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<div id="attachment_16213" class="wp-caption aligncenter">
<p id="caption-attachment-16213" class="wp-caption-text" style="text-align: center;"><img src="https://haspcms-fcb-lawyer.s3.ap-southeast-1.amazonaws.com/tinyeditor_uploads/SPnlwECtbYlgh7azVQl0bsohzHK6t4qJLvxRWHkP.webp" width="1263" height="561">The word &ldquo;research and development&rdquo; (R&amp;D) refers to the work a business does to innovate and enhance its processes and goods.</p>
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<p>&nbsp;</p>
<p>In business, research and development may be defined as activities by taxpayers in developing and making innovations for introductions of new or better services or products.</p>
<p>Research and development (R&amp;D) is not defined by the Internal Revenue Code of the Philippines.</p>
<p>However, R&amp;D may be defined based on the Internal Revenue Code providing for this deduction.</p>
<p>There are two types of R&amp;D expenditures that are provided under the tax laws.</p>
<ul>
<li>R&amp;D that can be deducted in full during the taxable year that it was incurred or paid.</li>
<li>R&amp;D distributed over several taxable periods based on the anticipated income that it will generate for the taxpayer.</li>
</ul>
<p>Any taxpayer may claim a deduction for R&amp;D.</p>
<p>It is an allowable deduction to an individual or to juridical entities such as corporations and partnerships.</p>
<p>The taxpayer claiming this deduction must adopt an itemized deduction and not the optional standard deduction.</p>
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<div id="attachment_16210" class="wp-caption aligncenter">
<p id="caption-attachment-16210" class="wp-caption-text" style="text-align: center;"><img src="https://haspcms-fcb-lawyer.s3.ap-southeast-1.amazonaws.com/tinyeditor_uploads/qKJAPZXMjmtx8AW4AJhZG0zof1jNHZDRUmIj073z.webp" width="1174" height="518">There are several conditions before R&amp;D deductions are allowed</p>
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<p>&nbsp;</p>
<p>R&amp;D can be deducted in full by the taxpayer when:</p>
<ul>
<li>R&amp;D was incurred in connection with the business, profession, or trade in which the taxpayer is engaged.</li>
<li>R&amp;D was incurred for the expansion, improvement, or growth of the product, services, or trade that the taxpayer is already offering to the public.</li>
<li>These costs must be considered as ordinary and necessary in the performance of the business, trade, or profession of the taxpayer.</li>
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<p>All of these three elements must be present in order for the taxpayer to claim R&amp;D as an allowable deduction for the taxable year that these expenses were incurred.</p>
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<div id="attachment_16211" class="wp-caption aligncenter"><img style="display: block; margin-left: auto; margin-right: auto;" src="https://haspcms-fcb-lawyer.s3.ap-southeast-1.amazonaws.com/tinyeditor_uploads/tShwYODsp7l7yIyvLDQR4wO8WqkxKRDYA4GjMoch.webp" width="1030" height="477"><br>
<p id="caption-attachment-16211" class="wp-caption-text" style="text-align: center;">Development R&amp;D costs may be amortized but must not exceed 60 months from the time the income was realized.</p>
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<p>&nbsp;</p>
<p>Amortization of the R&amp;D means that R&amp;D costs will be distributed based on a pro-rata basis of the income that will be generated by the R&amp;D.</p>
<p>The determination of pro-rata basis is determined by the regulations and rules issued by the Secretary of Finance with the assistance of the Commisioner.</p>
<p>It must be chargeable to the capital of the taxpayer and not to a property subject to depreciation and depletion which was used by the taxpayer in the R&amp;D.</p>
<p>Additionally, the distribution of the pro-rata expense must not exceed the period of sixty months or five years from the time that income was realized.</p>
<p>These conditions must be met in order for the deductions to be distributed over several taxable periods.</p>
<p>The election of the method for amortization of the expenses may be changed by the taxpayer with the approval of the Commissioner.</p>
<p>Computer-generated systems are the normal examples of R&amp;D expenses that a taxpayer may incur in relation to the exercise of its business, trade, or profession.</p>

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<p id="caption-attachment-16209" class="wp-caption-text" style="text-align: center;"><img src="https://haspcms-fcb-lawyer.s3.ap-southeast-1.amazonaws.com/tinyeditor_uploads/LK2aVzmvYBY9RuoRoHvSh9gmb2gh6cJzn1Syt3rt.webp" width="1020" height="491">All expenses must be properly substantiated.</p>
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<p>&nbsp;</p>
<p>Aside from the above-mentioned requirements for deducting in a single taxable period, all expenses incurred must be properly substantiated.</p>
<p>This means that all expenses must be proven or documented.</p>
<p>The taxpayer must file and store official receipts, purchase orders, acknowledgment receipts, or other documentation proving the amount used for these expenses.</p>
<p>It is a matter of proving the BIR that the proper amount was declared as an R&amp;D expenditure through proper record keeping.</p>

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<div id="attachment_16208" class="wp-caption aligncenter"><img src="https://haspcms-fcb-lawyer.s3.ap-southeast-1.amazonaws.com/tinyeditor_uploads/ld5VpLggbYqKvSUiRTiehBLJlxROpK3WyGftPuZh.webp" width="1025" height="506"><br>
<p id="caption-attachment-16208" class="wp-caption-text" style="text-align: center;">R&amp;D can be as simple as development of a new burger patty.</p>
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<p>&nbsp;</p>
<p>Let&rsquo;s take for example a taxpayer who is engaged in the sale of selling burgers.</p>
<p>In the course of the business, the taxpayer found and developed a new burger patty that is made of pure meat but can still provide health benefits to the consumer.</p>
<p>The taxpayer offered this to the public and earned income as a result of the innovation in the burger patty. The new burger patty cost one million pesos to develop.</p>
<p>This cost of one million pesos should be allowed as a deduction for its whole amount during the taxable year that this expense was incurred.</p>
<p>The expense was incurred in the ordinary and necessary course of the business of selling burgers.</p>
<p>The next example is a taxpayer who is running a grocery store.</p>
<div id="attachment_16206" class="wp-caption aligncenter"><img src="https://haspcms-fcb-lawyer.s3.ap-southeast-1.amazonaws.com/tinyeditor_uploads/Ko3nyrDPyF3LxOGHBrdRdxIExbwGHBFENG5Po0Kc.webp" width="1018" height="505"><br>
<p id="caption-attachment-16206" class="wp-caption-text" style="text-align: center;">R&amp;D such as developing a new computer system may be amortized.</p>
<p class="wp-caption-text" style="text-align: center;">&nbsp;</p>
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<p>This grocery store uses a manual system in the cashier which leads to a long queue of customers.</p>
<p>The taxpayer wants to make a payment system to prevent the customer queue.</p>
<p>The taxpayer invested in a new process and computer system to and developed a new system to speed up the payment process in the grocery.</p>
<p>This grocery store managed to generate income in greater amounts than what it used to do under the old system because it was able to process more customers.</p>
<p>The cost of this computer system is not incurred by the taxpayer in the ordinary and usual course of business, as its usual business is selling goods.</p>
<p>As these R&amp;D expenses do not fall under its usual business course, these can be amortized on a pro-rata basis based on the income generated by the taxpayer.</p>
<p>The costs of R&amp;D may be amortized in proportion to the income that it generates and in approval of the method prescribed by the Secretary of Finance and the Commissioner.</p>
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<div id="attachment_16212" class="wp-caption aligncenter"><img style="display: block; margin-left: auto; margin-right: auto;" src="https://haspcms-fcb-lawyer.s3.ap-southeast-1.amazonaws.com/tinyeditor_uploads/UTBPeE45OwzIlc8sl4oyCliyw2Peh7MQVjiXdd81.webp" width="1023" height="478"><br>
<p id="caption-attachment-16212" class="wp-caption-text" style="text-align: center;">One of the exceptions is property owned by a taxpayer that has been used for research and development that is depreciated</p>
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<p>&nbsp;</p>
<p>The tax law explicitly provides for enumerations of activities that cannot be considered R&amp;D deductions.</p>
<p>One of the exclusions are properties of a taxpayer that were used in R&amp;D that are subject to depreciation and depletion.</p>
<p>It also provides that any expenditure for the acquisition and improvement of land.</p>
<p>Lastly, any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas.</p>
<p>These expenses are expenses that are normally incurred by taxpayers who are engaged in the business of mining.</p>
<p>Here, the expense incurred by the taxpayer can still be considered as an allowable deduction but falls under a different category and not under R&amp;D.</p>
<p>It may be considered as Exploration and Development Expenditures under the Philippines tax laws for those taxpayers who normally incur this kind of expense in the course of their business.</p>

Research and Development in Philippine Tax Law

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Research and Development in Philippine Tax Law - Lawyers in the Philippines

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Atty. Francesco C. Britanico

Research and development in Philippine business covers taxpayer activities that create innovations, introducing new or improved products and services.