Bureau of Local Government Finance Opinion

June 11, 2003 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully referred thru the Provincial Assessor of Bukidnon, Malaybalay City, to the Municipal Assessor of Quezon, said province, the within letter dated March 20, 2003 of the Honorable Provincial Governor of Bukidnon, requesting opinion on the assessment practice being enforced by the Municipal Assessor of Quezon on the machineries of Bukidnon Sugar Milling Co. Representation is being made that the machineries of Bukidnon Sugar Milling Co. (Busco for brevity), situated in Butong, Quezon, Bukidnon and declared under TD Nos. LT-003248, LT-003492, LT-003493, LT-003494 and LT-003437 with a Total Assessed Value of P 1,244,081,880.10 as shown in the attached Real Property Tax Billing were assessed at the current exchange rate of the dollar to the peso (P 50: $ 1.00) as reflected in the books of accounts of the company. The company meanwhile pointed out that the dollar exchange rate at the time of the purchase should be made as the basis for the computation of the market value of the machinery for purposes of arriving at the correct amount of real property tax payable to the municipality of Quezon. In reply, please be informed of the applicable provisions of law on the matter, as provided under Sections 224 and 225 of the Local Government Code of 1991 (R.A. No. 7160), which are quoted hereunder: "Section 224. Appraisal and Assessment of Machinery . (a) The fair market value of a brand-new machinery shall be the acquisition cost. In all other cases, fair market value shall be determined by dividing the remaining economic life of the machinery by its estimated economic life and multiplied by the replacement or reproduction cost." "(b) If the machinery is imported, the acquisition cost includes freight, insurance, bank and other charges, brokerage, arrastre and handling, duties and taxes, plus cost of inland transportation, handling, and installation charges at the present site. The cost in foreign currency of imported machinery shall be converted to peso cost on the basis of foreign currency exchange rates as fixed by the Central Bank." "Section 225. Depreciation Allowance for Machinery . For purposes of assessment, a depreciation allowance shall be made for machinery at a rate not exceeding five percent (5%) of its original cost or its replacement or reproduction cost, as the case may be, for each year of use: Provided, however, that the remaining value for all kinds of machinery shall be fixed at not less than twenty percent (20%) of such original, replacement, or reproduction cost for so long as the machinery is useful and in operation." The abovequoted provisions of law should be read in relation with Section 199 (a) of the same Code, providing the definition of "acquisition cost" for newly acquired machinery not yet depreciated and appraised within the year of its purchase, as the actual cost of the machinery to its present owner plus the cost of transportation, handling, and installation at the present site. Applying the abovecited provision of law to the herein case, the fair Market Value of the machineries owned by the Bukidnon Sugar Milling Co. should be based on the acquisition cost. Say for instance, the machineries were acquired in 1998, the actual cost to the owner (Busco Sugar Milling) should be based on the acquisition cost of the machineries at that time (1998) converted at the average dollar exchange rate then prevailing and not on the current exchange rate of the dollar to the peso. For your ready reference, attached is a copy of our February 2, 2000 letter and 1st Indorsement dated January 22, 2002, both treating on the determination of the Fair Market Value of the machineries owned by STEELCORP based on the acquisition cost of the machineries computed at the average exchange rate prevailing at the time the same machineries were actually acquired. TICDSc Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA Executive Director