BIR Ruling [DA-010-98]

January 21, 1998 BIR RULING [DA-010-98] Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty. J. A. Osana Tax Division Gentlemen : This refers to your letter dated June 17, 1997 addressed to the Revenue District Officer of Revenue District Office No. 52, Paraaque City, requesting, on behalf of ALLEGRO MICROSYSTEMS PHILIPPINES, INC., ("Allegro") for authority to use the straight-line method of depreciation in addition to the existing double-declining-depreciation method effective April 1, 1997. It is represented that Allegro is a domestic corporation engaged in the manufacture of semiconductor products; that for the past years, it has been using the double-declining method in computing its depreciation expense; that in order to conform with the worldwide change in policy by its parent company effective April 1, 1997 to clearly reflect income as well as to achieve convenience for reporting purposes, it wants to adopt the straight-line method of depreciation to complement its present depreciation method, i.e. double-declining method, under the following conditions: HSaIET (a) All fixed assets existing and recorded in the books of accounts of Allegro as of fiscal year ended March 31, 1997 will continue to be depreciated using the double-declining method; (b) Fixed assets acquired starting April 1, 1997 and onwards will be depreciated using the straight-line method; that you wish to emphasize that this change is effected worldwide, i.e., by the parent company and all of its subsidiaries in various locations; that you have attached in support of your request the Schedule of Depreciation of Fixed Assets using the double-declining method for fiscal year ended March 31, 1997; that pursuant to Section 109 of Revenue Regulations No. 2, the Commissioner of Internal Revenue issued BIR Ruling Nos. 146-94 and 048-96 granting the request of the taxpayers to change their method of depreciation to another mode acceptable under the National Internal Revenue Code, as amended; that although these rulings involve a complete change from one method of depreciation to another, your client's case on the other hand is not exactly a change in depreciation method but the use of another method of depreciation allowed under the law to complement the existing one; that such arrangement is allowed as the taxpayer is given the privilege of choosing what kind of accounting method he will use in keeping his books of accounts as long as it is consistently employed and clearly reflecting income; that this is provided under Section 167 of the Income Tax Regulations, which states, that: ECTIHa ". . . It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. . . ."; In reply, please be informed that on the basis of the above representation, your client Allegro Microsystems Philippines, Inc., is hereby granted permission to use the straight line method of depreciation in addition to the existing double-declining method under the conditions earlier mentioned effective April 1, 1997, pursuant to Section 109 of Revenue Regulations No. 2 which provides, viz: "Section 109. Method of computing depreciation allowance. The capital sum to be replaced should be charged off over the useful life of the property, either in equal installment or in accordance with any other recognized trade practices, such as apportionment of the capital sum over units of production. Whatever plan or method of apportionment is adopted must be reasonable and must have due regard to operating conditions during the taxable period. While the burden of proof must rest upon the taxpayer to sustain the deductions taken by him, such deductions must not be disallowed unless shown by clear and convincing evidence to be unreasonable. The reasonableness of any claim for depreciation shall be determined upon the conditions known to exist at the end of the period for which the return is made. If it develops that the useful life of the property will be longer and shorter than the useful life as originally estimated under all the then known facts, the portion of the cost or other basis of the property not already provided for through depreciation allowances should be spread over the remaining useful life of the property as reestimated in the light of the subsequent facts, and depreciation deductions taken accordingly." CDAcIT This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. (BIR Ruling No. 052-96) Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group