By Euney Marie Mata-Perez on October 21, 2021

First of two-part

Having incurred losses during the Covid-19 pandemic, companies can avail of the net operating loss carry-over deduction (Nolco) pursuant to the National Internal Revenue Code (Tax Code), as amended, as well as certain special laws.

Section 34(D)(3) of the Tax Code provides that the net operating loss of a business or enterprise for any taxable year immediately preceding the current taxable year and not previously offset as a deduction from gross income can be carried over as a deduction from gross income for the next three consecutive taxable years immediately following the year of the loss. However, any net loss incurred in a taxable year during which the taxpayer was exempt from income tax will not be allowed as a Nolco deduction.

“Net operating loss” means the excess of allowable deductions over the gross income of the business in a taxable year.

Republic Act (RA) 11494 or the Bayanihan to Recover as One Act extended the allowable Nolco period to the next five consecutive taxable years following the years of the loss for losses incurred during taxable years 2020 and 2021. The Nolco for such can be carried over as a deduction even after the expiration of the Bayanihan Act, provided that the same are claimed within the next five consecutive taxable years immediately following the year of the loss.

For this purpose, “taxable year” means the calendar year or fiscal year (FY) ending during such calendar year, on the basis of which net income is computed under the Tax Code, and includes, in the case of a return made for a fractional part of a year, the period for which such return is made. For Nolco purposes, the term taxable year 2020 and 2021 includes all corporations with fiscal years ending on or before June 30, 2021 and June 30, 2022, respectively. (Revenue Regulations 25-20, September 30, 2020).

Under existing revenue issuances, an FY will fall on a particular taxable year depending on the number of months it has in the two years involved. Thus, an FY ending on March 31, 2020 will fall in taxable year 2019 since it has nine months in 2019 and only three months in 2020. In the case of an FY ending on June 30, 2021 and the beginning of which is July 1, 2020, it is considered as taxable year 2020 since it has more days in 2020 (184) than in 2021 (181). (Revenue Memorandum Circular 138-20).

The Corporate Recovery and Tax Incentives for Enterprises Act (Create) or RA 11534, meanwhile, amended Section 294(C)(8) of the Tax Code to provide that the net operating loss of the registered project or activity during the first three years from the start of commercial operation, which has not been previously offset as a deduction from the gross income, can be carried over as a deduction from gross income within the next five consecutive taxable years immediately following the year of the loss.

Nolco is also available under several special laws:

The Financial Institutions Strategic Transfer Act (Fist) or RA 11523, passed early this year, provides that a loss incurred by a financial institution as a result of the transfer of non-performing loans and real and other properties acquired within the two-year period from Fist’s effectivity will be treated as ordinary loss and may be carried over for a period of five consecutive taxable years immediately following the year of the loss. However, any accrued interest and penalties will not be included as a loss on said loss carry-over from operations. (Fist Act, Section 17[a]).

The Renewable Energy (RE) Act of 2008 or RA 9513 also provides that the net operating losses of a renewable energy developer during the first three years from the start of commercial operation, which have not been previously offset as a deduction from gross income, will be carried over as a Nolco deduction from gross income for the next seven consecutive taxable years immediately following the year of the loss.

Further, the Philippine Mining Act of 1995 (RA 7942) provides that net operating loss without the benefit of incentives incurred in any of the first 10 years of operations can be carried over as a deduction from taxable income for the next five years immediately following the year of such loss. (RA 7942, Sec. 92).

There are conditions imposed in the availment of Nolco. Under Section 34(D)(3) of the Tax Code, Nolco will be allowed only if there has been no substantial change in the ownership of the business or enterprise. There is deemed no substantial change if not less than seventy-five percent (75 percent) in the nominal value of a corporation’s outstanding issued shares is held by or on behalf of the same persons or (ii) not less than seventy-five percent (75 percent) of the corporation’s paid-up capital is held by or on behalf of the same persons. We will discuss these conditions in part two of this article.

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Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A, and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you can email the author at info@mtfcounsel.com or visit the MTF website at www.mtfcounsel.com.

https://www.manilatimes.net/2021/10/21/business/top-business/availment-of-nolco-deduction/1819138