BIR Ruling [DA-386-99]

July 8, 1999 BIR RULING [DA-386-99] Petron Corporation 7901 Makati Avenue Makati, Metro Manila Attention: Mr. Mario S. Lucas Manager Gentlemen : This refers to your letters dated October 29, 1998 and February 12, 1999 stating that your company, Petron Corporation, is presently using the weighted average method in the valuation of inventories for income tax reporting purposes; that for financial reporting, Petron actually values its inventory for crude oil, tires, batteries and accessories at first-in-first-out method (FIFO) and for petroleum products at last-in-first-out method (LIFO); that Petron has an Information Technology Project based on Systems Applications and Products in Data Processing or SAP that will automate a number of processes like inventory management, order taking, invoicing and scheduling, resulting in improved inventory flow visibility through on-line and real time access to inventory movement in every storage location; and that in view with this roll-out of enterprise-wide information system of inventory, Petron decided to adopt the moving average method of inventory valuation which conforms to the best accounting practice in the local oil industry for both financial and income tax reporting starting January 1999. In this connection, you are now requesting authority from this Office to change your inventory method from weighted average method to moving average method effect January 1, 1999. In reply, please be informed that Section 41 of the Tax Code of 1997, in relation to Section 145 of Revenue Regulations No. 2, which provides, viz: "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 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 HcTDSA "(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." "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 used in 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 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. HcSCED 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 (BIR Ruling No. 176-98 dated December 14, 1998) Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue