The Philippines, being an archipelago in the Pacific Ring of Fire and a frequent target of tropical cyclones, faces recurring challenges from natural disasters. Just last month, our country was devastated by typhoons Crising, Dante, and Emong, plus the southwest monsoon (Habagat), which caused widespread flooding. We are just in the second half of the year, and unfortunately, the Philippine Atmospheric, Geophysical, and Astronomical Services Administration (PAGASA), is projecting up to 16 cyclones between August and December.
Natural disasters bring not only humanitarian crises but also significant economic disruption. For businesses, the damage can be extensive — destroyed assets, halted operations, and financial losses. While recovery is paramount, understanding the tax implications of such losses is essential for financial resilience.
Typhoons affect businesses in multiple ways, such as damage to property (inventory, building, and equipment, among others), operational downtime, and financial losses. These losses, if properly documented, may be claimed as deductions for income tax purposes. Please note, however, only property used in business may be eligible for deductions.
Under the 1997 Tax Code, as amended, losses to property connected with the trade, business, or profession actually sustained in a taxable year and not compensated for by insurance or other forms of indemnity can be claimed as deductions for income tax purposes. These losses could arise from even ordinary and casual losses.
Casualty losses refer to damage or destruction of property due to unexpected events like typhoons. Taxpayers may deduct such losses from gross income, provided they meet specific criteria.
To be deductible for income tax purposes, the following criteria must be met for losses, whether they are ordinary or casualty losses:
• They must be related to trade, business, or profession;
• They should be actually sustained and written off during the year;
• They should not be compensated for by insurance; and
• They must be evidenced by closed and completed transactions.
It is important to note that the amount of loss that is compensated for by insurance coverage cannot be claimed as a deductible loss. If the insurance proceeds exceed the net book value of the damaged properties/assets, such excess shall be subject to the regular income tax but not to the VAT since the indemnification is not an actual sale of the goods.
Aside from the foregoing requirements, for casualty losses, the taxpayer must also file a sworn declaration of loss within 45 days from the date of the event. The declaration of loss must contain, among others, the nature and timing of the event, a description and location of damaged property, and details necessary to compute the losses (i.e., cost or basis of the property, depreciation allowed value before and after the event, cost of repair, and insurance or compensation received or receivable, among others). It must also be accompanied by supporting documents such as financial statements for the year preceding the event, insurance policies (if applicable), photographs before and after the event, receipts, vouchers, cancelled checks, and police reports (for theft or looting). These documents must be retained and made available during audits of the Bureau of Internal Revenue (BIR).
The deduction of assets as losses must be properly recorded in accounting records, with the adjustment of the applicable amounts and the restoration of the damaged property or the acquisition of the new property to replace it properly recorded and recognized either as repair expenses or capitalized as an asset.
In the event of total loss or destruction, the net book value immediately preceding the natural disaster should be used as the basis for claiming casualty losses and must be reduced by the amount of insurance proceeds received.
While casualty losses affect income tax computations, they also have VAT implications. Insurance proceeds received as indemnification for damaged assets are not subject to VAT. This is because the transaction is not a sale of goods or services but a reimbursement. In BIR Ruling No. OT-406-2022, the BIR also opined that inasmuch as indemnification cannot be regarded as an actual sale of goods, the insurance proceeds derived/to be derived by the taxpayer due to the destruction of its insured assets does not form part of gross sales for VAT purposes pursuant to Section 105 of the Tax Code, as amended.
Casualty losses also do not generate output VAT since there is no sale or exchange of goods or services. However, the sale of damaged goods may be subject to VAT.
On the other hand, taxpayers may also claim input VAT on expenses incurred for repairs or replacement of damaged assets, provided such are used in VAT-registered activities and these are supported by VAT invoices containing all information required under the invoicing regulations.
Typhoons are an unfortunate but recurring reality for businesses operating in the Philippines. Beyond the immediate physical and financial damage, these events pose long-term challenges to business continuity and fiscal health. However, with proper documentation and strict adherence to tax regulations, businesses can mitigate some of the financial impact through allowable deductions and VAT considerations. Casualty losses — when substantiated with complete and accurate records — can be deducted from taxable income, offering a measure of relief during recovery. It is essential that businesses maintain a robust system for tracking asset values, insurance coverage, and repair costs to ensure compliance and maximize tax benefits.
Incorporating tax planning into your disaster recovery strategy is not just smart — it’s essential. Engage your finance and legal teams to align on documentation, insurance, and tax compliance before the next storm hits. Preparedness is key to resilience.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Edward L. Roguel is a partner for the Tax Advisory & Compliance Practice Area of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
business.development@ph.gt.com
