BIR Ruling [DA-206-06]

April 3, 2006 BIR RULING [DA-206-06] 41; DA386-99 Total (Philippines) Corporation 31/F ExportBank Plaza corner Sen. Gil Puyat Sr. & Don Chino Roces Avenues Makati City Attention: Jean-Pierre Debord Vice President - Finance and Administration Gentlemen : This refers to your letter dated March 6, 2006 stating that Total (Philippines) Corporation (TPC) is a corporation organized and existing under the laws of the Philippines and duly registered with the Securities and Exchange Commission (SEC) on August 15, 1997; that its ultimate parent company is Total S.A., a company incorporated in France; that TPC is primarily engaged in the importation and trading of fuels, oils, lubricants and liquefied petroleum gas; that for financial and income tax reporting purposes, TPC is presently using the first-in, first-out (FIFO) method in the costing of its inventories; that to be consistent with the accounting system used by its parent company and its affiliates worldwide, TPC is adopting a new computerized accounting system based on Systems Applications and Products in Data Processing or SAP; that the FIFO method of inventory costing is not compatible with the SAP based accounting system; and that accordingly, TPC is adopting the use of the moving average method of inventory costing, which method is recognized by the new computerized accounting system. In connection therewith, you now request for an authority to change the inventory method from FIFO to the moving average method. In reply thereto, please be informed that Section 41 of the Tax Code of 1997, in relation to Section 45 of Revenue Regulations No. 2, provide that "Section 41. Inventories . "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 taxpayer 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 his 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." Corollarily, Section 145 of Revenue Regulations No. 2 provides "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 the 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 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. . . ." Thus, this Office had already occasion to rule on the matter, when it said in BIR Ruling No. DA386-99 dated July 8, 1999 that "Considering that the moving average method of valuation of inventories conforms to the best accounting practice in the local oil industry of which Petron Corporation belongs, this Office hereby grants the authority to change its method of inventory valuation from weighted average method to moving average method starting January 1999." From the foregoing circumstances, since the FIFO method of inventory costing is no longer compatible with the new computerized accounting system which the company is adopting, this Office hereby GRANTS TPC authority to use the moving average method of inventory costing to synchronize with its accounting system. 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. cHDEaC Very truly yours, (SGD.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service