Siguion Reyna Montecillo & Ongsiako Law Offices

March 30, 2007 BIR RULING [DA-191-07] Sec. 41; DA-206-2006 Siguion Reyna Montecillo & Ongsiako Law Offices 4th & 6th Floors, Citibank Center 8741 Paseo de Roxas, Makati City Attention: Attys . Jose Lis C . Leagogo and Julie Ann S . Terrado Gentlemen : This refers to your letter dated March 22, 2007 requesting on behalf of your client, PTT PHILIPPINES TRADING CORPORATION (hereinafter referred to as "PTTPTC") for an authority to change its accounting method on inventory costing from first-in-first-out method to weighted average method. It is represented that PTTPTC is a corporation duly organized and existing under the laws of the Philippines, with office address at Brand-Rex Compound, Argonaut Highway, Boton Area, Subic Bay Freeport Zone, Philippines, formerly known as PTT Philippines Trading (PTTTC) Corporation/Subic Bay Fuels Company, Inc. It was organized primarily to establish, maintain, and operate terminal and depot facilities, including storage tanks, reservoirs, pump houses, pipelines, control valves, refueling piers, docks, wharves, building, parts, appliances, appurtenances, accessories, and related miscellaneous equipment, for petroleum or petroleum related products, substances or by-products and to distribute, market, sell, trade, on wholesale basis, exchange or otherwise dispose of and deal in and with petroleum or petroleum related products, substances or by-products. Since it started business operations, PTTPTC has been using the first-in-first-out (FIFO) method in the costing of its inventories. Thereafter, PTTPTC changed its method for determination of the cost of inventories from FIPO method to weighted average method to fully comply with the Accounting Policies of PTT Public Company Limited ("PTTPCL"). Such change also coincided with the change in the Computerized Accounting System Program of the company from Sun System to Microsoft Business Solutions-Solomon, which is integrated with Average Inventory valuation method. In reply, please be informed that on the basis of the above representations, PTTPTC is hereby granted permission to change its accounting method from first-in-first-out (FIFO) method to weighted average method pursuant to the provisions of Section 41 of the Tax Code of 1997, as amended, in relation to Section 145 of Revenue Regulations No. 2, pertinent portions of which provide that "Section 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, 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." DCATHS "Section 145. Valuation of Inventories . The law provides two tests to which 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 PTTPTC change of its accounting method is for the company to fully comply with the Accounting Policies of its parent company, PTT Public Company Limited ("PTTPCL") and likewise to coincide with the change in the Computerized Accounting System Program, this Office hereby grants PTTPTC authority to use the weighted average method in its inventory costing. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service