PHILIPPINES Law and Practice Contributed by: Carina Laforteza, Joanna Marie Joson, Kristina Paola Frias and Joanna Marie Reyes, SyCip Salazar Hernandez & Gatmaitan
However, any net loss incurred in a taxable year when the taxpayer was exempt from income tax is not allowed as a deduction. Additionally, a net operating loss carry-over (NOLCO) shall be allowed only if there has been no substantial change in the ownership of the business in that: • not less than 75% in the nominal value of out - standing issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or • not less than 75% of the paid-up capital of the cor - poration, if the business is in the name of a corpo - ration, is held by or on behalf of the same persons, where such substantial change resulted from the taxpayer’s merger, consolidation or business com - bination with another person, and not through a sale by a shareholder. Ordinary loss is deductible against ordinary gain and capital gain, while capital loss is deductible only against capital gain. Individual taxpayers sustaining a net capital loss in any taxable year are also allowed to deduct such loss against capital gain in the succeeding taxable year but only in an amount not exceeding net income in the said taxable year. Under the CREATE MORE Law, RBEs granted tax incentives are entitled to an enhanced NOLCO, which means that the net operating loss of a registered activity during the first three years from the start of commercial operations that had not been offset as deduction from gross income may be carried over as deduction from gross income within the next five consecutive taxable years immediately following the last year of the ITH entitlement period of the project. 2.5 Deduction of Interest Interest paid or incurred by a taxpayer within a taxable year on indebtedness in connection with their busi - ness is generally allowed as a deduction from their gross income, but such allowable deduction for inter - est expense shall be reduced by 20% of the interest income of the taxpayer subject to final tax. An exam - ple of interest income subject to final tax is interest
income from peso bank accounts, which is subject to 20% final tax. No deduction is allowed in respect of interest: • if, within the taxable year, an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise; • if both the taxpayer and the person to whom the payment has been made or is to be made are related parties, as specified under the Philippine Tax Code; or • if the indebtedness is incurred to finance petroleum exploration. The taxpayer may opt to treat interest incurred to acquire property used in business as a deduction or as a capital expenditure. 2.6 Consolidated Tax Grouping Consolidated tax grouping is not permitted under Philippine law. Losses incurred by one company in a group may not be utilised by another company. Nonetheless, when a taxpayer merges, consolidates or combines with another person, that taxpayer’s NOL may be transferred or assigned to the surviving or new corporation or entity if the shareholders of the trans - feror/assignor gain control of 75% or more in nomi - nal value of the outstanding issued shares or paid- up capital of the transferee/assignee (if the surviving entity is a corporation) or 75% or more interest in the business of the transferee/assignee (if the transferee/ assignee is not a corporation). Additionally, in a merger, the NOLCO shall be allowed as a deduction from gross income of the surviving entity if the taxpayer that sustained and accumulated the NOL is the surviving entity. 2.7 Capital Gains Net capital gains realised by domestic corporations and foreign corporations on the sale or exchange of shares in a domestic corporation not traded on the Philippine stock exchange are subject to a final tax of 15%.
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