BIR Ruling No. 182-12

March 15, 2012 BIR RULING NO. 182-12 Section 34 (F) of the Tax Code of 1997; Revenue Regulations No. 2; BIR Ruling No. 176-98 Suzuki Philippines, Incorporated Danny Floro St.,Bagong Ilog, Pasig City 1600 Attention: Ms. Catalina T. Calderon Managing Director/Treasurer Gentlemen : This refers to your letter dated December 7, 2010 requesting, on behalf of Suzuki Philippines, Inc. (Suzuki Philippines),for an authority to change method of computing depreciation of its Property, Plant and Equipment (PPE) from Sum-of-the-years-digit Method to Straight Line Method. It is represented that: 1. Suzuki Philippines is a domestic corporation duly organized and existing under the laws of the Philippines and is engaged in the manufacture of Suzuki motorcycles and distribution of Suzuki automobiles in the Philippines. 2. Suzuki Philippines has been adopting the Sum-of-the-years-digit Method in depreciating its PPE over their expected useful lives, components of which and their related useful lives are as follows: Buildings and improvements 5 to 10 years Machinery and equipment 5 years Furniture, fixtures and equipment 3 years Transportation equipment 3 to 5 years 3. Suzuki Philippines' parent company, Suzuki Motor Corporation of Japan issued a mandate to all its overseas manufacturing affiliates including Suzuki Philippines to use a unified depreciation method wherein newly acquired dies (molds) and jigs shall be depreciated by 25% straight line method and newly acquired machinery and equipment shall be depreciated by 12.5% straight line method in order to adopt the depreciation period of dies (molds) and jigs and machinery and equipment to the cycles of products. HDIaET 4. The Sum-of-the-years-digit Method results in a decreasing charge of depreciation over the useful life of Suzuki Philippines' asset which means that its depreciation expense is relatively higher during its initial years than its later years regardless of the volume it produced which tend to mismatch the revenue it earned. 5. Suzuki Philippines' current standard time of completion of units produced, without considering the cost saving measures and/or improvements on a yearly basis, is constant throughout the life of the PPE which is expected to provide equal operational performance throughout its life, hence, Suzuki's continuous use of its PPE neither results to improved nor reduced completion time throughout the useful life of the asset that would correspondingly warrant higher depreciation charges during its initial years. In reply, please be informed that Section 34 (F) of the Tax Code of 1997 states 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. 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 BIR Commissioner under any of the following methods: (a) Straight Line Method (b) Declining balance Method, using rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method prescribed in Subsection (F) (1); (c) Sum-of-the-years-digit Method; and (d) Any other method which may be prescribed by the Secretary of Finance upon recommendation of the BIR Commissioner. In this connection, Section 109 of Revenue Regulations No. 2, 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 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 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." (cited in BIR Ruling No. 176-98 dated December 14, 1998) CTIDcA Moreover, Section 105 of the said Revenue Regulations state that: "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 would 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 the business, equal the basis of the property. Due regard must also be given to expenditures for current upkeep." Given the existing conditions in the operation of Suzuki Philippines, this Office hereby grants the latter the permission to change its method of computing depreciation of its PPE from Sum-of-the-years-digit Method to Straight Line Method. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained 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