Ceilings on Entertainment, amusement and recreation expenses.

Sec. 34 (A) (1) (iv) provides that the Secretary of Finance can provide ceilings on entertainment, amusement and recreation expenses, taking into account the needs as well as the circumstances, nature, and character of the industry, trade, business, or profession of the taxpayer. It is further provided that any expense for entertainment which is contrary to law, morals, or public policy or public order cannot be claimed as a deduction.

Payments which are in the nature of bribes are totally disallowed.

Rationalization of contributions to foundations and non-governmental organizations (NGOs).

The deductibility of donations to NGOs provided a generous tax shelter in the Tax Code. Pseudo-foundations were organized as a means of reducing taxable income. The accreditation process was discretionary and arbitrary in many instances.

At the initiative of the private sector, an accreditation process of NGOs and foundation was developed under the CTRP. It was a significant reform because government devolved the process of accreditation to the private sector. It is now responsible for policing its own.

The Philippine Council for NGO Certification , Inc. (PCNC) is tasked to establish and operationalize a system of accreditation to determine the qualifications of non-stock, non-profit corporations or organizations and NGOs for accreditation as qualified-donee institutions.

Newly organized and existing non-stock, non-profit corporations and NGOs should apply with the Accrediting Entity for accreditation and submit to a process of examination and evaluation. The examination and evaluation of the Accrediting Entity is a pre-requisite for the organizations' registration with the Bureau of Internal Revenue (BIR) as qualified-donee institutions. The applicant-NGOs are evaluated according to four criteria: missions and goals, resources, program implementation and evaluation and planning for the future.

If the NGO is deemed qualified, the Accrediting Entity issues a Certificate of Accreditation that is valid for five years for existing non-stock, non-profit corporations/NGO and three years for newly organized non-stock, non-profit corporations/NGOs.

If the application is denied, the applicant-NGO is given one year within which to implement the evaluator's recommendation.

Benefits of Accredited NGOs.

Donations to accredited non-stock, non-profit corporations, non-government organizations are entitled to the following benefits:

Limited deductibility - donations contributions or gifts actually paid or made within the taxable year to accredited non-stock, non-profit corporations shall be allowed limited deductibility in an amount not in excess of ten percent (10%) for an individual donor and five percent (5%) for a corporate donor, of the donor's income.

Full deductibility - donations, contributions or gifts actually paid or made within the taxable year to accredited NGOs shall be allowed full deductibility, subject to the certain conditions such as:

• The level of annual administrative expenses shall not have exceeded thirty percent (30%) of the total expenses for the taxable year.
• All the members of the Board of Trustee do not receive compensation or remuneration for their service to the organization.

Exemptions from Donor's Tax - Donations and gifts shall be exempt from donor's tax provided that not more than thirty percent (30% of the said donations and gifts shall be used by the accredited organizations for administration purposes.

The following are some of the prohibited transactions for any accredited non-stock, non-profit corporation/NGOs enjoying the benefits enumerated above:

Diverting its income or transferring its property by way of lease or sale to any member of the Board of Trustees, founder/s or principal officers or any member of their families or to any corporation controlled directly or indirectly by the above-cited individuals or their families;

Using any part of its property, income or seed capital for any purpose other than for which the corporation was created or organized; or Engaging in any activity which is contrary to law, public order, or public policy.

Existing non-stock, non-profit corporations, NGOs have three years beginning effective January 1, 1999 within which to secure accreditation.

After this date, donations to non-accredited entities would no longer be deductible.

The CTRP recognizes that the economic life of a firm goes beyond a certain tax year. This is especially true for new firms which take more than a year to make a profit. The initial years are generally years of losses .

Sec 34 (D) (3) allows taxpayers to carry forward their net operating losses for the next three consecutive years immediately following the year of such loss.

The CTRP provides basic safety nets to prevent the net operating loss carry-over (NOLCO) from being used as a means of tax avoidance. The NOLCO is only allowed if there has been no substantial change in the ownership of the business.

The CTRP maintained the negative list of expenses which are non-deductible for income tax purposes as follows (Sec. 36):

• personal, living or family expenses
• any amount paid out for new buildings or for permanent improvements made to increase the value of any property or estate;
• any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made;
• or premiums paid on any life insurance policy.

• certain losses from sales or exchange of property between:

1. members of the family,
2. the individual taxpayer and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;
3. two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual and if either of the corporations is a personal holding company or a foreign personal holding company;
4. the grantor and a fiduciary - person designated as the trustee of any trust
5. the fiduciary of a trust and the fiduciary of another trust whenever the same person is a grantor with respect to each trust;
6. fiduciary of trust and a beneficiary of such trust

Chapter VII of the Tax Reform Act enumerates the allowable deductions from gross income. These relate to ordinary and necessary expenses in carrying on the development, management, operation, and or the conduct of the trade, business or exercise of a profession such as:

• a reasonable allowance for salaries, wages, and other forms of compensation for a personal service actually rendered, including the grossed-up monetary value of fringe benefits granted to employees;
• a reasonable allowance for travel expenses, here and abroad, while away from home, in the pursuit of trade, business or profession;
• a reasonable allowance for rentals and/or other payments required for the continued use or possession of property in the conduct of trade, business or profession.

The Tax Reform Act provides for guidelines and limitations with respect to the deduction of other costs such as taxes, losses, bad debts, depreciation, and research and development. These include for example, substantiation requirements, e.g. official receipts.