BIR Ruling [DA-362-04]

June 28, 2004 BIR RULING [DA-362-04] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. R.C. Vinzon Gentlemen : This refers to your letter dated March 22, 2004 stating that your client, Tann Philippines, Inc. (TPI) is a corporation duly organized and existing under and by virtue of the laws of the Philippines with business address at the First Philippine Industrial Park, Barangay Sta. Anastacia, Sto. Tomas, Batangas; that it is registered with the Philippine Economic Zone Authority (PEZA) as an Export Enterprise; that it is engaged in the business of manufacturing, printing and conversion of packaging and other materials such as but not limited to tipping papers and soft packaging materials for the cigarette industry, including the selling, importing, exporting and general trading of said products; that TPI utilizes its production machinery for the following purposes: raw paper storage, printing, slitting, perforation and packaging in pallets; that the machines used for the said purposes have top rated mechanical speeds, which are relatively high since they are top of the line; and that however, current business demands of the company do not merit the use of such machinery at their top rated mechanical speed. In connection therewith, you now request permission that you be allowed to adopt the unit-of-production method in depreciating its machinery, as the use of the said method will best estimate the value of the depreciation of the subject machines and will reflect the true value of such assets of the company. In reply thereto, please be informed that Section 109 of Revenue Regulations No. 2 provides that "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 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." Considering that the operating conditions of the company does not maximize the use of its machinery, the use of the unit-of-production method in depreciating such machinery indeed best reflect the true value of the said machinery. Accordingly, this Office hereby grants permission to your client, TPI, to adopt the unit-of-production method in depreciating its machinery pursuant to the provisions of Section 109 of Revenue Regulations No. 2. THaDAE Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group