Depreciation and Depletion Deductions PDF

Depreciation and Depletion DE DU CTIO NS 1 Class Overview Depreciation, in general. Use of Certain Methods and Rates Agreement as to Useful life on Which Depreciation Rate is based Depreciation of Properties used in Petroleum Operations Depreciation of...

Depreciation and Depletion DE DU CTIO NS 1 Class Overview Depreciation, in general. Use of Certain Methods and Rates Agreement as to Useful life on Which Depreciation Rate is based Depreciation of Properties used in Petroleum Operations Depreciation of Properties used in Mining Operations Depreciation Deductible by Non-resident Aliens Engaged in Trade or Business or Resident Foreign Corporation Depletion, in general. Election to Deduct Exploration and Development Expenditures Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien Individual or Foreign Corporation 2 DEPRECIATION 3 What is the general rule on Depreciation as a deduction? Sec. 34. (F) Depreciation. (1) General Rule. There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each. 4  Depreciation Deduction: Businesses can deduct a reasonable amount from their income for the loss in value of property or equipment due to use, wear and tear, or becoming outdated (obsolescence). Purpose: This deduction helps businesses account for the decreasing value of assets (like machinery, vehicles, or buildings) over time. 5 Property Owned for Life by One Person with Remainder to Another: If someone has a property for their lifetime, but after they pass away, the property goes to someone else, the depreciation is treated as if the person using the property for life owns it completely. The depreciation deduction is given to the person who uses the property during their lifetime (the life tenant). 6  Property Held in Trust: If the property is held in trust (managed by someone for the benefit of others), the depreciation deduction is split between the beneficiaries (those who receive income from the trust) and the trustees (those who manage the trust). The split is based on what is written in the trust agreement, or if it’s not mentioned, it’s divided based on how the trust income is distributed. 7 Illustration: Anna owns a small bakery business and uses an oven, which she bought for ₱500,000. Over time, the oven wears out due to regular use, and Anna can deduct a portion of the oven’s cost each year as a depreciation deduction from her taxable income. This helps her account for the oven's loss in value as it gets older. 8 Now, suppose Anna’s mother, Maria, has a building that she owns for life, but upon Maria's death, the building will go to her granddaughter, Lucy. Even though Maria doesn’t own the building permanently, she can still claim depreciation deductions on the building while she’s alive, as if she were the complete owner. 9 If Maria sets up a trust for the building, and the income from the building goes partly to Lucy and partly to a charity, the depreciation deduction will be divided between the beneficiaries (Lucy and the charity) and the trustee, according to the terms in the trust document. 10 What does ”reasonable allowance” mean? Sec. 34. (F) Depreciation. (2) Use of Certain Methods and Rates. The term "reasonable allowance" as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods: (a) The straight-line method; (b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in Subsection (F)(1); (c) The sum-of-the-years-digit method; and (d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner. 11  "Reasonable allowance" for depreciation: This refers to the amount businesses can deduct for the decrease in value of their assets over time. The depreciation amount can be calculated using different methods. Here are some of the common methods allowed: 1) Straight-line method: This is the simplest method. The value of the asset is reduced by the same amount each year over its useful life. For example, if a machine costs ₱100,000 and has a useful life of 5 years, you deduct ₱20,000 per year (₱100,000 ÷ 5 years). 12 2) Declining-balance method: This method allows for a larger deduction in the early years of an asset's life and smaller deductions in later years. The depreciation rate used can be up to twice the rate used in the straight-line method. For example, if the straight-line rate is 20%, the declining-balance method allows you to use up to 40% in the early years. 13 3) Sum-of-the-years-digits method: This method also gives higher deductions in the earlier years and smaller ones later. It involves adding the digits of the asset's useful life and applying that as a fraction to the remaining value each year. 4) Other methods: The Secretary of Finance, based on the recommendation of the Commissioner of Internal Revenue, may allow other methods if needed. 14 Illustration: Lisa owns a printing business and buys a new printer for ₱600,000. She can claim depreciation on this printer as a deduction from her taxable income using one of the approved methods. Straight-line method: Lisa expects the printer to last 5 years. Using the straight-line method, she would deduct ₱120,000 each year (₱600,000 ÷ 5 years), evenly spreading out the printer’s cost over its useful life. 15  Declining-balance method: Lisa chooses a 40% depreciation rate, which is allowed (up to twice the straight-line rate of 20%). In the first year, she can deduct ₱240,000 (40% of ₱600,000). In the second year, she would deduct 40% of the remaining ₱360,000, which is ₱144,000. Sum-of-the-years-digits method: For this method, Lisa adds the digits of the printer’s 5-year life (5 + 4 + 3 + 2 + 1 = 15). The first year’s deduction would be 5/15 of the total cost, or ₱200,000 (₱600,000 × 5/15). In the second year, the deduction would be 4/15 of ₱600,000, or ₱160,000. 16 What is the rule as to agreement on which depreciation is based? Sec. 34. (F) Depreciation. 3) Agreement as to Useful Life on Which Depreciation Rate is Based. Where under rules and regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the national Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to the agreement: 17 What is the rule as to agreement on which depreciation is based? Provided, however, That where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection. 18 Written agreement on depreciation: A taxpayer and the Commissioner of Internal Revenue can make a written agreement on how long an asset will be used (useful life) and the rate of depreciation (how much value it loses each year). Binding agreement: Once this agreement is made, both the taxpayer and the government must follow the agreed-upon depreciation rate and useful life, unless new facts or circumstances arise that were not considered when the agreement was made. If anyone wants to change the terms of the agreement, they must provide proof of the new circumstances that justify the change. 19 Responsibility for changes: The party (either the taxpayer or the government) that wants to modify the depreciation rate or useful life must notify the other party in writing through certified or registered mail. Any changes to the depreciation rate or useful life will only apply starting from the year the notice was sent. The new terms cannot be applied to past years. No written objection from the Commissioner: If a taxpayer starts using a depreciation rate and useful life for an asset, and the Commissioner does not object in writing, this depreciation rate and useful life will be considered valid and binding. 20 Illustration: Mark owns a manufacturing company and buys a machine for ₱1,000,000. He estimates the machine will last 10 years and wants to use a 10% depreciation rate. Mark and the Bureau of Internal Revenue (BIR) agree in writing on this useful life and depreciation rate. Binding agreement: Since both Mark and the BIR signed this written agreement, the 10% depreciation rate (₱100,000 per year) will be binding, meaning both parties must follow it unless something unexpected happens that requires a change. 21  Changing circumstances: After three years, Mark discovers that the machine is wearing out faster than expected and may only last 7 years. To change the depreciation rate, Mark must provide proof of this new fact and notify the BIR in writing, requesting a change in the rate and useful life. Future changes: If the BIR agrees to change the depreciation rate, the new rate will only apply starting from the year the BIR receives Mark’s written notice. The new depreciation rate cannot be retroactively applied to the past three years. No written objection: If Mark had started using the 10% depreciation rate without a formal agreement, and the BIR did not object in writing after reviewing his tax returns, this rate would still be considered valid and binding under the tax code. 22 What is the rule on depreciation for petroleum-related properties? Sec. 34. (F) Depreciation. (4) Depreciation of Properties Used in Petroleum Operations. An allowance for depreciation in respect of all properties directly related to production of petroleum initially placed in service in a taxable year shall be allowed under the straight-line or declining- balance method of depreciation at the option of the service contractor. However, if the service contractor initially elects the declining-balance method, it may at any subsequent date, shift to the straight-line method. The useful life of properties used in or related to production of petroleum shall be ten (10) years of such shorter life as may be permitted by the Commissioner. Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an estimated useful life of five (5) years. 23  Depreciation for petroleum-related properties: Properties used directly for producing petroleum can be depreciated (deducted for the loss of value over time) using either the straight-line method or the declining-balance method. The service contractor (the company involved in the petroleum operation) can choose which method to use. 24 Switching methods: If the service contractor chooses the declining-balance method at first, they can switch to the straight-line method later, but not the other way around. Useful life of petroleum-related properties: The default useful life for properties used in petroleum production is 10 years, but the Commissioner of Internal Revenue can allow a shorter useful life if needed. Depreciation for non-production properties: Properties that are not directly used for producing petroleum (e.g., administrative buildings or offices) must be depreciated using the straight- line method over an estimated useful life of 5 years. 25 Switching methods: If the service contractor chooses the declining-balance method at first, they can switch to the straight-line method later, but not the other way around. Useful life of petroleum-related properties: The default useful life for properties used in petroleum production is 10 years, but the Commissioner of Internal Revenue can allow a shorter useful life if needed. Depreciation for non-production properties: Properties that are not directly used for producing petroleum (e.g., administrative buildings or offices) must be depreciated using the straight- line method over an estimated useful life of 5 years. 26 Illustration: ABC Petroleum Company buys two types of equipment in 2024: 1. Drilling equipment (used directly for oil extraction) costing ₱10,000,000. 2. Office equipment (not used directly in production) costing ₱500,000. Depreciation for Drilling Equipment: ABC Petroleum decides to use the declining-balance method for the drilling equipment. This means they will deduct a larger portion of the ₱10,000,000 cost in the earlier years of the equipment’s use. After 3 years, ABC Petroleum wants to switch to the straight-line method for the remaining years. They are allowed to do this since the rules permit switching from declining-balance to straight-line depreciation. 27 Depreciation for Office Equipment: Since the office equipment is not directly related to production, ABC Petroleum must use the straight-line method and depreciate it over 5 years. This means they will deduct ₱100,000 (₱500,000 ÷ 5 years) each year. Useful life: The drilling equipment is expected to last 10 years, but if new circumstances arise, the Commissioner could allow ABC Petroleum to shorten this period. 28 What is the rule on depreciation for petroleum-related properties? Sec. 34. (F) Depreciation. (5) Depreciation of Properties Used in Mining Operations. - An allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows: (a) At the normal rate of depreciation if the expected life is ten (10) years or less; or (b) Depreciated over any number of years between five (5) years and the expected life if the latter is more than ten (10) years, and the depreciation thereon allowed as deduction from taxable income: Provided, That the contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed by this Section will be used. 29 Depreciation for mining properties: Properties used in mining (except for petroleum operations) can be depreciated (deducted for the loss of value over time) in different ways, depending on their expected lifespan. If the property's life is 10 years or less: The depreciation is done at the normal rate, which means evenly over the asset’s expected useful life. 30 If the property's life is more than 10 years: The business can choose to depreciate the property over any period between 5 years and the actual expected life of the asset. For example, if a mining machine has an expected life of 12 years, the business can choose to depreciate it over 6, 7, or up to 12 years. Notification requirement: The business must inform the Commissioner of Internal Revenue at the start of the depreciation period about which depreciation rate it will use. 31 Illustration: XYZ Mining Company operates a gold mining site and purchases two pieces of equipment in 2024: 1. Excavator for ₱5,000,000 (expected life of 8 years). 2. Crushing machine for ₱15,000,000 (expected life of 15 years). Depreciation for Excavator: Since the excavator has an expected life of 8 years (which is less than 10 years), XYZ Mining will use the normal rate of depreciation. This means they will deduct ₱625,000 each year (₱5,000,000 ÷ 8 years). 32 Depreciation for Crushing Machine: The crushing machine has an expected life of 15 years, which is more than 10 years. XYZ Mining decides to depreciate it over 10 years instead of the full 15 years. Before starting the depreciation, XYZ Mining notifies the Commissioner of Internal Revenue that they will use a 10-year depreciation period for this asset. Therefore, they will deduct ₱1,500,000 each year (₱15,000,000 ÷ 10 years). XYZ Mining Company follows the rules by applying the normal depreciation rate for the excavator and selecting a shorter depreciation period for the crushing machine, while also notifying the Commissioner. 33 Depreciation as to Nonresident Aliens ETB or Resident Foreign Corporation Sec. 34. (F) Depreciation. (6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations. In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of property arising out of its use or employment or its non-use in the business trade or profession shall be permitted only when such property is located in the Philippines. 34 Who it applies to: This provision applies to nonresident alien individuals (foreign individuals not living in the Philippines) engaged in trade or business and resident foreign corporations (foreign companies doing business in the Philippines). Depreciation allowance: These entities can claim a reasonable allowance for depreciation. This means they can deduct a portion of the property’s value for wear and tear or deterioration due to use or non-use. Location requirement: The property must be located in the Philippines for the depreciation deduction to be allowed. If the property is outside the Philippines, no depreciation deduction can be claimed. 35 Illustration: Global Tech Corp is a foreign corporation based in the United States. They decide to set up a branch office in the Philippines to sell software products. 1. Property Purchase: Global Tech Corp buys office equipment for ₱1,000,000, which is located in their Philippine branch office. 2. Depreciation Allowance: Since the office equipment is used for business operations in the Philippines, Global Tech Corp can claim a reasonable allowance for depreciation due to the wear and tear of the equipment over time. They estimate the useful life of the office equipment to be 5 years, so they decide to use the straight-line method. This means they will deduct ₱200,000 each year (₱1,000,000 ÷ 5 years) from their taxable income as a depreciation expense. 36 3. Non-Qualifying Property: If Global Tech Corp had purchased similar office equipment for their headquarters in the U.S., they would not be allowed to claim depreciation for that property since it is not located in the Philippines. Global Tech Corp can deduct depreciation for the office equipment used in their Philippine branch, following the rules for nonresident aliens and resident foreign corporations. 37 DEPLETION 38 What is the general rule on Depletion as a deduction? Sec. 34. (G) Depletion of Oil and Gas Wells and Mines. (1) In General. In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the cost-depletion method shall be granted under rules and regulations to be prescribed by the Secretary of finance, upon recommendation of the Commissioner: Provided, That when the allowance for depletion shall equal the capital invested no further allowance shall be granted: Provided, further, That after production in commercial quantities has commenced, certain intangible exploration and development drilling costs: (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract area. 39 Depletion Allowance: For oil and gas wells or mines, businesses can claim a depletion allowance (a deduction for the reduction in value of these natural resources) based on the cost-depletion method. Regulatory Guidance: The specific rules and regulations for calculating this depletion allowance will be set by the Secretary of Finance based on recommendations from the Commissioner of Internal Revenue. 40 Limit on Allowance: If the total depletion allowance equals the initial capital investment in the well or mine, no further deductions can be claimed. Intangible Costs: After starting production in commercial quantities, certain costs related to exploration and development can be deducted: For non-producing wells/mines: Costs incurred can be deducted in the year they occur. For producing wells/mines: Costs can either be deducted in full in the year paid or, if the taxpayer chooses, they can be capitalized (added to the asset's value) and then amortized (deducted over time). 41 Illustration: ABC Oil Company operates an oil well and incurs various costs related to its operations. 1. Initial Investment: ABC Oil Company invests ₱10,000,000 in drilling and developing their oil well. 2. Depletion Allowance Calculation: After one year of production, the company calculates its depletion allowance based on the cost-depletion method. The depletion allowance for that year amounts to ₱2,000,000. 42 3. Total Depletion: Over the next four years, ABC Oil Company continues to claim depletion allowances totaling ₱8,000,000. By the end of the fifth year, the total depletion reaches ₱10,000,000, which equals their initial capital investment. At this point, they can no longer claim further depletion allowances. 4. Exploration and Development Costs: During the same period, ABC Oil Company incurs additional costs of ₱1,000,000 for exploratory drilling in a new area that is not yet producing oil. Since these costs are incurred for a non-producing well, they choose to deduct the full ₱1,000,000 in the year the costs were incurred. 43 5. Production Costs: ABC Oil also incurs ₱500,000 in development costs for a producing well. They choose to capitalize these costs, meaning they add this amount to the value of the asset instead of deducting it immediately. The company decides to amortize this capitalized cost over the next five years, deducting ₱100,000 each year. ABC Oil Company utilizes the depletion allowance for their investment in the oil well until reaching the capital limit. They also effectively manage costs related to non-producing and producing wells to maximize their tax deductions. 44 What does “intangible costs in petroleum operations mean? Sec. 34. (G) Depletion of Oil and Gas Wells and Mines. "Intangible costs in petroleum operations" refers to any cost incurred in petroleum operations which in itself has no salvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum: Provided, That said costs shall not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible under this Subsection. Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost basis for the purpose of computing allowable cost depletion. 45 Definition of Intangible Costs: Intangible costs in petroleum operations refer to expenses that: Have no salvage value (they cannot be sold for value after use). Are necessary and related to the drilling of wells and preparing them for petroleum production. Exclusions: These costs do not include expenses related to: Acquisition or improvement of physical property that can be depreciated. However, depreciation allowances on such properties can still be deducted under this section. 46  Deduction Rules: Any intangible costs related to exploration, drilling, and development that are deducted from taxable income for the year: Will not be included when calculating the adjusted cost basis for cost depletion. This means these costs cannot be used to increase the value of the asset for further depletion calculations. 47 What is the rule on the election to deduct exploration and development expenditures? Sec. 34. (G) Depletion of Oil and Gas Wells and Mines. (2) Election to Deduct Exploration and Development Expenditures. In computing taxable income from mining operations, the taxpayer may at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures paid or incurred during the taxable year: Provided, That the amount deductible for exploration and development expenditures shall not exceed twenty-five percent (25%) of the net income from mining operations computed without the benefit of any tax incentives under existing laws. The actual exploration and development expenditures minus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding years until fully deducted. The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable years. 48 Deduction Option: Taxpayers involved in mining operations have the option to deduct exploration and development expenditures when calculating their taxable income. This includes: Costs accumulated before prospecting (date of the initial exploration). Costs incurred or paid during the current taxable year. Limit on Deduction: The total amount deductible for exploration and development expenditures cannot exceed 25% of the net income from mining operations. This net income is calculated without considering any tax incentives available under current laws. 49 Carrying Forward Unused Deductions: If the actual exploration and development expenditures exceed the 25% limit, the excess amount can be carried forward to future years. This means it can be deducted in future taxable years until the entire amount is fully deducted. Irrevocable Election: Once the taxpayer elects to deduct the exploration and development expenditures, this decision is irrevocable. This means the taxpayer must follow this election in all future taxable years without the option to change it. 50 Illustration: XYZ Mining Corporation is a mining company that explores and develops mineral resources. 1) Exploration Costs: In the previous year, XYZ Mining Corporation incurred ₱1,200,000 in exploration and development costs while prospecting for new mining sites. 2) Current Year Income: For the current taxable year, they report a net income from mining operations of ₱3,000,000. Based on the rules, they can deduct up to 25% of this net income for exploration and development expenditures. 3) Calculation of Deduction Limit: 25% of ₱3,000,000 equals ₱750,000. This means XYZ Mining Corporation can deduct up to ₱750,000 for their exploration and development costs in the current year. 51 4) Deduction Decision: They choose to deduct ₱750,000 from their taxable income for the current year. 5) Carrying Forward Remaining Costs: After deducting ₱750,000, they still have ₱450,000 in exploration and development expenditures (₱1,200,000 - ₱750,000). This remaining amount can be carried forward to the next taxable year for deduction. 6) Irrevocable Election: Since XYZ Mining Corporation has elected to deduct these exploration and development expenditures, this decision is binding. They must continue to follow this deduction method in subsequent taxable years. XYZ Mining Corporation deducts ₱750,000 from their current taxable income based on the 25% limit and carries forward the remaining ₱450,000 to future years for further deductions. 52 What does “exploration expenditures” mean? Sec. 34. (G) Depletion of Oil and Gas Wells and Mines. The term "exploration expenditures" means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine or deposit. The term "development expenditures" means expenditures paid or incurred during the development stage of the mine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction. 53 Illustration: ABC Mining Company is exploring a new site for mineral deposits. 1) Exploration Phase: ABC Mining incurs ₱500,000 in costs related to: Geological surveys. Drilling to test for mineral presence. Laboratory analysis to determine the quality of the minerals. These costs are classified as exploration expenditures because they occur before the development stage begins. 2) Discovery of Deposits: After completing the exploration phase, ABC Mining discovers that there are significant deposits of ore present in the area, confirming they exist in sufficient commercial quantity and quality. 54 3)Development Phase: ABC Mining now enters the development stage where they need to prepare the site for extraction. During this stage, they incur ₱1,200,000 in costs for: Building access roads. Setting up facilities for processing ore. Drilling additional holes to assess the deposit further. These costs are classified as development expenditures because they occur after the discovery of commercial deposits and before the start of actual extraction. 55 4) Commencement of Extraction: Once the development stage is complete, ABC Mining starts the actual commercial extraction of minerals from the site. ABC Mining Company incurs ₱500,000 in exploration expenditures before confirming the existence of mineral deposits. After confirming the deposits, they spend ₱1,200,000 on development expenditures to prepare the site for extraction. 56 What does “exploration expenditures” mean? Sec. 34. (G) Depletion of Oil and Gas Wells and Mines. (3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines located within the Philippines. 57 Eligibility for Depletion Deduction: Who Can Claim: The provision applies to: Nonresident alien individuals (foreign individuals not residing in the Philippines) engaged in trade or business in the Philippines. Resident foreign corporations (foreign companies doing business in the Philippines). Depletion Allowance: What It Covers: These individuals and corporations can claim a depletion allowance for: Oil and gas wells. Mines. Location Requirement: Where the Properties Must Be: The oil and gas wells or mines must be located within the Philippines for the depletion allowance to be authorized. 58 Illustration: Global Oil Corp is a foreign corporation based outside the Philippines that has operations in the country. 1) Business Operations: Global Oil Corp has an oil well located in the Philippines, which they operate for extracting oil. 2) Depletion Deduction: As a resident foreign corporation engaged in trade within the Philippines, Global Oil Corp is eligible to claim a depletion allowance for the oil well they operate. 59 3) Calculation of Depletion: The company calculates its depletion allowance based on the amount of oil extracted from the well and the total investment in the well. For the current taxable year, they determine they can deduct ₱2,000,000 as a depletion allowance against their income earned from the oil well. 4) Compliance with Requirements: Global Oil Corp ensures that all requirements are met, particularly that the depletion deduction is only claimed for the oil well located in the Philippines. Global Oil Corp, a foreign corporation, claims a ₱2,000,000 depletion allowance for its oil well located in the Philippines, complying with the provisions of the tax code. 60 Thank you! 61