Bureau of Local Government Finance Opinion

February 7, 2000 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION The Provincial Assessor of Batangas Batangas City S i r : This refers to the request of Steel Corporation of the Philippines (SCP) for confirmation of their contention that the actual cost of the machinery and equipment imported by SCP, denominated in foreign currency should be determined based on the acquisition cost of the same computed at the average exchange rate prevailing at the time the properties were actually acquired, i.e., at the time the purchase contract was entered into, and not at the time the same were installed. In this connection, attached is a copy of the letter dated February 2, 2000 of this Bureau which clarified that: "By express provision of the Code, therefore, the acquisition cost of the properties should be based on the actual cost to the owner of the same. Considering that SCP acquired the subject machinery and equipment in 1997, the actual cost to SCP of the said properties should be based on the acquisition cost of the said properties at that time, converted at the average exchange rate then prevailing. "The determination by the Assessor of the fair market value of the machinery and equipment based on their acquisition cost, converted at the exchange rate prevailing at the time of their installation in 1998, is not supported by any provision of law." Accordingly, the subject machinery and equipment of SCP should be assessed taking into consideration the foregoing clarification as embodied under the abovementioned letter dated February 2, 2000 of this Bureau. ADaEIH Be guided accordingly. Very truly yours, (SGD.) ANGELINA M. MAGSINO Deputy Executive Director Officer-in-Charge 02 February 2000 Laya Mananghaya & Co. 22/F Antel 1000 Corporate Centre 139 Valero St., Salcedo Village Makati City 1227 Attention : Atty. REMIGIO A. NOVAL Subject : Request for Opinion on the Fair Market Value of Certain Machinery and Equipment of Steel Corporation of the Philippines Gentlemen : This refers to your request in behalf of your client, Steel Corporation of the Philippines (SCP), for confirmation of your contention that for purposes of determining the real property taxes due on certain machinery and equipment imported by SCP, the actual cost of the said properties denominated in foreign currency should be determined based on the acquisition cost of the same computed at the average exchange rate prevailing at the time the properties were actually acquired, i.e., at the time the purchase contract was entered into, and not at the time the same were installed. It is represented that SCP, a domestic corporation engaged in the business of processing and manufacturing steel and steel products, acquired the subject machinery and equipment in 1997 before the onset of the Asian currency crisis. For realty tax purposes, the Assessor fixed the fair market value of the properties by converting the acquisition cost of the said machinery and equipment to the Philippine peso at the exchange rate prevailing at the time the machinery and equipment were installed in 1998. The Assessor, thus, treated the devaluation of the Philippine Peso against the US Dollar as an increase in the acquisition cost of the machinery and equipment and consequently, an increase in their fair market value and the assessed value. In reply, please be informed that the pertinent provision of the Local Government Code of 1991 states that the fair market value of the machinery should be based on the acquisition cost of the same. 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. 1 Moreover, as defined under the same Code, the "acquisition cost for newly-acquired machinery not yet depreciated and appraised within the year of its purchase refers to the actual cost of the machinery to its present owner, plus the cost of transportation, handling and installation at the present site." 2 By express provision of the Code, therefore, the acquisition cost of the properties should be based on the actual cost to the owner of the same. Considering that SCP acquired the subject machinery and equipment in 1997, the actual cost to SCP of the said properties should be based on the acquisition cost of the said properties at that time, converted at the average exchange rate then prevailing. The determination by the Assessor of the fair market value of the machinery and equipment based on their acquisition cost, converted at the exchange rate prevailing at the time of their installation in 1998, is not supported by any provision of law. In view of the foregoing, your request is, hereby, granted. For your information and guidance. Very truly yours, (SGD.) ANGELINA M. MAGSINO Deputy Executive Director Officer-in-Charge Footnotes 1. Section 224 of the Local Government Code of 1991. 2. Section 199(a) of the Local Government Code of 1991.