BIR Ruling [DA-114-04]

March 12, 2004 BIR RULING [DA-114-04] 43; 014-02 SGV & Co. 6760 Ayala Avenue Makati City Attention: Mr. Joel L. Tan-Torres Partner Gentlemen : This refers to your letter dated December 8, 2003 stating that your client, California Energy International Services, Inc. (CalEnergy) is a corporation organized and existing under the laws of the Philippines; that it operates several power plants located in different parts of the Philippines under a Build-Operate-and-Transfer (BOT) arrangement; that CalEnergy is scheduled to turn over the plants to the Philippine National Oil Company (PNOC) on various dates in the years 2006 and 2007; that CalEnergy established and presently maintains California Energy International Retirement Plan (the Retirement Plan) covering all regular employees of CalEnergy, where CalEnergy contributes to a Trust Fund, the income of which is used to provide benefits to retiring employees who are members of the Retirement Plan; that pursuant to the Retirement Plan, a Trust Agreement covering the Trust Fund was executed by and between CalEnergy, as trustor and the Bank of the Philippine Islands, as trustee; that on February 5, 2003, the BIR ruled that the CalEnergy International Retirement Plan was a reasonable retirement benefit plan and accordingly, the retirement benefits to be received by the employee-members shall be exempt from income tax; the income of the Trust Fund from its investments are exempt from income tax and the contributions of the company to the retirement fund are deductible from gross income; that CalEnergy deducts from its gross income for the taxable year the amount corresponding to its contributions (in excess of the employer contributions for the Trust Fund to cover pension liability accruing during the year) made to the Trust Fund amortized in equal parts over a period of ten (10) years; that the contributions are booked under "Accrued and other liabilities"; that the BOT arrangement will end by the years 2006 and 2007; that as of the time of the turn over of the plants, CalEnergy will not have finished fully deducting from its gross income its contributions to the Retirement Fund; and that at the end of the BOT period, the amount of unamortized past service pension cost is estimated to be P27.3 Million. Based on the foregoing representations, you now request authority to change its method of amortization of the past service pension cost to spread the unamortized portion of CalEnergy's contributions to the Retirement Plan not previously deducted from its gross income in any prior taxable years over the remaining period of the BOT arrangement. In reply thereto, please be informed that Section 43 of the Tax Code of 1997 provides that the taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer. In relation thereto, Section 38 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations states, in part "Section 38. Bases of Computation . Approved standard methods of accounting will be ordinarily regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period. . . . " Based on the foregoing, the general rule is that a taxpayer is allowed to report income and expenses in accordance with the method of accounting employed, provided such method conforms with generally accepted accounting principles. Said method of accounting comprises a set of rules for determining when and how to report income and deduction ( Consolidated Mines, Inc. vs. Court of Tax Appeals , L-18843, August 29, 1974) However, the change of accounting method from one system to another is allowed under Section 168 of Revenue Regulations No. 2, which provides as follows: "Section 168. Changes in accounting methods . The true income, computed under the law, shall in all cases be entered in the return. If, for any reason, the basis of reporting income subject to tax is changed, the taxpayer shall attach to his return a separate statement setting forth for the taxable year and for the preceding year the classes of items differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted as the result of such change. A taxpayer who changes the method of accounting employed in keeping his book shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner of Internal Revenue. For the purposes of this section, a change in the method of accounting employed in keeping books means any change in the accounting treatment of items of income or deductions, . . . Application for permission to change the method of accounting employed and the basis upon which the return is made shall be filed within 90 days after the beginning of the taxable year to be covered by the return. The application shall be accompanied by a statement specifying all amounts which would be duplicated or entirely omitted as a result of the proposed change. Permission to change the method of accounting will not be granted unless the taxpayer and the Commissioner of Internal revenue agree to the terms and conditions under which the change will be effected." ( Emphasis supplied .) IN VIEW OF THE FOREGOING, CalEnergy is hereby granted permission to change its method of amortization of the past service pension cost in order to spread the unamortized portion of CalEnergy's contributions to the Retirement Plan not previously deducted from its gross income in any prior taxable years over the remaining period of the Build-Operate-and-Transfer arrangement. 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. aTIAES Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group