Zambrano & Gruba Law Offices

November 16, 2009 BIR RULING [DA-(TAR-013) 676-09 34 (A) (1) (a); 43; DA-698-07 Zambrano & Gruba Law Offices 27th Floor, 88 Corporate Center 141 Valero Street, Salcedo Village Makati City Attention: Atty. Charmaine L. Torres-Castro Atty. Angelo Patrick F. Advincula Atty. John Z. Lee Gentlemen : This refers to your letter dated March 20, 2009 requesting, on behalf of your client, HD Marketing and Distribution Phil., Inc. (HD Marketing) for a ruling allowing HD Marketing to change its accounting method of previously recognizing as assets its chest and upright freezers and depreciating the cost of the freezers over their useful lives to recognizing the cost of freezers as ordinary and necessary business expenses, to clearly reflect its income, for tax purposes. It is represented that HD Marketing is a domestic corporation engaged in the business of selling Haagen-Dazs ice cream through retail channels and franchised Haagen-Dazs Shops; that as part of building the brand name of Haagen-Dazs, HD Marketing acquires or purchases chest and upright freezers and deploys them, without any cost, to its customers; that these freezers are being used by customers of HD Marketing to store and dispense the Haagen-Dazs ice creams that they have purchased; that once these freezers are deployed to the customers, HD Marketing loses control on how these freezers are being used by the customers; that under this current accounting method, HD Marketing records the freezers as assets and depreciates the cost of such freezers over their useful lives of five years; that however, the cost of such freezers should not have been capitalized and amortized since the cost of the freezers as promotional items should have been actually considered as ordinary and necessary business expense under Sections 34 (A) (1) (a) of the National Internal Revenue Code of 1997; that the parent company or head office of HD Marketing treats the cost of the freezers as ordinary and necessary business expense within the year the freezers are deployed to its customers; that the company intends to change its accounting method of recognizing the freezers as assets to recognizing the freezers as prepaid expenses when they are acquired and once deployed, will be charged to operating expenses; and that HD Marketing will not be depreciating these freezers and charge depreciation expense since in the first place the freezers will not be recognized as assets. AICEDc 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, an ordinary and necessary business expense connotes payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. In BIR Ruling No. DA-698-07, the Bureau of Internal Revenue ruled that marketing equipments composed of ice coolers, powered coolers, jet sprays and dispensers which were distributed regularly and habitually because these are needed by the wholesalers, retailers and sales outlets in storing and dispensing the products are properly classifiable as ordinary and necessary expenses contemplated under Section 34 (A) (1) (a) of the Tax Code of 1997. Applying the same to the instant case and considering that HD Marketing purchases said freezers and deploys the same as its promotional item, without any cost to its customers, the cost thereof qualifies as an ordinary and business expense. In view of the foregoing, this Office hereby grants HD Marketing's request to change its accounting method of previously recognizing as assets its chest and upright freezers and depreciating the cost of the freezers over their useful lives to recognizing the cost of freezers as ordinary and necessary business expenses, to clearly reflect its income, for tax purposes. CTHDcS 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.) GREGORIO V. CABANTAC Deputy Commissioner