REVENUE MEMORANDUM CIRCULAR NO. 115-2023 issued on October 31, 2023 classifies the costs associated with franchises, concessions, licenses, rights, operations agreements or similar arrangements (herein referred to as Licenses or Rights) granted by the government to operate a public service, including public utility as an Administrative Cost instead of “Direct Cost of Services”, for purposes of computing the gross income to determine the Optional Standard Deduction (OSD) under Section 34 (L) of the Tax Code of 1997, as amended by Section 3 of Republic Act (RA) No. 9504.
           Public service Licenses or Rights are considered intangible assets because they represent legal or contractual rights granted by the government that provide the organization with exclusive privileges or the ability to operate in a specific industry or geographic area.
            The cost associated to Licenses or Rights are often capitalized as an intangible asset and amortized over the useful life of the agreement. This means that the costs are spread over the period during which the organization benefits from the exclusive rights granted by the government.
             Administrative costs typically include expenses related to the general management and administration of a business or organization, such as legal fees, accounting costs, licensing fees, and other regulatory expenses. Obtaining the licenses or rights to operate a public service usually involves administrative processes, negotiations, and legal formalities, which are more closely related to the administrative aspect of running a business.
              While the Licenses or Rights themselves may not be directly tied to the production process or the creation of specific goods or services, they are essential for the organization to operate within a specific industry or market. They provide the legal framework and permissions necessary to conduct business in a certain way or offer specific services. These rights provide the organization with a competitive advantage, market exclusivity, or the ability to operate in a specific industry or geographic area.
                 By categorizing the costs associated with the Licenses or Rights as an administrative cost, it implies that the expenses associated with acquiring and maintaining the entitlements should not be included as direct costs of services. Instead, they should be considered separately when calculating the Gross Income for Tax purposes. This distinction is crucial as it affects the determination of taxable income and the subsequent application of the OSD, which allows taxpayers to deduct a specified percentage from their gross income, ensuring a fair and reasonable assessment of their tax liability.