BDO Rental, Inc.

March 4, 2009 BIR RULING [DA-(TAR-005) 134-09] DA-638-07 BDO Rental, Inc. 2nd Floor, BDO Leasing Centre Corinthian Gardens, Ortigas Avenue Quezon City Attention: Mr. Ricardo V. Martin Executive Vice President Gentlemen : This refers to your letter dated February 5, 2009 stating that the BDO Rental, Inc. (indirectly a subsidiary of Banco de Oro Unibank, Inc.) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that it is primarily engaged in the business of providing operating leases to its customers, such as vehicles and heavy equipments; that for machineries and equipments used for mining operations, BDO Rental, Inc. has utilized the method of depreciation computed based on the estimated number of hours used; that the BDO Rental, Inc. estimated the depreciation of assets held out for operating lease by taking the acquisition price of such asset less salvage value and then dividing this amount by the total estimated number of hours equivalent to the remaining life of the machineries; that for other machineries and equipments used for production, the company used the sum-of-the-years-digit method which under this method, the estimated depreciation of the assets held for operating lease is computed by taking the acquisition price of the asset less salvage value and then dividing this amount by the total estimated years of the assets which can be reasonably expected to benefit the company; and that by applying the depreciation computed based on the estimated numbers of hours used, and the sum-of-the-years-digits method for certain type of machineries and equipments, the changes will simplify the company accounting procedures resulting in reliable and accurate figures in the financial statements. HEaCcD In connection therewith, you now request authority to change the method of depreciation from straight-line to depreciation computed based on the estimated number of hours used for mining equipments, machineries; and depreciation method computed based on the-sum-of-the-years-digits for other industrial machineries and equipments. In reply thereto, please be informed that Section 34 (F) (1) and (2) of the Tax Code of 1997 provides that "(1) General Rule . There shall be allowed as a depreciation deduction a reasonable allowance for 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: 1) The straight-line method 2) 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); 3) The sum-of the-years-digit method; and 4) Any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner. Corollarily, Section 109 of Revenue Regulation No. 2, otherwise known as the Income Tax Regulations, 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 and 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." TcSICH The proper allowance for depreciation of any property used in the trade or business is that amount which should be set aside for the taxable year in accordance with a reasonable consistent plan whereby the aggregate of the amount so 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 Regulation No. 2) The depreciation computed based on estimated number of hours, and the sum-of the-years-digit better method clearly reflect the true income of BDO Rental, Inc., the use of the depreciation methods are reflective of the market conditions of the assets, and is most-suited for the type of business of BDO Rental, Inc. Such methods of depreciation are reasonable and have due regard to the operating conditions of its business during a particular year, given that its core business deals with, among others, the lease of machineries and equipments, subject to high initial cost and accelerated depreciation. Inasmuch as the use of above described methods are reasonable and warranted and will conform to the best accounting practice in BDO Rental, Inc.'s economic life of its assets, this Office hereby GRANTS BDO Rental, Inc.'s request to adopt the method of depreciation computed based on estimated number of hours and the sum-of the-years-digit for certain type of machineries and equipments effective January 1, 2008. 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