Calamity losses as tax deductions
Credit to Author: Euney Marie Mata-Perez| Date: Wed, 05 Feb 2020 16:46:11 +0000
In last week’s article, we discussed that, under our National Internal Revenue Code, as amended (Tax Code), and existing regulations, donations in excess of P250,000 in any taxable year shall be exempt from donor’s tax if they are made to the national government, or any of its agencies or instrumentalities, such as the Department of Social Welfare and Development, and the National Disaster Risk Reduction and Management Council, or to an accredited qualified donee-institution. Because of these requirements, many donations to calamity victims through other organizations would not be exempt from donor’s tax.
In 2016, House Bill (HB) 2452 was filed with the 17th Congress to liberalize the requirements of donations to calamity victims, by exempting donations from donor’s tax to any organization without the need of accreditation requirements, provided that such organization declares that the funds shall be in favor of the victims and not more than 10 percent of the donations will be used by the donee-organization for administrative purposes. Such bill also sought to exempt the affected areas from real property tax. A simpler version of the bill was refiled with the 18th Congress as HB 1089 in July 2019 and is pending with the Committee on Social Services of the House of Representatives.
Because of the Taal Volcano eruption last January, where at least five Taal towns were severely affected, our legislators should push for the immediate passage of HB 1089.
In any case, we also wish to discuss that taxpayers affected by calamities or disasters have the remedy to claim casualty losses, and even be excused for late filing of returns, under the Tax Code and existing regulations.
Section 34(D) of our Tax Code provides that losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as income tax deductions on the following conditions: if incurred in trade, profession or business; and of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck or other casualties, or from robbery, theft or embezzlement. It is thus required that the property should be actually used in business, have been reported as part of the taxpayer’s assets in the year preceding the occurrence of the loss, and not be compensated for by insurance.
The taxpayer though has the burden to prove and substantiate its claim. Procedurally, this is done by filing a declaration of loss with the Commissioner of Internal Revenue (CIR) or his deputies within 45 days from the casualty, robbery or theft. Such declaration shall state the nature of the event that gave rise to the loss, the time of occurrence, the description and location of damaged properties, as well as the amount of insurance or other compensation received. Proof of the elements of the losses, such as photographs and other documentary evidence to determine the cost or valuation of the property damage, shall also be submitted. (Revenue Regulations [RR] 12-77; Revenue Memorandum Order [RMO] 31-2009)
Further, relief may be claimed under Section 204(B) of the Tax Code, which grants the CIR the power to compromise, abate, refund and credit taxes. As expounded in RR 13-2001, penalties and/or surcharges of a taxpayer may be abated if a taxpayer fails to file the return and pay the tax on time due to substantial losses from prolonged labor dispute, force majeure, or legitimate business reverses, as follows: labor strike for more than six months that has caused the temporary shutdown of business; public turmoil; natural calamity such as lightning, earthquake, storm, flood and the like; armed conflicts such as war or insurgency; substantial losses sustained due to fire, robbery, theft or embezzlement; continuous heavy losses incurred by the taxpayer for the last two years; liquidity problem of the taxpayer for the last three years; or such other instances which the CIR may deem analogous to the items enumerated. (RR 13-2001, Sec. 2.3). The abatement may extend to the basic tax or interest, subject to the filing of an application with the office of the CIR, and the review and evaluation by the technical working group of the Bureau of Internal Revenue (BIR).
Recently, in view of the declaration of a state of calamity in the Batangas resulting from the Taal Volcano eruption, the BIR issued Revenue Memorandum Circular 7–2020, which suspended the deadlines for the filing and payment of tax returns for taxpayers in the province for January 2020.
Since our country is prone to calamities, it is fair and just that affected taxpayers are given the opportunity to avail of all the reliefs permitted under our tax laws and regulations. They must be aware of the filing requirements and periods of availment.
Also, it is our hope that our Congress will go beyond lip service and pass HB 1089, to exempt from donor’s tax donations to non-accredited organizations aiding calamity victims and provide the added relief of real property tax exemption.
Euney Marie J. Mata-Perez is a CPA-lawyer and managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer, and president of the Asia-Oceana Tax Consultants’ Association. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, email the author at info@mtfcounsel.com or visit the MTF website at www.mtfcounsel.com.