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Basis of deductible depreciation

It is not unusual for the Bureau of Internal Revenue (BIR) to change its position on
certain matters affecting taxation. Recently, the BIR issued Revenue Memorandum
Circular 70-2010 clarifying the basis of the depreciation that can be claimed by
taxpayers and revoking previously issued BIR rulings.
In those BIR rulings, the bureau confirmed that the concerned taxpayer can use and
reflect on its books of accounts the appraisal fair market values of its property and
equipment used in business as determined and reported by an independent appraiser,
and accordingly to depreciate the same, for income tax purposes.
The taxpayer is allowed under the accounting rules to carry its property based on
revalued amounts (fair market values) and to depreciate the property on the same basis.
Presumably to have the same basis for income tax purposes, the taxpayer requested an
authority to use the appraised value for income tax reporting which, apparently, the BIR
granted.
The bureau may have conducted a review of the said rulings in the light of the Supreme
Court decision in the old case of Basilan Estates, Inc. vs. Commissioner of Internal
Revenue [G.R. No. L-22492, September 5, 1967]. In this case, the High Court ruled that
the depreciation of an asset must be premised on its acquisition cost, and not on its
reappraised value. On the strength of this judicial precedent, the bureau revoked the
previous rulings authorizing the depreciation of properties based on appraised values
and declared that the depreciation should be mere recovery of cost.
This new circular may have basis in holding that the depreciation should be based on
cost and not on the appraised values. A taxpayer may recover its investment in the form
of depreciation of property but only to the extent of the cost actually incurred in acquiring
the property and putting it into useful condition. But even with this circular, I believe the
issue as to whether depreciation can be claimed based on appraised value was not fully
settled. The revocation referred to specific rulings issued in 2004. There is an earlier

ruling issued in 1998 which requires the same review. In the said 1998 ruling, it was held
that mere increase in the value of property without actual realization, either through sale
or other disposition, is not taxable, the only exception being that even without sale or
other disposition, if by reason of appraisal, the cost basis of property is increased and
the resultant basis is used as the new tax base for purposes of computing the allowable
depreciation expense, the net difference between the original cost basis and new basis
due to appraisal is taxable under the economic-benefit principle.
Stated differently, the appraised value of property can be the basis of depreciation,
provided that the appraisal increase had been reported as taxable income. In effect, this
allows depreciation expense to be recognized based on the appraised value. Can it be
said that this ruling has not been revoked considering that it has a factual background
different from those specifically revoked? The recognition of the appraisal increase as
income justifies the depreciation on the appraisal increase.
I dont have to comment on which of these issuances is correct. After all, it is the same
bureau that issued the rulings and the circular. But to the ordinary taxpayers, many of
whom are not experts in the field of taxation and who refer to the issuances of the
bureau for guidance, the result is confusion.
This subsequent realization by the tax authority that the rulings it previously issued are
not in accordance with law and the subsequent revocation of the said rulings are just
examples of the many inconsistencies in the pronouncements by the tax authorities. It
also underscores the fact that the BIR itself errs in dealing with taxpayer issues. There
are, for instance, revenue regulations which are not consistent with the laws they are
supposed to implement. Indeed, there are reasons for the current leadership of the BIR
to conduct a review, not only of the previously issued rulings, but also other issuances,
and make the appropriate revisions or amendments, not only those that favour the
government but especially those that favour the taxpayers. Taxpayers, however, should
not be made to suffer the consequences of an erroneous interpretation.

The author is a Senior Partner of Du-Baladad and Associates Law Offices (BDB Law). If
you have any comments or questions concerning the article, you can e-mail the author at
fulvio.dawilan@bdblaw.com.ph or call 403-2001 local 310.