The Philippines is vulnerable to natural calamities due to its geographical location. The archipelago is frequently exposed to the devastating effects of natural disasters like typhoons, earthquakes, and — from time to time – volcanic eruptions.
On Jan. 12, the picturesque Taal Volcano expelled smoke, ash and lava, prompting the government to evacuate residents from nearby towns as a precaution in the event of a more powerful eruption. Just less than a month prior, hundreds of thousands of Filipinos lost their homes and livelihoods when Typhoons Tisoy and Ursula swept the Visayas region.
In the aftermath of natural or environmental catastrophes, many businesses struggle to recover from the resulting damage, loss and devastation, especially when they are unable to claim losses incurred as deductions for income tax purposes. However, it may be of some comfort to affected taxpayers that this can be avoided.
CLAIMING CASUALTY LOSSES
Affected individuals and corporations engaged in trade, business or a profession may avail of tax relief by claiming (as business deductions) casualty losses incurred from destroyed properties that were actually used in the business. Keep in mind, however, that casualty losses on assets not used in the course of business or are personal in nature will not be allowed as deductions.
To guide taxpayers on how to declare casualty losses incurred during the year for tax purposes, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Order (RMO) No. 31-2009. Although it is a dated RMO, these rules are still in force and highlight critical considerations for taxpayers in claiming casualty losses.
ACT FAST, BUT BE DETAILED
Businesses that wish to deduct casualty losses need to file their claim of casualty loss within 45 days after the date of the event. A Sworn Declaration of Loss is submitted to the Revenue District Office (RDO) holding jurisdiction over the taxpayer’s place of business.
The sworn declaration of loss should include specific details, such as the nature of the event that gave rise to the loss; when it occurred; a detailed description of the damaged properties and where they are located; and very importantly, the amount of insurance or other compensation that the taxpayer anticipates receiving.
In addition, the taxpayer needs to provide a detailed computation of the losses covering the cost of the property, any depreciation deducted, the value of the properties before and after the event, and the cost of any necessary repairs for assets that can be recovered. As with other similar claims for deduction, the taxpayer should submit proof of the loss incurred, including but not only limited to before and after photographs of the damaged or destroyed properties.
KNOW HOW MUCH LOSS TO REPORT
When a taxpayer submits the declaration for casualty losses, it is important to accurately calculate the deductible casualty losses. This amount is basically the difference between the value of the property before and immediately after the calamity. This means that the casualty loss should never exceed the cost (or other adjusted basis, including depreciated cost) of the property the taxpayer is using in business. At the same time, taxpayers should remember to deduct any insurance or compensation they receive for the loss.
Understandably, insurance claims take time to process. If the taxpayer or company anticipates any insurance payments to occur after the reporting period in which the losses occurred, then for financial reporting purposes, the loss should be recognized when incurred. For example, when a piece of equipment is destroyed, the asset should be written off, regardless of whether the losses can be recovered from an insurance policy or if there are plans to replace the equipment.
Companies should also note that timing will be different for financial reporting and for tax purposes. In cases where a company has no insurance on the assets used in its business, the loss will be recognized on the date it is incurred. However, if a claim for reimbursement exists and there is a reasonable prospect of recovery, then no portion of the loss is sustained until it can be reasonably ascertained whether or not such reimbursement will be received.
Determining whether a reimbursement will be received or not can be reasonably ascertained such as by a settlement, adjudication, or abandonment of the claim.
Why is this significant? Because taxpayers either need to actually collect insurance proceeds or decide to abandon their claim (which, naturally, requires documentary proof), before they can claim casualty losses as tax deductions.
Since volcanic eruptions and the damage they may cause are not usual vents, insurance companies will need time to accurately evaluate the reasonableness of the incurred losses compared to other more frequently occurring disasters, such as floods and typhoons.
HOPING FOR MORE TIME
Arguably, the 45-day period for taxpayers to submit 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.
Our tax authorities in their wisdom may wish to consider granting a longer period to allow taxpayers to collate all of the documentary requirements to report these casualty losses. As an example, the BIR extended by three months the filing of the sworn declaration in the wake of typhoon Yolanda in November 2013.
In the meantime, as we hope and wait for any advice for a reporting deadline extension from the BIR, we expect that affected businesses and taxpayers will continue to prioritize the safety and recovery of their employees and their families, while anticipating the resumption of normal operations in the soonest possible time.
Amidst all challenges, we hope and pray for the safety and well-being of our affected kababayans.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Pamela Lantes-Arellano is a Tax Senior Director under the Financial Services Organization Group of SGV & Co.