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Contrary to popular belief, not all business expenses can be claimed as deductions for income tax purposes. As a business owner, you should know the limits, exceptions and additional requirements of certain expenses to properly claim itemized deductions. Itemized deductions are by definition the expenses that you're eligible to claim to decrease your taxable income. This article discusses itemized deductions that are commonly mistreated by taxpayers. Disclaimer: This article is for general information only and is not substitute for professional advice. Go back to the main article: How to Compute Your Income Tax Using the New BIR Tax Rate Table General Requirements in Claiming Deductions The following are the general requirements in order to claim deductions1: Should be ordinary and necessary expenses paid/incurred during the taxable year for the development, management, operation and/or conduct of the trade, business or profession such as salaries and other remuneration, travel expenses, rentals, and entertainment, amusement and recreation expenses directly related to or in furtherance of trade (see succeeding sections for more information about these expenses and their specific requirements); Substantiated by Adequate Proof - documented by official receipts or adequate records which reflect the: (a) amount being deducted and; (b) connection or relation of expense to business/trade; Not contrary to law, morals, public policy or order (e.g., bribes, kickbacks or similar payments); The taxes required to be withheld (if applicable) have been properly withheld and remitted on time2. Different Expenses and Their Specific Requirements 1. Rental Expense A reasonable allowance for rentals and/or other payments which are required as a continued use or possession, for purposes of the trade, business or profession, or property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor. Receipts incurred, paid for and issued in the name of the taxpayer shall be recorded as its own expenses for income tax purposes. These expenses shall be claimed as deductions from gross income provided these are duly substantiated by Official Receipts/Invoices issued by third-party establishments3. As an itemized deduction: Depends on the accounting method used (cash basis vs. accrual basis) If there are advance payments and the payee is not a general professional partnership, the whole amount is deductible and consequently subject to VAT and Withholding Tax. Examples: Case 1: Lessee paid 3 out of 12 months of the taxable year Accrual = Lessee can claim expenses every month for the whole year provided he can substantiate it with official receipts. They also need to pay the BIR the withholding tax on the claimed expense. However, the lessee can only claim input VAT on 3 months paid. Cash = Lessee can expense the 3 months, claim input VAT on the 3 months paid and withhold only for the 3 months paid. Case 2: Lessee paid in advance worth 12 months at the start of the year Accrual and Cash basis = Lessee can expense the whole payment on January, claim input VAT worth 12 months on 1st quarter and the lessee must pay EWT (expanded withholding tax) worth 12 months in February. 2. Entertainment, Amusement, and Representation (EAR) Expense Requisites for deductibility It must be directly connected to the development, management and operation of the trade, business or profession of the taxpayer; or directly related to or in furtherance of the conduct of his or its trade, business or exercise of the profession; Not contrary to law, morals, good customs, public policy or public order; It must not have been paid, directly or indirectly, to an official or employee if it constitutes a bribe, kickback, or other similar payment; It must not exceed the prescribed ceiling. Ceiling on EAR Expense4 For taxpayers engaged in the sale of goods/properties – 0.50% of net sales (i.e., gross sales less sales returns/allowances and sales discounts) For taxpayers engaged in the sale of services (including the exercise of profession and use or lease of properties) – 1% of net revenues (i.e., gross revenues less discounts) For taxpayers engaged in both the sale of goods/ properties and services – pro-rate the actual EAR expense to determine the allocated EAR for each type of sale then compare it with the limit for each sale. The sum of the lower of the allocated EAR and the limit for each type of sale shall be the deductible EAR expense. Bribes, Kickbacks, and Similar Payments If the payment constitutes a bribe or kickback, it shall not be allowed as a deduction from gross income. However, even if the same is not considered deductible, it shall form part of the recipient’s gross income. The term “Representation Expenses” shall refer to expenses incurred by a taxpayer in connection with the conduct of his trade, business or exercise of a profession, in entertaining, providing amusement and recreation to, or meeting with, a guest or guests at a dining place, place of amusement, country club, theater, concert, play, sporting event, and similar events or places. For purposes of these Regulations, representation expenses shall not refer to fixed representation allowances that are subject to withholding tax on wages pursuant to appropriate revenue regulations. In the case particularly of a country, golf, sports club, or any other similar club where the employee or officer of the taxpayer is the registered member and the expenses incurred in relation thereto are paid for by the taxpayer, there shall be a presumption that such expenses are fringe benefits subject to fringe benefits tax unless the taxpayer can prove that these are actually representation expenses. For purposes of proving that said expense is a representation expense and not fringe benefits, the taxpayer should maintain receipts and adequate records that indicate the Amount of expense; Date and place of expense; Purpose of expense; Professional or business relationship of expense; Name of person and company entertained with contact details. Exclusions The following expenses are not considered entertainment, amusement and recreation expenses: Expenses which are treated as compensation or fringe benefits for services rendered under an employer-employee relationship, pursuant to Revenue Regulations 2-98, 3-98 and amendments thereto; Expenses for charitable or fundraising events; Expenses for a bonafide business meeting of stockholders, partners or directors; Expenses for attending or sponsoring an employee to a business league or professional organization meeting; Expenses for events organized for promotion, marketing and advertising including concerts, conferences, seminars, workshops, conventions, and other similar events; Other expenses of a similar nature. Notwithstanding the foregoing, such items of exclusions may, nonetheless, qualify as items of deduction under Section 34 of the Tax Code of 1997, subject to conditions for deductibility stated therein. 3. Interests Interest is defined as compensation for the use or forbearance or detention of money, regardless of the name it is called or denominated5. Requisites for deductibility An indebtedness exists; The interest has been paid or incurred; The indebtedness must be that of the taxpayer; The indebtedness is connected with the taxpayer’s trade, business or exercise of the profession; The interest was paid or incurred during the taxable year; The interest is stipulated in writing; The interest is legally due; The indebtedness is not between related taxpayers; The interest was not incurred to finance petroleum explorations; If incurred on indebtedness to acquire property, the interest was not treated as a capital expenditure. Common Sources of Interest Expense for Income Tax Purposes Ordinary and necessary loans related to business; Deficiency taxes which represent interest on unpaid taxes. This starts from the date required by law to file to the date of receipt of demand from the BIR; Delinquent taxes that represent interest on unpaid taxes after the receipt of demand from the BIR. Tax Arbitrage (Limitations on Deductibility of Interest Expenses) It is important to note that the business cannot claim the whole interest as an expense6. The amount of deductible interest shall be reduced by an amount equal to 33% of interest income earned which had been subjected to final withholding tax. The 33% represents the difference of the 30% RCIT (regular corporate income tax) tax rate and the 20% final tax rate on the interest income, divided by the 30% RCIT. Illustration: X corporation earned Php 100,000 interest income from bank deposits subject to the 20% final tax and incurred Php 50,000 interest expense from its loans. The amount deductible shall be reduced by Php 33,000 (33% of the Php 100,000 interest income). Thus, the deductible interest expense shall only be Php 17,000. Under RMC 31-2009, BIR publishes a BSP memorandum which reiterated the provision of Revenue Regulation No. 13-2000 that the limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer or regardless of the date when the interest-bearing loan and the date when the investment was made, as long as during the taxable year, there is an interest expense incurred on one side and an interest income earned on the other side, which interest income had been subjected to final withholding tax. Interest or not? There are instances where there certain “interests” are not treated as interest expense for income tax purposes7. This means that these “interests” have a different tax treatment and failure to pay the appropriate taxes will result in unnecessary penalties. Interest paid by a corporation on scrip dividends is an allowable deduction. So-called interest on preferred stock, which is, in reality, a dividend thereon, cannot be deducted in computing net income. In the case of banks and loan or trust companies, interest paid within the year on deposits or on money received for investment and secured by interest-bearing certificates of indebted issued by such hank or loan or trust company may be deducted from gross income. Interest paid by the taxpayer on a mortgage upon the real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness. 4. Losses There are times where things don’t go as planned. Luckily, the law provided a conciliatory provision to enable taxpayers to claim those losses8 as an expense and ultimately lowering their income taxes provided they follow certain rules. Requisites for Deductibility Actually sustained and charged-off during the taxable year and not compensated for by insurance or other forms of indemnity; Incurred in trade, profession or business; Of property connected with the trade, business, or profession, if the loss arises from fires, storms, shipwreck or other casualties, or from robbery, theft, or embezzlement; Sustained in a closed and completed transaction. Insurance payments: Insurance received as compensation for a loss must be subtracted in arriving at the amount of the loss. If the insurance proceeds exceed the net book value of the damaged 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 company9. Loss arising from casualty, robbery, theft or embezzlement: The taxpayer shall file a sworn declaration of loss to be filed within 45 days from the date of the event. Failure to report a theft or robbery to the police can be held against the taxpayer. However, a mere report of alleged theft or robbery to the police authorities is not considered as conclusive proof of the loss arising therefrom10. Voluntary removal of buildings: Loss due to the voluntary removal or demolition of old buildings, the scrapping of old machinery, equipment, etc., incident to renewals and replacements will be deductible from gross income11. When a taxpayer buys real estate upon which is located a building, which he proceeds to raze with a view to erecting thereon another building, it will be considered that the taxpayer has sustained no deductible expense on account of the cost of such removal, the value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land and building plus the cost of removing the useless building. Impairment or loss of useful value of depreciable assets12: Generally, reduction in the value of assets through fluctuation of the market prices or otherwise are not deductible for income tax, unless they are actually disposed of, destroyed or sold for less than their actual value. However, a permanent decline or permanent abandonment of an asset due to reasons below are allowable deductions. an increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture to which special machinery is exclusively devoted. where new legislation directly or indirectly makes the continued profitable use of the property impossible. Computation The taxpayer may claim as a deduction the actual loss sustained. In determining the amount of the loss, an adjustment must be made, however, for improvements, depreciation and the salvage value of the property. Buildings and Machinery: Buildings, only when they are permanently abandoned or permanently devoted to a radically different use, and; Machinery, only when its use as such is permanently abandoned. Any loss to be deductible under this exception must be charged off in the books and fully explained in returns of income. Casualty Loss: is one that has occurred in an identifiable event that was sudden, unexpected or unusual. Examples include loss caused by fire unless the taxpayer sets the fire, in which case no deduction is available. The amount deductible shall be based on the following: Total destruction – the net book value immediately preceding the casualty should be used as the basis in claiming losses, to be reduced by an amount of insurance or compensation received; Partial destruction – the replacement cost to restore the property back to its normal operating condition should be used but in no case shall be deductible loss be more than the net book value of the property as a whole immediately before the casualty. The excess of the replacement cost over the book value should be capitalized. 5. Net Operating Loss Carry-Over The Net Operating Loss Carry-Over (NOLCO)13 is an item deductible from Gross Income to arrive at Taxable Income. In a year where there is an operating loss, such operating loss can be carried over to the next period as a deductible item from gross income. The NOLCO may be carried over as a deduction from gross income for the next 3 consecutive taxable years immediately following the year of such loss. If the OSD (optional standard deduction) is available, the taxpayer cannot simultaneously claim NOLCO. However, the 3 year period is not interrupted. Take note that there must be no substantial change in ownership. Lastly, a corporation cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT (minimum corporate income tax) in any taxable year. The running of the three-year period for the expiry of NOLCO is not interrupted by the fact that such corporation is subject to MCIT in any taxable year during such three-year period14. The following are not entitled to any deduction for NOLCO: Offshore Banking Units (OBUs) and Foreign Currency Deposit Units (FCDUs); Those registered with the BOI or PEZA enjoying Income Tax Holiday (ITH) – for the years covered by the ITH; Subic Bay Metropolitan Authority (SBMA) registered enterprises; Foreign corporations engaged in international shipping or air carriage business in the Philippines; Any person enjoying exemption from income tax, with respect to its operation during the period for which the exemption is applicable. Loss from wash sales of shares of stocks or securities: A taxpayer cannot deduct any loss claimed to have been sustained from the sale or other disposition of stock, if, within a period beginning thirty (30) days before the date of such sale or disposition and ending thirty (30) days after such date (referred to in this section as the sixty-one (61)-day period), he has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock. However, this prohibition does not apply in the case of a dealer in stock if the sale or other disposition of stock is made in the ordinary course of the business of such dealer15. Substantially identical: means that the stock must be of the same class, or in the case of bonds, the terms thereof must be the same. Requisites for wash sales: There must be a capital loss from the sale of stocks held as cap ass. There must be a purchase of identical stock within the 61-day period. The formula for computing deductible loss on wash sales: I. Number of shares sold Multiply by: (Gross Selling Price or GSP/share sold – Cost/share sold) Equals: Indicated Loss II. Number of shares purchased 30 days before or 30 days after this sale Multiply by: (GSP/share sold – Cost/share sold) Equals: Non-deductible Loss III. Indicated loss + Non-deductible Loss = Deductible Loss. Losses from wagering: deductible only to the extent of gains from wagering transactions and cannot be deducted from other gains or income items. While gains from wagers are taxable in full. Related Party Transactions: No loss shall be recognized from transactions with related parties. 6. Bad Debts Bad debts16 are those debts or receivables due to the taxpayer which are actually ascertained to be worthless and charged off within the taxable year. Requisites for Deductibility There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable; The same must NOT be sustained in a transaction entered into between related parties enumerated under Section 36(B) of the Tax Code; The same must be connected with the taxpayer’s trade, business or practice of a profession; The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year, EXCEPT FOR BANKS where the Bangko Sentral ng Pilipinas (BSP) shall ascertain the worthlessness of the bad debts and shall approve the writing-off of said debts. Currently, under BSP regulations, the BSP must be notified of the decision of the Board of Directors to declare receivables as worthless. Worthless debts: The determination of whether a debt is worthless must be made by reference to all the pertinent evidence, including the general financial condition of the debtor and whether the debt is secured by collateral. A receivable is deemed worthless if after taking reasonable steps to collect the debt, there is no likelihood of recovery at any time in the future. It must be noted, however, that a collection suit need not be filed in court. It is sufficient that reasonable efforts were exerted to collect the debt, and such efforts proved to be insignificant. Recovery of bad debts previously written off: This is taxable only if there was a previous benefit derived therefrom, i.e., it was previously claimed as a deduction for income tax purposes. If there is no such deduction claimed, then subsequent recovery of the bad debt or uncollectible account is not taxable, this is otherwise known as the tax benefit rule. 7. Depreciation Depreciation17 is the gradual diminution in the useful value of the property used in the trade or business resulting from exhaustion, wear and tear, and normal obsolescence. Requisites for Depreciation Deduction must be reasonable; must be for property used or employed in the business, or temporarily not in use; must be charged off during the taxable year Methods for Computing Depreciation Straight-line method; Declining-balance method; Sum-of-the-years digit method; Any other method which may be prescribed by the Secretary of Finance upon recommendation of the BIR. Note that any change in depreciation method or changes in estimated useful life requires approval by the BIR If using the revaluation model, any increase in depreciation brought about by the increase of FV (appraisal value) shall be ignored. Depreciation must only be based on historical costs. In summary, allowable changes in depreciation expense must only come from changes in useful life, salvage value, additional capitalizable costs and change in depreciation method. Provided that the company must first secure a ruling from BIR. Under the current rules18, the following guidelines shall be observed in determining whether depreciation expense can be claimed or not on account of Vehicles capitalized by the taxpayer, or in claiming other expenses and input taxes on account of said Vehicle: • No deduction from gross income for depreciation shall be allowed unless the taxpayer substantiates the purchase with sufficient evidence, such as official receipts or other adequate records which contain the following, among others: Specific Motor Vehicle Identification Number, Chassis Number, or other registrable identification numbers of the Vehicle; The total price of the specific Vehicle subject to depreciation; and The direct connection or relation of the Vehicle to the development, management, operation, and/or conduct of the trade or business or profession of the taxpayer; • Only one Vehicle for land transport is allowed for the use of an official or employee. The value of the said vehicle should not exceed Php 2,400.000.00); • No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircraft, and land vehicles which exceed the above threshold amount, unless the taxpayer's main line of business is transport operations or lease of transportation equipment and the vehicles purchased are used in said operations; • All maintenance expenses on account of non-depreciable Vehicles for taxation purposes are disallowed in its entirety; • The input taxes on the purchase of non-depreciable Vehicles and all input taxes on maintenance expenses incurred thereon are likewise disallowed for taxation purposes. Under RMC No. 2-2013: Any loss that will be incurred as a result of a sale of the non-depreciable vehicles shall likewise be NOT allowed as a deduction from gross income. For income tax purposes, all expenses related to the non-depreciable vehicles such as but not limited to repairs and maintenance, oil and lubricants, gasoline, spare parts, tires and accessories, the premium paid for insurance covering said vehicles and registration fees shall not be allowed as a deduction in its entirety. For VAT purposes, all input taxes corresponding to the disallowed expenses mentioned above for income tax purposes are likewise not allowed. 8. Charitable and Other Contributions It is good to give something back to society and the law agrees that such philanthropic acts must be rewarded. Remember, under general requirements, only business-related expenses shall be claimed as a valid deduction but this is an exception. Charitable contributions are valid deductions to the gross income19 provided that they are below the limit and has complied with all requisites written in the code. Requisites for Deductibility 1. Evidence or proof submitted to the BIR by showing the Certificate/s of Donation (COD) and indicating therein the following: Actual receipt by the accredited non-stock, non-profit corporation/NGO of the donation or contribution and the date of receipt thereof; and The amount of the charitable donation or contribution, if in cash; if the property, whether real or personal, the acquisition cost of the said property. 2. For donation worth over Php 50,000, notice to the Revenue District Office is required and Certificate of Donation must be attached. Valuation - The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. Donations with FULL deductibility a. Donations to the Philippine Government or to any of its agencies or political subdivisions, including fully-owned government corporations undertaking priority activities; b. Donations to foreign institutions or international organizations to whom the Philippine Government has treaties or commitments with or covered by special laws; c. Donations to accredited NGOs subject to conditions set forth in the NIRC (National Internal Revenue Code): 1. Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual; The payment of compensation, salaries, or honorarium to its trustees or organizers; The payment of exorbitant or unreasonable compensation to its employees; The provision of welfare aid and financial assistance to its members; Donation to any person or entity (except donations made to other entities formed for the purpose/purposes similar to its own; The purchase of goods or services for amounts in excess of the fair market value of such goods or value of such services from an entity in which one or more of its trustees, officers or fiduciaries and interest; and When upon dissolution and satisfaction of all liabilities, its remaining assets are distributed to its trustees, organizers, officers or members 2. Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; 3. The level of the administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and 4. The assets of which, in the event of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for a public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of the said court shall best accomplish the general purpose for which the dissolved organization was organized. Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term 'utilization' means: Any amount in cash or in-kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized; Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds. Donations with LIMITED deductibility When the donee is: for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes; accredited domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans; to social welfare institutions Limits: For individual donor - not in excess of 10% of the donor’s income derived from trade, business or profession computed before the donation; and For corporate donor - not in excess of 5% of the donor’s income derived from trade, business or profession computed before the donation; In order for a donation to be deductible whether full or limited and be exempted from donor’s tax under Section 101 of NIRC, the donee must be accredited by the Philippine Council for NGO Certification Inc.20 Exemption of gifts from the donor’s tax21. Exemption of Certain Gifts. — The following gifts or donations shall be exempt from the tax: A. In the Case of Gifts Made by a Resident. 1. Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government; and 2. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization. Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For the purpose of this exemption, a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization' is a school, college or university and/or charitable corporation, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization, incorporated as a nonstock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. For the contributions to be deductible and be exempted from donor's tax, these must be supported with COD/NOD. Also, the NOD must be filed with the BIR within the time prescribed under the rules22. Campaign Contributions23 may be treated as a deductible item only if the same is declared in the Statement of Expenditures submitted by the candidate to the COMELEC. The following are institutions governed by special laws that allow full deductions on donations: National Museum, Library, and Archives (P.D. 373) Development Academy of the Philippines (P.D. 205) Intramuros Administration (P.D. 1616) The Cultural Center of the Philippines International Rice Research Institute Ministry of Youth & Sports Commission Museum of Philippine Costumes University of the Philippines and other state colleges and universities The Integrated Bar of the Philippines (P.D. 81) 9. Research and Development R&D expenses are allowed as a deduction24 if incurred in connection with the trade, business or profession of the taxpayer; and if not charged to capital account Treatment of R&D as Deferred Expense At the option of the taxpayer, R&D may be deferred and amortized over a period not less than 60 months if: If paid or incurred in connection with a trade, business or profession; if not treated as an expense; and if chargeable to capital account not subject to depreciation. Limitations on Deduction This subsection shall not apply to: Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion; and Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other minerals, including oil or gas. Items not deductible25: Personal, living or family expenses; Payment for new buildings or for a permanent improvement, or betterment made to increase the value of any property or estate (not applicable to intangible drilling and development costs incurred in petroleum operations); Expenses in restoring property or in making well the exhaustion thereof for which an allowance is or has been made; Premium paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporation, when the taxpayer is directly or indirectly a beneficiary under such policy; and Losses from sales or exchanges of property between related parties. The above items may also be construed as fringe benefits or dividends depending on the recipient. Fringe benefit if given to employees= subject to withholding tax on compensation or Fringe benefit tax Dividends if given to the shareholders/owner. READ: An Ultimate Guide to Philippine Tax: Types, Computations, and Filing Procedures References