BIR Ruling [DA-119-03]

April 14, 2003 BIR RULING [DA-119-03] RR No. 2; 048-96 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Mr. George Lavadia Principal/Tax Services Department Gentlemen : This refers to your letter dated March 3, 2003 requesting on behalf of your client, Daiho (Phils.), Inc. to allow them to change its depreciation method from the straight-line to the declining balance method on its assets other than the building and its related improvement, but retroactive to the date of acquisition thereof. aDHCcE It is represented that Daiho (Phils.), Inc. (DPI) is a domestic company with office address at 102 North Science Avenue, Laguna Technopark Special Economic Zone, Bian, Laguna, Philippines; that it was duly registered with the Securities and Exchange Commission (SEC) on April 27, 1998 under SEC Registration No. A199806406; that the primary objective for which the corporation was formed is to make, manufacture, assemble, fabricate, export, trade or sell at wholesale only, buy, or otherwise deal in plastics injection moulding, tooling die, injected plastic parts and other related products and goods of whatever nature; that on May 29, 1998, DPI was registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise with a non-pioneer status under Certificate of Registration No. 98-033; that PEZA originally granted DPI an Income Tax Holiday (ITH) of four (4) years, which expired on November 2002; that DPI has applied for a one (1)-year extension of the said ITH with PEZA; that presently, DPI is using the straight-line method of depreciation on the following assets with the corresponding useful life stated below: Machinery Related Structure 8 years Machinery & Equipment 8 years Tools and furniture 3 years Motor vehicle 3 years that due to the requirement of its parent company to align its method of computing depreciation with its affiliated companies worldwide as well as to the rapid obsolescence of the abovementioned assets, DPI is constrained to request for authority to change its depreciation method from the straight-line to the declining balance method which will be applied retroactively from the date of acquisition of the aforesaid assets; that as a result of the proposed change of depreciation method, DPI will in effect be claiming more depreciation expense during the ITH period when it derives no tax benefit whatsoever; that since the new depreciation method will be applied during the ITH period, the assets would have substantially depreciated by the time DPI will be subject to the 5% final tax; and that DPI will be claiming less depreciation expense after the ITH period and will accordingly pay a higher amount of tax to the government. SCIacA In reply, please be informed that on the basis of the foregoing, DPI is hereby granted permission to change its method of computing depreciation from the straight-line to the declining balance method pursuant to the provisions of Section 109 of Revenue Regulations No. 2 which provide, 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 annual installments or in accordance with any other recognized trade practice, such as apportionment of the capital sum over units of production. Whatever plan of 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 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 reestimated in the light of the subsequent facts, and depreciation deductions taken accordingly." Accordingly, considering that DPI will in essence be claiming increased depreciation charges during its ITH, the retroactive application thereof is hereby granted since no tax benefit therefrom accrues to DPI, and government collections will not be prejudiced because of such change. ( BIR Ruling No. 048-96 dated April 10, 1996 ) 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group