Deductibility of the Ordinary and Necessary Expenses Paid or Incurred During the Taxable Year

April 26, 1989 BIR RULING NO. 085-89 29 (a) (1) (A) 000-00 085-89 Gentlemen : This refers to your letter dated March 27, 1989 stating as follows: "The Coca-Cola Export Corporation (TCCEC for short) is a resident foreign corporation engaged in the manufacture of concentrates for softdrinks of specific brands, such as: "Coca Cola", Sprite", "Mello Yello", (collectively referred to hereinafter as "COCA-COLA BRANDS"), "Royal-Tru-Orange" and "Royal Flavors" (hereinafter collectively referred to as "SAN MIGUEL BRANDS"). The concentrates are sold to the exclusive bottler, COCA-COLA BOTTLERS PHILIPPINES, INC. (CCBPI, for short) a domestic corporation whose capital stock is 70% owned by San Miguel Corporation and 30% owned by the Home Office of TCCEC. CCBPI manufactures the concentrates into softdrinks. The concentrates manufactured by TCCEC which are specifically intended for softdrinks carrying a particular "COCA-COLA BRANDS" can be manufactured only into softdrinks carrying the particular "COCA-COLA BRANDS", and vice-versa, the softdrinks manufactured by CCPBI carrying a particular "COCA-COLA BRANDS" can be manufactured only but of concentrates specifically intended for softdrinks carrying the particular "COCA-COLA BRANDS" because there are secret special formula involved. cdtech "Before the beginning of each year, TCCEC and CCBPI agree on a Cooperative Marketing Budget (hereinafter referred to as the "BUDGET"), which is a budget for the Promotion and Advertising expenses of the softdrinks for the ensuing year. The promotion and Advertising expenses of the softdrinks carrying "COCA-COLA BRANDS" are shared by TCCEC and CCBPI. TCCEC does not share in the expenses for the Promotion and Advertising of the softdrinks carrying the "SAN MIGUEL BRANDS". The "BUDGET" may be revised during the year of implementation depending upon the needs of the business, but always upon mutual agreement of TCCEC and CCBPI. "The 'BUDGET' is being implemented by a working group composed of representatives from both TCCEC and CCPBI. Any promotion or advertising project is submitted to the working group for evaluation. If the group determines the project to be beneficial to the business, a commitment is made and the project is then launch. The expenses for the project is advanced by either TCCEC or CCBPI who submits an accounting therefor to the other for reimbursement of the latter's share." In connection therewith, you are requesting a ruling as to whether TCCEC's share in the expenses for promotion and advertising of softdrinks carrying "COCA-COLA BRANDS" is deductible in computing its net income subject to income tax. In reply thereto, please be informed that all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business are deductible from gross income pursuant to Section 29(a)(1)(A) of the Tax Code, as amended and as implemented by Section 65 of Revenue Regulations No. 2. Expenses which are "ordinary and necessary" generally contemplate expenses which are directly connected with and proximately resulting from carrying on the business and must be shown to be appropriate and helpful in the development of the taxpayer's business for the acquisition or pursuit of income or profit. Gancayco v. CIR, 1 SCRA 980) Thus, the share of TCCEC in the expenses for promotion and advertising of softdrinks carrying "COCA-COLA BRANDS" are considered ordinary and necessary because TCCEC's sale of concentrates intended for softdrinks carrying "COCA-COLA BRANDS" which requirement is likewise dependent upon the volume of CCBPI's sales of said softdrinks. Necessarily, if the volume of CCBPI's sales of said softdrinks increases or decreases, TCCEC's sales of concentrates will directly follow, increase or decrease, as the case may be. TCCEC has an interest in developing the market for softdrinks carrying "COCA-COLA BRANDS" and in reinforcing the brand's presence and awareness in the consumer, in order to increase CCBPI's volume of sales of softdrinks carrying "COCA-COLA BRANDS" because it will directly increase its sales of concentrates. The share of TCCEC in the promotion and advertising expenses is, therefore, also necessary being appropriate and helpful in the development of its business. In view thereof, this Office is of the opinion and so holds that the share of TCCEC in the expenses for promotion and advertising of softdrinks carrying "COCA-COLA BRANDS" is deductible in computing its net income subject to income tax. Very truly yours, (SGD.) JOSE U. ONG Commissioner