BIR Ruling [DA-138-01]

August 15, 2001 BIR RULING [DA-138-01] 41, 145 RR2; DA-420-2000 Joaquin Cunanan and Co . Price Waterhouse Coopers 14th Floor Multinational Bancorporation Centre 6085 Ayala Avenue Makati City Attention: Atty . George J. Lavadia Principal, Tax Services Gentlemen : This refers to your letter dated January 31, 2001 stating that Katolec Philippines Corporation (Katolec) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) and authorized to manufacture, distribute and sale on wholesale basis electronic equipment, business and office machines and other merchandise and commodities; that its principal place of business is located at 103 East Main Avenue, Special Export Processing Zone, Laguna Technopark, Bian, Laguna; and that Katolec is requesting for an authority to change its method of inventory valuation from First-In-First-Out to Moving Average Method for purposes of aligning its method of inventory valuation with its affiliated companies worldwide. In reply, please be informed that on the basis of the above representations, Katolec is hereby granted permission to change its method of inventory valuation from first-in-first-out to moving average method pursuant to the provisions of Section 41 of the Tax Code of 1997, in relation to Section 145 of Revenue Regulations No. 2, the pertinent portion of which provide, viz: "SEC. 41. Inventories Whenever in the judgment of the Commissioner, the use of inventories is necessary in order to determine clearly the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Secretary of Finance, upon the recommendation of the Commissioner, may, by rules and regulations, prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. "If a taxpayer, after having complied with the terms and conditions prescribed by the Commissioner, uses a particular method of valuing its inventory for any taxable year, then such method shall be used in all subsequent taxable years unless: i) with the approval of the Commissioner, a change to a different method is authorized: or ii) the Commissioner finds that the nature of the stock on hand (e.g., its scarcity, liquidity, marketability, and price movements) is such that inventory gains should be considered realized for tax purposes and, therefore, it is necessary to modify the valuation method for purposes of ascertaining the income, profits, or loss in a more realistic manner: Provided, however, That the Commissioner shall not exercise its authority to require a change in inventory method more often than once every three (3} years: Provided, further, That any change in an inventory valuation method must be subject to approval by the Secretary of Finance. "SEC. 145. Valuation of Inventories The law provides two tests to which each inventory must conform. (1) it must conform as nearly as possible to the best accounting practice in the trade or business, and (2) it must clearly reflect the income. It follows, therefore, that inventory rules can not be uniform but must give effect to trade customs which come within the scope of the best accounting practice in the particular trade or business. In order to clearly reflect income, the inventory practice of a taxpayer should be consistent from year to year, and greater weight is to be given to consistency than to any particular method of inventory or basis of valuation, as long as the method or basis used is substantially in accord with these regulations, an inventory that can be used under the best accounting practice in a balance sheet showing the financial position of the taxpayer is, as a general rule, regarded as clearly reflecting his income" Considering that the purpose of Katolec's change on its method is for it to align its valuation method with its affiliated companies worldwide and the moving average method will conform to the best accounting practice in its trade or business, this Office hereby grants authority to Katolec the use of moving average method in its inventory valuation. ESHcTD This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group