After the storm: Tax relief for casualty losses



Severe storm events are nothing new for our country. Last week in this column my colleague, Antonio Cubacub, wrote about the different ways organizations can prepare for, and recover from, natural disasters. It’s a timely discussion, especially now that El Niño is officially over and the Philippine Atmospheric, Geophysical and Astronomical Services Administration (Pagasa) has announced that we should brace for La Niña, which could bring with it massive flooding that could damage properties, inventories, and supplies used in the operation of businesses.

When businesses suffer property damage due to devastating storms, for example, the losses arising from damage to or loss of property that are used in business are treated as casualty losses, which are allowed as deduction under certain conditions. In relation to this, the Bureau of Internal Revenue (BIR) has prescribed policies and guidelines that govern the declaration of casualty losses incurred by taxpayers, and the reporting of such losses filed at the concerned Revenue District Offices (RDOs) through the issuance of Revenue Memorandum Order (RMO) 31-2009.

The requirements for filing claims of casualty losses are as follows:

1. Submit a sworn declaration of loss, which should be filed within 45 days after the date of the event, stating the nature of the event that gave rise to such losses, and the time of its occurrence; description and location of the damaged properties; items needed to compute the losses, such as: a) cost or other basis of the properties; b) depreciation allowed, if any; c) value of the properties before and after the event; d) cost of repair; and amount of insurance or other compensation received or receivable.

Such sworn declaration of loss must be supported by the financial statement for the year immediately preceding the event and copies of the insurance policies, if any, for the relevant properties.

2. Proof of the elements of the losses claimed, such as, but not limited to, the following:

• Photographs of the property (photographs taken showing the property before and after the typhoon, showing the extent of the damage sustained)

• Documentary evidence for determining the cost or valuation of the damaged properties, such as, but not limited to: cancelled checks, vouchers, receipts, and other evidence of costs

• Insurance policy, in the event that there is insurance coverage for the properties

• 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 conclusive proof of the loss arising therefrom.)

All documents and other evidence submitted to prove such losses shall be subject to verification by the Bureau office concerned, and should be kept by the taxpayer as part of his tax records, and be made available to the duly-authorized revenue officers, upon audit of his income tax return and the declaration of loss.

Further, the following requisites for deductibility of such losses should be present:

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 in 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 Revenue Regulations 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 damaged assets, such excess shall be subject to regular income tax, but not to value-added tax, since the indemnification is not an actual sale of goods by the insured company to the insurance company.

4. The deduction of assets as capital losses must be properly recorded in accounting reports, with the adjustment of the applicable accounts. In the event of a total loss/destruction of properties used in the business enterprise, the net book value immediately preceding the disaster should be used as the basis for 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 repair expense or as a capitalized asset.

Although this order was made available to help taxpayers claim losses due to disaster, it seems that the 45-day period for submitting the sworn statement, together with the supporting documents, may not be enough. This is considering that the losses should first be ascertained before a taxpayer can start preparing the documentary requirements. Besides, the business will prioritize the recovery from disruption of normal operations to limit the losses over filing support documents to claim the losses.

The BIR might want to consider extending the period of time required for submission of the said documents. Further, the BIR might also consider the automatic extension of filing and payment deadlines for all taxpayers once suspension of work is declared by the local government unit where they are located in order to avoid imposition of penalty. Notwithstanding the limitations set out in the foregoing issuance, taxpayers should be aware of the possible remedies in order to fully claim any losses they may have sustained during disasters.

The author is a Senior Manager with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd., a member firm of Deloitte Touche Tohmatsu Limited—comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.


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