Tax notes: List of deductible expenses for Peza firms not exclusive

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Monday, July 21, 2014

THE Court of Tax Appeals (CTA) ruled in East Asia Utilities v. Commissioner of Internal Revenue, CTA Case No. 8179, dated May 14, 2014, that the enumerated list of direct costs under Revenue Regulations (RR) No. 11-2005 is not an exclusive or closed list of expenses that may be deducted by Peza-registered companies for the purpose of computing the five percent gross income tax (GIT). The list merely enumerates the nature of expenses that can be considered as direct cost.

The criterion in determining whether or not the cost or expense should be part of direct cost is the direct relation of such item in the rendition of the PEZA-registered activities. In the instant case, technical training expenses and repair costs to plant’s machinery and equipment, which were not explicitly included in the list of deductible direct costs under RR No. 11-2005, were allowed as deductible items in computing the five percent GIT after evidence and documentation showed that such costs are directly related to the rendition and completion of the company’s Peza-registered activity.

Furthermore, the CTA defined operating expenses as primary recurring costs associated with central operations, which are incurred to generate sales.


In particular, general and administrative expenses are related to the general administration of the company’s operations such as officers and office salaries, office supplies, depreciation of office furniture and fixtures, telephone, postage, accounting and legal services and business licenses and fees.

These type of expenses are deemed not directly related to Peza registered-operations and hence, not considered as direct cost deductible in arriving at the taxable gross income for the purpose of five percent GIT.

Based on the foregoing, Peza-registered companies may be allowed to deduct expenses which are in the nature of direct costs even though the same are not specifically included in the list under RR 11-2005.

(Source: Punongbayan & Araullo)

Published in the Sun.Star Cebu newspaper on July 22, 2014.


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