BIR Ruling [DA-055-01]

April 2, 2001 BIR RULING [DA-055-01] 34 (F), 109; RR 2; 176-98 Joaquin Cunanan and Co . Price Waterhouse Coopers 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Ms . Tomasa H . Lipana Managing Partner, Tax Services Gentlemen : This refers to your letter dated July 18, 2000 requesting on behalf of your client, Sanyo Capacitor (Philippines) Corporation (SCPC) for an authority to change its depreciation method from straight-line to double-declining method. It appears that SCPC is a domestic corporation authorized to manufacture, produce, assemble, purchase, sell on a wholesale basis, and/or export capacitors, as well as its individual parts, and to do all acts that may be necessary and incidental for the promotion of its primary purpose; that its principal place of business is located at the Luisita Industrial Park Special Export Processing Zone, San Miguel, Tarlac City; that as a Philippine Economic Zone Authority (PEZA) registered company, SCPC enjoys an income tax holiday (ITH) of four years starting February 16, 2000; that SCPC intends to change its depreciation method for it to reflect the actual rate of obsolescence of its assets which is greatly affected by rapid advances and changes in technology; that under the double-declining method, the rate of depreciation is higher during the early period/life of the equipment or machinery; that the change in SCPC's depreciation method will not result in any revenue loss but will be beneficial to the government since higher depreciation will be claimed in the initial years of the operations when SCPC is still enjoying its ITH as a PEZA registered enterprise; and that at the time SCPC becomes liable to the 5% preferential tax (after the ITH), it will have a lower depreciation expense under the double-declining depreciation method as compared to the straight-line method of computing depreciation. In reply, please be informed that on the basis of the above representations, SCPC is hereby granted permission to change its method of computing depreciation of its assets from straight-line to double-declining method pursuant to the provisions of Section 34(F) of the Tax Code of 1997, in relation to Section 109 of Revenue Regulations No. 2, the pertinent portion of which provide, viz: "SEC. 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 annual installments or in accordance with any other recognized trade practice, such as an 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 or 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 re-estimated in the light of the subsequent facts, and depreciation deductions taken accordingly." Considering that double-declining method will conform to the best accounting practice in SCPC's trade or business, this Office hereby grants authority to SCPC the use of the double-declining method in computing the depreciation allowance of its properties and equipment. THIAaD 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group