Isla Lipana & Co.

December 12, 2007 BIR RULING [DA-638-07] BIR Ruling No. DA-097-05 Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Mr. Alexander B. Cabrera Managing Partner Tax Services Gentlemen : This refers to your letter dated October 23, 2007 requesting on behalf of your client, BPI Rental Corporation ("BPI Rental"), for an authority to change the method used by BPI Rental from the straight-line method to the double-declining balance method, which the company intends to implement beginning January 1, 2008. As represented, BPI Rental is a wholly-owned subsidiary of BPI Leasing Corporation, engaged in the business of providing operating leases to its customers, especially for vehicles. AHSEaD The existing straight-line method used by BPI Rental calculates the depreciation of its assets held out for operating lease by taking the purchase or acquisition price of the asset less salvage value and then dividing this amount by the total productive years of the asset which can be reasonably expected to benefit the company. Under the double-declining balance method the economic useful life of the asset is not shortened or changed. This method, however, allows a higher amount of depreciation to be taken in the earlier life of the asset which gradually declines over its life. In this respect, the double-declining balance method is reflective of the market conditions of its assets and is most-suited for the type of business of BPI Rental. As commented by one of the standard reference accounting textbooks, "where the expected productivity or revenue-earning power of the asset is relatively greater during the earlier years of its life, or where maintenance or charges tend to increase during the later years, the declining-balance method may-well provide the most satisfactory allocation of cost." ( Intermediate Accounting, Smith & Skousen, 1992 Ed., p. 497 ) TcICEA Thus, the purpose of BPI Rental's change of its depreciation method is for the company to adopt one that is reasonable and has due regard to the operating conditions of its business during a particular taxable year. Given that its core business mainly deals with the lease of vehicles which is subject to high initial costs and accelerated depreciation, this accounting method is more suited to its needs. In support of your request, you attached copies of the following: 1) Certificate of Registration No. CS200414160 dated September 8, 2004 issued by the Securities and Exchange Commission; 2) Articles of Incorporation; 3) Certificate of Registration No. 9RC0000133449 dated September 23, 2004 issued by the Bureau of Internal Revenue; and 4) Affidavit executed by Mr. Danilo T. Reyes, Vice-President of BPI Rental, attesting to the purpose for the change in depreciation method. In reply, please be informed that this Office had the occasion to rule in BIR Ruling No. DA-097-05 dated March 30, 2005 as follows: ". . . pursuant to Section 34(F) of the Tax Code of 1997, the pertinent portion of which provides, viz : '(F) Depreciation . (1) General Rule . There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in trade or business. . . . (2) Use of Certain Methods and Rates . The term "reasonable allowance" as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, 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. EaSCAH xxx xxx xxx' In this connection, Section 109 of Revenue Regulations No. 2 provides '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 installment or in accordance with any other recognized trade practices, 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 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.' SCEDaT Depreciation is a cost allocation process that systematically and rationally allocates acquisition costs of operational assets to periods benefited by their use. In this connection, the AICPA Committee on Accounting Procedure has stated, 'The declining-balance method is one of those which meets the requirements of being "systematic and rational." In those cases where the expected productivity or revenue-earning power of the asset is relatively greater during the earlier years of its life, or where maintenance or charges tend to increase during the later years, the declining-balance method may well provide the most satisfactory allocation of cost.' It should be noted that under the double declining balance method, the economic useful life of the asset is not shortened or changed. However, the method allows higher amount of depreciation to be taken in the earlier life of the asset which gradually declines over the life of the asset. HTDAac xxx xxx xxx" The purpose of the change of BPI Rental's depreciation method is relative to the operating conditions of the Company in the light of the high initial cost and accelerated wear and tear expected from the operating leases being administered by the Company. Moreover, the change will also make the Company's depreciation method consistent with its parent company, BPI Leasing Corporation. Considering that the use of the double-declining balance method is reasonable and warranted and will conform to the best accounting practice in BPI Rental's business and will not result in any revenue loss to the government over the useful economic life of the asset, this Office hereby grants your request for the change in BPI Rental's method from the straight-line method to double-declining balance method effective January 1, 2008. TDCAHE 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service