BUSINESSMEN expect to earn a profit, but that is not always the case. Losses are always possible, especially for start-ups, or if economic conditions are unfavorable. A loss, while not ideal, is not exactly the end of the world.
One of the ways losses are compensated, like life insurance for loved ones who pass away, is tax relief. Those who register a net operating loss are entitled to offset one year’s losses against the succeeding year’s income, subject to certain conditions. The so-called “net operating loss carry-over” (NOLCO) provides tax relief by reducing the tax liability for future years.
The big issue with NOLCO is how the Bureau of Internal Revenue (BIR) interprets the rules. Lately, the bureau has been very aggressive in tax assessments when it comes to NOLCO treatment, adopting the position that even taxpayers reporting losses are to be assessed zero taxable income per return. This effectively prevents the use of losses to reduce taxable income. Accordingly, the BIR disregards losses incurred for the taxable year under audit regardless of whether the same was utilized in the succeeding years or not.
Under Philippine tax rules, the net operating loss of a business for any taxable year immediately preceding the current year, which has not been previously offset as deduction from gross income, shall be carried over as a deduction from gross income for the next three consecutive taxable years immediately following the year of the loss.
However, in some cases, the BIR is taking the position that the taxpayer is no longer entitled to claim unutilized NOLCO as deduction for any deficiency tax assessment for the year under audit. The BIR theory is that the taxpayer waives the right to claim losses for the taxable period in question when it signified its intention to make these deductions available to the subsequent years through filed income tax returns (ITR). Since the losses became part of the available NOLCO, the taxpayer is barred from claiming these losses in the year they emanated.
While it is true that the regulation does not specify that NOLCO cannot be used to offset any deficiency tax assessment, it must also be noted that nothing in the Tax Code states that a taxpayer who has failed to utilize the accumulated NOLCO shall be deemed to have waived its right to utilize the same as deduction from any tax assessment by signifying in the ITR its intention to carry over the same as tax deduction in the succeeding year.
The law would have expressly provided this if it were the intention of the lawmakers to constitute such failure as a waiver of its right to utilize the available and unexpired NOLCO in the current year. A waiver, being a relinquishment of a legal right, cannot be presumed.
In fact, various recent Court of Tax Appeal (CTA) cases (Oakwood Overseas Limited vs. CIR, CTA Case No. 8196, April 29, 2014, AR Realty Holdings Co., Inc., vs. CIR, CTA Case No. 8239, April 1, 2014, among others) resulted in findings of erroneous computation of the deficiency income tax, because although the BIR started with the taxable loss per return, it added back the taxable loss.
According to the CTA, unless the BIR can present evidence to prove that petitioner used its net loss as NOLCO in the succeeding year, the tax benefit purportedly realized by the taxpayer in the succeeding year cannot be assumed.
Consequently, the taxpayer must be allowed to deduct net operating loss incurred from the taxable income during the year.
Notwithstanding the Court decisions, some BIR examiners are still disregarding the losses incurred by the taxpayers in determining the amount of deficiency tax liabilities. That is why some taxpayers are questioning whether there really is a tax relief for losses.
In certain countries, lawmakers have been providing actual relief to taxpayers in case of losses, including the carrying back of NOLCO to the preceding years, using the current year’s deficit to earn a refund for the taxes paid in the previous years. NOLCO can also be carried forward over the next 20 years to reduce future tax liability.
In the Philippines, instead of tax relief, we are seeing businessmen who have incurred losses also have to settle huge tax deficiencies.
Businesses are important economic engines, and it is important for the BIR to look at all the circumstances before disallowing losses, and not just assume that the same will benefit the taxpayer in the future. Instead of being strict on the treatment of NOLCO, the BIR should be providing relief to taxpayers in times of economic distress. The payoff comes later, when taxpayers turn profitable, translating to large tax payments down the line.
Jen R. Serrano
Let’s Talk Tax
Punongbayan and Araullo