As Featured on Philstar: Write-Off, Tax-Off

Most companies have an enormous balance of accounts receivable in their financial statements. However, some of these receivables pertain to overdue accounts which could become uncollectible in the succeeding years and subsequently written off. The question is, can the reduction of accounts receivable due to write-off lead to deficiency Value-Added Tax (VAT)?

A recent En Banc Case provided some light to this question. In the said case, the Commissioner of Internal Revenue (Petitioner) assessed deficiency VAT on a general professional partnership (Respondent). Part of the assessed deficiency VAT arose from reduction of receivables which was treated by the Bureau of Internal Revenue (BIR) as collections. Respondent then argues that it is not liable for deficiency VAT because the reduction of accounts receivable is attributable to write-off of uncollectible accounts and therefore does not constitute as receipts subject to VAT. It also presented proof of the write-off.

On the other hand, the Petitioner argues that assessments are prima facie presumed correct and made in good faith— and the taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. The Petitioner also claims that the write-off did not comply with the mandatory requirements set forth under Revenue Regulations (RR) No. 05-99, as amended by RR No. 25-02. The RR provides the following requisites for bad debts to be allowed as a deduction from gross income: (1) there must be an existing indebtedness due to the taxpayer which must be valid and legally demandable; (2) the same must be connected with the taxpayer’s trade, business or practice of profession; (3) the same must not be sustained in a transaction entered into between related parties enumerated under Sec. 36(B) of the Tax Code of 1997; (4) the same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and (5) the same must be ascertained to be worthless and uncollectible as of the end of the taxable year.

Let us now discuss the ruling of the Court on the Petitioner’s two main arguments: prima facie correctness of the tax assessment, and noncompliance with the requirements of RR No. 05-99, as amended.

The Court of Tax Appeals (CTA) En Banc ruled that the prima facie correctness of a tax assessment does not apply in an assessment that is arbitrary and capricious. It is important that assessments are based on facts and not mere presumption. In arriving at the assessment for deficiency VAT, the Petitioner merely compared the beginning and ending balance of the Respondent's accounts receivable and then presumed that the decrease in the balance was undeclared receipts. The Court further explained that a change in the accounts receivable balance does not necessarily pertain to collections that are subject to VAT. Also, in this case, the Respondent was able to explain the decrease in receivables with supporting documents. The Respondent presented Minutes of the Partner’s meeting, journal vouchers, and collection letters, among others.

Now, for the Petitioner’s second argument that the write-off did not comply with RR No. 05-99, as amended, the Court discussed that the requirements in the RR pertain to deductibility for income tax and not on deficiency VAT. Hence, assuming that the write-off did not comply with the requirements of the RR, the same would not result to a deficiency VAT but to a deficiency income tax as it relates to disallowance of claimed expense from gross income. The Court did not examine in detail whether the write-off of the Respondent complied or not with the requisites of the RR, but only provided an illustration.

Writing off an accounts receivable is a crucial decision for companies not only in terms of the financial aspect, but also on its impact on tax compliance. Companies need to comply with the Bureau of Internal Revenue (BIR) regulations and ensure proper documentation of bad debt write-offs. This includes maintaining records supporting the decision to write-off specific accounts and providing evidence of efforts made to collect the outstanding amounts, so that the taxpayer may rebut the presumption of correctness of tax assessments.

James Eliud G. Santos is an Associate from the Tax Group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Tax Associate James Eliud G. Santos or Tax Partner Leandro Ben M. Robediso through, social media or visit


This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.