BIR Ruling [DA-452-04]

August 27, 2004 BIR RULING [DA-452-04] Rev. Regs. No. 2 206-88 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty . Veronica A . Santos Principal, Tax Services Gentlemen : This refers to your letter dated May 31, 2004 requesting on behalf of your client, Business Process Outsourcing International, Inc . ("BPOII"), for a confirmation of your opinion that the portion of the asset purchase price attributable to the non-compete clause and acquired Customers List is amortizable over five (5) years for income tax purposes. It is represented that BPOII is a corporation, while SyCip Gorres Velayo & Co. ("SGV") is a general professional partnership, both duly organized and existing under the laws of the Philippines; that pursuant to the Asset Purchase Agreement ("APA") and Supplemental Agreement between SGV and BPOII, SGV, as Seller, agreed to sell, convey, assign, transfer and deliver to BPOII, the Purchaser, the assets of SGV pertaining to its business process outsourcing ("BPO") business carried on prior to and up to the date of the APA (the "Assets"); that SGV's BPO business consisted of services such as payroll services, time keeping, Human Resources ("HR") benefits administration, employee loans administration, bookkeeping, credit and collection administration, company closure administration, treasury, and other HR, accounting, and finance related services (excluding consultancy services); that the APA specifically provided in Clause C of the Recitals that "it is the intention of the Parties that upon execution of this Agreement, or immediately thereafter, the Purchaser shall own all the Assets and be in a position to operate the Business as a going concern"; that to ensure that this objective is realized, the Parties provided, in Section 3.2 of the APA, for the Continuing Assistance by the Seller to the Purchaser "3.2 Continuing Assistance At the Purchaser's request and without further consideration or compensation whatsoever, the Seller will execute and deliver such instruments of sale, transfer, conveyance, assignment, and confirmation and take such action as the Purchaser may deem necessary or desirable in order to more effectively transfer, convey, and assign to the Purchaser and to confirm Purchaser's title to, all of the Assets, to put the Purchaser in actual possession and operating control thereof and to assist the Purchaser in exercising all rights with respect thereto." that thereafter, the Parties executed a Supplemental Agreement providing for a five-year non-compete covenant on the part of SGV in connection with its transfer to BPOII of the Assets, including the Customers List; that the portion of the asset purchase price pertaining to the non-compete clause of the Supplemental Agreement, wherein SGV, the Seller, shall not compete in the BPO business it had sold to your client, BPOII, for a period of five years, shall be amortized over the same period; and that based on the experience of BPOII, it is reasonable to approximate the limited useful life of the Customers List for amortization purposes at five years since this is the average period at which customers retain their business relationship. In reply thereto, please be informed that intangibles, the use of which in the trade or business is definitely limited in duration, may be the subject of depreciation allowance but intangibles, the use of which in the business or trade is not so limited, will not usually be a proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is known from experience to be of value in the business for a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance provided the facts are fully shown in the return or prior thereto to the satisfaction of the Commissioner of Internal Revenue. ( Sec . 107, Revenue Regulations No. 2, otherwise known as Income Tax Regulations ) In BIR Ruling No. 206-88, dated May 12, 1988, we have ruled that the amount paid for an agreement not to compete in a trade or business, where your client can prove the existence of such an agreement, is considered a capital expenditure and is subject to allowances for depreciation ratably spread over the period mentioned in the agreement, but only where the elimination of competition is for a definite and limited term (par. 23.68, Vol. 4 Mertens' Law of Federal Income Taxation). Accordingly, your opinion that the portion of the asset purchase price pertaining to the non-compete clause of the Supplemental Agreement, wherein SGV, the Seller, shall not compete in the BPO business it had sold to your client, BPOII, for a period of five years, may be amortized over the same period ( i . e ., five years), is hereby confirmed. Furthermore, to be allowed to take depreciation allowance on an intangible asset, a two-pronged test may be used, wherein the taxpayer need to establish that the intangible has (1) an ascertainable cost basis; and (2) a limited useful life, the duration of which can be ascertained with reasonable accuracy. The Customers List acquired by BPOII from SGV has an ascertainable cost basis as indicated in the APA and the Supplemental Agreement, and as represented, based on the experience of BPOII, it is reasonable to approximate the limited useful life of the Customers List for amortization purposes at five years since this is the average period at which customers retain their business relationship. From the foregoing, your opinion that the portion of the asset purchase price pertaining to the Customers List acquired by BPOII from SGV is amortizable over a period of five years is hereby likewise confirmed. caSEAH This ruling is 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group