BIR Ruling [DA-680-06]

November 24, 2006 BIR RULING [DA-680-06] 34 (F); DA 037-06 Del Monte Philippines, Inc . Citibank Tower, 8741 Paseo de Roxas Makati City Attention: Mr. Ignacio Carmelo O. Sison Gentlemen : This refers to your letter dated March 20, 2006 stating that Del Monte Philippines, Inc. (DMPI) is a corporation engaged and existing under the laws of the Philippines with business address at Bugo, Cagayan de Oro City; that it is engaged in the business of processing, manufacture, and packing of pineapple, tomato and other food products; that for both financial accounting and tax purposes, DMPI has primarily adopted the straight line method for depreciating Property, Plant and Equipment (PPE); that DMPI's PPE is classified in the financial statements into five (5) major categories: Buildings and improvements Machineries and equipment Land, leasehold and improvements Dairy, horses, and breeding herd Construction in progress that effective January 1, 2005, there are various international accounting standards that were adopted in the Philippines; that among this is the Accounting Standard on Property, Plant and Equipment, or otherwise known as the Philippine Accounting Standards (PAS) No. 16, Paragraph 43 of this standard provides that: HDTSCc "Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately." that to comply with this new accounting standard, the DMPI's engineering department has reviewed the fixed assets records, re-estimated the useful life of each significant and identifiable PPE component, and re-established its fixed assets ledger in a format that would facilitate the preparation of accounts under the new accounting requirements; that based on the work performed by its engineering department, it was found that the estimated useful lives of most of the assets of the Company should either be shortened or extended compared to the existing/current estimated useful lives; that in accordance with the requirements of PAS No. 16, the change in useful lives of the assets will be applied retrospectively by the Company for financial statement purposes; and that the Company will continue to use the straight line method of depreciation both for financial and accounting purposes. Based on the foregoing representations, you now request confirmation of your opinion that beginning tax year 2005, DMPI may compute, for tax purposes, its depreciation expense for each component of the PPE by dividing the net book value prior to the application of IAS (e.g. net book value as of December 31, 2004), by the remaining useful life as re-estimated by the DMPI's engineering department. In reply thereto, please be informed that Section 34(F) of the Tax Code of 1997 provides that 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. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each. aSEDHC The term "reasonable allowance" 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. The proper allowance for depreciation of any property used in the trade or business is the amount which should be set aside for the taxable year in accordance with a reasonable consistent plan whereby the aggregate of the amount to set aside, plus the salvage value, will, at the end of the useful life of the property in business, equal the basis of the property. Due regard must be given to expenditures for current upkeep. ( Sec. 105, Revenue Regulations No. 2 ) Moreover, 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 year. 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 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. ( Sec. 109, Revenue Regulations No. 2 ) CTAIDE Similarly situated is BIR Ruling No. DA037-06 dated February 9, 2006 , which is a reiteration of BIR Ruling No. 144-97 dated December 29, 1997 , where this Office ruled that ". . . . . 'The remaining estimated useful life of the assets transferred from Sime Darby has been determined as that period of time, expressed in years, that an asset is expected to perform in a satisfactory manner the function for which it was designed and built, assuming normal and reasonable maintenance. The estimates of remaining life for each item of property had been based, in very large measure, upon the observed condition at the time of appraisal and condition of maintenance, and the consideration of normal rates of depreciation for the type of property. Such being the case, Goodyear may be allowed to adopt in computing its depreciation expense for both tax and financial accounting purposes the estimated remaining useful life after rehabilitation of the assets acquired from Sime Darby and valuated as of October 17, 1996, based on the independent study of AACI. "In view of the above, MPHI may compute its depreciation expense for each component of the PPE by dividing the net book value prior to the application of IAS (e.g. net book value as of December 31, 2004) by the remaining useful life as re-estimated by DLS." In the instant case, DMPI has re-evaluated the useful life of its assets in accordance with the rules set under PAS 16 and the findings of the review conducted showed that certain changes must be made. While the adoption of the revised useful lives of the affected properties will result in lower tax depreciation expense for 2005, which, consequently, will lead to a higher income tax liability, DMPI nevertheless would like to adopt the same to align the reporting of depreciation for financial and tax purposes. SUCH BEING THE CASE, this Office hereby confirms that beginning taxable year 2005, DMPI can compute for its depreciation expense, for tax purposes, using the revised useful life of its properties, re-estimated by it in connection with its adoption of accounting guidelines prescribed under PAS 16. SCEHaD 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service