BIR Ruling [DA-128-99]

March 3, 1999 BIR RULING [DA-128-99] Digitel Telecommunications Philippines, Inc. 110 E. Rodriguez Jr. Avenue Bagumbayan, Quezon City Attention: Mr . John Gokongwei , Jr . President and CEO Gentlemen : This refers to your letter dated December 11, 1998 requesting permission to use the Straight Line Method of depreciation from the Capacity Utilization Method you are presently using on your central office equipment and outside plant facilities effective taxable year 1998. It appears that Digitel Telecommunications Philippines, Inc . is a domestic corporation engaged in telecommunications industry; that for the past years you have been using the Capacity Utilization Method in computing the depreciation expenses on your central office equipment and outside plant facilities; that the said assets currently have an estimated useful life of 15 years; that your present method of depreciation is actually a variation of the straight line method; that in view of the recent economic conditions and rapid technological developments in the telecommunications industry, you believe that the straight Line Method will better and clearly reflect the income of your company; and that for reporting purposes, the change will simplify your accounting procedures resulting in reliable and accurate figures in your financial statements. In reply, please be informed that pursuant to Section 34 (F)(1) of the Tax Code of 1997, there shall be allowed as depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. The term "reasonable allowance" shall include (but not limited to) an allowance computed in accordance with regulations prescribed by the Secretary of Finance, under any of the following methods: (A) The straight-line method; (B) Declining-balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in Subsection (F)(1); (C) The sum-of-the-years-digit method; and (D) Any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner. Moreover, pursuant to the provisions of Section 109, Revenue Regulations No. 2 which provides, viz: "Moreover, 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." The proper allowance for depreciation of any property used in the trade or business is that amount which should be set aside for the taxable year in accordance with a reasonable consistent plan whereby the aggregate of the amount so set aside, plus the salvage value, will, at the end of the useful life of the property in business, equal the basis of the property. Due regard must be given to expenditures for current upkeep. (Section 105, Revenue Regulations No. 2) Such being the case, Digitel Telecommunications Philippines, Inc. may be allowed to adopt in computing its depreciation expense from Capacity Utilization Method to Straight Line Method effective taxable year 1998 provided that the conditions set forth under Sec. 109 of Revenue Regulations No. 2 are all complied with. (BIR Ruling No. 144-97 dated December 29, 1997) llcd 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)