BIR Ruling [DA-466-06]

July 28, 2006 BIR RULING [DA-466-06] Section 43; 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. 39, 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 consistent with the treatment of interest incurred to finance acquisition of the power plant, other incidental financing costs of QPPL were amortized over the life of the power plant as specifically allowed under Sec 34 (B) of the Tax Code of 1997, as implemented by Revenue Regulations No. 13-00, which provides: "(e) Optional treatment of interest expense on capital expenditure . At the option of the taxpayer, interest expense on a capital expenditure incurred to acquire property used in trade, business or exercise of a profession may be allowed as a deduction in full in the year when incurred, the provisions of Sec. 36 (A)(2) and (3) of the Tax Code of 1997 to the contrary notwithstanding, or may be treated as a capital expenditure for which the taxpayer may claim only as a deduction the periodic amortization of such expenditure." (Section 4, RR 13-00) It is represented further that, beginning 2005, due to the adoption of Philippine Accounting Standard (PAS) No. 39, debt issue costs or other incidental financing costs would have to be treated as a deduction against the face value of the loan (contra-liability account) and consequently amortized over the life of the loan under the effective interest rate method; that as a result, debt issue costs or other incidental financing costs previously booked as part of the power plant cost would now be reclassified to a separate contra liability account which will then be amortized based on effective interest rate method, instead of straight line method. 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) Moreover, under Section 34 (B) of the Tax Code, as implemented by Revenue Regulations (RR) No. 13-00, at the option of the taxpayer, interest incurred to acquire property used in trade or business may be allowed as a deduction or a capital expenditure. Thus, the change in accounting method will be in conformity with Section 34(B) of the Tax Code of 1997. In view of the foregoing, this Office hereby grants QPPL's request to change its accounting method to the method prescribed in PAS 39, i.e. to treat debt issue costs or other incidental financing costs as a deduction against the face value of the loan and consequently amortized over the life of the loan under the effective interest rate method, 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