April 2, 1976 REVENUE REGULATIONS NO. 05-76 SUBJECT : Prescribing A Alllowable Co Cost De Depletion Al Allowance B Be e g in n in g Calendar Year 1975 and Fiscal Year Beginning July 1, 1975, pursuant to Section 30 (g) (1) of the National Internal Revenue Code, as amended TO
:
All Internal Revenue Officers and Others Concerned
Pursuant to Sections 30 (g)(1) and 338, in relation to Section 4 (1) of the National Internal Revenue Code, as amended, the following regulations are hereby promulgated and shall be known as Revenue Regulations No. 5-76. cdta SECTION SECTION 1. Scope. — These These regulations regulations shall shall cover cover cost depletio depletion n allowance, allowance, allowable as deduction in computing taxable income beginning with the calendar year 1975 and fiscal year beginning July 1, 1975, pursuant to Section 30 (g) (1) of the National Internal Revenue Code, as amended. SECTION SECTION 2. Allowance Allowance of Deduct Deduction ion for Depleti Depletion. on. — In the case of of mines, mines, oil and gas wells and other natural deposits, there shall be allowed as deductions in computing its taxable income a reasonable allowance for depletion computed in accordance with the following sections beginning calendar year 1975 and fiscal year beginning July 1, 1975. SECTION SECTION 3. Who May May Avail Avail of the Cost Cost Depletion Depletion.. — Annual depletion depletion deductions are allowed only to mining entities which own an economic interest in mineral deposits. An economic interest is possessed in every case in which the taxpayer has acquired by investment any interest in mineral, in place and secures, by any form of legal relationship, such as, but not limited to, operating agreement and service contract agreement, income derived from the extraction of the mineral, to which it must look for a return of its capital. A person who has no capital investment in the mineral deposit does not possess an economic interest merely because through a contractual relation he possesses a mere economic or pecuniary advantage derived from production. SECTION SECTION 4. Basis of of Cost Depletion Depletion.. — The basis basis upon upon which the cost cost depletion depletion is to be allowed in respect of a property being mined shall be the adjusted cost basis of the mining property being mined as of December 31, 1974 for those on a calendar year basis and June 30, 1975 for those on a fiscal year basis beginning July 1, 1975. For this purpose, the adjusted cost basis shall be the accumulated exploration and development expenses incurred on the mining properties as of December 31, 1974 for those on a calendar year basis and June 30, 1975 for those on a fiscal year basis beginning July 1, 1975 minus accumulated cost depletion that should have been deducted as of the same date on the same property. cd Accumulated exploration expenses shall include the amount paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any
deposit of ore or other minerals before the beginning of the development stage of mine or deposit of a particular mining property. Exploration expenses shall not include expenditures for improvements subject to allowances for depreciation. However, allowances for depreciation of such improvements which were used in the exploration of ores or minerals shall form part of exploration expenditures. Development expenditures shall include all capital expenditures paid or incurred during the development stage of the mine or other natural deposits. The development stage of the mine or other natural deposit will be deemed to begin at the time when, in consideration of all the facts and circumstances (including the action of the taxpayer) deposits of ore or other minerals are shown to exist in sufficient quantity and quality in a particular area to reasonably justify commercial exploitation and actually commence commercial extraction. Development expenditures shall not include expenditures for improvements subject to allowances for depreciation. However, allowances, for depreciation of such improvements which are used in the development of ores or mineral, shall form part of development expenditures. SECTION 5. Limitation of Cost Depletion. — (a)
The basis for cost depletion of mineral deposits does not include:
1. Amounts recoverable through depreciation, through deferred expenses and through deductions other than depletion; 2.
The residual value of improvements at the end of operation.
(b) Such basis does not include exploration and development expenses incurred on mining properties or areas other than those presently being mined. These expenses shall be treated as deferred expenses (capitalized) to be taken into account as deduction in the future in the form of allowances for cost depletion if ore mineral reserves warrant commercial production or as a write-off, in case of abandonment, in the event commercial operation is not warranted as confirmed by the Bureau of Mines. (c) The annual allowable cost depletion shall not exceed the market value as used for purposes of imposing the mining ad valorem taxes in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made. Market value shall mean the actual market value of the annual gross output of the minerals or mineral extracted or produced from the particular mining property. (d) The allowable cost depletion deduction shall be limited only to the extent of the capital invested in the particular mining property. For this purpose, capital invested in the particular mining property shall include the accumulated exploration and development expenditures and expenditures incurred on the ongoing mine exploration and development on the same mining area which
1.
increase the value of the mine;
2.
decreases the cost of production of mineral units; or
3. restores property to its previous condition or in making good the exhaustion thereof for which an allowance is or has been made. In fine, no further deduction for cost depletion shall be allowed when the sum of the cost depletion equals the cost of adjusted basis of the property plus allowable capital additions. SECTION 6. Manner of Computation of Cost Depletion. — The cost depletion for taxable year beginning calendar year 1975 and fiscal year beginning July 1, 1975 shall be computed by dividing the adjusted cost basis as of December 31, 1974 of June 30, 1875, as the case may be, by the number of units of minerals remaining as of the taxable year and by multiplying the depletion unit so determined by the number of units of minerals sold within the taxable year. In the selection of a unit of mineral for depletion, preference shall be given to the principal or customary unit or units paid for in the products sold, such as tons of ore, barrels of oil, or thousands of cubic feet of natural gas. As used in this regulation, the phrase — (1) "the number of units of minerals remaining as of the taxable year" is the number of units of minerals remaining at the end of the period to be recovered from the property (including units recovered but not sold) plus the "number of units sold within the taxable year"; (2)
"number of units sold within the taxable year" is —
a. In the case of taxpayer reporting income on the cash basis include units for which payments were received within the taxable year although extracted or sold prior to the period and exclude units sold but not paid for in the taxable year; and b. In the case of taxpayer reporting income on the accrual method include all units extracted and sold during the period, whether paid for or not, but does not include units with respect to depletion deductions which were allowed or allowable prior to the taxable year. In the case of natural gas or oil wells, the taxpayer may compute the cost depletion in respect of such property for the taxable year by multiplying the adjusted cost basis of the property by a fraction, the numerator of which is equal to the number of cubic feet or barrels of oil recovered during the year and the denominator of which is equal to the expected recoverable number of cubic feet of gas or barrels of oil at the end of the year plus the number of cubic feet of gas or barrels of oil recovered during the year. SECTION 7. Determination of Mineral Contents of Deposits Remaining as of the Taxable Year. — The mineral contents of deposits remaining as of the taxable
year pertains to the estimated mineral products reasonably known or on good evidence believed to have existed in place as of the end of the taxable year, the estimate or determination of which was made according to the method current in the industry and in the light of the most accurate and reliable information obtainable. For purposes of computing cost depletion allowable for the taxable year, the estimated mineral products remaining as of the taxable year shall include both quantity and grade — (a) The positive ores and mineral deposits, which include ores and minerals "blocked out" and "developed" or "assured" in the usual conventional meaning; and (b) The probable or prospective ores and mineral deposits, which include ores or minerals that are believed to exist on the basis of good evidence although not actually known to occur on the basis of existing development. Such probable or prospective ores or minerals may be estimated: 1. As to quantity, only in case they are extensions of known deposits or are new bodies or masses whose existence is indicated by geological surveys or other evidence to a high degree of probability; and 2. As to grade, only in accordance with the best indications available as to richness. If the quantity of recoverable units of minerals in the deposit has been previously estimated for the prior year or years, and if there has been no known change in the facts upon which the prior estimate was based, the quantity of recoverable units of mineral in the deposit as of the taxable year will be the quantity remaining from the prior estimate. However, for any taxable year for which it is ascertained, either by the taxpayer or the Commissioner of Internal Revenue, from any source, such as operations or development work prior to the close of the taxable year, that the remaining recoverable mineral units as of the taxable year are materially greater or less than the quantity remaining from the prior estimate, then the estimate of the remaining recoverable units shall be revised and the annual cost depletion allowance with respect to the property for the taxable year and for subsequent taxable years will be based upon the revised estimate until a change in the facts required another revision. Such revised estimate will not, however, change the adjusted basis for depletion. SECTION 8. Statement to be Attached to the Return. — There shall be attached to the return of the taxpayer for such taxable year a sworn statement by a responsible officer setting forth, in complete and summary form, the pertinent information required by these regulations with respect to each such mineral property or improvement (including oil and gas properties or improvements) as enumerated hereunder: (i)
Location plan and brief description of each property;
(ii) The date of acquisition of each property and the accumulated cost to date of each property; (iii) The accumulated cost depletion for each of the mineral property and improvements; (iv) The estimated number of units of each kind of mineral at the end of the taxable year as estimated by the Head of the Geological and Mining Departments of the taxpayer and confirmed by the Bureau of Mines; (v) The number of units sold and the number of units for which payment was received during the year for which the return is made; (vi)
The gross amount received from the sale of mineral;
(vii) The amount and manner of computation of depreciation for the taxable year and the amount of cost depletion for the taxable year; and (viii) Such data as may be required by the Commissioner of Internal Revenue as the case may be. SECTION 9. Records to be Kept. — Every taxpayer claiming and making a deduction for depletion of mineral property shall keep a separate account for each and every mining area in his books of accounts in which shall be accurately recorded the cost or other basis of such property and thereafter to be debited by any, and all capital additions. Likewise, the corresponding depletion allowance account (reserve) shall be maintained which shall be credited annually with the amounts of depletion acquired in accordance with these regulations. In addition, the taxpayer must assemble, segregate and have readily available at his principal place of business, all the supporting data which were used in compiling the summary statement required to be attached to the income tax return to be filed as prescribed under Section 8 hereof. SECTION 10. Basis of Depreciation of Improvements. — There shall likewise be allowed as a deduction a reasonable allowance for depreciation of improvements including, but not limited to, mining and milling equipments. Such allowance shall include wear and tear and obsolescence. The amount of depreciation that can be claimed as expenses in cases of certain equipment is subject to the provision of Section 4 of these regulations regarding properties used in exploration and development stages. SECTION 11. Aggregation or Combination of Separate Properties. — In the case of mining companies with several mining properties, it may aggregate into one operating unit, several mining properties for purposes of determining the adjusted cost basis recoverable thru depletion subject to the following conditions: (a) All contiguous areas included in a single concession grant or in separate concession grants may be constituted as a single operating unit;
(b) Operating mineral interests which are geographically widespread may not be treated as parts of the same operating unit; (c) Undeveloped operating mineral unit may be aggregated only those interests with which it will be operated as a unit when it reaches the production stage. For purposes of these regulations, the term — (1) Operating mineral interest means a separate mineral interest in respect of which the cost would be required to be taken into consideration of the mine, well or other natural deposit were in the production stage. (2) Operating unit refers to the operating mineral interest which are operated together for the purpose of producing minerals. It refers to a producing unit and not to an administrative or sales organization. Among the factors which indicate that interests are operated as a unit are — i.
common field or operating unit; aisa dc
ii.
common supply and maintenance facilities;
iii.
common processing as treatment plants; and
iv.
common storage facilities.
Separate operating units shall have its own accounts to which all expenditures pertaining thereto shall be debited and the credit to such amount may either be for future depletion or write-offs as the case may be. SECTION 12. Definition of Terms. — (a) "Mineral's" means all naturally occurring inorganic substances in solid, liquid, or any intermediate state including coal. Soil which supports organic life, sand and gravel, guano, petroleum, geothermal energy and natural gas are included in this term but are governed by special laws. (b) "Mineral Lands" are those lands in which minerals exist in sufficient quantity and grade to justify the necessary expenditures in extracting and utilizing such minerals. (c)
"Mineral Deposit" means a natural deposit or accumulation of minerals.
(d) "Exploration" is the examination and investigation of lands supposed to contain valuable minerals, by drilling, trenching, shaft sinking, tunneling, test pitting and other means, for the purpose of probing the presence of mineral deposits and the extent thereof. (e) "Development" refers to steps necessarily taken to reach an ore body or mineral deposit so that it can be mined. (f)
"Exploitation" means the extraction and utilization of mineral deposits.
(g) "Mining" or "to mine" means to extract, remove, utilize minerals, and includes operations necessary for that purpose. (h) "Actual commercial production" shall mean the stage of mining operation attained by a mine in which mineral or mineral products of marketable grade and quantity have been produced and sold to local and/or foreign markets. (i) "Mining and Milling equipments" shall mean machineries, equipment, tools for production, plants to convert mineral ores into saleable form, spare parts, supplies, materials, accessories, explosives, chemicals and transportation, and communication facilities which shall include all the items herein enumerated for commercial production which are necessary or incidental for mining, as well as for the processing of ores into marketable form and grade, and shall include those needed to explore and develop the mineral land for mining and the processing plants which may be imported and installed before the actual commercial production. (i) "Positive ore" shall mean the full ore tonnage computed with good mining practice from dimensions revealed in outcrops, trenches, underground working and drill holes and for which the grade is computed from results of detailed sampling. The sites of inspection, sampling and measurements shall be closely spaced and the geological character were so defined that the size, shape and mineral content are well established. (k) "Probable" or "Prospective ore "shall mean the ore for which tonnage and grade are computed partly specific measurement, samples and partly from projection for a reasonable distance on geologic evidence. The sites available for inspection, measurement and sampling are too wildly or otherwise inappropriately spaced to outline the ore completely or to establish its grade throughout. (1) "Exploration stage" shall mean the step in exploring "new mines" or "old mines resuming operations" consisting of shallow borings, trenches, test pitting, diamond drilling and underground workings to prove the persistence and tonnage or the ore body laterally and in depth. SECTION 13. Repealing Clause. — All existing rules and regulations or parts hereof in conflict with the provisions of these regulations are hereby revoked. SECTION 14. Effectivity. — These regulations shall apply to depletion beginning calendar year 1975 and fiscal year beginning July 1, 1975. CESAR VIRATA Secretary of Finance Recommending Approval: EFREN I. PLANA Acting Commissioner of Internal Revenue
TAN 1456-040-3
C o p y r i g h t 2 0 0 8 C D T e c h n o l o g i e s A s i a, I n c.
