RMC No. 5-2025 — Amending certain provisions of RMC Nos. 11-2024. 12-2024, 13-2024 and 19-2024, provide clarifications/ transitory provisions and to align them with the provisions of R.A. No. 11976, (EOPT Act), its Implementing Rules and Regulations and other issuances Digest | Full Text | Sworn Statement

REPUBLIC OF THE PHILIPPINES

for Nation-building Bringing in Revenues BUREAU OF INTERNAL REVENUE DEPARTMENT OF FINANCE PILIPINAS January 16, 2025 BAGONG

REVENUE MEMORANDUM CIRCULAR NO. _0 0 5 - 2 0.2 5

SUBJECT: Amends Certain Provisions of Revenue Memorandum Circular Nos. 11-2024,

12-2024, 13-2024 and 19-2024, Provide Clarifications/ Transitory Provisions and to Align them with the Provisions of Republic Act No. 11976, otherwise known as the "Ease of Paying Taxes Act", its Implementing Rules and Regulations and Other Issuances

TO: All Internal Revenue Officials, Employees and Others Concerned

This Circular is issued to update certain provisions of Revenue Memorandum Circular (RMC) Nos. 11-2024, 12-2024, 13-2024 and 19-2024, by integrating clarifications/ transitory provisions in line with Republic Act No. 11976, otherwise known as the "Ease of Paying Taxes Act" (EOPT Act), its Implementing Rules and Regulations and other issuances.

COVERAGE:

RMC No. 11-2024 - Clarifies the tax treatment of iease accounting by lessees under Philippine Financial Reporting Standard 16 in relation to Sections 34(A), 34(K), 106. 108, 179. 194 of the Tax Code, as amended, Revenue Regulations (RR) No. 19-86, as amended. and RR No. 02-98, as amended;

RMC No. 12-2024 -- Clarifies the treatment of foreign currency transactions for financial reporting and internal revenue tax purposes:

3. RMC No. 13-2024 -- Clarifies the treatment of retirement benefits expense for financial reporting and tax purposes; and

4 RMC No. 19-2024 - Clarifies the tax treatment of interest expense paid or incurred on

indebtedness in connection with the taxpayer's profession, trade or business and other related

matters.

BIR National Office Bldg., Senator Miriam Defensor-Santiago Avenue, Diliman, Quezon City

Website: www.bir.gov.ph Trunkline: 8981-7000 ; 8929-7676]

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AMENDMENTS/ALIGNMENT WITH EOPT ACT:

PROVISIONS AFFECTED BY EOPT ACT AMENDMENTS

Q6: What shall be the income tax treatment of initial direct costs paid by the lessee in relation to the lease of an asset? RMC No. 11-2024 (Lease Accounting by Lessees) [ Q6: What shall be the income tax treatment of initial direct costs paid by the lessee in relation to the lease of an asset?

the Tax Code, as amended. shall be defined as payments which are directly related to the negotiation and execution of a lease by the lessee in relation to the lease agreement shall be claimed as outright expenses in the year it was paid or incurred subject to substantiation and withholding requirements pursuant to Section 34 of A6: For purposes of taxation, Initial Direct Costs agreement. The initial direct cost paid or incurred related to the negotiation and execution of a lease by the lessee in relation to the lease agreement it was paid or incurred subject to substantiation shall be defined as payments which are directly agreement. The initial direct cost paid or incurred shall be claimed as outright expenses in the year requirements pursuant to Section 34(A)(1)(b) of the Tax Code of 1997, as amended. A6: For purposes of taxation, Initial Direct Costs

Furthermore, the same shall be subject to

of Paying Taxes (EOPT) and Section 7 of RR No. withholding tax pursuant to Section 9 of the Ease 4-2024, as provided below:

Source. Section 2.57.4 of RR No. 2-98, as amended, shall now read as follows: "SECTION 7. Withholding of Tax at

'Sec. 2.57.4. Time of Withholding. - The

has become payable. The term "payable" obligation of the payor to deduct and withhold the tax under Section 2.57 of these Regulations arises at the time an income

refers to the date the obligation becomes

income payment is accrued or recorded as due, demandable or legally enforceable. The obligation of the payor to deduct and withhold the tax arises at the time an

payable, whichever comes first. ' an expense or asset, whichever is issuance by the seller of the sales invoice or other adequate document to support such applicable, in the payor's books, or at the

It was however clarified under RMC No. 60- 2024 that the non-withholding of tax will no longer be a ground for the disallowance of the

covering January 1, 2024 onwards. claimed deduction/expense for taxable year

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PROVISIONS AFFECTED BY EOPT ACT AMENDMENTS

Q7: What shall be the income tax treatment of which are properly for the account of the expenses paid or incurred by the lessee Iessor? Q7: What shall be the income tax treatment of which are properly for the account of the expenses paid or incurred by the lessee Iessor?

A7: The amounts paid by the lessee for certain expenses, which are properly for the account of the lessor as indicated in the contractual agreement between the parties, shall be allowed as deductions during the year the same has been lessor shall issue invoices/receipts in the name of the lessee (e.g., realty tax, association dues. paid or accrued pursuant to Section 34 of the Tax Code, as amended. Provided, however, that etc.) A7: The amounts paid by the lessee for certain expenses, which are properly for the account of the lessor as indicated in the contractual agreement between the parties, shall be allowed as deductions during the year the same has been paid or accrued pursuant to Section 34 of the Tax Code of 1997, as amended, substantiated with invoices issued by the lessor in the name of the lessee. Thus, it will form part as gross sales of lessor and allowable as deduction on the part of the which shall be properly

lessee.

Q12: What are the business tax implications relative to leases? Q12: What are the business tax implications relative to leases?

Al2: For business tax purposes, the following guidelines shall still be observed: A12: For business tax purposes, the following guidelines shall still be observed:

1. The corresponding input VAT shall only be creditable to the lessee upon payment of the amended. rentals, which shall be evidenced by a VAT Official Receipt pursuant to Section 110 in relation to Section l13 of the Tax Code, as The corresponding input VAT shall only be creditable to the lessee for the amount of rentals paid incurred/accrued, which shall be evidenced by a VAT Invoice pursuant to Section 110 in relation to Section 113 of the Tax Code, as amended.

xxX xxx xXx XXX xXX XXX

Q13: What are the withholding tax implications of leases? 013: implications of leases? What are the withholding tax

A13: For contracts considered as leases, only the K A13: The 5% withholding tax under Section

to five percent (5%) Expanded Withholding actual rental paid or accrued shall be subject actual rental paid or accrued shall be Tax (EWT) pursuant to Section 2.57.2 (B) of RR No. 02-98, as amended. Hence, only the considered as the tax base for EWT purposes. without regard to the depreciation expense from the ROUA. 2.57.2 (B) of RR No. 02-98 shall be based on the amount payable which refers to the value paid/accrued or recorded as an expense or asset, whichever is applicable in the payor's book or at the issuance by the seller of the sales invoice or other adequate document to support such payable whichever comes first pursuant to Section 7 of RR No. 4-2024.

XXX XXX XXX XXX XXX XXX

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PROVISIONS AFFECTED BY EOPT ACT AMENDMENTS

Q17: What will be the basis for the reportable Q17: amount of transactions denominated in foreign currency for taxes other than income tax (e.g., Value Added Tax Percentage Tax (OPT), Excise (VAT), Gross Receipt Tax (GRT), Other RMC No. 12-2024 (FOREX Transactions) Tax. reportable amount of transactions in foreign currency for taxes other than income tax (e.g., Value Added Tax (VAT)) Other Percentage Tax (OPT), Excise Tax, Documentary Stamp Tax (DST), etc.)? What will be the basis for the

Documentary Stamp Tax (DST), ete.)? A17: For taxes other than income tax (e.g. A17: Foreign Currency transactions are converted into Philippine Peso using the prevailing spot rate on the date of transaction. This is the basis of the reportable transactions of taxes other than income tax (e.g., VAT. transactions shall be the Philippine Peso- rate on the date of transaction. VAT, OPT, Excise, DST, etc.), the basis of the reportable amount for foreign currency converted amount using the prevailing spot

GRT, OPT, Excise, DST, etc.) In determining the date of transaction, the

enactment of RA 11976 or EOPT Act shall be taken into consideration which provides the revised bases for the reportable amounts for VAT, OPT and withholding taxes, as follows:

of goods or properties shall be the gross selling price or the gross value in money as supported by a corresponding sales invoice; while for sale or exchange of services, including the use or lease of property, it shall be the gross receipts as supported For VAT purposes, the reportable amount for sale For VAT purposes, the reportable amount for sale of 'goods, properties and sale or as supported by a corresponding VAT exchange of services shall be the gross sales invoice';

by a corresponding official receipt.

For GRT and OPT, the reportable amount shall be the type of transaction subject to the said taxes. the gross quarterly sales or receipts depending on For OPT, the reportable amount shall be the gross quarterly sales depending on the type of transaction subject to the said taxes2;

removal/release of the excisable products. For Excise, the reportable amount shall be the excise taxes imposed and based on weight or volume capacity or any other physical unit of on selling price or other specified value of the goods (ad valorem tax) generally before the measurement (specific tax) and imposed and based For Excise, the reportable amount shall be: based on weight or volume capacity or any valorem tax. The excise tax shall be based a) Specific tax. The excise taxes imposed other physical unit of measurement. b) Ad on selling price or other specified value of goods before the removal/release of the excisable products;

the value of the documents subject to stamp tax. For DST, the reportable amount shall be based on based on the value provided in the For DST, the reportable amount shall be documents subject to stamp tax; and

For withholding taxes, in general, the reportable For withholding taxes, in general, the amount shall be the value of the taxable income reportable amount shall be the value of the payment at the time it is paid or payable or when it taxable income payment at the time it has

' Revenue Regulations No. 3-2024. 2 (bid.

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PROVISIONS AFFECTED BY EOPT ACT AMENDMENTS

Q1: When can interest expense be claimed as a is accrued or recorded as an expense or asset, whichever comes first. deduction from gross income? RMC No. 19-2024 (Interest Expense) Q1: When can interest expense be claimed as become payable, accrued or recorded as an document to support such the payor's books, or at the issuance by the seller of the sales invoice or other adequate whichever comes first. a deduction from gross income? expense or asset, whichever is applicable, in payable,

Al: Interest paid or incurred within a taxable year No. 13-2000 and Section 7(B) of RR No. 5- on indebtedness in connection with ' the taxpayer's profession, trade or business shall following requisites, provided in Section 34 (B)(2) of the National Internal Revenue Code be allowed as a deduction from gross income, (NIRC) of 1997, as amended, and as implemented by Revenue Regulations (RR) subject to certain limitations, when the Al: Interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as a deduction from gross income, subject to certain limitations, when implemented by RR No. 13-2000 and Section 7(B) of RR No. 5-2021, are met: the following requisites, provided in Section 34 (B)(2) of the National Internal Revenue Code (NIRC) of 1997, as amended, and as

1 . 2 2021, are met: The indebtedness must be that of the The interest must have been stipulated in taxpayer: writing: 3 2 The indebtedness must be that of the The interest must have been stipulated in The interest must be legally due: writing; taxpayer;

3 4 6. I The interest payment arrangement must The interest shall be reduced by an amount The interest must be legally due: expenditure" if such interest was incurred not be between related taxpayers as mandated in Sec. 34 (B)(2)(b), in relation to Sec. 36(B), both of the NIRC of 1997, The interest must not be incurred to in acquiring property used in trade. equivalent to twenty percent (20%) of However, if the final withholding tax rate as amended; The interest was not treated as "capital business or exercise of profession; and interest income subjected to final tax. finance petroleum operations: 4 S The interest shall be reduced by an The interest payment arrangement must not be between related taxpayers as to Sec. 36(B), both of the NIRC of 1997, expenditure" if such interest was trade, business or exercise of profession; and amount equivalent to twenty percent mandated in Sec. 34 (B)(2)(b), in relation The interest must not be incurred to The interest was not treated as "capital incurred in acquiring property used in (20%) of interest income subjected to as amended: finance petroleum operations; final tax. However, if the final

(20%) will be adjusted in the future, the interest reduction shall be adjusted accordingly. on interest income of twenty percent of twenty percent (20%) will be adjusted be adjusted accordingly. withholding tax rate on interest income in the future, the interest reduction shall

In addition, the taxpayer must have withheld the appropriate tax in order to claim the interest expense as a deduction from the gross income (refer to Q9) The requirement to withhold taxes in order to claim the interest expense as a deduction from the gross income was repealed under Section 5 of the EOPT Act, as implemented by Section 6 of RR No. 4-2024.

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PROVISIONS AFFECTED BY EOPT ACT AMENDMENTS

As clarified in RMC No. 60-2024,3 the non- withholding of tax will no longer be a ground for the disallowance of the claimed interest expense for taxable year covering January 1, 2024 onwards. However, the obligation of the payor to withhold tax and remit the same under Q9 remains, pursuant to Section 9 of the EOPT Act and as implemented by Section 7 of RR No. 4- 2024, to wit

"SECTION 7. Withholding of Tax at Source. Section 2.57.4 of RR No. 2-98, as amended, shall now read as follows:

Sec. 2.57.4. Time of Withholding. - The obligation of the payor to deduct and withhold the tax under Section 2.57 of these Regulations arises at the time an income has become puyable. The term "payable' refers to the date the obligation becomes due, demandable or legally enforceable. The obligation of the payor to deduct and withhold the tax arises at the time an income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor's books, or at the issuance by the seller of the sales invoice or

2: W f payable, whichever comes first. other adequate document to support such

CLARIFICATIONS/TRANSITORY PROVISIONS:

I. RMC NO. 12-2024 (FOREX TRANSACTIONS)

Q1: Is the use of average rate for a period under Philippine Accounting Standards (PAS) 21 for

Foreign Currency Transactions permitted both for Financial Reporting and Tax purposes?

Al: No. For tax purposes, foreign currency transactions shall be converted to Philippine Peso using

only the spot rate of exchange on the date of transaction.

Conversely, for financial reporting purposes, Paragraph 22 of PAS 21 allows a rate that approximates the actual rate at the date of the transaction (e.g., an average rate for a week or a month might be used for all transactions in each foreign currency occurring that period) can be used for practical reasons provided that specific spot rate within the day (opening, closing, high. low or weighted average in a day) has been identified in the sworn statement. However, if exchange rates fluctuate significantly, the use of the average rate for a certain period is inappropriate.

3 Providing Clarifications and Guidance on Section 6 of Revenue Regulations No. 4-2024 on the Repeal of Section 34 (K) of the National Internal Revenue Code of 1997, as Amended. issued on May 9, 2024.

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In the event that in converting foreign currency transactions, the taxpayer used the average rate for a certain period for financial reporting purposes and the spot rate of exchange on the date of transaction for tax purposes, a reconciliation on the foreign exchange (forex) rates used must be prepared and must be available for presentation and submission, together with other supporting documents, during Bureau of Internal Revenue (BIR) audit.

Q2: PAS 21 does not mandate the use of forex rates published exclusively by a specified source

for financial reporting purposes. Do taxpayers have an option to choose the source of forex rate to be used in converting foreign currency denominated transactions for tax purposes?

A2: Yes. Q&A No. 4 of RMC No. 12-2024 standardizes the forex rates to be used for tax purposes in

converting foreign currency denominated transactions to Philippine Peso. It prescribes the use of forex rates from sources that are widely available to the taxpayers and that can be easily accessed by BIR during tax audits. Taxpayers are given freedom to choose the source of forex rates to be used that are deemed appropriate for their foreign currency transactions as long as the conditions under Q& A No. 4 of RMC No. 12-2024 are met.

Q3: What shall be the spot rate applicable for transactions that occurred prior to the opening of

Banker's Association of the Philippines (BAP) Rates at 9 AM like transactions between 6 AM to 8 AM or before 9AM?

A3: For transactions occurring prior to the opening of the BAP Rates, the taxpayer shall use the latest

selected spot rate available on the business date immediately preceding the opening of the BAP rates. The use of selected spot rate shall cover the duration up to the cut-off period to avoid multiple use of forex spot rate resulting to various reconciliation. Thus, the duration of the opening/closing spot rate will be up to the next business day. However, if the taxpayer opts to use other or combination of spot rate within the day, such shall be included in the Sworn Statement for submission to BIR concerned office as a guide for proper calculation during audit.

Moreover, the taxpayer shall summarize its foreign currency transactions occurring prior to the opening of the BAP rates, adopting the latest selected spot rate available on the business date immediately preceding the opening of the BAP rates. The summary schedules which is necessary to reconcile the date prior to opening of BAP rate shall be made available for presentation and submission during the BIR audit.

Q4: Is netting or offsetting of forex gains and losses allowed for income tax purposes?

A4: No. The practice of offsetting or netting of separate and distinct transactions, and the accounting

and recording of the same and its related/incidental transactions (e.g., forex gains/losses) in the taxpayer's books, is strictly prohibited for tax purposes.

Each transaction is considered a separate taxable event, hence, shall be accounted and taxed separately from other transactions. Regardless if there is an offsetting or netting arrangement between parties, the income and expenses shall be recorded and taxed separately from each other. Moreover, since losses are among those deductions from Gross Income provided under Section 34 of the National Internal Revenue Code of 1997 (Tax Code),as amended, such losses (e.g., forex loss) shall not form part of deduction from Gross Sales.

Q5: What is the deadline for submission of the Notarized Sworn Statement as a Requirement

under Q&A No. 4 of RMC 12-2024?

A5: The notarized sworn statement informing the concerned BIR offices of electing the use of forex

rates other than BAP published rates shall be submitted within.30 days prior to the'start of the taxable year. In case of subsequent change in forex rates used, a new notice shall be submitted to

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the concerned BIR office, which shall be applied from the start of the succeeding taxable year.

Since RMC No. 12-2024 was issued on January 22, 2024, which is beyond the required period of 30 days prior to the start of the taxable year, taxpayers shall submit the Notarized Sworn Statement to the concerned BIR offices for the selected forex rates for 2024 without penalty/sanction on or before December 31, 2024. In case elected/used forex rates for 2024 with corresponding Sworn Statement is the same for the succeeding year/s, there is no need to resubmit a Sworn Statement for the year 2025.

The template for the Notarized Sworn Statement is attached as Annex "A".

Q6: What is the timeline for Taxpayers who intends to adopt the standardized forex rates under

Q&A No. 4 of RMC 12-2024 on their duly registered Computerized Accounting System (CAS) or Computerized Books of Accounts (CBA)?

Taxpayers that are using duly registered CAS or CBA need to revisit their system in case alignment is needed in terms of their use of forex rates for financial reporting and what is prescribed as source of forex rates under Q&A No. 4 of RMC 12-2024 for tax purposes. In case the adoption of forex rates will have a direct effect on the financial aspect, the system shall be updated/reconfigured following the existing policies and procedures on system enhancement.

In order to provide ampie time for system reconfiguration adjustments shall be allowed to be undertaken on or before December 31, 2024. In case, system reconfiguration has not been aecomplished within December 2024, a request for extension shall be submitted for approval by the Regional Director or Assistant Commissioner-Large Taxpayers Service (LTS) for a period of not more than six (6) months from December 3 1, 2024.

II.RMC NO. 13-2024 (RETIREMENT BENEFITS)

Q1: What is the rationale for the exclusion of entities applying Philippine Financial Reporting

Standard (PFRS) for Small-Medium Enterprises(SMEs), considering that PFRS for SME allows use of projected unit credit method for Defined Benefit plans?

A1: The RMCs issued by the BIR to address the gaps between the PFRS and the Tax Code only cover

the standards under the full PFRS. The PFRS for SMEs and Small Entities were excluded from the coverage since certain standards adopted in the full PFRS are not applicable to PFRS for SMEs and Small Entities. Hence, to avoid any confusion, the BIR initially limited the coverage of the same to full PFRS. Considering however, the manifestation that there are companies (subsidiary. conglomerates, headquarters, branches, etc.) which are required to comply with rules and standards irrespective of classification, SMEs and/or Small Entities may avail of the provisions of RMC No. 13-2024 on an optional basis and to comply with the required disclosure under PFRS.

To clarify the coverage, the following definition from the Securities and Exchange Commission Memorandum Circular No. 5, series of 2018 has been adopted.

(a) Large and/or Publicly Accountable Entities -

For purposes of this Rule, large or publicly accountable entities are those that meet any of the

(1) Total assets of more than #350 Million or total liabilities of more than #250 Million; or following criteria:

(2) Are required to file financial statements under Part II of SRC Rule 68; or (3) Are in the process of filing their financial statements for the purpose of issuing any class

instruments in a public market; or (4) Are holders of secondary licenses issued by regulatory agencies.

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* Mandatorily covered by RMC No. 13-2024 as Full PFRS Users

(b) Medium-Sized Entities:are those that meet all of the following criteria:

(1) Total assets of more than # 100 Million to #350 Million or total liabilities of more than

# 100 Million to 250 Million. If the entity is a parent company, the said amounts shall be

(2) Are not required to file financial statements under Part II of SRC Rule 68; based on the consolidated figures;

(3) Are not in the process of filing their financial statements for the purpose of issuing any class

of instruments in a public market; and (4) Are not holders of secondary licenses issued by regulatory agencies.

(c) Small Entities are those: that meet all of the following criteria:

(1) Total assets of between #3 Million to #100 Million or total liabilities of between 3 Million

to #100 Million. If the entity is a parent company, the said amounts shall be based on the consolidated figures: (2) Are not required to file financial statements under Part II of SRC Rule 68; PRSN (3) Are not in the process of filing their financial statements for the purpose of issuing any class of instruments in public market; and

H(4) Are not holders of secondary licenses issued by regulatory agencies.

SZOZ 9I NVT BE on an optional basis upon compliance with the requirement on disclosure under existing PFRS The Medium Sized-Entities and Small Entities may avail of the provisions of RMC No. 13-2024

E Pt1 E *(d} Micro Entities are those that meet all of the following criteria: issuances.

(1) Total assets and liabilities are below P 3 Million; (2) Are not required to file financial statements under Part II of SRC Rule 68: (3) Are not in the process of filling their financial statements for the purpose of issuing any class

(4) Are not holders of secondary licenses issued by regulatory agencies. of instruments in a public market; and

Please note that the above entity classification for PFRS purposes is not the same with the taxpayer's classification under Section 21 of the Tax Code which is based on annual Gross Sales.

Q2: In the absence of the actuarial valuation report for funding purposes, can the taxpayer use the

current service cost under the actuarial valuation report under PAS 19R as replacement of normal cost?

A2: No. In reiteration of Q&A No. 8 of RMC No. 13-2024, there is a difference in the calculation of

service/retirement costs under PAS/PFRS and the Tax Code. The current service cost pertains to the amount that the employee earned for his service in the current reporting period while actuarial valuation is an estimate established by an actuary.

Q3: If the taxpayer contributed to the retirement fund before the date of filing of a Tax Qualified

Plan but within the taxable period of the interim period between the date of filing and issuance of certificate of qualification, can the taxpayer claim the contribution up to normal cost as a deductible expense?

A3: No. Employers may deduct their contributions to the retirement fund if they meet the requirements

under RA No. 4917, evidenced by a certificate of tax qualification issued by the BIR. Nevertheless. pending employers' application with the BIR, contributions to the retirement fund are allowed to be deducted from the gross income subject to the subsequent issuance of the said certificate (Q&A No.

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12, RMC No. 13-2024). Any contributions made by an employer to the retirement fund before the filing of application for tax qualified plan are not deductible from gross income for income tax

purposes.

Q4: Can an employee covered by a retirement benefit plan but determined (at the time of retirement)

not qualified under the said retirement benefit plan, be covered by RA No. 7641?

A4: No. Under RA No. 7641, "in the absence of a retirement plan or agreement providing for retirement

benefits of employees in the:establishment, an employee upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year.7 It is clear that an employee may only be entitled to the tax-exemipt retirement benefits under RA No. 7641 if his/her employer has no existing retirement plan of:which the employee is part of. Accordingly, employees covered by a retirement benefit plan (whether determined as reasonable or not by the BIR) may not avail of the tax

exemption benefit provided under RA No. 7641.

However, in case the concerned employee is not covered by the retirement benefit plan of his/her employer, or any other retirement plan in the employer's company (e.g. Collective Bargaining Agreement), then such employee may receive the tax-exempt retirement benefits provided under RA No. 7641.

Q5: Is an employee who was not included in the retirement benefit plan of the company but qualified under

RA No. 7641, authorized to claim exempt benefit?

A5: Yes, said employee is entitled to claim an exempt retirement benefit under RA No. 7641 since he/she

was not included in the retirement benefit plan and no contribution was made in his behalf for income tax deduction purposes.

In addition to the above clarifications, the following are the corrections on the accounting entries provided in Annex B of RMC No. 13-2024:

In scenario no. 1, all of the difference between the pension expense of P1,200,000.00 and the deductible pension expense for TY 2023 of P820,000.00 for tax purposes are considered temporary difference because the resulting additional accrual to pension liability of P200,000 will still result in deductible amounts in future periods when the corresponding contribution to the plan is made. Accordingly, corresponding deferred tax assets of P50,000 should also be recognized for such amount (P200,000 x 25%).

Moreover, there is also a temporary difference for the Remeasurement Loss recognized in Other Comprehensive Income of P100,000 because the resulting additional accrual to pension liability also results in deductible amounts in future periods when the corresponding contribution to the plan is made. Accordingly, corresponding deferred tax assets of P25,000 should also be recognized for such amount (P100,000 x 25%).

2 In scenario no. 2, the illustration concluded that there should be no deferred tax entry. However.

the difference between the carrying amount of a net defined benefit liability/asset and its tax base. where tax deduction can be claimed for the actual amount of retirement benefits paid to employees, is a temporary difference because any accruals of retirement liability in excess of benefits paid (or contributions in plan assets not yet paid to employees) will still be deductible in future periods when ultimately settled to employees in the future. BUREAU OF INtERNAL REVENUE RECORDS MANAGEMFNT DIMISION

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III. RMC NO. 19-2024 (INTEREST EXPENSE)

Provided below are the clarifications and corrections on the computations and accounting entries for

Machines B and C under Illustration B in Annex A of RMC No. 19-2024:

1 Since the interest is incurred by NIRC Company yearly, the computation of capitalized interest and depreciation expense for Machine B under Ilustration B are revised as follows:

Year S 3 1 2 4 1 6 P1,000,000.00 Machine B 1.100,000.00 1,200,000.00 1,040,000.00 Value of 855,000.00 636,666.67 318,333.33 P100,000.00 Capitalized 100,000.00 100,000.00 Interest 100,000.00 100,000.00 Adjusted Value of Machine B PI,100,000.00 1,200,000.00 1,300,000.00 1,140,000.00 955,000.00 318,333.33 636,666.67 Depreciation P 260,000.00 285,000.00 318,333.33 318,333.33 318,333,33 P1,100,000.00 1,200,000.00 1,040,000.00 Balance 855,000.00 318,333.33 636,666.67

Year The revised differences between the accounting and tax treatments for Machine B are as follows: 2 3 4 6 3 Accounting R 100,000.00 100,000.00 100,000.00 Interest Expense R Tax Difference P 100,000.00 100,000.00 100,000.00 Accounting B 240,000.00 240,000.00 240,000.00 240,000,00 240.000.00 Depreciation F 260,000.00 285,000.00 318,333.33 318,333.33 318,333.33 Tax Difference & (20,000.00) (45,000.00) (78,333.33) (78,333.33) (78,333.33) Difference 8 (78,333.33) (78,333.33) 55,000.00 80000,00 21,666.67 Net

There is an automatic gap between the interest expense and depreciation expense accounts due to the loan term, period of preparation of the machine, and useful life of the machine which may be disclosed in the notes to the financial statements. The net difference through years 3 to 5 are temporary differences that are deductible from gross income for tax purposes in subsequent periods.

The following are the revised journal entries to record interest incurred and depreciation for Machine B:

Dr. PPE-Machine B Accounting Years 1 and 2 Cr. Interest Liability P 100,000.00 100,000.00 Dr. PPE --Capitalized Years I and 2 Cr. Interest Liability Tax Interest Expense 100,000.00 100,000.00

Years 3, 4 and 5 Cr. Interest Liability Dr. Interest Expense 8 100,000.00 100,000.00 Dr. PPE -- Capitalized Year 3 Cr. Interest Liability Interest Expense E 100,000.00 100,000.00

Cr. Accumulated Dr. Depreciation 260,000.00 260,000.00

Depreciation

Years 3 to 7 Dr. Depreciation Cr. Accumulated Depreciation P240,000.00 240,000.00 Dr. PPE --Capitalized Year 4 Cr. Interest Liability Interest Expense P 100,000.00 100,000.00

Dr. Depreciation 2 285,000.00

BUREAU OF INTERNA! REVENUE RECOROS MANAGMENT HIVISION ef ' Cr. Accumulated Depreciation 285,000.00

JAN 16 2025

By ADMIN UWIT -1 EO WTIME: 2:o9_Pm

Dr. PPE - Capitalized Year 5 100,000.00

F

Hi- TTR Cr. Interest Liability Dr. Depreciation Cr. Accumulated Depreciation Interest Expense 318,333.33 100,000.00 318,333.33

Dr. Depreciation Cr. Accumulated Years 6 and 7 Depreciation 318,333.33 318,333.33

2 Similarly, for Machine C, the interest should be capitalized as incurred. Below is the computation of

capitalized interest and depreciation expense for Machine C under Illustration B:

Year 6 3 1 2 4 S P2,000,000.00 Machine B 1,626,666.67 1,833,333.33 1,370,000.00 1,046,666.67 Value of 623,333.33 Capitalized P200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 Interest Adjusted Value of Machine B 2,200,000.00 2,033,333.33 1,246,666.67 1,826,666.67 1,570,000.00 623,333.33 P 366,666.67 Depreciation 406,666.67 523,333.33 456,666.67 623,333.33 623,333.33 P1,833,333.33 1,626,666.67 1,370,000.00 1,046,666.67 Balance 623,333.33

Year The revised differences between accounting and tax treatments are as follows: 2 3 4 S 6 1 P200.000.00 Accounting 200,000.00 200,000.00 200,000.00 200,000.00 Interest Expense Y Tax P 200,000.00 Difference 200,000.00 200,000.00 200,000.00 200,000.00 Accounting 333,333.33 333,333.33 333,333.33 333,333.33 333,333.33 333,333.33 Depreciation : 366,666.67 523,333.33 623,333.33 406,666.67 456,666.67 623,333.33 Tax P(33,333.34) (290,000.00) (123,333.34) (190,000.00) ( 290,000.00) Difference (73,333.34) 1 (290,000.00) Difference (90,000.00) 166,666.66 126,666.66 76,666.66 10,000.00 Net

There is an automatic gap between the interest expense and depreciation expense accounts due to the loan term, period of preparation of the machine, and useful life of the machine which may be disclosed in the notes to the financial statements. The net difference through years 1 to 4 are temporary differences that are deductible from gross income for tax purposes in subsequent periods.

The following are the revised journal entries to record interest incurred and depreciation for Machine C:

Years I, 2, 3, 4 and 5 Accounting Dr. Interest Expense j Cr. Interest Liability 200,000.00 200,000.00 Year I Dr. PPE --Capitalized Tax Cr. Interest Liability Interest Expense P 200,000.00 200,000.00

Cr. Accumulated Dr. Depreciation Depreciation 333,333.33 333,333.33 Dr. Depreciation Cr. Accumulated Depreciation P 366,666.67 366,666.67

oruneat F.nte can revenif Dr. PPE - Capitalized Year 2 P 200,000.00

JAN 16 2025 Cr. Interest Liability Interest Expense 200,000.00

BY Q ADMIN UNIT-1 TiMe. 2:00 Pf Depreciation Dr. Depreciation Cr. Accumulated P 406,666.67 406,666.67

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Dr. PPE -- Capitalized Year 3 1 200,000.00

Cr. Interest Liability Interest Expense 200,000.00

Dr. Depreciation Cr. Accumulated Depreciation 456,666.67 456,666.67

Dr. PPE -- Capitalized Cr. Interest Liability Year 4 Interest Expense P 200,000.00 200,000.00

Dr. Depreciation Cr. Accumulated Depreciation P 523,333.33 523,333.33

Dr. PPE -- Capitalized Year 5 Cr. Interest Liability Interest Expense P 200,000.00 200,000.00

Depreciation Dr. Depreciation Cr. Accumulated P 623,333.33 623,333.33

Dr. Depreciation Cr. Accumulated Depreciation Year 6 8 333,333.33 333,333.33 Dr. Depreciation Depreciation Year 6 Cr. Accumulated P 623,333.33 623,333.33

3 Given the foregoing,Ithe revised computation of income tax is as follows:

Year 4 2 5 6 1 3 and Depreciation P before Interest Net Income 10,000,000.00 10,000,000.00 10,000,000.00 10,000,000.00 10,000,000.00 10,000,000.00 10,000,000,00 (a Interest Expense Allowable (b 30,000.00 30,000.00 30,000.00 30,000.00 Depreciation Expense 533,333.34 573,333.34 808,333.33 941,666.66 941,666.66 883,333.34 318,333.33 ( P a-b-c)=d Net Taxable 9,436,666.66 Income 9,396,666.66 9,086,666.66 9,161,666.67 9,058,333.34 9,058,333.34 9,681,666.67 P Income Tax {d) x 25% 2,359,166.67 2,349,166.67 2.420,416.67 2,290,416.67 2,264,583.34 2,271,666.67 2.264,583.34

Below are the differences between accounting and tax treatments:

Year 2 3 5 6 4 F 1 Accounting Net Income 9,250,000.00 9,076,666.67 9.250.000.00 8,910,000.00 9,426,666.67 9,760,000.00 9,126,666.67 a} Net Income Taxable 9,436,666.66 9,086,666.66 9,161,666.67 9,058,333.34 9,058,333.34 9,681,666.67 9,396,666.66 b 8 Difference (186,666.66) (146,666.66) (a-b (176,666.66) (85,000.00) 368,333.33 68,333.33 80,000.00 78,333.33

RUCERDS RANEMENT TVISION VBUREAU OF INTERNAL REVENU a

13 JAN 16 2025

Dv. ADMIN UNII3 Sa TIME: Q-0u Pin

capitalize interest expense for tax purposes. The differences must be included as reconciling items in the .reconciliation of net income per books against taxable income in the income tax return.

IV.GENERAL TRANSITORY PROVISIONS

The taxpayer using official receipts (manual, POS, CRM, CAS, etc.) shall comply with the provisions of Revenue Regulations No. 7-2024 dated March 22, 2024 and other related issuances.

All revenue issuances and BIR Rulings inconsistent herewith are hereby considered amended, modified or revoked accordingly.

All internal revenue officials/officers, employees and others concerned are hereby enjoined to give this Circular a wide publicity as possible.

This Circular takes effect(immediately.

FUMAGUI JR

1 F of Internal Revenue

RECORDS MANAGFMENT DIVISION BUREAU OF INTERNAL REVENUE

JAN 1 6 20Z5

. ADMIN UNIT - : TMe: Q.bu Y

C (pfrs project)

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