Self-Insurance Not Deductible from Gross Income

October 9, 1992 BIR RULING NO. 287-92 29 (a) 000-00 287-92 Fernandez, Santos & Lopez 21st Floor, Metrobank Plaza Sen. Gil J. Puyat Avenue Makati, Metro Manila Attention: Atty . Lovell R . Bautista Partner Gentlemen : This refers to your letter dated April 14, 1992 requesting a ruling whether the annual contribution to the sinking fund to be created by your client, Pepsi Cola Products Philippines, Inc. (PCPPI), by way of self-insurance and in lieu of its regular insurance premium payments, is deductible from the gross income of your client. It is represented that PCPPI is contemplating to self-insure their real and personal properties instead of insuring the same with insurance companies; that the plan for self-insurance will be funded through the creation of a sinking fund to be managed by an independent Trustee Bank; that the fund will be segregated and will no longer form part of the assets of PCPPI and will answer for the catastrophic losses which may be suffered by the company; that the fund will operate just like any employee retirement fund; that PCPPI will contribute annually to the sinking fund and that the amount to be contributed will be based on prior years insurance premium payments. In reply, please be informed that relative to the deductibility of business expense, the Supreme Court laid down the rule that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows (Atlas Consolidated Mining & Development Corporation vs. Commissioner of Internal Revenue, L-26911, Jan. 27, 1981; O.G. Vol. 78, No. 4, P. 393) There are four requirements for the deductibility of business expense, to wit: 1) the expense must be ordinary and necessary; (2) it must be paid or incurred within the taxable year; and (3) it must be paid or incurred in carrying on a trade or business; 4) the taxpayer must prove by evidence or records the deductions claimed under the law. An ordinary expense connotes payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. In this sense, while regular premium payment to an insurance company is a deductible business expense because it is ordinary, an amount paid to a sinking fund created by PCPPI as a form of self-insurance will not qualify as an ordinary expense because self-insurance is not an ordinary means of insuring business assets; thus, an amount paid to a sinking fund for self-insurance in lieu of payment to an insurance company is not deductible from the gross income of the taxpayer under Section 29(a) of the Tax Code. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue