BIR Ruling [DA-274-05]

June 21, 2005 BIR RULING [DA-274-05] 41, 145; RR 2; DA-248-2002 International Flavors & Fragrances (Philippines), Inc . 28th Floor, Wynsum Corporate Plaza 22 Emerald Avenue, Ortigas Center Pasig City Attention: Ms. Nelia G. Corpuz Financial Controller Gentlemen : This refers to your letters dated December 1, 2003 and January 4, 2004 requesting an authority to change the inventory valuation method of International Flavors & Fragrances (Philippines), Inc. (IFF for brevity) from standard to weighted average method beginning October 2005. Documents submitted shows that on May 2002, IFF and Bush Boake Allen Philippines (BBA) executed a Plan of Merger with BBA as the surviving company. On September 30, 2002, the Securities and Exchange Commission (SEC) approved the merger and BBA has since been renamed IFF. Since then, your company has undergone a lot of changes for the past years, and with these changes you are in pursuit of complying with the legal requirements in connection therewith. On May 6, 2002, you requested approval of this Office of a change in accounting method of inventory costing from standard to moving average method and said request was approved on June 16, 2003. However, you have not implemented the change of inventory valuation from standard to moving average method up to the present inasmuch as your current system used is not capable of handling a moving average inventory method. Your foreign principal had issued a directive to comply with the global SAP financial system, effective October 2005, thus you now would like to request that the inventory costing method of IFF would be: Standard costing method on Finished Goods Manufactured; and Weighted average method on Raw Materials and Finished Goods Traded In reply, please be informed that on the basis of the above representations, IFF is hereby granted permission to change its accounting method from standard to weighted average method on Raw Materials and Finished Goods Traded, 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 provides, 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. aEcSIH "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: . . . "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 IFF's change of its accounting method is for the company to comply with its foreign principal to use the weighted average method since it is necessary to comply with the global SAP system, this Office hereby grants authority to IFF the use of the weighted average method on raw materials and finished goods traded, beginning October 2005, and that the standard costing method on finished goods manufactured be maintained. (BIR Ruling No. DA-248-2002 dated December 18, 2002) 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group