Deductibility of Business Expenses for Imported Goods in the Philippines

Query: Can I claim the products I bought from abroad as a deductible business expense in the Philippines?

In the Philippines, the tax deductibility of business expenses, including those incurred for purchasing products from foreign suppliers, is governed by the National Internal Revenue Code (NIRC). For a business expense to be deductible, it must be ordinary, necessary, and reasonable. This means the expense must be typical and helpful for your business, and the amount spent should not be excessive.

1. Ordinary and Necessary: The expense should be common and accepted in your industry. Additionally, it must be appropriate and helpful for your business.

2. Documentation: To claim an expense as deductible, proper documentation is required. This includes invoices, receipts, and proof of payment. For purchases from foreign suppliers, it's important to keep records of financial transactions, such as bank statements or credit card statements showing payments.

3. Directly Related to Business Activities: The products purchased must be directly used in your business operations. For example, raw materials for manufacturing or goods for resale.

4. Cost Recording: Expenses must be recorded in the appropriate accounting period. If the products are used over multiple periods, such as machinery or equipment, they might need to be capitalized and depreciated.

5. Compliance with Customs and Import Taxes: Products purchased from abroad are subject to customs duties and import taxes. These costs are also generally deductible as part of the cost of the goods. Ensure that all customs duties are paid and properly documented.

6. Arm’s Length Standard: Transactions should be conducted at arm’s length, meaning the terms and prices are made as if between unrelated parties. This is particularly scrutinized in transactions with foreign affiliates to prevent tax evasion through transfer pricing.

If your business operations comply with these criteria, the cost of products bought from foreign suppliers can generally be claimed as deductible business expenses. However, specific situations or exceptions may apply, so it is advisable to consult with a tax professional or accountant to ensure compliance with all applicable tax regulations and to optimize the tax benefits legally available to your business.

Maintaining thorough records and adhering to the tax laws not only supports your expense claims during tax filings but also positions your business favorably during potential audits.