezzlement.

(b) Proof of the elements of the loss claimed, such as the actual nature and occurrence of theevent and amount of the loss.

SECTION 3. Declaration of loss.Within forty-five days after the date of the occurrence ofcasualty or robbery, theft or embezzlement, a taxpayer who sustained loss therefrom and whointends to claim the loss as a deduction for the taxable year in which the loss was sustained shallfile a sworn declaration of loss with the nearest Revenue District Officer. The sworn declaration


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of loss shall contain, among other things, the following information:

(a) The nature of the event giving rise to the loss and the time of its occurrence;

(b) A description of the damaged property and its location;

(c) The items needed to compute the loss such as cost or other basis of the property;depreciation allowed or allowable if any; value of property before and after the event; cost ofrepair;

(d) Amount of insurance or other compensation received or receivable.

Evidence to support these items should be furnished, if available. Examples are purchasecontracts and deeds, receipted bills for improvements, and pictures and competent appraisals ofthe property before and after the casualty.

SECTION 4. Proof of loss.(a) In general. The declaration of loss, being one of theessential requirements of substantiation of a claim for a loss deduction, is subject to verificationand does not constitute sufficient proof of the loss that will justify its deductibility for income taxpurposes. Therefore, the mere filing of a declaration of loss does not automatically entitle thetaxpayer to deduct the alleged loss from gross income. The failure, however, to submit the said

declaration of loss within the period prescribed in these regulations will result in thedisallowance of the casualty loss claimed in the taxpayer's income tax return. The taxpayershould therefore file a declaration of loss and should be prepared to support and substantiate theinformation reported in the said declaration with evidence which he should gather immediatelyor as soon as possible after the occurrence of the casualty or event causing the loss.

(b) Casualty loss.Photographs of the property as it existed before it was damaged will behelpful in showing the condition and value of the property prior to the casualty. Photographstaken after the casualty which show the extent of damage will be helpful in establishing thecondition and value of the property after it was damaged. Photographs showing the conditionand value of the property after it was repaired, restored or replaced may also be helpful.

Furthermore, since the valuation of the property is of extreme importance in determining theamount of loss sustained, the taxpayer should be prepared to come forward with documentary

proofs, such as cancelled checks, vouchers, receipts and other evidence of cost.

The foregoing evidence should be kept by the taxpayer as part of his tax records and be madeavailable to a revenue examiner, upon audit of his income tax return and the declaration of loss.

(c) Robbery, theft or embezzlement losses.To support the deduction for losses arisingfrom robbery, theft or embezzlement, the taxpayer must prove by credible evidence all theelements of the loss, the amount of the loss, and the proper year of the deduction. The taxpayerbears the burden of proof, and no deduction will be allowed unless he shows the property wasstolen, rather than misplaced or lost. A mere disappearance of property is not enough, nor is amere error or shortage in accounts.

Failure to report theft or robbery to the police may be a factor against the taxpayer. On the otherhand, a mere report of alleged theft or robbery to the police authorities is not a conclusive proofof the loss arising therefrom.

SECTION 5. Determination of amount deductible.(a) In general. The amount of casualtyloss deductible is limited to the difference between the value of the property immediatelypreceding the casualty and its value immediately thereafter, but shall not exceed an amountequal to the cost or other adjusted basis of the property, or depreciated cost in the case ofproperty used in business, reduced by any insurance or other compensation received.

(b) Method of valuation.(i) The fair market value of the property immediately before and


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immediately after the casualty for purposes of determining the amount of casualty lossdeductible under this section shall be ascertained by an impartial but competent appraisal. Thisappraisal must recognize the effects of any general market decline affecting undamaged, as wellas damaged property, which may occur simultaneously with the casualty in order that anydeduction under this section shall be limited to actual loss resulting from damage to property.

(ii) The cost of repairs to the property damaged is acceptable as evidence of the loss of valueif the taxpayer shows that (1) the repairs are necessary to restore the property to its conditionimmediately before the casualty, (2) the amount spent for such repairs is not excessive, (3) therepairs do not cover more than the damage suffered, and (4) the value of the property after therepairs does not as a result of the repairs exceed the value of the property immediately before thecasualty.

(c) Examples.

The application of this section may be illustrated by the following examples:

(i) Property not used in business:

Cost or adjusted basis P18,000.00

Value of property before casualty 15,000.00Value of property after casualty 10,000.00

Insurance recovered 3,000.00

The casualty loss is computed as follows:

Value of property before casualty P15,000.00

Value of property after casualty 10,000.00

Difference P5,000.00

========

Loss to be taken into account for

purposes of Section 30(d):

lesser amount of property

actually destroyed (P5,000)

or adjusted basis of property

actually destroyed (P18,000) P5,000.00

Less: Insurance received 3,000.00

AMOUNT OF LOSS DEDUCTIBLE P2,000.00

=======

(ii) Property used in business:

(A) Total destruction.In case of losses arising from total destruction of property used inbusiness (ordinary asset) the net book value (cost less accumulated depreciation) immediatelypreceding the casualty should be used as the basis in claiming losses, also to be reduced by anyamount of insurance or compensation received.


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To illustrate:

Assume that

Acquisition cost of property P10,000

Accumulated depreciation 5,000

Insurance recovered 2,500

Amount deductible is computed as follows:

Acquisition cost P10,000

Less: Accumulated depreciation 5,000

Amount of loss suffered P5,000

Less: Amount recovered through insurance 2,500

AMOUNT DEDUCTIBLE P2,500======

(B) Partial destruction.In case of losses arising from partial damages of property used inbusiness, the replacement cost to restore the property back to its normal operating conditionshould be used for purposes of computing deductible losses, but in no case shall the deductibleloss be more, than the net book value of the property as a whole immediately before the casualty.The excess over the net book value immediately before the casualty should be capitalized subjectto depreciation over the remaining useful life of the property.

To illustrate:

Assume:

Acquisition cost P100,000Accumulated depreciation 90,000

Net book value P10,000

=======

Estimated remaining useful life 5 years

Replacement cost of damaged portion P20,000

In the above example, the loss deductible for tax purposes would be limited to P10,000 which is

equal to the net book value of the whole property:

Net book value P10,000

Replacement cost 20,000

Excess of replacement cost to be

capitalized P10,000


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======

Consequently, the new cost basis subject to depreciation charges over the remaining useful life ofthe property which is five (5) years, would be P20,000 as shown hereunder:

Net book value before casualty P10,000

Add: Excess of replacement cost over

book value 10,000

New cost basis P20,000

======

Yearly depreciation

P20,000

5 years = P4,000

(iii) Farm losses.In the case of losses sustained, by farmers, the following rules shall apply:

(a) Loss of livestock.The loss sustained in the death of livestock shall be allowed as adeduction to the extent of the acquisition cost only if no inventories are taken into account indetermining the income from the business of farming.

If inventories are taken into account in determining the income from the trade or business offarming, no deduction shall be allowed for losses sustained during the taxable year uponlivestock or other products, whether purchased for resale or produced on the farm, to the extentsuch losses are reflected in the inventory on hand at the close of the taxable year.

(b) Other farm losses.Where ground is prepared and planted or stocked as in case ofsugar, coconut and other agricultural plantations, orchards, fishponds and other farms and its

value is completely destroyed by the overflow or seepage of water from natural causes, the costof the preparation and planting or stocking up to the time of the disaster shall be deductible lossin the year in which it is incurred.

SECTION 6. Determination of amount deductiblerobbery, theft and embezzlement losses.The amount deductible in respect of robbery, theft and embezzlement loss shall be determinedconsistently with the manner prescribed in the preceding section for determining the amount ofcasualty loss allowable as a deduction. In applying the provisions of the preceding section for thispurpose, the fair market value of the property immediately after the theft shall be considered tobe zero. This section does not apply to losses reflected in the inventories of the taxpayer.

Example:

In 1969, B purchases for personal use a diamond brooch costing P40,000. On November 30, 1975

at which time it has a fair market value of P35,000 the brooch was stolen. The brooch was fullyinsured against theft. A controversy develops with the insurance company over its liability inrespect of the loss. However, in 1976; B has a reasonable prospect of recovery of the fair marketvalue of the brooch from the insurance company. The controversy is settled in March, 1977, atwhich time B receives P20,000 in insurance proceeds to cover the loss from theft. No deductionfor loss is allowable for 1975 or 1976; but the amount of the deduction allowable for the taxableyear 1977 is P15,000, computed as follows:

Value of property immediately before theft P35,000


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Less: Value of property immediately after

theft -0-

Loss to be taken into account (P35,000 but

not to exceed adjusted basis of P40,000

at the time of theft) P35,000

Less: Insurance received in 1977 20,000

Deduction allowable for 1977 P15,000

======

SECTION 7. Year of deduction.If a casualty occurs which may result in a loss and, in theyear of such casualty or event, there exist a claim for reimbursement with respect to which thereis a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement

may be received is sustained until it can be ascertained with reasonable certainty whether or notsuch reimbursement will be received. Whether a reasonable prospect of recovery exist withrespect to a claim for a reimbursement of a loss is a question of fact to be determined upon anexamination of all facts and circumstances. Whether or not such reimbursement will be receivedmay be ascertained with reasonable certainty, for example, by a settlement of the claim, by anadjudication of the claim, or by an abandonment of the claim. When a taxpayer claims that thetaxable year in which a loss is sustained is fixed by his abandonment of the claim forreimbursement, he must be able to produce objective evidence of his having abandoned theclaim, such as the execution of a release.

SECTION 8. Effectivity of these regulations.These regulations shall be applicable to lossessustained or arising from casualties, robbery, theft or embezzlement occurring on or after theapproval of these regulations.

With respect however to such losses arising before the approval of these regulations, thedeclaration of loss required under these regulations should be filed within forty-five days fromthe approval of these regulations.

ALFREDO PIO DE RODA, JR.

Acting Secretary of Finance

Recommended by:

EFREN I. PLANA

Acting Commissioner

ANNEX

B.I.R. Form No. 1746

DECLARATION OF LOSS ARISING FROM CASUALTY,

ROBBERY, THEFT OR EMBEZZLEMENT

Name of taxpayer: _____________________________________________________

Address: ____________________________________________________________

T.A.N. ______________________________________________________________


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A. NATURE OF LOSS

1. Event causing the loss ______________________________________________

2. Date of occurrence of event __________________________________________

3. Description of damaged property and its location (an itemized list should be attached)

________________________________________________________________

4. Facts and circumstances surrounding the loss of the property:

5. Name of insurance company or other entity from which recovery claim may be made:

_______________________________________________________________

B. VALUATION OF LOSS

1. Nonbusiness property

Original cost or adjusted basis P____________

Value immediately before casualty P____________ ____________

Value immediately after casualty ____________ ____________Amount of insurance recoverable ____________

2. Business propertyTotal destruction

Acquisition cost of property P____________

Accumulated depreciation ____________

Amount of insurance recovered ____________

3. Business propertypartial damage

Net book value immediately before P____________

Amount of replacement cost to restore the property

back to its normal operating condition ____________

REVENUE MEMORANDUM CIRCULAR NO. 26-85

Subject : Amending Revenue Memorandum Circular No. 5-85 dated February 26, 1985on the Applicable Uniform Exchange Rate of U.S. Dollar to Philippine Peso for InternalRevenue Tax Purposes.

To : All Internal Revenue Offices and Other Concerned

For the information and guidance of all concerned, the following rules as amended are hereby

prescribed to govern the conversion of U.S. dollar and other foreign currencies to Philippinepesos contained in Revenue Memorandum Circular No. 5-85 dated February 26, 1985:

a) Beginning January 1, 1985, the conversion rate to be applied shall be the prevailinginterbank reference rate for the day of the transaction.

b) In the event that the foreign exchange rate as stated in the above paragraph (a) isimpractical or not feasible, the average interbank reference during the year shall apply. aisa dc

c) For the purpose of converting the tax liability in U.S. dollar to Philippine Peso, theprevailing interbank rate at the time of payment shall be applied when paid before the due date


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of the tax or the prevailing interbank reference rate at the due date of tax when paid on or afterthe due date of the tax.

d) When currency involved is other than U.S. dollar, the foreign currency shall first beconverted to U.S. dollar at the prevailing exchanges rate between the two currencies.

This circular does not apply to transaction covered by Revenue Memorandum Circular No. 30-84

dated October 19, 1984, regarding the imposition of additional one per cent (1%) gross receiptstax on buying and selling of foreign exchange for peso by bank, non-bank financialintermediaries and other authorized foreign exchange dealers or agents and RevenueMemorandum Circular No. 32-84 dated November 7, 1984, in determining (for income taxpurposes) the cost basis of certain commodities imported beginning January 1, 1984, the valueand prices thereof are quoted in the foreign currency.

ENFORCEMENT AND PUBLICITY

All internal revenue officers and other charged with the enforcement of internal revenue laws areenjoined to adhere to the provisions of this circular and to give it the widest publicity possible.

REVENUE REGULATIONS NO. 05-99SUBJECT : Implementing Section 34(E) of the Tax Code of 1997 on theRequirements for Deductibility of Bad Debts from Gross Income


SECTION 1. Scope.Pursuant to the provisions of Section 244 of the Tax Code of 1997,these regulations are hereby promulgated to implement the provisions of Section 34(E) of thesame Code on the requirements for deductibility of bad debts from the gross income of acorporation or an individual engaged in trade or business or a professional engaged in thepractice of his profession.

SECTION 2. Definition of Terms.For purposes of these regulations, the following wordsand phrases shall have the following meaning, viz:

a. "Bad debts"shall refer to those debts resulting from the worthlessness oruncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from moneylent or from uncollectible amounts of income from goods sold or services rendered.

b. "Securities" shall mean shares of stock in a corporation and rights to subscribe for or toreceive such shares. The term includes bonds, debentures, notes or certificates, or other evidenceof indebtedness, issued by any corporation, including those issued by a government or politicalsubdivision thereof, with interest coupons or in registered form.

c. "Actually ascertained to be worthless"In general, a debt is not worthless simplybecause it is of doubtful value or difficult to collect. Worthlessness is not determined by aninflexible formula or slide rule calculation but upon the exercise of sound business judgment. The

determination of worthlessness in a given case must depend upon the particular facts and thecircumstances of the case. A taxpayer may not postpone a bad debt deduction on the basis of amere hope of ultimate collection or because of a continuance of attempts to collect notes whichhave long become overdue, and where there is no showing that the surrounding circumstancesdiffer from those relating to other notes which were charged off in a prior year. While a merehope probably will not justify postponement of the deduction, a reasonable possibility ofrecovery will permit the account to be carried along notwithstanding that the probabilities arethat the debt may not be collected at all. The creditor may offer evidence to show someexpectation that the debt would have been paid in the intervening years, and that subsequently,


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the hope was shattered or appeared to have been unfounded. If, for example, the creditor couldshow that during the years he attempted to collect the debt, the debtor had property the title ofwhich was in dispute but which would enable him to pay his debts when the title was cleared,the creditor would be entitled to defer the deduction on the ground that there was no genuineascertainment of worthlessness.

Thus, accounts receivable, the amount whereof is insignificant and the collection of whichthrough court action may be more costly to the taxpayer, may be written-off as bad debts evenwithout conclusive evidence that the taxpayer's receivable from a debtor has definitely becomeworthless. LexLib

Good faith does not require that the taxpayer be an "incorrigible optimist" but on the other hand,he may not be unduly pessimistic. Creditors do not have to wait until some turn of the wheel offortune may bring their debtors into affluence. The taxpayer may strike a middle course betweenpessimism and optimism and determine debts to be worthless in the exercise of sound business

judgment based upon as complete information as is reasonably ascertainable. The taxpayer neednot have perfect discernment.

d. "Actually charged off from the taxpayers books of accounts"This phrase means thatthe amount of money lent by the taxpayer (in the course of his business, trade or profession) to

his debtor had been recorded in his books of account as a receivable has actually becomeworthless as of the end of the taxable year, that the said receivable has been cancelled andwritten-off from the said taxpayer's books of account. A mere recording in the taxpayer's books ofaccount of estimated uncollectible accounts does not constitute a write-off of the said receivable,hence, shall not be a valid basis for its deduction as a bad debt expense. In no case may any baddebt deduction be allowed unless the facts pertaining to the money or property lent and itscancellation or write-off from the taxpayer's accounting records, after having been determinedthat the same has actually become worthless, have been complied with by the taxpayer.

SECTION 3. Requisites for Valid Deduction of Bad Debts From Gross income.GeneralRule.In general, the requisites for deductibility of bad debts are:

(1) There must be an existing indebtedness due to the taxpayer which must be valid and

legally demandable;(2) The same must be connected with the taxpayer's trade, business or practice of profession;

(3) The same must not be sustained in a transaction entered into between related partiesenumerated under Sec. 36(B) of the Tax Code of 1997 ;

(4) The same must be actually charged off the books of accounts of the taxpayer as of the endof the taxable year; and

(5) The same must be actually ascertained to be worthless and uncollectible as of the end ofthe taxable year.

Before a taxpayer may charge off and deduct a debt, he must ascertain and be able todemonstrate with reasonable degree of certainty the uncollectibility of the debt. The

Commissioner of Internal Revenue will consider all pertinent evidence, including the value of thecollateral, if any, securing the debt and the financial condition of the debtor in determiningwhether a debt is worthless, or the assigning of the case for collection to an independentcollection lawyer who is not under the employ of the taxpayer and who shall report on the legalobstacle and the virtual impossibility of collecting the same from the debtor and who shall issue astatement under oath showing the propriety of the deductions thereon made for alleged baddebts. Thus, where the surrounding circumstances indicate that a debt is worthless anduncollectible and that legal action to enforce payment would in all probability not result in thesatisfaction of execution on a judgment, a showing of those facts will be sufficient evidence of the


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worthlessness of the debt for the purpose of deduction.

Exception: In the case of banks, however, in lieu of requisite No. 5 above, the Bangko Sentral ngPilipinas (BSP), thru its Monetary Board, shall ascertain the worthlessness and uncollectibility ofthe bad debts and it shall approve the writing off of the said indebtedness from the banks' booksof accounts at the end of the taxable year. The bank though should still comply with requisitesNos. 1-4 as enumerated above before it can avail of the benefit of deduction.

Also, in no case may a receivable from an insurance or surety company be written-off from thetaxpayer's books and claimed as bad debts deduction unless such company has been declaredclosed due to insolvency or for any such similar reason by the Insurance Commissioner. cda

SECTION 4. Tax Benefit Rule.The recovery of bad debts previously allowed as deductionin the preceding year or years shall be included as part of the taxpayer's gross income in the yearof such recovery to the extent of the income tax benefit of said deduction. Example: If in the yearthe taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income taxdue from him on account of the said deduction, his subsequent recovery thereof from his debtorshall be treated as a receipt of realized taxable income. Conversely, if the said taxpayer did notbenefit from the deduction of the said bad debt written-off because it did not result to anyreduction of his income tax in the year of such deduction (i.e. where the result of his business

operation was a net loss even without deduction of the bad debts written-off), then hissubsequent recovery thereof shall be treated as a mere recovery or a return of capital, hence, nottreated as receipt of realized taxable income.

SECTION 5. Securities Becoming Worthless.If securities, as defined under Sec. 2(b) hereof,held as capital asset, are ascertained to be worthless and charged off within the taxable year, theloss resulting therefrom shall be considered as a loss from the sale or exchange of capital assetmade on the last day of such taxable year. The taxpayer, however, has to prove through clear andconvincing evidence that the securities are in fact worthless.

This rule, however, is not true in the case of banks or trust companies incorporated under thelaws of the Philippines, a substantial part of whose business is the receipt of deposits.

SECTION 6. Repealing Clause.The provision of any revenue regulations, revenuememorandum order, revenue memorandum circular or any other revenue issuances inconsistentwith these Regulations are hereby repealed, amended, or modified accordingly.

SECTION 7. Effectivity Clause.These Regulations shall take effect fifteen (15) days afterpublication in any newspaper of general circulation.


SUBJECT : Prescribing Allowable Cost Depletion Allowance Beginning CalendarYear 1975 and Fiscal Year Beginning July 1, 1975, pursuant to Section 30 (g) (1) of the NationalInternal Revenue Code, as amended


Pursuant to Sections 30 (g)(1) and 338, in relation to Section 4 (1) of the National Internal RevenueCode, as amended, the following regulations are hereby promulgated and shall be known asRevenue Regulations No. 5-76. cdta

SECTION 1. Scope.These regulations shall cover cost depletion allowance, allowable asdeduction in computing taxable income beginning with the calendar year 1975 and fiscal yearbeginning July 1, 1975, pursuant to Section 30 (g) (1) of the National Internal Revenue Code, as


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amended.

SECTION 2. Allowance of Deduction for Depletion.In the case of mines, oil and gas wellsand other natural deposits, there shall be allowed as deductions in computing its taxable incomea reasonable allowance for depletion computed in accordance with the following sectionsbeginning calendar year 1975 and fiscal year beginning July 1, 1975.

SECTION 3. Who May Avail of the Cost Depletion.

Annual depletion deductions areallowed only to mining entities which own an economic interest in mineral deposits. Aneconomic interest is possessed in every case in which the taxpayer has acquired by investmentany interest in mineral, in place and secures, by any form of legal relationship, such as, but notlimited to, operating agreement and service contract agreement, income derived from theextraction of the mineral, to which it must look for a return of its capital. A person who has nocapital investment in the mineral deposit does not possess an economic interest merely becausethrough a contractual relation he possesses a mere economic or pecuniary advantage derivedfrom production.

SECTION 4. Basis of Cost Depletion. The basis upon which the cost depletion is to beallowed in respect of a property being mined shall be the adjusted cost basis of the miningproperty being mined as of December 31, 1974 for those on a calendar year basis and June 30,

1975 for those on a fiscal year basis beginning July 1, 1975.

For this purpose, the adjusted cost basis shall be the accumulated exploration and developmentexpenses incurred on the mining properties as of December 31, 1974 for those on a calendar yearbasis and June 30, 1975 for those on a fiscal year basis beginning July 1, 1975 minus accumulatedcost depletion that should have been deducted as of the same date on the same property. cd

Accumulated exploration expenses shall include the amount paid or incurred for the purpose ofascertaining the existence, location, extent or quality of any deposit of ore or other mineralsbefore the beginning of the development stage of mine or deposit of a particular mining property.

Exploration expenses shall not include expenditures for improvements subject to allowances fordepreciation. However, allowances for depreciation of such improvements which were used inthe exploration of ores or minerals shall form part of exploration expenditures.

Development expenditures shall include all capital expenditures paid or incurred during thedevelopment stage of the mine or other natural deposits. The development stage of the mine orother natural deposit will be deemed to begin at the time when, in consideration of all the factsand circumstances (including the action of the taxpayer) deposits of ore or other minerals areshown to exist in sufficient quantity and quality in a particular area to reasonably justifycommercial exploitation and actually commence commercial extraction. Developmentexpenditures shall not include expenditures for improvements subject to allowances fordepreciation. However, allowances, for depreciation of such improvements which are used in thedevelopment of ores or mineral, shall form part of development expenditures.

SECTION 5. Limitation of Cost Depletion.

(a) The basis for cost depletion of mineral deposits does not include:

1. Amounts recoverable through depreciation, through deferred expenses and throughdeductions other than depletion;

2. The residual value of improvements at the end of operation.

(b) Such basis does not include exploration and development expenses incurred on miningproperties or areas other than those presently being mined. These expenses shall be treated asdeferred expenses (capitalized) to be taken into account as deduction in the future in the form ofallowances for cost depletion if ore mineral reserves warrant commercial production or as a


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write-off, in case of abandonment, in the event commercial operation is not warranted asconfirmed by the Bureau of Mines.

(c) The annual allowable cost depletion shall not exceed the market value as used forpurposes of imposing the mining ad valorem taxes in the mine of the product thereof which hasbeen mined and sold during the year for which the return and computation are made. Marketvalue shall mean the actual market value of the annual gross output of the minerals or mineralextracted or produced from the particular mining property.

(d) The allowable cost depletion deduction shall be limited only to the extent of the capitalinvested in the particular mining property. For this purpose, capital invested in the particularmining property shall include the accumulated exploration and development expenditures andexpenditures incurred on the on-going mine exploration and development on the same miningarea which

1. increase the value of the mine;

2. decreases the cost of production of mineral units; or

3. restores property to its previous condition or in making good the exhaustion thereof forwhich an allowance is or has been made.

In fine, no further deduction for cost depletion shall be allowed when the sum of the costdepletion equals the cost of adjusted basis of the property plus allowable capital additions.

SECTION 6. Manner of Computation of Cost Depletion.The cost depletion for taxable yearbeginning calendar year 1975 and fiscal year beginning July 1, 1975 shall be computed bydividing the adjusted cost basis as of December 31, 1974 of June 30, 1875, as the case may be, bythe number of units of minerals remaining as of the taxable year and by multiplying thedepletion unit so determined by the number of units of minerals sold within the taxable year.

In the selection of a unit of mineral for depletion, preference shall be given to the principal orcustomary unit or units paid for in the products sold, such as tons of ore, barrels of oil, orthousands of cubic feet of natural gas.

As used in this regulation, the phrase

(1) "the number of units of minerals remaining as of the taxable year" is the number of unitsof minerals remaining at the end of the period to be recovered from the property (including unitsrecovered but not sold) plus the "number of units sold within the taxable year";

(2) "number of units sold within the taxable year" is

a. In the case of taxpayer reporting income on the cash basis include units for whichpayments were received within the taxable year although extracted or sold prior to the periodand exclude units sold but not paid for in the taxable year; and

b. In the case of taxpayer reporting income on the accrual method include all unitsextracted and sold during the period, whether paid for or not, but does not include units withrespect to depletion deductions which were allowed or allowable prior to the taxable year.

In the case of natural gas or oil wells, the taxpayer may compute the cost depletion in respect ofsuch property for the taxable year by multiplying the adjusted cost basis of the property by afraction, the numerator of which is equal to the number of cubic feet or barrels of oil recoveredduring the year and the denominator of which is equal to the expected recoverable number ofcubic feet of gas or barrels of oil at the end of the year plus the number of cubic feet of gas orbarrels of oil recovered during the year.

SECTION 7. Determination of Mineral Contents of Deposits Remaining as of the Taxable


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Year.The mineral contents of deposits remaining as of the taxable year pertains to theestimated mineral products reasonably known or on good evidence believed to have existed inplace as of the end of the taxable year, the estimate or determination of which was madeaccording to the method current in the industry and in the light of the most accurate and reliableinformation obtainable.

For purposes of computing cost depletion allowable for the taxable year, the estimated mineralproducts remaining as of the taxable year shall include both quantity and grade

(a) The positive ores and mineral deposits, which include ores and minerals "blocked out"and "developed" or "assured" in the usual conventional meaning; and

(b) The probable or prospective ores and mineral deposits, which include ores or mineralsthat are believed to exist on the basis of good evidence although not actually known to occur onthe basis of existing development. Such probable or prospective ores or minerals may beestimated:

1. As to quantity, only in case they are extensions of known deposits or are new bodies ormasses whose existence is indicated by geological surveys or other evidence to a high degree ofprobability; and

2. As to grade, only in accordance with the best indications available as to richness.

If the quantity of recoverable units of minerals in the deposit has been previously estimated forthe prior year or years, and if there has been no known change in the facts upon which the priorestimate was based, the quantity of recoverable units of mineral in the deposit as of the taxableyear will be the quantity remaining from the prior estimate. However, for any taxable year forwhich it is ascertained, either by the taxpayer or the Commissioner of Internal Revenue, from anysource, such as operations or development work prior to the close of the taxable year, that theremaining recoverable mineral units as of the taxable year are materially greater or less than thequantity remaining from the prior estimate, then the estimate of the remaining recoverable unitsshall be revised and the annual cost depletion allowance with respect to the property for thetaxable year and for subsequent taxable years will be based upon the revised estimate until achange in the facts required another revision. Such revised estimate will not, however, change theadjusted basis for depletion.

SECTION 8. Statement to be Attached to the Return.There shall be attached to the returnof the taxpayer for such taxable year a sworn statement by a responsible officer setting forth, incomplete and summary form, the pertinent information required by these regulations withrespect to each such mineral property or improvement (including oil and gas properties orimprovements) as enumerated hereunder:

(i) Location plan and brief description of each property;

(ii) The date of acquisition of each property and the accumulated cost to date of eachproperty;

(iii) The accumulated cost depletion for each of the mineral property and improvements;

(iv) The estimated number of units of each kind of mineral at the end of the taxable year asestimated by the Head of the Geological and Mining Departments of the taxpayer and confirmedby the Bureau of Mines;

(v) The number of units sold and the number of units for which payment was receivedduring the year for which the return is made;

(vi) The gross amount received from the sale of mineral;

(vii) The amount and manner of computation of depreciation for the taxable year and the


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amount of cost depletion for the taxable year; and

(viii) Such data as may be required by the Commissioner of Internal Revenue as the case maybe.

SECTION 9. Records to be Kept.Every taxpayer claiming and making a deduction fordepletion of mineral property shall keep a separate account for each and every mining area in his

books of accounts in which shall be accurately recorded the cost or other basis of such propertyand thereafter to be debited by any, and all capital additions. Likewise, the correspondingdepletion allowance account (reserve) shall be maintained which shall be credited annually withthe amounts of depletion acquired in accordance with these regulations.

In addition, the taxpayer must assemble, segregate and have readily available at his principalplace of business, all the supporting data which were used in compiling the summary statementrequired to be attached to the income tax return to be filed as prescribed under Section 8 hereof.

SECTION 10. Basis of Depreciation of Improvements.There shall likewise be allowed as adeduction a reasonable allowance for depreciation of improvements including, but not limited to,mining and milling equipments. Such allowance shall include wear and tear and obsolescence.

The amount of depreciation that can be claimed as expenses in cases of certain equipment is

subject to the provision of Section 4 of these regulations regarding properties used in explorationand development stages.

SECTION 11. Aggregation or Combination of Separate Properties.In the case of miningcompanies with several mining properties, it may aggregate into one operating unit, severalmining properties for purposes of determining the adjusted cost basis recoverable thru depletionsubject to the following conditions:

(a) All contiguous areas included in a single concession grant or in separate concessiongrants may be constituted as a single operating unit;

(b) Operating mineral interests which are geographically widespread may not be treated asparts of the same operating unit;

(c) Undeveloped operating mineral unit may be aggregated only those interests with whichit will be operated as a unit when it reaches the production stage.

For purposes of these regulations, the term

(1) Operating mineral interest means a separate mineral interest in respect of which the costwould be required to be taken into consideration of the mine, well or other natural deposit werein the production stage.

(2) Operating unit refers to the operating mineral interest which are operated together forthe purpose of producing minerals. It refers to a producing unit and not to an administrative orsales organization. Among the factors which indicate that interests are operated as a unit are

i. common field or operating unit; aisa dc

ii. common supply and maintenance facilities;

iii. common processing as treatment plants; and

iv. common storage facilities.

Separate operating units shall have its own accounts to which all expenditures pertaining theretoshall be debited and the credit to such amount may either be for future depletion or write-offs asthe case may be.

SECTION 12. Definition of Terms.(a) "Mineral's" means all naturally occurring inorganic


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substances in solid, liquid, or any intermediate state including coal. Soil which supports organiclife, sand and gravel, guano, petroleum, geothermal energy and natural gas are included in thisterm but are governed by special laws.

(b) "Mineral Lands" are those lands in which minerals exist in sufficient quantity and gradeto justify the necessary expenditures in extracting and utilizing such minerals.

(c) "Mineral Deposit" means a natural deposit or accumulation of minerals.

(d) "Exploration" is the examination and investigation of lands supposed to contain valuableminerals, by drilling, trenching, shaft sinking, tunneling, test pitting and other means, for thepurpose of probing the presence of mineral deposits and the extent thereof.

(e) "Development" refers to steps necessarily taken to reach an ore body or mineral depositso that it can be mined.

(f) "Exploitation" means the extraction and utilization of mineral deposits.

(g) "Mining" or "to mine" means to extract, remove, utilize minerals, and includes operationsnecessary for that purpose.

(h) "Actual commercial production" shall mean the stage of mining operation attained by a

mine in which mineral or mineral products of marketable grade and quantity have beenproduced and sold to local and/or foreign markets.

(i) "Mining and Milling equipments" shall mean machineries, equipment, tools forproduction, plants to convert mineral ores into saleable form, spare parts, supplies, materials,accessories, explosives, chemicals and transportation, and communication facilities which shallinclude all the items herein enumerated for commercial production which are necessary orincidental for mining, as well as for the processing of ores into marketable form and grade, andshall include those needed to explore and develop the mineral land for mining and theprocessing plants which may be imported and installed before the actual commercial production.

(i) "Positive ore" shall mean the full ore tonnage computed with good mining practice fromdimensions revealed in outcrops, trenches, underground working and drill holes and for which

the grade is computed from results of detailed sampling. The sites of inspection, sampling andmeasurements shall be closely spaced and the geological character were so defined that the size,shape and mineral content are well established.

(k) "Probable" or "Prospective ore "shall mean the ore for which tonnage and grade arecomputed partly specific measurement, samples and partly from projection for a reasonabledistance on geologic evidence. The sites available for inspection, measurement and sampling aretoo wildly or otherwise inappropriately spaced to outline the ore completely or to establish itsgrade throughout.

(1) "Exploration stage" shall mean the step in exploring "new mines" or "old mines resumingoperations" consisting of shallow borings, trenches, test pitting, diamond drilling andunderground workings to prove the persistence and tonnage or the ore body laterally and indepth.

SECTION 13. Repealing Clause.All existing rules and regulations or parts hereof in conflictwith the provisions of these regulations are hereby revoked.

SECTION 14. Effectivity.These regulations shall apply to depletion beginning calendar year1975 and fiscal year beginning July 1, 1975.


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SUBJECT : Implementing Republic Act No. 8424, "An Act Amending the NationalInternal Revenue Code, as amended" Specifically Section 34 (H) Relative to the Deductibilityof Contributions or Gifts Actually Paid or Made to Accredited Donee Institutions inComputing Taxable Income

SECTION 1. Definition of Terms.

For purposes of these Regulations, the terms hereinenumerated shall have the following meanings:

a) "Non-stock, non-profit corporation or organization"shall refer to a corporation orassociation/organization referred to under Section 30 (E) and (G) of the Tax Code created ororganized under Philippine laws exclusively for one or more of the following purposes: cdasia

(i) religious;

(ii) charitable;

(iii) scientific;

(iv) athletic;

(v) cultural;(vi) rehabilitation of veterans; and

(vii) social welfare

no part of the net income or asset of which shall belong to or inure to the benefit of any member,organizer, officer or any specific person.

b) "Non-government Organization (NGO)"shall refer to a non-stock, non-profit domesticcorporation or organization as defined under Section 34 (H)(2)(c) of the Tax Code organized andoperated exclusively for scientific, research, educational, character-building and youth and sportsdevelopment, health, social welfare, cultural or charitable purposes, or a combination thereof, nopart of the net income of which inures to the benefit of any private individual.

(i) Which, not later than the fifteenth (15th) day of the third month after the close of theNGO's taxable year in which contributions are received, makes utilization directly for the activeconduct of the activities constituting the purpose or function for which it is organized andoperated, unless an extended period is granted by the Secretary of Finance, uponrecommendation of the Commissioner;

(ii) The level of administrative expenses of which shall, on an annual basis, not exceed thirtypercent (30%) of the total expenses for the taxable year; and

(iii) The assets of which, in the event of dissolution, would be distributed to anotheraccredited NGO organized for similar purpose or purposes, or to the State for public purpose, orpurposes, or to the state for public purpose, or would be distributed by a competent court of

justice to another accredited NGO to be used in such manner as in the judgment of said courtshall best accomplish the general purpose for which the dissolved organization was organized.

(c) "Utilization" by an accredited NGOshall refer to

(i) Any amount in cash or in kind, including administrative expenses, paid or utilized by anaccredited NGO to accomplish one or more purposes for which it was created or organized; or

(ii) Any amount paid to acquire an asset used, or held for use, directly in carrying out one ormore purposes for which the accredited NGO was created or organized; or

(iii) Any amount set aside for a specific project which comes within one or more purpose or


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purposes for which the accredited NGO was created, but only if at the time such amount is setaside, the accredited NGO has established to the satisfaction of the Commissioner of InternalRevenue that the amount will be utilized for a specific project within a period not to exceed five(5) years, and the project is the one which can be better accomplished by setting aside suchamount than by immediate payments of funds: Provided, That, the utilization requirementsprescribed under Sec. 5 of these Regulations shall be complied with; or

(iv) Any amount in cash or in kind invested in any activity related to the purpose for which itwas created or organized.

(v) Any amount in cash or in kind invested in capital sustaining and generating activities,such as but not limited to, endowment funds, trust funds, money market placements, shares ofstock and similar instruments: Provided, That, any income derived from these investments shallbe exclusively used in activities directly related to one or more purposes for which the accreditedNGO was created or organized.

(d) "Accrediting Entity"shall refer to a non-stock, non-profit organization composed ofNGO networks, duly designated by the Secretary of Finance to establish and operationalize asystem of accreditation to determine the qualification of non-stock, non-profit corporations ororganizations and NGOs for accreditation as qualified-donee institutions. The Secretary of

Finance and the Commissioner of Internal Revenue shall oversee, monitor and coordinate withthe Accrediting Entity to ensure that the provisions of these Regulations are complied with. Inthis connection, the Secretary of Finance or the Commissioner of Internal Revenue or their dulyauthorized representative shall sit as ex-officio member of the Board of Trustees of theAccrediting entity with the right to vote. The Secretary of Finance may also designate an officialof a concerned government agency, e.g. Department of Science and Technology, to assist theBoard of Trustees in the accreditation of foundations.

The Secretary of Finance shall designate an entity as an Accrediting Entity provided it has acountrywide membership composed of (a) NGOs which belong to the sector that the PrivateAccrediting Entity intends to certify; (b) NGOs which have been in existence for at least five (5)years; and (c) NGOs not more than 50% of the members of which belong to other existing NGOsor Private Accrediting Agencies. dctai

The Philippine Council for NGO Certification, Inc. (PCNC), a non-stock, non-profit corporationwhich was established by several NGO networks (e.g., Caucus of Development NGO Networks(CODE-NGO); Philippine Business for Social Progress (PBSP); Association of Foundations (AF);League of Corporate Foundations (LCF); Bishops-Businessmen's Conference for HumanDevelopment (BBC); and the National Council for Social Development Foundation (NCSD), hasbeen duly designated by the Secretary of Finance as an Accrediting Entity pursuant toMemorandum of Agreement dated January 29, 1998 executed by and between the Secretary ofFinance and PCNC's Interim Chairman.

(e) "Religious purpose" shall refer to the promotion, propagation and accomplishment ofany form of religion, creed or religious belief recognized by the Government of the Republic ofthe Philippines.

(f) "Charitable Activity"shall refer to extending relief to the poor, distressed andunderprivileged and shall include fighting against juvenile delinquency and communitydeterioration.

(g) "Scientific and research purpose"shall refer to undertaking or assisting in pure orbasic, applied and scientific research in the field of agriculture, forestry, fisheries, industry,engineering, energy development, food and nutrition, medicine, environment and biological,physical and natural sciences for the public interest.


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(i) Basic research shall refer to an experimental or theoretical work undertaken primarily toacquire new knowledge of the underlying foundations of phenomena and observable factswithout any particular application or use in view. It analyzes properties, structures orrelationships with a view to formulating and testing hypothesis, theories or laws. The results ofbasic research are not generally sold but are usually published in scientific journals or circulars tointerested colleagues.

(ii) Applied research shall refer to an original investigation undertaken in order to acquirenew knowledge. It is directed primarily towards a specific practical aim or objective. It isundertaken either to determine possible uses for the findings of basic research or to determinenew methods or ways of achieving some specific and predetermined objectives. It involves theconsideration of the available knowledge and its extension in order to solve particular problems.Applied research develops ideas into operational form.

(iii) Scientific research will be regarded as carried on for public interest if the results of suchresearch are made available to the public on a non-discriminatory basis; or if such research isperformed for the Government of the Philippines or any of its agencies or political subdivisions;or if such research is directed to benefit the public.

(h) "Character building and youth and sports development (or athletic) purposes"shall

refer to and include conducting basic and applied research on youth development, initiating andestablishing youth organizations to promote and develop youth activities, including theestablishment of summer camps or centers for leadership training, conducting a program onphysical fitness and amateur sports development for the country; developing and maintainingrecreational facilities, playgrounds and sports centers; and conducting training programs for thedevelopment of youth and athletes for national and international competitions. cdll

(i) "Cultural activity"shall refer to and include undertaking and/or assisting in researchactivities on all aspects of history, social system, customs and traditions; developing, enrichingand preserving Filipino arts and culture; developing and promoting the visual and performingarts; and participating in vigorous implementation of bilingual policy through translation andwider use of technical, scientific and creative publications, development of an adaptive technicaldictionary and use of Filipino as the medium of instruction.

(j) "Educational activity"shall refer to and include the granting of scholarships todeserving students and professional chairs for the enhancement of professional courses, andinstructing or training of individuals either through formal and informal methods, viz:

(i) Formal method of instruction refers to the institutionalized, chronologically graded andhierarchically structured educational system at all levels of education;

(ii) Non-formal method of instruction refers to any deliberately organized, systematiceducational activity carried on outside the framework of the formal system to provide selectedtypes of learning to particular subgroups of the population, particularly out-of-school youths andadults, for the purpose of communicating ideas, developing skills, changing attitudes ormodifying behavior or improve their character and to provide them with tools necessary for theachievement of a higher standard of living. For the purpose of this section, a certification from theTechnical Education and Skills Development Authority (TESDA) is required for the accreditationof the non-formal educational program which is implemented or carried out by a non-stock, non-profit corporation, organization or an NGO.

It also includes upgrading of existing facilities to support the conduct of the above activities.

(k) "Rehabilitation of veterans"shall include services extended to Philippine veterans andmembers of their families because of financial difficulties and attendant problems; and servicesextended to disabled veterans towards productive life.


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(l) "Social welfare purposes"shall refer to and include

(i) undertaking and/or assisting in the amelioration of the living conditions of distressedcitizens particularly those who are handicapped by reasons of poverty, youth, physical andmental disability, illness, old age, and natural disasters, including assistance to culturalminorities;

(ii) pursuing a program for the protection and development of children and youth, such asproviding services for drop-outs, pre-school children of low-income working mothers, andphysically handicapped children;

(iii) providing for the rehabilitation of the youth and disabled adults, released prisoners, drugaddicts, alcoholics, mentally retarded, hansenites and similar cases; and

(iv) providing for services to squatter families and to displaced workers.

(m) "Health purposes"shall refer to include the pursuit of any of the following:

(i) control, prevention and treatment of communicable and degenerative diseases, accidentsand other health disabilities;

(ii) family planning program designed to indicate knowledge and understanding of

population, human growth and development of family life;

(iii) environment sanitation, such as, public sewerage system and sanitary toilets; and

(iv) nutrition, which aims to reduce the prevalence of malnutrition and increase the energyand protein intake among households. prcd

SECTION 2. Accreditation of non-stock, non-profit corporations/NGOs by the AccreditingEntity.

a) The Accrediting Entity shall examine, evaluate and accredit non-stock, non-profitcorporations and NGOs as a pre-requisite for their registration with the BIR as qualified-doneeinstitutions under Section 34 (H)(1) and (2)(c) of the Tax Code.

(b) Newly-organized and existing non-stock, non-profit corporations and NGOs shall apply

with the Accrediting Entity for accreditation and submit to a process of examination andevaluation. The application for accreditation shall be accompanied by the following documents:

(i) Articles of Incorporation and By-laws;

(ii) Certificate of Registration with the Securities and Exchange Commission;

(iii) Affidavit of Modus Operandi showing:

1. the character of the organization;

2. the purpose for which it is organized;

3. the lists of projects/activities for the past two (2) years, or list of proposedprojects/activities for the first two (2) years of operations for newly-organized non-stock, non-

profit corporations/NGOs;4. the source of income and the utilization thereof, or target fund sources for newly-organized non-stock, non-profit corporations/NGOs; and

5. other facts relating to their operations which are relevant to their qualification as doneeinstitutions;

(iv) Duly audited financial statements for the past two (2) years showing the assets, liabilities,receipts and disbursements of existing organizations, or financial projections for the f irst two (2)years for newly-organized non-stock, non-profit corporations/NGOs. prLL


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(c) The Accrediting Entity shall evaluate and accredit non-stock, non-profitcorporations/NGOs using the following major criteria:

(i) Mission and Goals

The mission and goals of the non-stock, non-profit corporation/NGO should justify its existence.Statements of mission and goals shall serve as guideposts for its planning and operations and a

framework for decision-making.

(ii) Resources

The criterion focuses on the adequacy of the resources and the effectiveness of the structure andsystems of the non-stock, non-profit corporation/NGO. Areas that should be evaluated underthis criterion include the organization structure, human, financial and physical resources.Evaluation shall take into account the names, positions and qualifications of the individuals orcommittee members who manage and make decisions for the non-stock, non-profitcorporation/NGO, its sources of funds and distribution of financial resources, and the followingexhibits at the time of examination, among others:

1. Minutes of the Board meetings

2. Table of organization;3. Policy Manual, if any;

4. Personnel Manual, if any;

5. Budget for the past two (2) years, or proposed projects for the first two (2) years ofoperations for newly-organized non-stock, non-profit corporations/NGOs; and

6. Audited financial statements for the past two years for existing non-stock, non-profitcorporations/NGOs.

(iii) Program Implementation and Evaluation

The non-stock, non-profit corporation/NGO must demonstrate that it is effectively using itsresources to accomplish the purposes for which it was created. There should be clearly defined

policies, priorities and guidelines for implementing the various programs and projects.Evaluation shall consider programs and projects implemented within the last two years;description of how its programs/projects/services are managed; how the following proceduresare carried out; record keeping, monitoring, evaluating and contingency planning;programs/projects vis-a-vis the needs and priorities of its beneficiaries; the presentdocumentation or results of evaluation and provisions for adequate training, peopleparticipation, development of leaders and eventual self-sufficiency.

(iv) Planning for the Future

The non-stock, non-profit corporation/NGO must provide evidence that it has the capability toplan, implement and monitor its programs and projects. Evaluation shall provide evidence thatthe non-profit corporation/NGO has mechanisms for planning, implementing and monitoring its

programs and projects and for ensuring the continuity of programs/projects even when externalfunding has ceased. Evaluation shall also rely on the presentation of the following exhibits at thetime of visit:

1. Organizational plan

2. Monitoring and evaluation tools

(d) The Secretary of Finance, upon the recommendation of the Board of Trustees of theAccrediting Entity can waive the submission of duly audited financial statements for newly-


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organized non-stock, non-profit corporations/NGOs which have been organized to carry outprograms of national significance, e.g. foundation to build the National Museum. They shall beeligible to apply for a three (3)-year probationary accreditation and registration as qualifieddonee institutions with the Accrediting Entity.

(e) Existing non-stock, non-profit corporations/NGOs which have qualified as doneeinstitutions under BIR-NEDA Regulations 1-81, as amended , shall have three (3) years beginningthe effectivity of these rules and regulations within which to secure a Certificate of Accreditationfrom the Accrediting Entity. Failure by the said non-stock, non-profit corporations/NGOs tosecure accreditation within the three-year period shall be a ground for the cancellation by the BIRof their Certificates of Registration as qualified-donee institutions: Provided, however, Thatdonations and contributions to the said non-stock, non-profit corporations/NGOs during thethree-year period shall still be allowed as deductible expense on the part of the donors subject tothe provisions of Sec. 4 of these Regulations: Provided, further, That after the three-year period,only donations and contributions to non-stock, non-profit corporations/NGOs which have beenaccredited under these Regulations, shall be allowed as deductible expense on the part of thedonors. LLpr

(f) The Accrediting Entity shall issue a Certificate of Accreditation to a non-stock, non-profit

corporation/NGO upon determination that it meets the criteria for accreditation; Provided, thatthe Certificate of Accreditation shall be valid for a maximum period of five (5) years for existingnon-stock, non-profit corporations/NGOs and three (3) years for newly-organized non-stock,non-profit corporations/NGOs.

(g) The Accrediting Entity shall deny the applications of any non-stock, non-profitcorporation/NGO which does not meet the criteria for accreditation. The Private AccreditingEntity shall notify the non-stock, non-profit corporation/NGO of the denial of the application,the reasons therefor, and the evaluators' recommendation in order that the non-stock, non-profitcorporation/NGO may meet the criteria for accreditation. A non-stock, non-profitcorporation/NGO whose application for accreditation has been denied by the PrivateAccrediting Entity shall have one (1) year within which to implement the evaluator'srecommendations. After the one-year implementation period, the non-stock, non-profit

corporation/NGO may re-apply for accreditation.

(h) The Secretary of Finance and the Commissioner of Internal Revenue shall oversee,monitor and coordinate with the Accrediting Entity to ensure that the provisions of theseRegulations are complied with.

SECTION 3. Donations to Accredited Non-stock, Non-profit Corporations/NGOs. Donations to accredited non-stock, non-profit corporations/NGOs shall be entitled to thefollowing benefits:

(1) Limited Deductibility.Donations, contributions or gifts actually paid or made withinthe taxable year to accredited non-stock, non-profit corporations shall be allowed limiteddeductibility in an amount not in excess of ten percent (10%) for an individual donor, and fivepercent (5%) for a corporate donor, of the donor's income derived from trade, business or

profession as computed without the benefit of this deduction.

(2) Full Deductibility.Donations, contributions or gifts actually paid or made within thetaxable year to accredited NGOs shall be allowed full deductibility, subject to the followingconditions:

(i) The accredited NGO shall make utilization directly for the active conduct of the activitiesconstituting the purpose or function for which it is organized and operated, not later than thefifteenth (15th) day of the third month after the close of the accredited NGOs taxable year inwhich contributions are received, unless an extended period is granted by the Secretary of


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Finance, upon recommendation of the Commissioner.

For this purpose, the term "utilization" shall have the meaning as defined under Sec. 1(c) of theseRegulations.

(ii) The level of administrative expenses of the accredited NGO, shall, on an annual basis, notexceed thirty percent (30%) of the total expenses for the taxable year;

(iii) In the event of dissolution, the assets of the accredited NGO, would be distributed toanother accredited NGO organized for similar purpose or purposes, or to the State for publicpurpose, or purposes, or to the state for public purpose, or would be distributed by a competentcourt of justice to another accredited NGO to be used in such manner as in the judgment of saidcourt shall best accomplished the general purpose for which the dissolved organization wasorganized. llcd

(iv) The amount of any charitable contribution of property other than money shall be basedon the acquisition cost of said property

(v) All the members of the Board of Trustees of the non-stock, non-profit corporation,organization or NGO do not receive compensation or remuneration for their service to theaforementioned organization.

(3) Exemption from Donor's Tax Donations and gifts made in favor of accredited non-stock, non-profit corporations/NGOs shall be exempt from donor's tax: Provided, however, Thatnot more than thirty percent (30%) of the said donations and gifts for the taxable year shall beused by such accredited non-stock, non-profit corporations/NGOs institutions qualified-doneeinstitution for administration purposes pursuant to the provisions of Section 101 (A)(3) and (B)(2)of the Tax Code .

SECTION 4. Utilization Requirements.Amounts set aside or to be set aside for a specificproject must have the prior approval of the Commissioner in writing: Provided, however, That acertification issued by the Accrediting Entity that the accredited NGO's specific project is onewhich can be better accomplished by setting aside the funds, shall be sufficient basis for theCommissioner to grant his/her approval.

The application for the Commissioner's prior approval must contain the following:

(a) the nature and purpose of the specific project and the amount programmed therefor;

(b) a detailed description of the project, including estimated costs, sources of any futurefunds expected to be used for completion of the project, and the location or locations (general orspecific) of any physical facility to be acquired or constructed as part of the project; and

(c) a statement by an authorized official of the organization that the amount to be set asidewill actually be disbursed for the specific project within five (5) years from the date of approvalby the Commissioner, unless the nature of the project is such that the five-year period isimpracticable.

Amounts set aside shall be evidenced by book entries and documents showing evidence of

deposits or investments, including of the funds so set aside, or other documents that theCommissioner may require. llcd

SECTION 5. Certificate of Donations.All accredited non-stock, non-profitcorporation/NGO are required to issue a certificate of donation in such form as prescribed by theBIR, on every donation or gift they receive. Such certificate shall be accomplished by the saidaccredited non-stock, non-profit corporation/NGO in triplicate and distributed within thirty (30)days after the receipt of the donation, as follows:

(a) Original copy - Donor


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(b) Duplicate copy - BIR

(c) Triplicate copy - Donee

SECTION 6. Notice of Donations.The donor, on the other hand, should give a notice forevery donation worth over One Million pesos (P1,000,000) to the Revenue District Officer wherehis place of business is located within thirty (30) days after the receipt of the Certificate of

Donation attaching to the said notice the copy of the Certificate of Donation issued to him by theaccredited non-stock, non-profit corporation/NGO.

SECTION 7. Date and Place of Filing Returns.

(a) Time of Filing.Claims for limited or full deductibility of donations and contributionsby the donors shall be filed by the donors at the time of filing their income tax returns.

On the other hand, the accredited non-stock, non-profit corporation/NGO shall file its annualinformation return not later than the fifteenth (15th) day of the fourth month after the close of itstaxable year in order to maintain its status as an accredited non-stock, non-profitcorporation/NGO.

(b) Place of Filing.The income tax return and/or the annual information return of the

donor or of the accredited non-stock, non-profit corporation/NGO shall be filed in the RevenueDistrict Office where the place of business of the donor or the donee, as the case may be, islocated.

SECTION 8. Substantiation Requirements.

(a) For Donors.Donors claiming donations and contributions to accredited non-stock,non-profit corporation/NGO as deductions from their taxable business income should submitevidences or proofs to the BIR by showing the Certificate/s of Donation and indicating thereinthe following:

(i) Actual receipt by the accredited non-stock, non-profit corporation/NGO of the donationor contribution and the date of receipt thereof; and

(ii) The amount of the charitable donation or contribution, if in cash; if property, whether

real or personal, the acquisition cost of the said property.

On the other hand, donors claiming exemption from donor's tax on their donations andcontributions to accredited non-stock, non-profit corporations/NGOs should submit evidences orproofs showing the amount of donation, if in cash; if real property, the zonal value thereof at thetime of donation; and if personal property, the acquisition cost thereof, but if said personalproperty had already been used at the time of donation, the depreciated or book value thereof.

(b) For Accredited Non-stock, Non-profit Corporations/NGOs.Accredited non-stock,non-profit corporations/NGOs shall, upon filing their income tax returns/annual informationreturns, furnish the Revenue District Officer of the place where the said accredited non-stock,non-profit corporation/NGO is located, the following:

(i) A list of the donations and income received during the year, showing the name andaddress of the donors; the sources of income; the amount or market value of each donation anditems of income and the disposition thereof;

(ii) A list of the activities and/or projects undertaken by the institution and the cost of eachundertaking indicating in particular where and how the donations has been utilized.

(iii) A list of projects, their corresponding costs; the amount "set aside" and the status of fundsbalances at the end of the year;

(iv) A declaration that the utilization requirements under Section 2(c) and 8 of these


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Regulations have been sufficiently complied with;

(v) A declaration that no part of the net income of the accredited non-stock, non-profitcorporation/NGO inures to the benefit of any private stockholder or individual; and

(vi) A declaration of the status of project implementation.

SECTION 9. Monitoring and Verification of Annual Information Return.Pursuant to thelast paragraph of Section 235 of the Tax Code , any provision of existing general or special law tothe contrary notwithstanding, the books of accounts and other pertinent records, as well as theoperations, of accredited non-stock, non-profit corporations/NGOs may be examined by the BIRannually for purposes of ascertaining compliance with the conditions under which they havebeen granted tax exemptions or tax incentives, and their tax liability, if any. Compliance by theaccredited non-stock, non-profit corporation/NGO with the conditions set forth in the grant ofincentives under Sec. 4 of these Regulations shall be strictly monitored to ascertain whether ornot they have met the requirements for maintaining the status as an accredited qualified-doneeinstitution. cdasia

SECTION 10. Prohibited Transactions.any accredited non-stock, non-profitcorporation/NGO enjoying the benefits provided for under Sec. 4 of these Regulations is

prohibited from undertaking any of the following transactions:(a) Lending any part of its income or property without adequate security and/or areasonable rate of interest unless the institution has a formal micro-credit or micro-financeprogram as approved by their Board of Trustees;

(b) Purchasing any security and/or property for more than an adequate consideration inmoney or money's worth;

(c) Selling any part of the security or other property for less than adequate consideration inmoney or money's worth;

(d) Diverting its income or transferring its property by way of lease or sale to any member ofits Board of Trustees, founder/s or principal officers or any member of their families or to anycorporation controlled directly or indirectly by the aforesaid individuals or their families in

accordance with the attribution of stock ownership under Section 73 (A) and (B) of the Tax Code ;

(e) Using any part of its property, income or seed capital for any purpose other than that forwhich the corporation was created or organized; or

(f) Engaging in any activity which is contrary to law, public order or public policy.

SECTION 11. Withdrawal of Certificate of Accreditation and Revocation of the Certificate ofRegistration.

(a) The Accrediting Entity shall have the authority to withdraw the Certificate ofAccreditation which it issued to a non-stock, non-profit corporation/NGO upon a determinationthat the latter no longer meets the criteria for accreditation under Sec. 2 (c) of these Regulations.The Private Accrediting Entity concerned shall inform the Legal Service of the National Office or

the concerned division of the Regional Offices of the withdrawal of the Certificate ofAccreditation and recommend to the BIR the revocation of the Certificate of Registration of thenon-stock, non-profit corporation/NGO concerned.

(b) The Accrediting Entity which issued the Certificate of Accreditation shall report to theLegal Service of the National Office or to the concerned division of the Regional Offices anyviolation of any provision of these Regulations by the accredited non-stock, non-profitcorporation/NGO. Violation of any provision of these Regulations shall constitute a ground forthe withdrawal by the Private Accrediting Entity concerned of the Certificate of Accreditation


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and the revocation by the BIR of the Certificate of Registration.

(c) Any donor found to have participated in or consented to the violation of theseRegulations shall be deprived of the benefits provided under Sec. 4 of these Regulationsimplementing Sections 34 (H)(1), (2)(c) an

Documents

O-Y Tax Laws