Depletion Deduction for Oil and Gas Wells and Mines Under NIRC Section 34(G)

The depletion deduction under NIRC Section 34(G) is the allowance that owners of oil and gas wells and mines may deduct from gross income to recover the capital invested in a deposit as it is used up, computed under the cost-depletion method. It is an itemized deduction: the total allowed over time cannot exceed the capital invested, and it is not available to a taxpayer who elects the Optional Standard Deduction (OSD) or the 8% income tax option.

This guide covers what Section 34(G) says, who it applies to, how cost depletion is computed in practice, how exploration and drilling costs interact with it, and a worked mine example. For the wider deductions framework, see Optional Standard Deduction (OSD) vs. Itemized Deductions, the sibling guide on depreciation under NIRC Section 34(F), and the guide on research and development expense under Section 34(I).

What does NIRC Section 34(G) provide? #

NIRC Section 34(G), titled “Depletion of Oil and Gas Wells and Mines,” grants a reasonable allowance for depletion or amortization for oil and gas wells and mines, computed under the cost-depletion method, and stops the allowance once it equals the capital invested. The operative text, as enacted in Republic Act No. 8424, reads:

“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”

— NIRC (Republic Act No. 8424), Section 34(G)(1), lawphil.net

Section 34 was later restated by the TRAIN Law (Republic Act No. 10963, Section 11) and the CREATE Act (Republic Act No. 11534, Section 9). The CREATE restatement lists paragraph (G) as “Depletion of Oil and Gas Wells and Mines. - x x x”, meaning the paragraph carries over without new language. The Ease of Paying Taxes Act (Republic Act No. 11976, Section 5) repealed Section 34(K) only. This article’s sources did not include a verified text of the Bureau of Internal Revenue (BIR) implementing regulations on the computation, so the mechanics shown below illustrate the cost-depletion concept rather than quote a regulation.

Who may claim the depletion deduction? #

The depletion deduction is available to a taxpayer that owns oil and gas wells or mines in the course of its business and itemizes deductions, and, for foreign taxpayers, only for wells or mines located in the Philippines. Section 34 applies to taxpayers computing taxable income under Sections 24(A), 25(A), 26, 27(A), (B) and (C), and 28(A)(1), other than employees whose compensation income allows no deductions.

• Domestic taxpayers: individuals and domestic corporations with oil and gas wells or mines used in their business.
• Nonresident alien individuals engaged in trade or business in the Philippines and resident foreign corporations: depletion is “authorized only in respect to oil and gas wells or mines located within the Philippines” (Section 34(G)(3)).
• Taxpayers who elect OSD or the 8% option: not eligible, as explained below.

How is cost depletion computed? #

Cost depletion spreads the capital invested in an oil and gas well or mine over the deposit’s estimated recoverable units, so each year’s deduction equals the cost per unit multiplied by units extracted, until total depletion reaches the capital invested. Section 34(G) names the cost-depletion method and caps total depletion at capital invested, and the following steps show the usual arithmetic of the method:

1. Determine the depletable cost basis (capital invested in the property).
2. Estimate total recoverable units (tons of ore, barrels of oil, or cubic meters of gas).
3. Divide cost basis by estimated recoverable units to get the depletion rate per unit.
4. Multiply the rate by the units extracted in the taxable year.
5. Stop when cumulative depletion equals the capital invested.

Section 34(G)(1) adds that any intangible exploration, drilling and development expense deducted in the year is not counted in the adjusted cost basis used for cost depletion, which prevents the same cost from being deducted twice.

How do exploration, development, and drilling costs fit in? #

Section 34(G) lets a taxpayer deduct certain exploration, development, and intangible drilling costs separately from depletion, subject to conditions, but never for the same cost twice. For oil and gas, after production in commercial quantities has commenced, intangible exploration and development drilling costs are deductible in the year incurred if incurred for non-producing wells or mines, and for producing wells or mines in the same contract area they are deductible in full or, at the taxpayer’s election, capitalized and amortized.

For mining, Section 34(G)(2) lets the taxpayer elect to deduct exploration and development expenditures, but “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 excess is carried forward to succeeding years until fully deducted, the election is irrevocable and binding in succeeding taxable years, and the paragraph does not apply to the exploration and development of oil and gas.

Can depletion be claimed under OSD or the 8% income tax option? #

No. Depletion is an itemized deduction, and a taxpayer who elects the OSD or the 8% income tax option gives up itemized deductions, so depletion cannot be claimed on top of either. Section 34(L) provides that the OSD applies “in lieu of the deductions allowed under the preceding Subsections,” and Section 24(A)(2)(b) gives eligible self-employed individuals an 8% tax on gross sales or gross receipts in excess of ₱250,000 “in lieu of the graduated income tax rates … and the percentage tax under Section 116.” A mining or oil and gas business that wants to deduct depletion must itemize. See also Ordinary and Necessary Business Expense Deduction for the general itemized-deduction rules.

Worked example: cost depletion for a small mine #

Consider a fictional domestic corporation that itemizes deductions and owns a mining property with a depletable cost basis of ₱60,000,000 and estimated recoverable ore of 1,200,000 tons. The depletion rate is ₱60,000,000 ÷ 1,200,000 = ₱50 per ton. The figures are illustrative only, not drawn from a BIR issuance.

In Year 1 the corporation deducts ₱4,500,000 as depletion alongside its other itemized expenses. Because deductions stop when the allowance equals the capital invested, the cumulative total can never pass ₱60,000,000 even if the mine yields more than the original estimate. If the corporation had instead elected the OSD, it would deduct up to 40% of gross income and could not separately claim the ₱4,500,000.

Summary #

The depletion deduction under NIRC Section 34(G) lets owners of oil and gas wells and mines recover capital invested through the cost-depletion method, capped when cumulative depletion equals that capital. It is an itemized deduction unavailable under the OSD or the 8% option, foreign taxpayers may claim it only for Philippine wells or mines, and exploration and development costs follow separate rules, with a 25% of net mining income limit on the mining election. The CREATE Act restatement of Section 34 leaves paragraph (G) unchanged.

Sources #

Primary sources

• LawPhil.net — Republic Act No. 8424 (Tax Reform Act of 1997), Section 34(G)
• LawPhil.net — Republic Act No. 10963 (TRAIN), Section 11 restating Section 34, including Section 34(L) OSD and Section 24(A)(2)(b) 8% option
• LawPhil.net — Republic Act No. 11534 (CREATE), Section 9 restating Section 34
• LawPhil.net — Republic Act No. 11976 (Ease of Paying Taxes Act), Section 5 repealing Section 34(K)