Bureau of Local Government Finance Opinion

December 3, 1999 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully referred to the Provincial Assessor of Batangas, Batangas City. This refers to the letter dated September 2, 1999 of Messrs. Remigio A. Noval and Manuel P. Salvador III, both of Laya Mananghaya and Co., for and in behalf of their client, the Steel Corporation of the Philippines (SCP). SCP, thru its abovementioned counsels, is requesting confirmation of its contention that, for purposes of determining the real property taxes due on its machinery and equipment, the actual cost of the machinery denominated in foreign currency, should be determined based on the average exchange rate prevailing at the time the machinery was actually acquired and not at the time the same was installed. Simply put, SCP contends that, for purposes of determining the acquisition cost of its machineries and equipment, exclusive of the cost of installation, the same (acquisition cost) should be reckoned at the time the contract on the purchase of the machinery was perfected and not at the time when the machinery was completely installed in 1998. ScaHDT The applicable provision of law in this regard is Section 224 of R.A. No. 7160, otherwise known as the Local Government Code of 1991, which provides: "SEC. 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, the 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." Under the abovementioned letter dated September 2, 1999, it is represented that: 1. SCP is a domestic Corporation engaged in the business of processing and manufacturing steel and steel products with principal office and factory located at Km 4 Barangay Munting Tubig, Balayan, Batangas; 2. The said Notice of Assessment issued by the Assessor states the market value, assessed value, as well as the basic tax assessment, including the Special Education Fund tax effective year 2000, covering. among others, the real property under a tax declaration bearing Assessment of Real Property (ARP) No. 034-00438 and Property Index No. 024-03-034-01-070-MI; 3. The Property under the said tax declaration consists of machinery and equipment owned by SCP and is located at its abovementioned factory in Balayan, Batangas; IADaSE 4. The subject machinery and equipment were mainly imported by SCP from various foreign suppliers. The acquisition cost of the machinery and equipment, per contracts or purchase orders with various foreign suppliers of the machinery, was stated in foreign currency, primarily in US dollars, depending on the country of origin; 5. The subject machinery and equipment were acquired by SCP in 1997, before the onset of the Asian currency crisis; 6. The assessment covering the subject machinery and equipment was made by the Assessor upon SCP's declaration of the said real property for real property tax purposes; 7. The fair market value of the property was determined by converting its US dollar denominated acquisition cost using the average Philippine peso to US dollar exchange rate at the time the machinery was installed in 1998 ; 8. The average exchange rate of the Philippine peso against the US dollar at the time the machinery was installed had allegedly fluctuated to P40.8013 to US$1.0, from an average of P29.48 to US$1.0 at the time purchase contracts therefor were perfected in 1997; and 9. In effect, the Assessor allegedly treated the devaluation of the Philippine peso against the US dollar as an increase in the acquisition cost and consequently, resulted in an increase in the fair market value and the assessed value of the machinery and equipment. The stand taken by that office, apparently, conforms with the 3rd Indorsement dated March 16, 1999 of this Department which; (1) primarily resolved, on account of Section 3(m) (definition of machinery) of P.D. No. 464, the Real Property Tax Code, that: ". . . machinery shall be assessed for taxation purposes when the same are actually, directly and essentially used to meet the needs of the industry, business or works. Conversely, when the same are not yet installed and are not yet actually, directly and essentially used for its purpose, the same are not yet subject to assessment for taxation purposes." aATHIE and, (2) incidentally, supported the view that the dollar exchange rate when the machineries were completely installed should be the basis of appraisal. The claim of SCP, on the other hand, is anchored on the Decision rendered by the Court of Tax Appeals (CTA) in Case No. 2880, dated April 5, 1982 entitled ATLAS CONSOLIDATED MINING Vs. COMMISSIONER OF INTERNAL REVENUE, the pertinent portion of which held, thus: "In conformity with the standard accounting practice, 'if acquisition of an asset is on a credit basis, the asset should be entered in the account at 'the amount of money immediately required to settle the obligation . . . the amount of money which might have been raised directly through the use of the same instrument employed in making the credit purchase . . .'.' Whether title technically passes or not at the date of delivery, the preferred position under these conditions is to recognize plant cost immediately in the total amount of payments called for under the agreement, exclusive of interest, and to show the amount due as a liability. (Wixon, Accountant's Handbook, Fourth Edition, (16-3). When property is acquired on a deferred payment plan, and interest is charged on the unpaid balance of the contract, such interest should be treated as an expense (Simons and Karrnebrock, Intermediate Accounting, Fourth Edition, p. 410.)" ". . . Furthermore, as cited above, if the asset should be entered in the account at the amount of money immediately required to settle the obligation "when it is acquired on the credit basis, then its cost should be computed at the current exchange rate at the time of acquisition , regardless of exchange rate fluctuations at the time the deferred payments are made. . . ." (Emphasis supplied) Moreover, SCP, in citing Section 198(e) of the Code (R.A. No. 7160), submits "that it would be inequitable, unjust and unfair for SCP to bear the burden of (higher) real property taxes resulting from a regional currency crisis and not from a real appreciation of the value of realty per se but from a devaluation of the cost of local currency." Section 198(e) provides: "Section 198. Fundamental Principles . The appraisal, assessment, levy and collection of real property tax shall be guided by the following principles: "xxx xxx xxx. "(e) The appraisal and assessment of real property shall be equitable." DSHTaC In view thereof, this Department finds merit in the contention of SCP that, in determining the acquisition cost of a brand new machinery, exclusive of its cost of installation, the same (Acquisition Cost) should be reckoned at the time the contract on the purchase of said machinery was perfected and not at the time it was completely installed. The abovementioned 3rd Indorsement dated March 16, 1989 of this Department, which, apparently, has been made as basis by the said Provincial Assessor in assessing the subject machinery and equipment of SCP on the basis of the dollar exchange rate at the time the same (machinery) was installed, is hereby deemed modified to this extent. The Provincial Assessor of Batangas is, therefore, hereby given instructions to assess the subject real properties of SCP in accordance herewith. Report of action taken hereon, within ten (10) days from receipt hereof, is requested. (SGD.) EDGARDO B. ESPIRITU Secretary