Revenue Regulations (RR) No. 12-2012, dated October 12, 2012, prescribes the rules on the deductibility of depreciation expenses as it relates to purchase of vehicles and other expenses related thereto, and input taxes allowed therefor.
Read also Revenue Memorandum Circular (RMC) No. 2-2013 for some clarification regarding this matter. Click Here!
On a summary Revenue Regulations No. 12-2012 prohibits the deduction of depreciation expense and maintenance expenses of vehicles with cost exceeding P2,400,000.00 and disallowing input VAT on the purchase of this vehicle and input VAT on maintenance expenses to be deducted from output VAT, unless such vehicle is used primarily in the business of transport operation and lease of transportation equipment.
Following are some illustration following the provision of Revenue Regulations No. 12-2012:
- Vehicle used by employees in connection with the business acquired costs more that P2,400,000.00. Depreciation is not deductible, related repairs and maintenance are not deductible, input VAT on purchases cannot be claimed against output VAT.
- Vehicle acquired to be leased out to customers costing more than P2,400,000.00. Depreciation and maintenance expense deductible, input VAT on purchase and repairs claimable against output VAT.
- Vehicle used by employee for personal purposes costing P1,000,000. All expenses non-deductible, all related VAT not allowed to claim against output VAT.
- 2 vehicles purchased by the Company to be used by its VP-Marketing with total cost of P1,500,000 (P750,000 x 2) used in servicing clients. Depreciation and maintenance expenses allowed only for one vehicle. Input VAT on purchase and maintenance allowed only for one vehicle.
Tell us your scenario, and we will try to analyze them. Of course, there is impact on fringe benefit for certain vehicles provided for employees’ used but were not tackled here. You can check relevant regulation for the same.
Following are the contents of Revenue Regulations No. 12-2012:
SECTION 1. Scope.— Pursuant to the provisions of Section 244, in relation to Section 245 of the National Internal Revenue Code of 1997, these Regulations are hereby promulgated to implement Sections 34 (F) and 110 of the 1997 National Internal Revenue Code (“Tax Code”), specifically to define depreciation expenses relating to taxpayer’s purchase of Vehicles of all types (defined herein as passenger vehicles of all type, whether by land, water, or air) providing for limits on the deductibility thereof and-all expenses related thereto, and the disallowance of input taxes for disallowed expenses.
SECTION 2. General Principles. — Under Chapter VII, Section 34 (F) of the Tax Code, in computing taxable income, a reasonable allowance for the exhaustion, wear and tear of property used in business is allowed to be deducted from gross income. Generally, it cannot be presumed that the purchase of a Vehicle is a purchase of a property used in business. In order for the deduction for depreciation for said purchase, and all other expenses and input taxes incurred on said Vehicle may be allowed, the rules as prescribed under these Regulations must be complied with.
SECTION 3. Rules on Deductibility of Depreciation on Vehicles, Other Expenses Incurred Thereon, and Input Taxes on Disallowed Expenses. — The following guidelines shall be observed in determining whether depreciation expense can be claimed or not on account of Vehicles capitalized by the taxpayer, or in claiming other expenses and input taxes on account of said Vehicle:
A. No deduction from gross income for depreciation shall be allowed unless the taxpayer substantiates the purchase with sufficient evidence, such as official receipts or other adequate records which contain the following, among others:
- Specific Motor Vehicle Identification Number, Chassis Number, or other registrable identification numbers of the Vehicle;
- The total price of the specific Vehicle subject to depreciation; and
- The direct connection or relation of the Vehicle to the development, management, operation, and/or conduct of the trade or business or profession of the taxpayer;
B. Only one Vehicle for land transport is allowed for the use of an official or employee, the value of which should not exceed Two Million Four Hundred Thousand Pesos (Php 2,400,000.00);
C. No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land vehicles which exceed the above threshold amount, unless the taxpayer’s main line of business is transport operations or lease of transportation equipment and the vehicles purchased are used in said operations;
D. All maintenance expenses on account of non-depreciable Vehicles for taxation purposes are disallowed in its entirety;
E. The input taxes on the purchase of non-depreciable Vehicles and all input taxes on maintenance expenses incurred thereon are likewise disallowed for taxation purposes.
SECTION 4. Repealing Clause.- All Rules and Regulations or parts thereof inconsistent with the provisions of these Regulations are hereby repealed accordingly.
SECTION 5. Effectivity.- The provisions of these Regulations shall take effect immediately.
Clearly, the intention of the BIR for such limits is to disallow expenses which are neither ordinary nor necessary in the conduct of business of a taxpayer.