ECCP at Work

ADVISORY: Policies and Guidelines on Declaring Casualty Losses and Procedures for Processing Applications Related to Inventory Destruction

Dear ECCP Members,

As we all navigate the challenges brought by this natural disaster, we recognize that some of you may be dealing with property damage, inventory loss, and other disruptions.

Considering this, SGV Cebu sent us the relevant policies and guidelines as reminders on declaring casualty losses, as well as the procedures for processing applications related to inventory destruction or disposal. These are intended to ensure proper documentation and support deductions for inventory and other asset/property write-offs.

Casualty Losses:

 Requirements for the Filing of Claims of Casualty Loss as prescribed under Revenue Regulations (RR) No. 12-77 as reiterated by Revenue Memorandum Order (RMO) No. 31-09

1.       Sworn Declaration of Loss, to be filed within forty-five (45) days after the date of the event, stating the following: 

• Nature of the event that gave rise to such loss(es), and the time of its occurrence; 
• Description and location of the damaged property(ies);

·       Items needed to compute the loss(es), such as

a.     cost or other basis of the property(ies);

b.     depreciation allowed, if any;

c.     value of the property(ies) before and after the event;

d.     cost of repair.  

• Amount of insurance or other compensation received or receivable. 

The Sworn Declaration of loss must be supported by the following documents: 

• The Financial Statement for the year immediately preceding the event; and, 
• Copies of the Insurance Policy(ies), if any, for the concerned property(ies). 

2.     Proof of the elements of the loss(es) claimed, such as, but not limited to, the following:

·       Photographs of the property(ies): 

1. Photographs taken showing the property(ies) before the typhoon; and, 
2. Photographs taken after the typhoon, showing the extent of the damage sustained. 

 ·       Documentary evidence for determining the cost or valuation of the damaged property(ies), such as, but not limited to: cancelled checks, vouchers, receipts, and other evidence of costs. 

·       Insurance policy, in the event that there is an insurance coverage for the property(ies). 

·       Police report, in cases of robbery/theft during the typhoon and/or as a consequence of looting. 

Failure to report a theft or robbery to the police can be held against the taxpayer. However, a mere report of an alleged theft or robbery to the police authorities is not considered as conclusive proof of the loss arising therefrom. 

All documents and other evidence submitted to prove such loss(es) shall be subject to verification by the concerned Bureau office, and should be kept by the taxpayer as part of his tax records, and be made available to the duly-authorized Revenue Officer(s), upon audit of his Income Tax return and the declaration of loss.

 Requisites for Deductibility 

1.        A taxpayer engaged in trade or business may be entitled to claim, as business deductions, casualty losses incurred for properties actually used in the business enterprise that were damaged and reported as losses in the appropriate declaration filed with the BIR. The loss of assets not used in the course of business and/or are personal nature shall therefore not be allowed.

2.        Properties that shall be reported as casualty losses must have been properly reported as part of the taxpayer’s assets in the taxpayer’s accounting records and financial statements in the year immediately preceding the occurrence of the loss, with the costs of acquisition clearly established and recorded. Otherwise, the claim for deduction shall not be allowed.

3.        The recovery of casualty losses through insurance claims shall be governed by the guidelines set forth in RR No. 12-77. Moreover, the amount of loss that shall be compensated by insurance coverage should not be claimed as a deductible loss.

 If the insurance proceeds exceed the net book value of the damages assets, such excess shall be subject to the regular income tax, but not to the VAT, since the indemnification is not an actual sale of goods by the insured company to the insurance company. 

4.        In addition to the policies prescribed in RR No. 12-77 relative to the substantiation of casualty losses arising from typhoons and other natural disasters, RMO No. 31-09 provided the following guidelines that shall be observed:

 The deduction of assets as capital losses must be properly recorded in accounting reports, with the adjustment of the applicable accounts. The accounting entry to record this action is illustrated as follows: 

In the event of a total loss/destruction of property(ies) used in the business enterprise, the net book value (costs less accumulated depreciation) immediately preceding the natural disaster should be used as the basis in claiming casualty losses, and shall be reduced by the amount of insurance proceeds received.  

The restoration of the damaged property, or the acquisition of new property to replace it, must be properly recorded and recognized as either: a) a repairs expense; or, b) a capitalized asset.   

The appropriate treatment of this property shall be governed by the financial accounting and tax accounting rules and must take into account the nature of the transaction, the value of the amounts involved, and other factors. 

Inventory Destruction:

Deduction of losses for income tax purposes arising from inventory destruction or disposal shall be allowed after witnessing in accordance with RMO No. 21-20 and issuance of the “Certificate of Deductibility of Goods/Assets Destructed/Disposed”.

 Process for inventory destruction: 

*of RMO No. 21-20

• In the event that the destruction/disposal activity cannot be completed in one (1) day, the same may be scheduled in a manner acceptable to both the taxpayer and the BIR or BIR authorized representative until the total volume applied for has been entirely destroyed or disposed of. 

• The date of the destruction shall be scheduled on regular working days. However, destruction may be conducted on a weekend or on a non-working holiday subject to prior approval by the BIR.  

• The valuation that will be used for the inventory or assets to be disposed/destructed shall be the actual cost. Currently, where the actual cost cannot be accurately determined, the inventory valuation maintained and used by the taxpayer shall be adopted subject to adjustment upon verification during the audit. In the case of fixed assets, the carrying book value shall be considered. 

• Deduction of losses for income tax purposes arising from inventory destruction or disposal shall be allowed after witnessing in accordance with RMO No. 21-20 and issuance of the "Certificate of Deductibility of Goods/Assets Destructed/Disposed".

The BIR shall issue the "Certificate of Deductibility of Goods/Assets Destructed/Disposed" within five (5) days from the date of submission by the taxpayer of the complete documents (e.g., photos and videos, inventory count sheet, etc.) of destruction/disposal. 

• In case the inventories/assets applied for disposal are for any reason or cause, are replaced/substituted by its supplier, or the taxpayer shall become entitled to reimbursement for the partial or equivalent value thereof by an insurance company, the claim for the deductibility of the value thereof shall be denied. 
• In case any discrepancy is discovered in the course of the evaluation and verification of the application for deductibility, and that it was determined that the taxpayer has already claimed such deductions for income tax purposes, the taxpayer shall be subjected to mandatory audit. 

Any scrap or salvage value as may be subsequently determined shall be declared as other income. 

• The corresponding reports bearing on the results of inventory destruction as well as the "Certificate of Deductibility of Goods/Assets Destructed/Disposed" shall be approved by the ACIR-LTS or Regional Director, which may be delegated in writing to the Division Chiefs of the LT Office/RDO having jurisdiction over the applicant-taxpayer. 
• Destruction/disposal of goods, products and articles subject to Excise Tax shall be witnessed/validated by the authorized BIR official from the Excise Tax Divisions of the LTS. 

We hope that you find the foregoing helpful.

Please feel free to reach out to Atty Anne Margaret Momongan- Lim via email through Anne.Margaret.E.Momongan@ph.ey.com if you have any questions or require any assistance with your tax compliance requirements as well as preparation of the documentary submissions needed.

Thank you.