BIR Ruling [DA-412-06]

June 30, 2006 BIR RULING [DA-412-06] Sec. 43 1997 Tax Code; DA-595-04 SGV & Co. 6760 Ayala Avenue Makati City Attention: Cirilo P . Noel Head, Tax Services Antonette C . Tionko Tax Services Gentlemen : This refers to your letter dated March 30, 2006 requesting on behalf of Quezon Power (Philippines), Limited Co. (QPPL) for authority to change its accounting method, in order to be consistent with Philippine Accounting Standard (PAS) No. 21 and to clearly reflect its income for tax purposes. It is represented that QPPL is an independent power producer which operates a coal fired power plant with a capacity of 470 megawatts producing electricity (the Project) under a build, operate and own scheme; that the cost of QPPL's power plant facility includes capitalized foreign exchange differences on liabilities obtained to finance the construction of the Project; that QPPL's practice has been to capitalize foreign exchange adjustments arising from foreign currency denominated obligations incurred to finance the construction of its power plant, that the capitalized foreign exchange losses are amortized over the life of the related power plant asset; that the amortization of the realized portion is treated as a deductible expense for tax purposes. It is also represented that, beginning 2005, due to the adoption of Philippine Accounting Standard (PAS) No. 21, The Effects of Changes in Foreign Exchange Rates , QPPL was required to determine its functional currency and measure its results and financial position in that currency; 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; that QPPL has determined its functional currency to be the United States Dollar. It is represented further that QPPL applied for authority to adopt functional currency reporting with the Philippine SEC in September 2005; that its application was approved in October 2005; that the capitalized foreign exchange differences arising on the US dollar denominated obligations were eliminated in the translation process and were no longer reflected in QPPL's books; and that QPPL will have to write off the unamortized balance of the previously capitalized foreign exchange losses and recognize foreign exchange gains and losses at the time of realization. In reply, please be informed that the change of accounting method from one system to another is specifically allowed under the provision of Section 43 of the National Internal Revenue Code, in relation to Section 167 of Revenue Regulations No. 2, the pertinent portion of which provides as follows: "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 reflects the income . . . ." Section 167 of Revenue Regulations No. 2 provides: ". . . 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 accounting as are in his judgment best suited for his purpose. . . Any approved standard method of accounting which reflects taxpayer's income may be adopted . . . ." (cited in BIR Ruling Nos. 014-02 dated April 10, 2002 and DA-595-04 dated November 23, 2004) SDIaHE In view of the foregoing, this Office hereby grants QPPL's request to change its accounting method to the method prescribed in PAS 21 and in order to truly reflect its income for tax purposes. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service