QuestionsQuestions (BIR REGULATIONS NO. 25-2002)
It is promulgated pursuant to Section 244 of the Tax Code of 1997 and it amends Revenue Regulations No. 5-99, further implementing Section 34(E) of the Tax Code on the requirements for deductibility of bad debts.
It covers corporations (including banks and insurance companies) and individuals, estates, and trusts engaged in trade/business or a professional engaged in the practice of his profession.
The amended requisites are: (1) existing indebtedness due to the taxpayer, valid and legally demandable; (2) connected with the taxpayer’s trade/business/profession; (3) not from a transaction with related parties enumerated under Section 36(B); (4) actually charged off the books as of the end of the taxable year; and (5) actually ascertained to be worthless and uncollectible as of the end of the taxable year.
Because the deductible bad debt must represent an existing obligation the taxpayer has a legal right to collect; an invalid or non-demandable claim is not considered a proper “existing indebtedness” for deduction.
It requires that the indebtedness be connected with the taxpayer’s trade, business, or practice of profession; debts unrelated to business activity generally fail this condition.
A bad debt deduction is not allowed if the indebtedness is sustained in a transaction entered into between related parties enumerated under Section 36(B) of the Tax Code of 1997.
It requires an actual book entry/write-off in the taxpayer’s accounting records at the end of the taxable year; a mere intention to write off or a later adjustment is insufficient.
The taxpayer must ascertain and demonstrate with reasonable degree of certainty that the debt is uncollectible as of the end of the taxable year, based on pertinent evidence evaluated by the BIR.
The Commissioner will consider all pertinent evidence, including the value of collateral (if any) and the financial condition of the debtor.
The regulation requires (as part of demonstrating uncollectibility) that the case be assigned to an independent collection lawyer not under the employ of the taxpayer, who will report legal obstacles and the virtual impossibility of collecting, and who must issue a sworn statement showing the propriety of the deductions.
Where surrounding circumstances indicate the debt is worthless/uncollectible and that legal action would in all probability not result in satisfaction of execution on a judgment, those facts may be sufficient evidence of worthlessness for deduction.
For banks, the Commissioner determines worthlessness/uncollectibility in the manner described (evidence-based), and additionally the taxpayer must submit Bangko Sentral ng Pilipinas/Monetary Board written approval for writing off the indebtedness from the banks’ books at the end of the taxable year.
No receivable from an insurance or surety company may be written off and claimed as a bad debt deduction unless such company has been declared closed due to insolvency or similar reason by the Insurance Commissioner.
It takes effect after fifteen (15) days following publication in a newspaper of general circulation and applies to taxable year 2002.
It repeals, amends, or modifies any existing revenue issuances (regulations, memorandum orders/circulars, or other issuances) inconsistent with the new regulations.
No. Both requirements must concur: the debt must be actually charged off as of year-end and actually ascertained to be worthless and uncollectible as of the end of the taxable year.
The regulation suggests deduction is supported when legal action would in all probability not result in satisfaction of execution on a judgment; if execution could likely be satisfied, the debt may fail the worthlessness/uncollectibility showing.