BIR Ruling No. 144-13

April 12, 2013 BIR RULING NO. 144-13 Philippine Racing Club Santa Ana Park, A.P. Reyes Avenue Makati City Attention: Allan V. Abesamis SVP-Finance Gentlemen : This refers to your letter dated December 22, 2011 and March 12, 2013 wherein you requested for approval to revise the estimated economic useful life of your depreciable racing-related assets effective taxable year 2012. DIcTEC It is represented that Philippine Racing Club, Inc. (PRCI), a corporation duly organized and existing under the laws of the Philippines, is a grantee of a legislative franchise, as embodied in Republic Act No. 7953, to construct, operate and maintain a racetrack; establish such branches for booking purposes anywhere in the country; and hold or conduct horse races therein with bettings. The franchise is effective for twenty-five years from October 1997 through October 2022. Upon review of PRCI's operations, it was discovered that while the existing racing franchise expires in October 2022, almost all major improvements and structures in the racing complex are assigned depreciable life of 30 years from January 2009. PRCI's management decided to change the estimated economic useful life of its assets effective at the start of taxable year 2012 to coincide with the remaining life of the existing franchise. This change in estimated economic useful life of depreciable assets should results in a more reasonable and informative financial statements as investment costs and expenses are properly matched against the economic benefits from such investment. The details of the revision are as follows: Present Revised Present Revised Property Book Value Useful Useful Annual Annual Classification Dec. 31, 2010 Life Life Depreciation Depreciation Track P456,193,000 30 years 10.83 years P29,854,000 P42,1100,000 n improvements Horse stables and Holding barn 182,048,000 30 years 10.83 years 6,738,000 16,804,000 Grandstand 96,092,000 30 years 10.83 years 3,557,000 8,870,000 Powerhouse 72,939,000 30 years 10.83 years 2,700,000 6,733,000 Jockey's quarters, bunkhouse and dorm 28,333,000 30 years 10.83 years 1,049,000 2,615,000 Landscaping 6,259,000 30 years 10.83 years 232,000 577,000 Antenna tower 2,665,000 25 years 10.83 years 113,000 264,000 Warehouse 60,000 15 years 10.83 years 4,000 6,000 Miscellaneous structures 23,603,000 30 years 10.83 years 874,000 2,179,000 Total P864,366,000 P45,121,000 P80,140,000 =========== ========== ========== In reply, please be informed as follows: Under Section 34 (F), of the National Internal Revenue Code of 1997, as amended, (NIRC), a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in trade or business is allowed as depreciation deduction. The provision reads: "(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 the 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. xxx xxx xxx (3) Agreement as to Useful Life on Which Depreciation Rate is Based. Where under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the National Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to other party to the agreement. SaCDTA Provided, however, That where the taxpayer has adopted such useful life and depreciation rate for any depreciable asset and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representative, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection." In this connection, Section 105, Revenue Regulations No. 2 provides: "Section 105. Depreciation . A reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in the trade or business may be deducted from gross income. For convenience, such an allowance will usually be referred to as depreciation, excluding from the term any idea of a mere reduction in market value not resulting from exhaustion, wear and tear, or obsolescence. The proper allowance for such 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 also be given to expenditures for current upkeep." Moreover, Section 109, Revenue Regulations No. 2 also states: "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 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 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 the useful life as originally estimated under all 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 reestimated in the light of the subsequent facts, and depreciation deductions taken accordingly." Based on the foregoing, the taxpayer and the Commissioner may agree on the estimated useful life and rate of depreciation of any property. The rate so agreed upon shall be binding on both the taxpayer and the BIR. However, if it develops that the useful life of the property originally estimated under previous factual conditions is no longer reasonable, the law allows the taxpayer to lengthen or shorten the useful life of the property in the light of prevailing factual considerations. SATDHE It has been ruled that the remaining estimated useful life of the assets is 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 a 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. (BIR Ruling No. 144-97 dated December 29, 1997) In view of the foregoing, Philippine Racing Club, Inc. is hereby granted permission to change the estimated useful life of the aforementioned assets beginning January 1, 2012, provided, however, that any prior period adjustments shall be subject to deficiency income tax, interest and penalties, if warranted. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official copy.