Deductible Depreciation Expense for Income Tax in Philippines

By: Tax and Accounting Center Philippines

Depreciation expense in the Philippines refers to the reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. This allowable deduction for income tax in the Philippines would allow taxpayer to recover the cost of its property, plant and equipment throughout the useful life of the property, plant, and equipment in the Philippines. As a result of the depreciation expense deduction in the Philippines, the taxable net income of a taxpayer (corporate or individual income taxpayer) will be reduced by the amount of depreciation expense deduction resulting to a tax benefit on the part of the taxpayer. In general, the taxpayer is given freedom to make reasonable estimates on the depreciation expenses as to useful life, depreciation method, and salvage value after the life of the depreciable asset.

Useful life for depreciation expenses

Useful life is the period within which the asset will be productive for use in the conduct of the trade or business. It is the taxpayer who initially determines the useful life and the tax regulations in the Philippines does not prescribe specific useful lives of certain properties, though, taxpayers have commonly used some number of years for specific properties – e.g. vehicles for 5 years, and building 20 years. However,   should the taxpayer decided to change the useful life of the depreciable asset, it will have to secure approval of the Bureau of Internal Revenue (BIR or tax authorities).

Depreciation methods in the Philippines

Different depreciation methods yields varying amount of depreciation expense in the Philippines so that the tax rules prescribe some depreciation methods that taxpayers may choose from. For tax savings purposes, a choice that will yield more depreciation expense during the time of more taxable income is a good option, while a depreciation method with less depreciation expense during operating loss is a good one.

1. The straight-line method;
2. Declining-balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in Subsection (F)(1) of the Tax Code;
3. The sum-of-the-years-digit method; and
4. Any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner.

Again, it is the taxpayer who initially determines the method of depreciating its property, plant, and equipment. Change of depreciation method in the Philippines would require an approval of the Bureau of Internal Revenue (BIR or tax authorities)

Depreciation expense on appraised value

Appraisal value is the reasonable increase in value of the property brought about by a revaluation conducted by an independent appraiser. This would mean that the book value as of the date of revaluation is much lower than the appraised value upon appraisal that may have been brought about by excessive depreciation. Depreciation of appraised value in the Philippines is not allowed as deduction from income tax in the Philippines. Accordingly, this becomes a source of reconciliation of income for tax purposes and the income for accounting purposes.

Limitations on depreciation expense under RR No. 12-2012

Under Revenue Regulations No. 12-2012, while depreciation expense in the Philippines is allowed to be deduction for the wear and tear of the depreciable asset used in trade or business or practice of profession, the following limitations and requirements are imposed:

1. Substantiation of purchase with sufficient evidence, such as official receipt or other adequate records showing details (e.g. motor vehicle number, chassis number or other registration numbers; total price subject to depreciation; direct connection or relation of the vehicle ot the development, management, operation and/or conduct of trade or business or profession of the taxpayer)
2. Only one (1) vehicle for land transport is allowed for an official or employee with cost of motor vehicle not to exceed P2,400,000.00;
3. Depreciation of certain types of motor vehicles e.g. yachts, helicopters, airplanes and/or aircrafts, and land vehicles exceeding the threshold are not allowed to be deducted.

RR No. 12-2012 is dated October 12, 2012 and to take effect within 15 days from date of publication last 17 October 17 2012 at Manila Bulletin.

Change of useful life and depreciation method

Determining the estimated useful life of a property subject to depreciation in the Philippine is a matter of judgment of the taxpayer.  There is yet no prescribed periods for useful lives in the Philippines so taxpayers are given freedom to reasonably estimate the same. Reasonableness is a matter of professional judgement based on the nature and property and the extent of use in the conduct of trade or business. Change of useful life however, would require an approval of the Bureau of Internal Revenue (BIR) that the taxpayer may not simply just manipulate the depreciation expense in the Philippines by periodically changing the same.

Initial determination of depreciation method from among those prescribed is likewise left to the discretion of the taxpayer. Change of depreciation methods in the Philippines is however, requiring approval of the BIR.

Special tax privileges on depreciation expense

In some industries, special tax privileges are allowed on certain properties used on their operations such as under the following:

1. Properties used in mining operations are allowed to be depreciated 10 or 5 years only under certain circumstances;
2. Properties constructed by an educational education could be expenses outright instead of being depreciation throughout its estimated useful life.

BIR is now eyeing at depreciation expense and we suggest that taxpayers take extra caution in claiming allowable deductions for depreciation expense in the Philippines.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.