BIR Ruling [DA-267-98]

June 24, 1998 BIR RULING [DA-267-98] Kito Philippines, Inc. 128 North Science Avenue Extension Laguna Technopark-SEPZ Bian, Laguna Attention: Mr . Nobuyuki Watanabe VP-General Manager Gentlemen : This refers to your letters dated March 23, 1998, February 20, 1998 and January 28, 1998 requesting that you be allowed to adopt in computing your method of depreciation from straight line method to double declining method beginning April 1, 1998, the start of your fiscal year. It appears that Kito Philippines, Inc . is a Philippine Economic Zone Authority (PEZA) registered enterprise under Registration Certificate No. 96-062; that its principal place of business is located at Laguna Technopark, Inc. SEPZ; that it started its commercial operation on November 3, 1997; that from the start of its fiscal year April 1, 1998, it is adopting the straight line method of depreciation; that it intends to shift its method of depreciation to the double declining method because your system of accounting will be patterned from your mother company Kito Corporation. 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. LLpr Furthermore, 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 useful life as originally estimated under all the then known facts, the portion of the cost of 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, Kito Philippines, Inc. may be allowed to adopt in computing its depreciation expense from straight line method to double declining method beginning its fiscal year April 1, 1998. (BIR Ruling No. 146-94 dated September 28, 1994) prll 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group