Request for Authority to Implement Change in Computing Depreciation Expense of Property and Equipment

December 14, 1998 BIR RULING NO. 176-98 000-00-176-98 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . C . Gison Tax Division Gentlemen : This refers to your letter dated February 26, 1997 requesting in behalf of your client, Canon Marketing Philippines, Inc. (CMPI), for authority to implement the following: (1) Change its method of computing depreciation expense of its property and equipment from sum-of-the-years digits method to straight-line method; and (2) Change its method of costing supplies and spare parts inventories from first-in-first-out (FIFO) method to the monthly average method. It is represented that CMPI was formerly registered as Datagraphics, Inc., and the sum-of-the-years digit method and the FIFO method were adopted by the previous management that in November, 1996, Canon Singapore Pte. Ltd. (Canon Singapore), acquired all of the outstanding shares of Datagraphics, Inc., and changed the name from "Datagraphics, Inc." to "Canon Marketing Philippines, Inc."; that Canon Singapore wants CMPI to adopt the depreciation method and inventory valuation practice of the Canon companies that the changes are necessary so that the measurement of the income of CMPI will be consistent with the method adopted by its parent company and its worldwide affiliates; and that the Canon companies are industry leaders and have adopted the method of depreciation and inventory valuation that are best suited to their business. In reply, please be informed that on the basis of the above representations, Canon Marketing Philippines, Inc., is hereby granted permission to change its method of computing depreciation of its assets from sum-of-the-years digits method to the straightline method pursuant to Section 34(F) of the Tax Code of 1997, in relation to Section 109 of Revenue Regulations No. 2 which provides, viz: "SEC. 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 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 taxpayers 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 that 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." (BIR Ruling Nos. 146-94 dated September 28, 1994; 052-96 dated April 24, 1996) In addition, Sec. 41 of the Tax Code of 1997, in relation to Section 145 of Revenue Regulations No. 2, the pertinent portion of which provided, viz: "SEC. 41. Inventories . . . . "If a taxpayer, after having complied with the terms and conditions prescribed by the Commissioner, uses a particular method of valuing its inventory for any taxable year, then such method shall be used in all subsequent taxable years unless: "(i) with the approval of the Commissioner, a change to a different method is authorized; or "(ii) The Commissioner finds that the nature of the stock on hand (e.g., its scarcity, liquidity, marketability and price movements) is such that inventory gains should be considered realized for tax purposes and, therefore, it is necessary to modify the valuation method for purposes of ascertaining the income, profits, or loss in a more realistic manner: Provided, however, That the Commissioner shall not exercise his authority to require a change in inventory method more often than once every three (3) years: Provided, further, That any change in an inventory valuation method must be subject to approval by the Secretary of Finance." "SEC. 145. Valuation of Inventories . The law provides two tests to which each inventory must conform (1) it must conform as nearly as possible to the best accounting practice in the trade or business, and (2) it must clearly reflect the income. It follows, therefore, that inventory rules cannot be uniform but must give effect to the trade customs which come within the scope of the best accounting practice in the particular trade or business. In order to clearly reflect income, the inventory practice trade or business. In order to clearly reflect income, the inventory practice of a taxpayer should be consistent from year to year, and greater weight is to be given to consistency than any particular method of inventory or basis of valuation, as long as the method or basis used is substantially in accord with these regulations, an inventory that can be used under the best accounting practice in a balance sheet showing the financial position of the taxpayer is, as a general rule, regarded as clearly reflecting his income. . . ." Considering that the monthly average method of valuation of inventories conforms to the best accounting practice in the trade or business of the Canon companies and the change requested by the taxpayer will be consistent with the method adopted by its parent company and its worldwide affiliates granted the authority to change its method of costing supplies an spare parts inventories from the FIFO method to the monthly average method. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue