Maynilad Water Services, Inc.

June 24, 2010 BIR RULING [DA-(TAR-002) 108-10] Section 41; BIR Ruling No. DA-191-07 Maynilad Water Services, Inc. MWSS Compound, Katipunan Road Balara, Quezon City Attention: Mr. Arturo Celso D. Baranda SAVP-Controller Gentlemen : This refers to your letter dated October 7, 2008 requesting for an authority to change your inventory costing method from First In First Out (FIFO) to Weighted Average Method for calendar year 2009 for the following reasons: 1. The nature of your business requires bulk purchases which are not easy to track in the present method (FIFO); 2. Since Systems Applications and Products in Data Processing or SAP, your accounting system, adopts the weighted average method, it will be costly to customize the system to retain FIFO method; 3. Materials do not expire over a long period of time ( i.e., pipes, valves, etc.); and 4. No significant impact on taxation since prices do not usually fluctuate. Verification report by the Large Taxpayers Audit and Investigation Division I disclosed that you are a domestic corporation duly organized and registered with the Securities and Exchange Commission. You were incorporated on January 22, 1997 primarily to bid for the operation of the privatized system of waterworks and sewerage services of the Metropolitan Waterworks and Sewerage System (MWSS) for Metropolitan Manila. Your registered office is located at MWSS Compound, Katipunan Road, Balara, Quezon City. aSITDC Documents further disclosed that the change in inventory costing from FIFO Method to Weighted Average method beginning calendar year 2009 has no significant effect for tax purposes. You record the purchase of materials and supplies as follows: CIP Inventory Acct.-Water Meter & Spareparts xxxx Current Input VAT xxxx Withholding Taxes payable xxxx Philippine Value Accounts Payable xxxx Upon recognition of the usage of said materials and supplies, subject taxpayer recognizes the expense account as follows: Repairs and Maintenance xxxx CIP Inventory Acct.-Water Meter & Spareparts xxxx Further audit of the entries made and schedule of costing inventory of materials and supplies using the FIFO Method to Weighted Average Method showed that the effect of the change resulted to a decrease in Repairs and Maintenance expense giving rise to an increase in the taxable income. As a result, there was an adjustment of the cost of materials and supplies as follows: Inventory Revaluation xxxx Valves, hydrant & Accessories xxxx Water Meter xxxx Pipes & Fittings xxxx Construction and Maintenance Supplies xxxx In reply thereto, please be informed that Section 41 of the Tax Code of 1997 in relation to Section 145 of Revenue Regulations No. 2 provides that "SEC. 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 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 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 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." (BIR Ruling No. DA-191-07 dated March 30, 2007) acCTSE Since the Materials and Supplies do not expire over a long period of time and their prices do not usually fluctuate and in compliance of your accounting system using SAP, this Office hereby grants you authority to use Weighted Average Method in your inventory costing. 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.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group