BIR Ruling [DA-263-01]

December 19, 2001 BIR RULING [DA-263-01] 41, 145 RR2 DA-420-2000 National/Panasonic Matsushita Electric Philippines Corporation (MEPCO) Manufacturing Division Ortigas Avenue Extension Taytay, Rizal Attention: Mr. Ariston P. Martinez Tax Officer Gentlemen : This refers to your letter dated April 20, 2001 stating that Matsushita Electric Philippines Corporation (MEPCO) is a manufacturer and seller of various electronics and electrical home appliances bearing the "National/Panasonic" brand; that on June 11, 1998, you bought a computer software package from Baan International B V. represented by Baan Asia Pacific Pte. Ltd. and Leverage Systems Technologies, Inc.; that the aforesaid software package has the capability of full integration that is, transactions from manufacturing departments will automatically be captured by the Accounting Department on a real-time basis; that financial statements, therefore, can be consolidated and completed within one day after the end of any given month; that Baan software package supports the "Standard Cost System" in valuing inventories such as finished goods, work-in-process and raw materials; and that you are now requesting for an authority to change your method of inventory valuation from First-In-First-Out (FIFO) to Standard Cost System for the purpose of completing and consolidating financial statements the soonest possible time after the end of the month. In reply, please be informed that your request for a change in the method of inventory valuation from first-in-first-out to standard cost system is hereby granted provided that the same conforms as nearly as possible to the best accounting practice in the trade or business and it truly reflects your income for the period. The change of accounting method from one system to another is allowed under 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: "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 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 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." 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