BIR Ruling [DA-195-04]

April 6, 2004 BIR RULING [DA-195-04] Sections 41 & 145, RR2; BIR Ruling No. DA-130-01 Pentax Luzon Philippines Corp. Special Export Processing Zone Gateway Business Park, Javalera General Trias, Cavite Attention: Ms. M. Precila N. Garcia Accounting and Admin. Manager Gentlemen : This refers to your letter dated December 12, 2003 requesting for an authority to change your accounting method effective January 1, 2004: DaIAcC From To 1. Inventory Method FIFO Method Last Cost Method 2. Accounting Method Actual Cost Accounting Standard Cost Accounting to Actual Cost Accounting 3. Treatment of Sales Processing Fee Sales It is represented that your company is a PEZA-registered export enterprise located at SEPZ, Gateway Business Park, Javalera, Gen. Trias, Cavite; that you are registered with the Securities and Exchange Commission (SEC) under SEC Registration No. ASO92-0000002708; that you are also registered with the Philippine Economic Zone Authority (PEZA) under Registration Certificate No. 92-028 issued on April 30, 1992; that you are licensed to engage in the production of high index ophthalmic plastic lenses which your company export to your Head Office in Japan; that you charged Pentax Corporation-Head Office with Processing Fee (Labor Fee) because Pentax Corporation-Head Office provided raw materials and machinery & equipment free of charge; that starting January 1, 2004 Pentax Corporation-Head Office will charge your company all raw materials and machinery & equipment and your products will be exported directly to your new customer, Seiko Optical Product (SOP); and that with the above scenario, you need to change your Accounting Method. In support of your request, you have attached photocopies of the following documents: 1) PEZA Certificate; 2) SEC Certificate; and 3) Audited Financial Statement for the fiscal year ended March 31, 2003 In reply, please be informed that on the basis of the above representations, Pentax Luzon Philippines Corporation is hereby granted permission to change its method of inventory from First-In-First-Out Method to Last Cost Method; its method of accounting from Standard Cost Accounting to Actual Cost Accounting; and the treatment of its sales from "processing fee" to "sales" pursuant to Section 41 of the Tax Code of 1997 and Section 145 of Revenue Regulations No. 2, the pertinent portion of which provide, viz. : AHDacC "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, 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 the approval by the Secretary of Finance. "Section 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 cannot 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." STcHDC 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group