SGV & Co.

March 23, 2007 BIR RULING [DA-170-07] SGV & Co. 6760 Ayala Avenue Makati City Attention: W. U. Villanueva Principal, Tax Services and C.P. NOEL Vice-Chair and Deputy Managing Partner Gentlemen : This refers to your letter dated January 3, 2007 stating that your clients, Mirant Sual Corporation (MSC) and Mirant Pagbilao Corporation (MPC), are corporations duly organized and existing under the laws of the Philippines with principal address at Bo. Pangascasan, Sual Pangasinan and Pagbilao Grande Island, Pagbilao, Quezon, respectively; that they are principally engaged in the business of power generation services and the subsequent sale thereof to the National Power Corporation under a Build, Operate, Transfer scheme; that Revenue Regulations No. 6-2006 dated March 16, 2006 was promulgated to prescribe the guidelines and procedures in adopting the use of functional currency, other than the Philippine peso, in financial statements that will be submitted and books of accounts that will be maintained for internal revenue tax purposes; and that beginning January 1, 2005, both MSC and MPC adopted the US Dollar as functional currency for financial recording and reporting purposes, and, for the calendar year 2005 through the taxable quarter ending September 30, 2006, they have prepared their Philippine peso income tax returns using the peso historical rate method. Based on the foregoing representations, you now request confirmation of your opinion that MSC and MPC may still use the peso historical rate method in the preparation of their respective 2006 Income Tax Returns in light of the issuance of Revenue Regulations No. 6-2006; and the issuance of the necessary guidelines to further clarify the application of the current rate method specifically for the clear guideline of taxpayers that adopt foreign functional currency pursuant to said regulations. CScaDH In reply thereto, please be informed that Section 7 of Revenue Regulations No. 6-2006 provides "SEC. 7. Currency to be Used for Income Tax Purposes . The income tax returns (ITRs) of taxpayers which have adopted functional currency (other than Philippine peso) in their financial statements and books of accounts shall still be prepared in Philippine peso. Thus, all entries in the ITR shall be in Philippine peso. For purposes of translating the functional currency income and expense to Philippine pesos, the translation shall be done on a monthly basis using the average exchange rate during the month (under the Philippine Dealing System or PDS). The total translated amounts per month shall be added to arrive at the income and expenses in Philippine pesos for the quarter/year, which shall be the basis in computing the taxpayer's income tax liability. The total figures in the ITR for the year should be reconciled with the total of the equivalent peso figures as converted from the functional currency figures in the subsidiary ledgers maintained to serve as the source of the figures reflected in tax returns other than income tax. The reconciliation of the figures shall be done at the end of the year and the reconciling items shall be reflected in the annual or final adjustment income tax return. Thus, after such reconciliation, the figures in the annual ITR should tally with the total annual figures in the other tax-type tax returns such as the tax returns for VAT, Percentage Tax, Withholding Tax, Documentary Stamp Tax, etc. Tax credits applied against the income tax due (in Philippine pesos), if any, shall be equal to the actual amounts of such credits in Philippine pesos, as shown in the supporting documents (e.g. withholding tax certificates issued by the other party withholding agents, proof of advance payment of the tax and prior year's income tax return)." Corollarily, Section 43 of the Tax Code of 1997 provides that "SEC. 43. General Rule . 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 with the books of such taxpayer but if no such method of accounting has been employed or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflect the income . . . ." Finally, Section 167 of Regulations No. 2 states that "Section 167. Methods of accounting . 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 account 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. Any approved standard method of accounting which reflects taxpayer's income may be adopted. . . . " It is to be noted that the Philippine Securities and Exchange Commission (SEC) in SEC Memorandum Circular No. 14, Series of 2003, Guidelines on Preparation of Functional Currency Financial Statement, gives qualified companies the option to file functional currency financial statements, subject to compliance with certain criteria. Revenue Regulations No. 6-2006 was then promulgated by the Department of Finance precisely to regulate the use of functional currency other than the Philippine Peso in financial statements that will be submitted and in the book of accounts that will be maintained for internal revenue tax purposes. From the foregoing circumstances, this Office holds that your clients' usage of the historical rate method for the year 2006 is in conformity with Revenue Regulations No. 6-2006 inasmuch as they have reconciled or will be reconciling the Philippine peso figures in their income tax return (ITR) with the Philippine peso figures in the subsidiary ledgers maintained to serve as the source of the figures reflected in tax returns other than income tax (tax returns for VAT, Percentage Tax, Withholding Tax, Documentary Stamp Tax, etc.) CSDcTH However, to clarify the implementation of the functional foreign currency tax reporting for taxable year 2007, this Office has yet to issue the necessary guidelines by way of an issuance to supplement Revenue Regulations No. 6-2006. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service